A

STUDY ONCOMMODITY MARKET

WITH

SPECIAL REFERENCE TO GOLD

IN

INTER- CONNECTED STOCK EXCHANGE OF INDIA LIMITED

A project report submitted to Osmania University, Hyderabad in partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By

P.PAVAN PRAHALAD(Regd.No.08808109)

Under the guidance ofMr. B.SATISH(Faculty Member)

VATHSALYA COLLEGE OF BUSINESS MANAGEMENT(Affiliated to Osmania University)

BANJARA HILLS, BHONGIRI, DIST: NALAGONDA

DECLARATION

I here by declare that this project report titled “COMMODITY MARKET

WITH SPECIAL REFERENCE TO GOLD in INTER- CONNECTED STOCK

EXCHANGE OF INDIA LIMITED, HYDERABAD, (NARAYANAGUDA)” has

been prepare by me during the academic year 2008-2010, and the report is the

result of my own efforts and it is not been submitted to any other university for the

award of any degree or diploma any time before.

Place: HYDERABAD

Date: P.PAVAN PRAHALAD

2

CERTIFICATE

This is to certify that the project report titled “COMMODITY MARKET

WITH SPECIAL REFERENCE TO GOLD” IN INTER- CONNECTED STOCK

EXCHANGE OF INDIA LIMITED, HYDERABAD, (NARAYANAGUDA)” is a

bonified work done by Mr.P.PAVAN PRAHALAD bearing Regd No. 08808109

under my guidance and supervision for a period of 8 weeks and this project report

is submitted to Osmania University in partial fulfillment for the award of degree

of Master Of Business Administration.

B.SATISH RAMA SUBBA RAO (Head of the Department) (Project Guide)

ACKNOWLEDGEMENT

3

It is my privilege to express my deepest sense of gratitude

to the management of INTER- CONNECTED STOCK EXCHANGE

OF INDIA LIMITED and Mr. RAMA SUBBA RAO my company

guide in INTER- CONNECTED STOCK EXCHANGE OF INDIA

LIMITED without whose support, encouragement and guidance

this Executive Training would not have been possible.

I am also grateful to B. SATISH, Asst professor of The

Vathsalya college of business management , Master of

Business Administration whose guidance & teachings have

enabled me to understand the concept of FinanceI also thankful

to I.S.E senior manager for their constant support

Encouragement, cooperation and valuable suggestions

throughout the Progress of project.Above all I thank to my family

for their support andEncouragement, which has always been a

source of inspiration.

P.PAVAN

PRAHALAD

4

INDEX

CHAPTER-I

INTRODUCTION

Introduction to the study

Need and importance of the study

Scope of the study

Objectives of the study

Sources of data

Limitations

CHAPTER- II

Company profile

CHAPTER-III

Theoretical review

CHAPTER IV

Data analysis &Interpretations

CHAPTER -V

Findings & suggestions

BIBLIOGRAPHY

ANNEXURES

5

CHAPTER - I

6

INTRODUCTION

INTRODUCTION TO THE STUDY

Indian markets have recently thrown open a new avenue for retail investors and traders to

participate commodity derivatives. For those who want to diversify their portfolios beyond

shares, commodities bonds and real estate are the best options.

The retail investors could have done very little to actually invest in commodities such as gold

and silver or oilseeds in the futures market. This was nearly impossible in commodities except

for gold and silver as there was practically no retail avenue for pumping in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors

can now trade in commodity futures without having physical stock.

Commodities actually offer immense potential to become a separate asset class for market survey

investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity

markets, may find commodities an unfathomable market. But commodities are easy to

understand as far as fundamentals of demand and supply are concerned. Retail investors should

understand the risks and advantages of trading in commodities futures before taking a leap.

Historically, pricing in commodities futures has been less volatile compared with equity and

bonds, thus providing an efficient portfolio diversification option.

NEED AND IMPORTANCE OF THE STUDY

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The era of liberalization has revolutionized the commodity market. In such a scenario it is

necessary to make an assessment of commodity market .as more and more investors are seeking

commodity market as of the important investment avenues, it is neccesary to make a detailed

analysis.such an analysis will help any person who is to invest in commodity market.

SCOPE OF THE STUDY

The analysis is based on commodity trading specifically in gold futures market.

The analysis is based on six (6) month prices on daily basis to show the friend of the

bullion market.

The analysis is based on opening and closing price of gold in commodity market.

The study is conducted based on four types of gold products i.e.

Gold

Gold hni

Gold guinea and

Gold mini only

8

OBJECTIVES OF THE STUDY

To study the commodity trading and its clearing&settelement.

To study the commodity trading with reference to gold.

To analyze the gold trend in commodity market.

SOURCES OF DATA

The data is collected from secondary sources mainly from financial websites.

Primary of data: The no primarily source of data used.

Secondary source of data: The secondary data is collected from Hyderabad inter

connected stock exchange and various internet sources

LIMITATIONS

The analysis is based on moving average tool.

A technical analysis is done using 3day moving averages.

The present study takes in to consideration of 6 month data of gold prices.

This analysis will be holding good for a limited time period i.e. based on present

scenario and study conducted, future movement of price may or may not be similar.

9

CHAPTER-II

COMPANY PROFILE

           Inter-connected Stock Exchange of India Limited (ISE) is a national-level stock exchange, providing trading, clearing, settlement, risk management and surveillance support to its Trading Members. It has 841 Trading Members, who are located in 131 cities spread across 25 states.

10

These intermediaries are administratively supported through the regional offices at Delhi, Kolkata, Patna, Ahmedabad, Coimbatore and Nagpur, besides Mumbai.

           ISE has been promoted by 14 Regional stock exchanges to provide cost effective trading linkage to all the members of the participating Exchanges. ISE aims to address the needs of small companies and retail investors by harnessing the potential of regional markets, so as to transform them into a liquid and vibrant market using state-of-the art technology and networking.

            ISE has floated ISE Securities & Services Limited as a wholly owned subsidiary under the policy formulated by the Securities and Exchange Board of India (SEBI) for “Revival of Small Stock Exchanges”. The policy enunciated by SEBI permits a stock exchange to float a subsidiary, which can take up membership of larger stock exchanges, such as the National Stock Exchange of India Limited (NSE), and Bombay Stock Exchange Limited (BSE). ISS has been registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and Futures & Options segment of NSE and Capital Market segment of BSE. Trading Members of ISE can access NSE and BSE by registering themselves as Sub-brokers of ISS. Thus, the trading intermediaries of ISS can access other markets in addition to the ISE market. ISS, thus provides the investors in smaller cities, a one-stop solution for cost-effective and efficient trading and settlement services in securities.

Complementing the stock trading function, ISE’s depository participant (DP) services reach out to intermediaries and investors at industry-leading prices. The full suite of DP services are offered using online software, accessible through multiple connectivity modes - leased lines, VSATs and internet. Operation of the demat account by a client requires just a few mouse clicks.

                  The Research Cell has been established with the objective of carrying out quality research on various facets of the Indian financial system in general and the capital market in particular.

            It brings out a monthly newsletter titled “NISE” and a fortnightly publication titled “V share”. The Research Cell plans to expand its activities by publishing a host of value based research publications, covering a number of areas, such as equities, derivatives, bonds, mutual funds, risk management, pension funds, money markets and commodities. The ISE Training Centre conducts class-room training programmes on different subjects related to the capital market, such as equities trading and settlement, derivatives trading, day trading, arbitrage operations, technical analysis, financial planning, compliance requirement, etc. Through these courses, the training centre provides knowledge to stockbrokers, sub-brokers, professionals and investors to also appear for the certificate courses conducted by the stock exchanges.

            It also aims to make and build the professional careers of MBAs, post graduates and graduates, with a view to enabling them to work effectively in securities trading, risk management, financial management, corporate finance disciplines or function as intermediaries (viz. stock brokers, sub-brokers, merchant bankers, clearing bankers, etc.)

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MISSION OF ISE

ISE endeavors to consolidate the small, fragmented and less liquid markets into a

national-level, liquid market by using state-of-the-art infrastructure and support systems.

OBJECTIVES OF ISE

Create a single integrated national level solution with access to multiple markets for providing

high cost-effective service to millions of investors across the country.

Create a liquid and vibrant national level market for all listed companies in general and small

capital companies in particular.

Optimally utilize the existing infrastructure and other resources of participating Stock

Exchanges, which are under-utilized now.

Provide a level playing field to small Traders and Dealers by offering an opportunity to

participate in a national markets having investment-oriented business.

Provide clearing and settlement facilities to the Traders and Dealers across the Country at

their doorstep in a decentralized mode.

Spread demats tradin

g across the country.

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SAILENT FEATURES OF ISE

NETWORK OF INTERMEDIARIES

As at the beginning of the financial year 2003-04, 548 intermediaries (207 Traders and 341

Dealers) are registered on ISE. A broad of members forms the bedrock for any Exchange, and in this

respect, ISE has a large pool of registered intermediaries who can be tapped for any new line of

business.

ROBUST OPERATIONAL SYSTEMS

The trading, settlement and funds transfer operations of ISE and ISS are completely automated

and state-of-the-art systems have been deployed. The communication network of ISE, which has

connectivity with over 400 trading members and is spread across46 cities, is also used for supporting

the operations of ISS. The trading software and settlement software, as well as the electronic funds

transfer arrangement

established with HDFC Bank and ICICI Bank, gives ISE and ISS the required operational

efficiency and flexibility to not only handle the secondary market functions effectively, but

also by leveraging them for new ventures.

SKILLED AND EXPERIENCED MANPOWER

ISE and ISS have experienced and professional staff, who have wide experience in

Stock Exchanges/ capital market institutions, with in some cases, the experience going up to

nearly twenty years in this industry. The staff has the skill-set required to perform a wide

range of functions, depending upon the requirements from time to time.

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AGGRESSIVE PRICING POLICY

The philosophy of ISE is to have an aggressive pricing policy for the various products

and services offered by it. The aim is to penetrate the retail market and strengthen the

position, so that a wide variety of products and services having appeal for the retail market

can be offered using a common distribution channel. The aggressive pricing policy also

ensures that the intermediaries have sufficient financial incentives for offering these products

and services to the end-clients.

Trading, Risk Management and Settlement Software Systems

The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS (Automated

Exchange Integrated Settlement) software developed on the Microsoft NT platform, with

consultancy assistance from Microsoft, are the most contemporary of the trading and

settlement software introduced in the country. The applications have been built on a

technology platform, which offers low cost of ownership, facilitates simple maintenance and

supports easy up gradation and enhancement. The software’s are so designed that the

transaction processing capacity depends on the hardware used; capacity can be added by just

adding inexpensive hardware, without any additional software work.

VIBRANT SUBSIDIARY OPERATIONS

ISS, the wholly owned subsidiary of ISE, is one of the biggest Exchange subsidiaries in the

country. On any given day, more than 250 registered intermediaries of ISS traded from 46

cities across the length and breadth of the country.

INTER-CONNECTED STOCK EXCHANGE SECURITIES SERVICES LIMITED (ISS)

Inter-connected stock exchange of India Ltd. (ISE) has floated ISE Securities &

Services Ltd (ISS) as a wholly owned subsidiary under the policy formulated by the Securities

and Exchange Board of India (SEBI) for “Revival of Small Stock Exchange”. The policy

14

enunciated by the SEBI permits a stock exchange to float a subsidiary, which can take up

membership of larger stock exchange, such as the National Stock Exchange of India Ltd.

(NSE) and Bombay Stock Exchange Ltd. (BSE).

ISS has been registered by SEBI as a Trading-cum-Clearing Member in the Capital

Market segment and Futures & Options segment of NSE and Capital Market segment of BSE.

Trading Members of ISE can access NSE and BSE by registering themselves with SEBI as

Sub-brokers of ISS. Thus, the trading intermediaries of ISS can access other markets in

addition to the ISE market and their local market. ISS thus provides the investors in small

cities, a one-stop solution for cost-effective and efficient trading and settlement services in

securities.

ISS has commenced operations in the NSE segment from May 3, 2000 and the BSE segment

from December 24, 2004 and is at present operating from 80 locations.

MISSION OF ISS

ISS shall endeavor to provide flexible and cost-effective access to multiple markets to its

intermediaries across the country using the latest technology.

MAJOR MILESTONES

July 6, 1996 a report on Inter-Connected Market System (ICMC)

Submitted to the Federation of Indian Stock Exchange

(FISE).

15

October 26, 1996 Steering Committee was constituted by FISE at

Hyderabad.

January 4, 1997 Price water House Coopers, the management consultancy Firm.

January 22, 1998 ISE incorporated as a company limited by guarantee.

November 18, 1998 SEBI grants recognition to ISE.

February 26, 1999 Commencement of trading on ISE.

December 31, 1999 Induction of 450 Dealers commences.

January 18, 2000 Incorporation of ISS as a company limited by share

Capitals.

February 24, 2000 SEBI registers ISS for the Capital Market Segment of

NSE.

May 3, 2000 Commencement of trading by ISS in the Capital

Market Segment of NSE.

January 10, 2001 Turnover in the Capital Market Segment of NSE

Crosses Rs.1000 million per day.

February 28, 2001 Turnover of Rs.1508.80 million recorded by ISS in

The Capital Market Segment of NSE.

May 4, 2001 Internet trading for clients started by ISS for the

NSE segment through DotEx plaza.

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May 19, 2001 ISE’s website, www.iseindia.com, launched.

February 13, 2002 SEBI registers ISS for the Futures & Options segment

Of NSE.

May 6, 2002 ISS commences trading in the Futures & Options segment

Of NSE.

March 12, 2003 ISS admitted as a member of the Equities segments of

BSE.

April 21, 2003 DP services through CSDL launched by ISE.

June 21, 2003 First Investor Education Program under the Securities

Market Awareness Campaign (SMAC) of SEBI conducted

At Vashi.

January 9, 2004 Peak turnover of Rs.3034.90 million recorded by ISS in the

Capital Market Segment of NSE.

May 17, 2004 First DP branch office opened at Coimbatore by ISE.

July 17, 2004 First Investor Point opened at the Vashi Railway Station Complex by ISE.

July 24, 2004 Second DP branch opened at New Delhi by ISE.

Sept 3, 2004 Third DP branch opened at Kolkata by ISE.

Dec 27, 2004 Trading in the BSE equities started by ISS.

Sept 15, 2005 Approval of ISE’sCorporatisation & Demutualization Scheme by SEBI.

October 20, 2005 Switchover to Direct Client Dealing commences in ISS.

17

November24, 2005 ISE re-registered as a “For Profit” company, limited by Shares.

November 24, 2005 Board of ISE reconstituted in tune with the Corporatisation And Demutualisation Provision.

BOARD OF DIRECTORS

Shri K. Rajendran Nair  -  Chairman, Public Interest Director

Shri P. J. Mathew  -  Managing Director

Shri S. Ravi  -  Public Interest Director

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Shri K. V. Thomas  -  Shareholder Director

Shri K. D. Gupta  -  Shareholder Director

Shri A.K. Chakrawal  -  Shareholder Director

Shri Debrai Biswal  -  Shareholder Director 

Shri Dharmendra B. Mehta  -  Shareholder Director

Shri P. Sivakumar  -  Shareholder Director

Shri Surendra Holani  -  Trading Member Director

Shri Rajeeb Ranjan kumar  -  Trading Member Director

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CHAPTER - III

THEORETICAL REVIEW

INTRODUCTION

Commodities Futures’ trading in India has a long history. The first commodity futures

market appeared in 1875. But the new standardized form of trading in the Indian capital

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market is an attractive package for all the people who earn money through speculation by

trading into FUTURES. It is a well-known fact and should be remembered that the trading

in commodities through futures’ exchanges is merely, “old wine in a new bottle”.

The trading in commodities was started with the first transaction that took place between

two individuals. We can relate this to the ancient method of trading i.e., BARTER

SYSTEM. This method faced the initial hiccups due to the problems like: store of value,

medium of exchange, deferred payment, measure of wealth etc. This led to the invention of

MONEY. As the market started to expand, the problem of scarcity piled up.

The farmers / traders then felt the need to protect themselves against the fluctuations in the price

for their produce. In the ancient times, the commodities traded were – the Agricultural Produce,

which was exposed to higher risk i.e., the natural calamities and had to face the price uncertainty.

It was certain that during the scarcity, the farmer realized higher prices and during the

oversupply he had to loose his profitability. On the other hand, the trader had to pay higher price

during the scarcity and vice versa. It was at this time that both joined hands and entered into a

contract for the trade i.e., delivery of the produce after the harvest, for a price decided earlier. By

this both had reduced the future uncertainty.

One stone still remained unturned- ‘surety of honoring the contract on part from either of the

parties’. This problem was settled in the year 1848, when a group of traders in

CHICAGO came forward to standardize the trading. They initiated the concept of “to-arrive”

contract and permitted the farmers to lock in the price upfront and deliver the grain at a

contracted date later. This trading was carried on a platform called CHICAGO BOARD OF

TRADE, one of the most popular commodities trading exchanges’ today. It was this time that the

trading in commodity futures’ picked up and never looked back.

Although in the 19th century only agricultural produce was traded as a futures contract, but now,

the commodities of global or at least domestic importance are being traded over the commodity

21

futures’ exchanges. This form of trading has proved useful as a device for HEDGING and

SPECULATION. The commodities that are traded today are:

Agro-Based Commodities…… Wheat, Corn, Cotton, Oils, Oilseeds etc..

Soft Commodities…………….. Coffee, Cocoa, Sugar etc

Livestock………………………. Live Cattle, Pork Bellies etc

Energy………………………….. Crude Oil, Natural Gas, Gasoline etc

Precious Metals……………….. Gold, Silver, Platinum etc

Other Metals…………………… Nickel, Aluminum, Copper etc

STRUCTURE OF THE COMMODITY MARKET

22

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DEFINITION OF COMMODITIES

Any product that can be used for commerce or an article of commerce which is traded on

an authorized commodity exchange is known as commodity. The article should be movable of

value, something which is bought or sold and which is produced or used as the subject or barter

or sale. In short commodity includes all kinds of goods. Forward

Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property

other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and

fossil origin are allowed for commodity trading recognized under the FCRA. The national

commodity exchanges, recognized by the Central Government, permits commodities which

include precious (gold and silver) and non-ferrous metals: cereals and pulses; ginned and un-

ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and

onions.

NEED OF COMMODITY MARKET IN INDIA

Achieving hedging efficiency is the main reason to opt for futures contracts. For instance, in

February, 2007, India had to pay $ 52 per barrel more for importing oil than what they had to pay

a week ago. The utility of a futures contact for hedging or risk management purpose parallel or

near-parallel relationship between the spot and futures prices over time. In other words, the

efficiency of a futures contract for hedging essentially envisages that the prices in the physical

and futures markets move in close union not only in the same direction, but also by almost the

same magnitude, so that losses in one market are offset by gains in the other.

24

Theoretically ( and ideally), in a perfectly competitive market with surplus supplies and

abundant stocks round the year, the futures price will exceed the spot price by the cost of storage

till the maturity of the futures contract. But such storage cost declines as the contract approaches

maturity, thereby reducing the premium or contango commanded by the futures contract over the

spot delivery over its life and eventually becomes zero during the delivery month when the spot

and futures prices virtually converge. The efficiency of a futures contract for hedging depends

on the prevalence of such an ideal price relationship between the spot and futures markets.

COMMODITIES EXCHANGES

A brief description of commodity exchanges are those which trade in particular

commodities, neglecting the trade of securities, stock index futures and options etc.,

In the middle of 19th century in the United States, businessmen began organizing market forums

to make the buying and selling of commodities easier. These central market places provided a

place for buyers and sellers to meet, set quality and quantity standards, and establish rules of

business.

The major commodity markets are in the United Kingdom and in the USA. In India there are 25

recognized future exchanges, of which there are three national level multi-commodity

exchanges. After a gap of almost three decades, Government of India has allowed forward

transactions in commodities through Online Commodity Exchanges, a modification of traditional

business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of

commodities.

25

THE THREE EXCHANGES ARE

National Commodity & Derivatives Exchange Limited ( NCDEX)

Multi Commodity Exchange of India Limited ( MCX)

National Multi-Commodity Exchange of India Limited ( NMCEIL)

All the exchanges have been set up under overall control of Forward Market Commission (FMC)

of Government of India.

NATIONAL COMMODITY & DERIVATIVES EXCHANGES

LIMITED (NCDEX)

National Commodity & Derivatives Exchanges Limited (NCDEX) located in Mumbai is

a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and

had commenced its operations on December 15, 2003. This is the only commodity exchange in

the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life

Insurance Corporation and National Bank for Agriculture and Rural Development (NABARD)

and National Stock Exchange of India Limited (NSE). It is a professionally managed online

multi commodity exchange. NCDEX is regulated by Forward Market Commission and is

subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act.,

Forward Commission ( Regulation) Act and * various other legislations.

Multi Commodity Exchange of India Limited (MCX)

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an

independent and de-mutualised exchange with a permanent recognition from Government of

India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,

Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online

trading, clearing and settlement.

All the exchanges have been set up under overall control of Forward Market Commission (FMC)

of Government of India.

26

Commodity exchange in India plays an important role where the prices of any commodity are

not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market

judged upon the prices. Others never had a say. Today, commodity exchanges are purely

speculative in nature. Before discovering the price, they reach to the producers, end-users, and

even the retail investors, at a grassroots level. It brings a price transparency and risk

management in the vital market.

A big difference between a typical auction, where a single auctioneer announces the bids, and the

Exchange is that people are not only competing to buy but also to sell. By Exchange rules and

by law, no one can bid under a higher bid, and no one can offer to sell higher than some one

else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their

toes to make sure no one gets the purchase or sale before they do.

INTERNATIONAL COMMODITIES EXCHANGES

Chicago board of trade (CBOT) – 1848

Chicago mercantile exchanges (CME) – 1898

New York mercantile exchanges (NYMEX) –1872

London metal exchange (LME) – 1877

London international financial futures exchange (LIFFE) – 1979

Tokyo commodity exchange (TOCOM) – 1984

Shanghai metal exchange (SHME)

Dahlia commodity exchange (DCE) – 1993

27

DERIVATIVES

The emergence of the market for derivatives products, most notably forwards, futures and

options, can be tracked 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 product minimizes the impact of fluctuations in asset prices on

the profitability and cash flow situation of risk-averse investors.

Derivatives are risk management instruments, which derive their value from an underlying asset. The

underlying asset can be bullion, index, share, bonds, currency, interest, etc. Banks, Securities firms,

companies and investors to hedge risks, to gain access to cheaper money and to make profit, use

derivatives. Derivatives are likely to grow even at a faster rate in future.

DEFINITION

Derivative is a product whose value is derived from the value of an underlying asset in a contractual

manner. The underlying asset can be equity, forex, commodity or any other asset.

1) Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to

secured or unsecured, risk instrument or contract for differences or any other form of security.

2) A contract which derives its value from the prices, or index of prices, of

underlying securities.

3)

Emergence of financial derivative products

28

Derivative products initially emerged as hedging devices against fluctuations in commodity prices,

financial derivatives came into spotlight in the post-1970 period due to growing instability in the

financial markets. However, since their emergence, these products have become very popular and by

1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years,

the market for financial derivatives has grown tremendously in terms of variety of instruments

available, their complexity and also turnover. Even small investors find these useful due to high

correlation of the popular indexes with various portfolios and ease of use.

PARTICIPANTS

The following three broad categories of participants in the derivatives market.

HEDGERS

Hedgers face risk associated with the price of an asset. They use futures or options markets to

reduce or eliminate this risk.

SPECULATORS

Speculators wish to bet on future movements in the price of an asset. Futures and options

contracts can give them an extra leverage; that is, they can increase both the potential gains and

potential losses in a speculative venture.

ARBITRAGERS

Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if,

for, example, they see the futures price of an asset getting out of line with the cash price, they will take

offsetting position in the two markets to lock in a profit.

FUNCTION OF DERIVATIVES MARKETS

29

The following are the various functions that are performed by the derivatives markets. They are:

Prices in an organized derivatives market reflect the perception of market participants about

the future and lead the price of underlying to the perceived future level.

Derivatives market helps to transfer risks from those who have them but may not like them to

those who have an appetite for them.

Derivatives trading acts as a catalyst for new entrepreneurial activity.

Derivatives markets help increase saving and investment in long run.

TYPES OF DERIVATIVES

The following are the various types of derivatives. They are

FORWARDS

A forward contract is a customized contract between two entities, where settlement takes place on a

specific date in the future at today’s pre-agreed price.

FUTURES

A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a

certain price; they are standardized and traded on exchange.

OPTIONS

Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a

given quantity of the underlying asset, at a given price on or before a given future date. Puts give the

buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price

on or before a given date.

WARRANTS

Options generally have lives of up to one year; the majority of options traded on options exchanges

having a maximum maturity of nine months. Longer-dated options are called warrants and are

generally traded over-the counter.

LEAPS

30

The acronym LEAPS means long-term Equity Anticipation securities. These are options having a

maturity of up to three years.

BASKETS

Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving

average of a basket of assets. Equity index options are a form of basket options.

SWAPS

Swaps are private agreements between two parties to exchange cash floes in the future according to a

prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly

used Swaps are

Interest rate Swaps

These entail swapping only the 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 on

direction being in a different currency than those in the opposite direction.

SWAPTION

Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.

Thus a swaption is an option on a forward swap.

INTRODUCTION TO FUTURES AND OPTIONS

In recent years, derivatives have become increasingly important in the field of finance. While

futures and options are now actively traded on many exchanges, forward contracts are popular on

the OTC market. In this chapter we shall study in detail these three derivative contracts.

Forward contracts

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

asset on a certain specified future date for a certain specified price. The other party assumes a

short position and agrees to sell the asset on the same date for the same price. Other 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:

31

They are bilateral contracts and 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.

If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty,

which often results in high prices being charged.

However forward contracts in certain markets have become very standardized. This process of

standardization reaches its limit in the organized futures market.

Forward contracts are very useful in hedging and speculation. The classic hedging application

would be that of an exporter who expects to receive payment in dollars three months later. He is

exposed to the risk of exchange rate fluctuations. By using the currency forward market to sell

dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer

who is required to make a payment in dollars two months hence can reduce his exposure to

exchange rate fluctuations by buying dollars forward

Limitations of forward markets

Forward markets world-wide are afflicted by several problems:

Lack of centralization of trading,

Liquidity, and

Counter party risk

INTRODUCTION TO FUTURES

Futures markets were designed to solve the problems that exist in forward markets. A futures

contract is an agreement between two parties to buy or sell an asset at a certain time in the future

at a certain price. But unlike forward contracts, the futures contracts are standardized and

exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain

standard features of the contract. A futures contract may be offset prior to maturity by entering

into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

Distinction between futures and forwards

Futures Forwards

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Trade on an organized exchange OTC in nature

Standardized contract terms customized contract terms

Hence more liquid hence less liquid

Requires margin payments no margin payments

Follows daily settlement settlement happens at end of period

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. Table 3.1 lists the distinction between the two

DEFINITION

A Futures contract is an agreement between two parties to buy or sell an asset a certain time in the future

at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard

features of the contract.

Quantity and Quality of the underlying of the underlying.

The date and the month of delivery

The units of price quotations and minimum price change

Location of settlement

FEATURES OF FUTURES

1. Futures are highly standardized.

2. The contracting parties need not pay any down payments.

3. Hedging of price risks.

4. They have secondary markets to.

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TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types:

Stock futures

Index futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a future contract, the buyer and the seller. The buyer of the futures contract is

one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the

futures contract.

The pay off for the buyer and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

Profit

FP

F

0 S2 S1

FL

Loss

CASE 1 the buyer bought the futures contract at (F); if the future price goes to S1 then the buyer gets

the profit of (FP).

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CASE 2 the buyer gets loss when the future price goes less then (F), if the future price goes to S2 then

the buyer gets the loss of (FL).

PAY-OFF FOR A SELLER OF FUTURES

Profit

FL

S2 F S1

FP

Loss

F – FUTURES PRICE S1, S2 – SETTLEMENT PRICE

CASE 1 the seller sold the future contract at (F); if the future goes to S1 then the seller gets the

profit of (FP).

CASE 2 the seller gets loss when the future price goes greater than (F), if the future price goes to

S2 then the seller gets the loss of (FL).

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES

Holding portfolios of securities is associated with the risk of the possibility that the

investor may realize his returns, which would be much lesser than what he expected to get. There

are various factors, which affect the returns

1. Price or dividend (interest)

2. Some are internal to the firm like-

35

Industrial policy

Management capabilities

Consumer’s preference

Labour strike, etc.

These forces are to a large extent controllable and are termed as non systematic risks. An

investor can easily manage such non-systematic by having a well-diversified portfolio spread

across the companies.

There are other of influence which are external to the firm which cannot be controlled

and affect large number of securities. They are termed as systematic risk. They are:

1. Economic

2. Political

3. Sociological changes are sources of systematic risk.

For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-

individual stocks to move together in the same manner. We therefore quite often find stock prices

falling from time to time in spite of company’s earning rising and vice versa.

In debt market, a large position of the total risk of securities is systematic. Debt

instruments are also finite life securities with limited marketability due to their small size relative

to many common stocks. Those factors favor for the purpose of both portfolio hedging and

speculation, the introduction of a derivatives securities that is on some broader market rather than

an individual security

EVOLUTION OF COMMODITY FUTURES EXCHANGES

Commodity markets have existed for centuries around the world because producers and buyers

of foodstuffs and other items have always needed a common place to trade. Cash transactions

were most common, but sometimes “forward” agreements were also made deals to deliver and

pay for something in the future at a price agreed upon in the present. There are records, for

example, of “forward” agreements related to the rice markets in Seventeenth century Japan: most

scholars agree that forward arrangements actually date back much farther in time.

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The first organized grain futures trading in the U.S began in places such as New York City and

Buffalo, but the development of “modern” futures, which are a unique type of forward

agreement, began in Chicago in the 1840s. With the construction of the railroads, Chicago began

to emerge as a center for transportation between Midwestern producers and west coast

population centers. The city was a natural hub for trade, but the trading that took place there was

inefficient and unorganized until a group of Chicago-based business men formed the Board of

Trade of the City of Chicago in 1848. The Board was a member-owned organization that offered

a centralized location for cash trading of a variety of goods as well as trading of forward

contracts. Members served as brokers who facilitated trading in return for commissions.

As trading of forward contracts increased, the Board decided that standardizing those contracts

would streamline the trading and delivery processes. Instead of individualized contracts, which

took a great deal of time to negotiate and fulfill, people interested in the forward trading of corn

at the Board, for example, were asked to trade contracts that were identical in terms of quantity,

quality, delivery month and terms, all as established by the exchange. The only thing left for

traders to negotiate was price and the number of contracts.

These standardized forwards were essentially the first modern futures contracts.

They were unlike other forwards in that they could only be traded at the exchange that created

them, and only at certain designated times. They were also different from other forwards in that

the bids, offers and negotiated prices of the trades were made public by the exchange. This

practice established futures exchanges as venues for “price discovery” in U.S markets.

In contrast to customized contracts, standardized futures contracts were easy to trade, since all

traders were simply re-negotiations of price, and they usually changed hands many times before

expiration. People who wanted to make a profit based on a fortuitous price change, or

alternatively, who wished to cut mounting losses as quickly as possible, could “offset” a futures

contract before expiration by engaging in an opposite trade: buying a contract which they had

previously sold (or “gone short”), or selling a contract which they had previously bought (or

“gone long”).

CASH COMMODITY

37

A cash commodity must meet three basic conditions to be successfully traded in the futures

market:

1. It has to be standardized and, for agricultural and industrial commodities, must be in a basic,

raw, unprocessed state. There are futures contracts on wheat, but not on flour. Wheat is wheat

(although different types of wheat have different futures contracts). The miller who needs

wheat futures to help him avoid losing money on his flour transactions with customers

wouldn’t need flour futures. A given amount of wheat yields a given amount of flour and the

cost of converting wheat to flour is fairly fixed hence predictable.

2. Perishable commodities must have an adequate shelf life, because delivery on a futures contract

is deferred.

3. The cash commodity’s price must fluctuate enough to create uncertainty, which means both rise

and potential profit.

Unlike a stock, which represents equity in a company and can be held for along time, if not

indefinitely, futures contracts have finite lives. They are primarily used for hedging commodity

price-fluctuation risks or for taking advantage of price movements, rather than for the buying or

selling of the actual cash commodity. The word “contract” is used because a futures contract

requires delivery of the commodity in a stated month in the future unless the contract is

liquidated before it expires.

The buyer of the futures contract (the party with a long position) agrees on a fixed purchase price

to buy the underlying commodity (wheat, gold or T-bills, for example) form the seller at the

expiration of the contract. The seller of the futures contract (the party with a short position)

agrees to sell the underlying commodity to the buyer at expiration at the fixed sales price. As

time passes, the contract’s price changes relative to the fixed price at which the trade was

initiated. This creates profits or losses for the trader.

In most cases, delivery never takes place. Instead, both the buyer and the seller, acting

independently of each other, usually liquidate their long and short positions before the contract

expire: the buyer sells futures and the seller buys futures.

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THE ERA OF FINANCIAL FUTURES

In the 19th and early 20th centuries gold played a key role in international monetary transactions.

The gold standard was used to back currencies; the international value of currency was

determined by its fixed relationship to gold; gold was used to settle international accounts. The

gold standard maintained fixed exchange rates that were seen as desirable because they reduced

the risk of trading with other countries.

Imbalances in international trade were theoretically rectified automatically by the gold standard.

A country with a deficit would have depleted gold reserves and would thus have to reduce its

money supply. The resulting fall in demand would reduce imports and the lowering of prices

would boost exports; thus the deficit would be rectified. Any country experiencing inflation

would lose gold and therefore would have a decrease in the amount of money available to spend.

This decrease in the amount of money would act to reduce the inflationary pressure.

Supplementing the use of gold in this period was the British pound. Based on the dominant

British economy, the pound became a reserve, transaction, and intervention currency. But the

pound was not up to the challenge of serving as the primary world currency, given the weakness

of the British economy after the Second World War.

Preparing to rebuild the international economic system as World War II was still raging 730

delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Breton Woods,

New Hampshire for the United Nations Monetary and Financial Conference. The delegates

deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July

1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary

system, the planners at Bretton Woods established the International Bank for Reconstruction and

Development (IBRD) (now one of five institutions in the World Bank Group) and the

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International Monetary Fund (IMF). These organizations became operational in 1946 after a

sufficient number of countries had ratified the agreement.

THE BRETTON WOODS SYSTEM OF FIXED EXCHANGE RATES

The chief features of the Bretton Woods system were an obligation for each country to adopt a

monetary policy that maintained the exchange rate of its currency within a fixed value-plus or

minus one percent – in terms of gold; and the ability of the IMF to bridge temporary imbalances

of payments.

THE “PEGGED RATE” OR “PAR VALUE” CURRENCY REGIME

What emerged was the “pegged rate” currency regime. Members were required to establish a

parity of their national currencies in terms of gold (a “peg”) and to maintain exchange rates

within plus or minus 1% of parity (a “band”) by intervening in their foreign exchange markets

(that is, buying or selling foreign money)

THE “RESERVE CURRENCY”

In practice, however, since the principal “ Reserve currency” would be the U.S dollar, this meant

that other countries would pet their currencies to the U.S dollar, and – once convertibility was

restored – would buy and sell U.S dollars to keep market exchange rates within plus or minus 1%

of parity. Thus, the U.S dollar took over the role that gold had played under the gold standard in

the international financial system.

40

Meanwhile, in order to bolster faith in the dollar, the U.S agreed separately to link the dollar to

gold at the rate of $ 35 per ounce of gold. Member countries could only change their par value

with IMF approval, which was contingent on IMF determination that its balances of payments

was in a “fundamental disequilibrium”.

THE U.S BALANCES OF PAYMENTS CRISIS (1958-68)

After the end of World War H. the U.S held $26 billion in gold reserves, of an estimated total of

$40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the

gold base increased by only a few percent. In 1958, the U.S balance of payments swung

negative. The first U.S response to the crisis was in the late 1950s when the Eisenhower

administration placed import quotas on oil and other restrictions on trade outflows. More drastic

measures were proposed, but not acted on. However, with a mounting recession that began in

1959, this response alone was not sustainable.

By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the

Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. By the

early 1970s as the Vietnam War accelerated inflation, the United States as a whole began

running a trade deficit (for the first time in the twentieth century). The crucial turning point was

1970, which saw U.S gold coverage deteriorate from 55% to 22%.

The Smithsonian Agreement

On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in

Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with

2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It

was criticized at the time, and was by design a “temporary” agreement. It failed to impose

41

discipline on the U.S government, and with no other credibility mechanism in place, the pressure

against the dollar in gold continued.

This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $

70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg

against the dollar, though it took a decade for all of the industrialized nations to do so. In

February 1973 the Bretton Woods currency exchange markets closed after a last-gasp

devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.

Throughout the first seven decades of the twentieth century, the futures industry remained

essentially as it has been – focused on the trading of futures on agricultural products. But a

remarkable change occurred in the industry in 1971, with the introduction of futures based on

financial products.

EMERGING TRENDS IN COMMODITY MARKET IN INDIA

Commodity markets have existed in India for a long time, below Table gives the list of registered

commodities exchanges in India. Above Table gives the total annualized volumes on various

exchanges.

While the implementations of the Kara committee recommendations were rather slow, today, the

commodity derivative market in India seems poised for a transformation. National level

commodity derivatives exchanges seem to be the new phenomenon. The Forward Markets

Commission accorded in principle approval for the following national level multi commodity

exchanges. The increasing volumes on these exchanges suggest that commodity markets in India

seem to be a promising game.

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NATIONAL BOARD OF TRADE

Multi Commodity Exchange of India

National Commodity & Derivatives Exchanges of India Ltd.,

Commodity Exchange ProductsNational board of trade, Indore Soya, mustardNational multi commodity exchange, Ahmedabad MultipleAhmedabad commodity exchange Castor, cottonRajadhani Oil & Oil seeds MustardVijai Beopar Chamber Ltd., Muzzaffarnagar GurRajkot seeds, Oil & bullion exchange Castor, groundnutIPSTA, Cochin PepperChamber of commerce, Hapur Gur, mustardBhatinda Om and Oil Exchange GurOther ( mostly inactive)

COMMODITY EXCHANGES REGISTERED IN INDIA

Commodity Exchange Products TradedBhatinda Om & Oil Exchange Ltd., Gur

The Bombay commodity Exchange Ltd

Sunflower OilCotton ( Seed and Oil)Safflower ( Seed , Oil and Oil Cake)Groundnut ( Nut and Oil)Castor Oil, Castor seedSesamum ( Oil and Oilcake)Rice bran, rice bran oil and oil cakeCrude palm oil

The Rajkot Seeds Oil & Bullion Merchants Association Ltd.

Groundnut Oil, Castro Seed

The Kanpur Commodity Exchange Rapeseed / Mustard seed oil and cake.

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Ltd.,Te Meeerut Agro commodities Exchange Co., Ltd.

Gur

The Spices and Oilseeds exchange Ltd., Sangli

Turmeric

Ahmedabad Commodities Exchange Ltd

Cottonseed, castor seed

Vijay Beopar Chamber Ltd., Muzaffarnagr

Gur

India Pepper & Spice Trade Association, Kochi

Pepper

Rajadhani Oils and Oil seeds Exchange Ltd.,Delhi

Gur, Rapeseed / Mustard Seed Sugar Grade – M

National Board of Trade, Indore

Rapeseed / Mustard Seed / Oil / CakeSoyabean / Meal / Oil / Crude Palm Oil

The Chamber of Commerce, Hapur Gur, Rapeseed / Mustard seed

The East India Cotton Association,

Mumbai

Cotton

The central India Commercial

Exchange Ltd Gwaliar

Gur

The east India Jute & Hessain

Exchange Ltd., Kolkata

Hessain, Sacking

First Commodity Exchange of India

Ltd., Kochi

Copra, Coconut Oil & Copra Cake

The Coffee Futures Exchange India

Ltd Bangalore

Coffee

National Multi Commodity Exchange

of India Ltd., / Ahmedabad

Gur RBD Pamolien

Crude Palm Oil, Copra

Rapeseed / Mustard Seed, Soy Bean

Cotton ( Seed, Oil, Oil Cake)

Safflower ( Seed, Oil, and Oil cake)

Ground nut ( Seed, Oil, and Oil cake)

Sugar, Sacking, Gram

Coconut ( Oil and Oilcake)

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Castor ( Oil and Oilcake)

Sesamum ( Seed, Oil, and Oil cake)

Linseed ( Seed, Oil, and Oil cake)

Rice Bran Oil, Pepper, Guar seed Aluminium ingots,

Nickel, tin Vanaspati, Rubber, Copper, Zinc, Lead

National commodity & Derivatives

Exchange Limited

Soy Bean, Refined Soy oil, Mustard Seed

Expeller Mustard Oil

RBD Palmolein Crude Palm Oil

Medium staple cotton

Long Staple Cotton

Gold, Silver

COMMODITY TRADING

COMMODITY MARKET TRADING MCHANISM

Every market transaction consists of three components – trading, clearing and settlement.

TRADING

The trading system on the Commodities exchange provides a fully automated screen-based

trading for futures on commodities on a nationwide basis as well as an online monitoring and

surveillance mechanism. It supports an order driven market and provides complete transparency

of trading operations. After hours trading has also been proposed for implementation at a later

stage.

The NCDEX system supports an order driven market, where orders match automatically. Order

matching is essentially on the basis of commodity, its price, time and quantity. All quantity

fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery

unit for futures contracts on various commodities. The exchange notifies the regular lot size and

45

tick size for each of the contracts traded from time to time. When any order enters the trading

system, it is an active order. It tries to find a match on the other side of the book. If it finds a

match, a trade is generated. If it does not find a match, the order becomes passive and gets

queued in the respective outstanding order book in the system; Time stamping is done for each

trade and provides the possibility for a complete audit trail if required.

COMMODITY FUTURES TRADING CYCLE

NCDEX trades commodity futures contracts having one-month, two-month and three-month

expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration

contract would expire on the 20th of January and a February expiry contract would cease trading

on the 20th February. If the 20th of the expiry month is a trading holiday, the contracts shall

expire on the previous trading day. New contracts will be introduced on the trading day

following the expiry of the near month contract. Following Figure shows the contract cycle for

futures contracts on NCDEX.

Jan Feb Mar Apr

Time

Jan 20 contract

Feb 20 contract

March 20 contract

April 20 contract

May 20 contract

June 20 contract

ORDER TYPES AND TRADING PARAMETERS

An electronic trading system allows the trading members to enter orders with various conditions

attached to them as per their requirement. These conditions are broadly divided into the

following categories:

Time conditions

Price conditions

46

Other conditions

Several combinations of the above are possible thereby providing enormous flexibility to users.

The order types and conditions are summarized below. Of these, the order types available on the

NCDEX system are regular lot order, stop loss order, immediate or cancel order, good till day

order, good till cancelled order, good till order and spread order.

TIME CONDITIONS

1. Good till day order

A day order, as the name suggests is an order which is valid for the day on which it is entered. If

the order is not executed during the day, the system cancels the order automatically at the end of

the day Example: A trader wants to go long on March 1, 2004 in refined palm oil on the

commodity exchange. A day order is placed at Rs.340/- 10 kg. If the market does not reach this

price the order does not get filled even if the market touches Rs.341 and closes. In other words

day order is for a specific price and if the order does not get filled that day, one has to place the

order gain the next day.

2. Good till cancelled (GTC)

A GTC order remains in the system until the user cancels it. Consequently, it spans trading days,

if not traded on the day the order is entered. The maximum number of days an order can remain

in the system is notified by the exchange from time to time after which the order is automatically

cancelled by the system. Each day counted is a calendar day inclusive of holidays. The days

counted are inclusive of the day on which the order is placed and the order is cancelled from the

system at the end of the day of the expiry period. Example: A trader wants to go long on refined

palm oil when the market touches Rs.400/- 10 kg. Theoretically, the order exists until it is filled

up, even if it takes months for it to happen. The GTC order on the NCDEX is cancelled at the

end of a period of seven calendar days from the date of entering an order or when the contract

expires, whichever is earlier.

3. Good till date (GTD)

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A GTD order allows the user to specify the date till which the order should remain in the system

if not executed. The maximum days allowed by the system are the same as in GTC order. At the

end this day / date, the order is cancelled from the system. Each day / date counted is inclusive

of the day / date on which the order is placed and the order is cancelled from the system at the

end of the day / date of the expiry period.

4. Immediate or Cancel (IOC)

An IOC order allows the user to buy or sell a contract as soon as the order is released into the

system, failing which the order is cancelled from the system. Partial match is possible for the

order, and the unmatched portions of the order are cancelled immediately.

5. All or none order

All or none order ( AON) is a limit order, which is to be executed in its entirety, or not at all.

Unlike a fill-or-kill order, an all-or-none order is not cancelled if it is not executed as soon as it is

represented in the exchange. An all-or-none order position can be closed out with another AON

order.

6. Fill or Kill order

This order is a limit order that is placed to be executed immediately and if the order is unable to

be filed immediately, it gets cancelled.

PRICE CONDITION

1. Limit Order

An order to buy or sell a stated amount of a commodity at a specified price, or at a better price, if

obtainable at the time of execution. The disadvantage is that the order may not get filled at all if

the price of that day does not reach specified price.

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2. Stop-loss

A stop-loss order is an order, placed with the broker, to buy or sell a particular futures contract at

the market price if and when the price reaches a specified level. Futures traders often use stop

orders in an effort to limit the amount they might lose if the futures price moves against their

position Stop orders are not executed until the price reaches the specified point. When the price

reaches that point the stop order becomes a market order. Most of the time, stop orders are used

to exit a trade. But, stop orders can be executed for buying / selling positions too. A buy stop

order is initiated when one wants to buy a contract or go long and a sell stop order when one

wants to sell or go short . The order gets filled at the suggested stop order price or at a better

price. Example: A trader has purchased crude oil futures at Rs.750 per barrel. He wishes to

limit his loss to Rs.50 a barrel. A stop order would then be placed to sell an offsetting contract if

the price falls to Rs.700 per barrel. When the market touches this price, stop order gets executed

and the trader would exit the market. For the stop-loss sell order, the trigger price has to be

greater than the limit price.

OTHER CONDITIONS

Margins for trading in futures

Margin is the deposit money that needs to be paid to buy or sell each contract. The margin

required for a futures contract. The margin required for a futures contract is better described as

performance bond or good faith money. The margin levels are set by the exchanges based on

volatility (market conditions) and can be changed at any time. The margin requirements for most

futures contracts range from 2% to 15% of the value of the contract.

In the futures market, there are different types of margins that a trader has to maintain. We will

discuss them in more details when we talk about risk management in the next chapter. At this

stage we look at the types of margins as they apply on most futures exchanges.

Initial margin: The amount that must be deposited by a customer at the time of entering

into a contract is called initial margin. This margin is meant to cover the largest potential

loss in one day. The margin is a mandatory requirement of parties who are entering into

the contract.

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Maintenance margin: A trader is entitled to withdraw any balance in the margin account

in excess of the initial margin. To ensure that the balance in the margin account never

becomes negative, a maintenance margin, which is somewhat lower than the initial

margin, is set. If the balance in the margin account falls below the maintenance margin,

the trader receives a margin call and is requested to deposit extra funds to bring it to the

initial margin level within a very short period of time. The extra funds deposited are

known as a variation margin. If the trader does not provide the variation margin, the

broker closes out the position by offsetting the contract.

Additional margin: In case of sudden higher than expected volatility, the exchange calls

for an additional margin, this is a preemptive move to prevent breakdown. This is

imposed when the exchange fears that the markets have become too volatile and may

result in some payments crisis, etc.,

Mark-to-Market margin (MTM): At the end of each trading day, the margin account is

adjusted to reflect the trader’s gain or loss. This is known as marking to market the

account of each trader. All futures contracts are settled daily reducing the credit exposure

to one day’s movement. Based on the settlement price, the value of all positions is

marked-to-market each day after the official close, i.e., the accounts are either debited or

credited based on how well the positions fared in that day’s trading session. If the

account falls below the maintenance margin level the trader needs to replenish the

account by giving additional funds. On the other hand, if the position generates a gain,

the funds can be withdrawn (those funds above the required initial margin) or can be used

to fund additional trades.

Just as a trader is required to maintain a margin account with a breaker, a clearing house member

is required to maintain a margin account with the clearing house. This is known as clearing

margin. In the case of clearing house member, there is only an original margin and no

maintenance margin. Clearing house and clearing house margins have been discussed further in

detail under the chapter on clearing and settlement.

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CHARGES

Members are liable to pay transaction charges for the trade done through the exchange during the

previous month. The important provisions are listed below; the billing for the all trades done

during the previous month will be raised in the succeeding month.

1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs. One Lakh

trade done. This rate is subject to change from time to time.

2. Due date: The transaction charges are payable on the 7th day from the date of the bill

every month in respect of the trade done in the previous month.

3. Collection process: NCDEX has engaged the services of Bill Junction Payments Limited

(BJPL) to collect the transaction charges through Electronic Clearing System.

4. Registration with BJPL and their services: Members have to fill up the mandate form and

submit the same to NCDEX. NCDEX then forwards the mandate form the BJPL. BJPL

sends the login ID and password to the mailing address a s mentioned in the registration

form. The members can then log on through the website of BJPL, and view the billing

amount and the due date. Advance email intimation is also sent to the members. Besides,

the billing details can be viewed on the website up to a maximum period of 12 months.

5. Adjustment against advances transaction charges: In terms of the regulations, members

are required to remit Rs.50, 000/- as advance transaction charges on registration. The

transaction charges due first will be adjusted against the advance transaction charges

already paid as advance and members need to pay transaction charges only after

exhausting the balance lying in advance transaction.

6. Penalty for delayed payments: If the transaction charges are not paid on or before the due

date, a penal interest is levied as specified by the exchange. Finally, the futures market is

a zero sum game i.e. the total number of long in any contract always equals the total

number of short in any in time is called the “Open interest”. This Open interest figure is a

good indicator of the liquidity in every contract. Based on studies carried out in

international exchanges, it is found that open interest is maximum in near month expiry

contracts.

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CLEARING & SETTLEMENT

Most futures contracts do not lead to the actual physical delivery of the underlying asset. The

settlement is done by closing out open positions, physical delivery or cash settlement. All these

settlement functions are taken care of by an entity called clearing house or clearing corporation.

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades

executed on the NCDEX. The settlement guarantee fund is maintained and managed by

NCDEX.

CLEARING

Clearing of trades that take place on an exchange happened through the exchange-clearing

house. A clearinghouse is a system by which exchanges guarantee the faithful compliance of all

trade commitments undertaken on the trading floor or electronically over the electronic trading

systems. The main task of the clearing house is to keep track of all the transactions that take

place during a day so that the net position of each of its members can be calculated. It

guarantees the performance of the parties to each transaction. Typically it is responsible for the

following:

1. Effecting timely settlement.

2. Trade registration and follow up.

3. Control of the evolution of open interest.

4. Financial clearing of the payment flow.

5. Physical settlement (by delivery) or financial settlement ( by price difference) of

contracts.

6. Administration of financial guarantees demanded by the participants.

The clearing house has a number of members, who re mostly financial institutions responsible

for the clearing and settlement of commodities traded on the exchange. The margin accounts for

the clearing house members are adjusted for gains and losses at the end of each day (in the same

way as the individual traders keep margin accounts with the broker). On the NCDEX, in the

case of clearing house members only the original margin is required (and not maintenance

margin). Everyday the account balance for each contract must be maintained at an amount equal

to the original margin times the number of contracts outstanding. Thus depending on a day’s

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transactions and price movement, the members either need to add funds or can withdraw funds

from their margin accounts at the end of the day. The brokers who are not the clearing members

need to maintain a margin account with the clearing house member through whom they trade in

the clearing house.

CLEARING MECHANISM

Only clearing members including professional clearing members (PCMs) are entitled to clear and

settle contracts through the clearinghouse.

The clearing mechanism essentially involves working out open positions and obligations of

clearing members. This position is considered for exposures and daily margin purposes. The

open positions of PCMs are arrived at by aggregating the open positions of all the TCMs clearing

through him, in contracts in which they have traded. A TCM’s open position is arrived at by the

summation of his clients’ open positions, in the contracts in which they have traded. Client

positions are netted at the level of individual client and grossed across all clients, at the member

level without any set-offs between clients. Proprietary positions are netted at member level

without any set-offs between client and proprietary positions.

At NCDEX, after the trading hours on the expiry date, based on the available information, the

matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping

in view the factors such as available capacity of the vault / warehouse, commodities already

deposited and dematerialized and offered for delivery etc., Matching done by this process is

binding on the clearing members. After completion of the matching process, clearing members

are informed of the deliverable / receivable positions and the unmatched positions. Unmatched

positions have to be settled in cash. The cash settlement is only for the incremental gain / loss as

determined on the basis of final settlement price.

CLEARING BANKS

NCDEX has designed clearing bank through who funds to be paid and/or to be received must be

settled. Every clearing member is required to maintain and operate a clearing account with any

one of the designated clearing bank branches. The clearing account is to be used exclusively for

clearing operations i.e., for settling funds and other obligations to NCDE including payments of

margins and penal charges. A clearing member can deposit funds into this account, but can

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withdraw funds from this account only in his self-name. A clearing member having funds

obligation to pay is required to have clear balance in his clearing account on or before the

stipulated pay-in day and the stipulated time. Clearing members must authorize their clearing

bank to access their clearing account for debiting and crediting their accounts as per the

instructions of NCDEX from time to time. The clearing bank will debit/credit the clearing

account of clearing members as per instructions received from NCDEX. The following banks

have been designated as clearing banks ICICI Bank Limited, Canara Bank, UTI Bank Limited

and HDFC Bank Limited, National Securities Clearing Corporation (NSCCL) undertakes

clearing of trades executed on the NCDEX.

SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which happens on a

continuous basis at the end of each day, and the final settlement which happens on the last

trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM

settlement in respect of admitted deal in futures contracts are cash settled by debiting/crediting

the clearing accounts of CMs with the respective clearing bank. All positions of a CM, brought

forward, created during the day or closed out during the day, are marked to market at the daily

settlement price or the final settlement price at the close of trading hours on a day.

Daily settlement price: Daily settlement price is the consensus closing price as arrived after

closing session of the relevant futures contract for the trading day. However, in the absence

of trading for a contract during closing sessions, daily settlement price is computed as per the

methods prescribed by the exchange from time to time.

Final settlement price: Final settlement price is the closest price of the underlying

commodity on the last trading day of the futures contract. All open positions in a futures

contract cease to exist after its expiration day.

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SETTLEMENT MECHANISM

Settlement of commodity futures contracts is a little different from settlement of financial

futures, which are mostly cash settled. The possibility of physical settlement makes the process

a little more complicated.

`

DAILY MARK TO MARKET SETTLEMENT:

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Types ofSettlement

Daily Settlement Final Settlement

Daily Settlement Price

Handles daily price fluctuationFor all trades (mark to market)

Daily process at end of day

Final Settlement Price

Handles final settlement of allOpen oppositions

On contract expiry date

Daily mark to market settlement is done till the date of the contract expiry. This is done to take

care of daily price fluctuations for all trades. All the open positions of the members are marked

to market at the end of the day and profit/loss is determined as below:

On the day of entering into the contract, it is the difference between the entry value and daily

settlement price for that day.

On any intervening days, when the member holds an open position, it is the different between

the daily settlement price for that day and the previous day’s settlement price.

FINAL SETTLEMENT

On the date of expiry, the final settlement price is the spot price on the expiry day. The spot

prices are collected from members across the country through polling. The polled bid/ask prices

are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price.

The responsibility of settlement is on a trading cum clearing member for all trades done on his

own account and his client’s trades. A professional clearing member is responsible for settling

all the participants’ trades, which he has confirmed to the exchange.

On the expiry date of a futures contract, members are required to submit delivery information

through delivery request window on the trader workstations provided by NCDEX for all open

positions for a commodity for all constituents individually. NCDEX on receipt of such

information matches the information and arrives at a delivery position for a member for a

commodity. A detailed report containing all matched and unmatched requests is provided to

members through the extranet.

Pursuant to regulations relating to submission of delivery information, failure to submit delivery

information for open positions attracts penal charges as stipulated by NCDEX from time to time.

NCDEX also adds all such open positions for a member, for which no delivery information is

submitted with final settlement obligations of the member concerned and settled in cash.

Non-fulfillment of either the whole or part of the settlement obligations is treated as a violation

of the rules, bye-laws and regulations of NCDEX, and attracts penal charges as stipulated by

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NCDE from time to time. In addition NCDEX can withdraw any or all of the membership rights

of clearing member including the withdrawal of trading facilities of all trading members clearing

through such clearing members, without any notice. Further, the outstanding positions of such

clearing member and/or trading members and/or constituents, clearing and settling through such

clearing member, may be closed out forthwith or any thereafter by the exchange to the extent

possible, by placing at the exchange, counter orders in respect of the outstanding position of

clearing member without any notice to the clearing member and / or trading member and / or

constituent. NCDEX can also initiate such other risk containment measures, as it deems

appropriate with respect to the open positions of the clearing members. It can also take

additional measures like imposing penalties, collecting appropriate deposits, invoking bank

guarantees or fixed deposit receipts, realizing money by disposing off the securities and

exercising such other risk containment measures as it deems fit or take further disciplinary

action.

SETTLEMENT METHODS

Settlement of futures contracts on the NCDEX can be done in three ways –by physical delivery

of the underlying asset, by closing out open positions and by cash settlement. We shall look at

each of these in some detail. On the NCDEX all contracts settling in cash are settled on the

following day after the contract expiry date. All contracts materializing into deliveries are settled

in a period 2-7 days after expiry. The exact settlement day for each commodity is specified by

the exchange.

Physical delivery of the underlying asset

For open positions on the expiry day of the contract, the buyer and the seller can announce

intentions for delivery. Deliveries take place in the electronic form. All other positions are

settled in cash.

When a contract comes to settlement/the exchange provides alternatives like delivery place,

month and quality specifications. Trading period, delivery date etc. are all defined as per the

settlement calendar. A member is bound to provide delivery information. If he fails to give

information, it is closed out with penalty as decided by the exchange. A member can choose an

alternative mode of settlement by providing counter party clearing member and constituent. The

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exchange is however not responsible for, nor guarantees settlement of such deals. The settlement

price is calculated and notified by the exchange. The delivery place is very important for

commodities with significant transportation costs. The exchange also specifies the precise

period (date and time) during which the delivery can be made. For many commodities, the

delivery period may be an entire month. The party in the short position (seller) gets the

opportunity to make choices from these alternatives. The exchange collects delivery

information. The price paid is normally the most recent settlement price (with a possible

adjustment for the quality of the asset and – the delivery location). Then the exchange selects a

party with an outstanding long position to accept delivery.

As mentioned above, after the trading hours on the expiry date, based on the available

information, the matching for deliveries is done, firstly, on the basis of locations and then

randomly keeping in view factors such as available capacity of the vault/warehouse,

commodities already deposited and dematerialized and offered for delivery and any other factor

as may be specified by the exchange from time to time. After completion of the matching

process, clearing members are informed of the deliverable/receivable positions and the

unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is

done only for the incremental gain/loss as determined on the basis of the final settlement price.

Any buyer intending to take physicals has to put a request to his depository participant. The DP

uploads such requests to the specified depository who in turn forwards the same to the registrar

and transfer agent (R&T agent) concerned. After due verification of the authenticity, the R&T

agent forwards delivery details to the warehouse which in turn arranges to release the

commodities after due verification of the identity of recipient. On a specified day, the buyer

would go to the warehouse and pick up the physicals.

The seller intending to make delivery has to take the commodities to the designated warehouse.

These commodities have to be assayed by the exchange specified assayer. The commodities have

to meet the contract specifications with allowed variances. If the commodities meet the

specifications, the warehouse accepts them. Warehouses then ensure that the receipts get updated

in the depository system giving a credit in the depositor’s electronic account. The seller then

gives the invoice to his clearing member, who would courier the same to the buyer’s clearing

member.

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NCDEX contracts provide a standardized description for each commodity. The description is

provided in terms of quality parameters specific to the commodities. At the same time, it is

realized that with commodities, there could be some amount of variances in quality/weight etc.,

due to natural causes, which are beyond the control of any person. Hence/ NCDEX contracts

also provide tolerance limits for variances. A delivery is treated as good delivery and accepted if

the delivery lies within the tolerance limits. However, to allow for the difference, the concept of

premium and discount has been introduced. Goods that come to the authorized warehouse for

delivery are tested and graded as per the prescribed parameters. The premium and discount rates

apply depending on the level of variation. The price payable by the party taking delivery is then

adjusted as per the premium/discount rates fixed by the exchange. This ensures that some

amount of leeway is provided for delivery, but at the same time, the buyer taking delivery does

not face windfall loss/gain due to the quantity/quality variation at the time of taking delivery.

This, to some extent, mitigates the difficulty in delivering and receiving exact quality/quantity of

commodity.

CLOSING OUT BY OFFSETTING POSITIONSMost of the contracts are settled by closing out open positions. In closing out, the opposite

transaction is effected to close out the original futures position. A buy contract is closed out by a

sale and a sale contract is closed out by a buy. For example, an investor who took a long

position in two gold futures contracts on the January 30, 2004 at 6090, can close his position by

selling two gold futures contracts on February 27, 2004 at Rs.5928. In this case, over the period

of holding the position he has suffered a loss of Rs.162 per unit. This loss would have been

debited from his margin account over the holding period by way of MTM at the end of each day,

and finally at the price that he closes his position, that is Rs. 5928 in this case.

CASH SETTLEMENT

Contracts held till the last day of trading can be cash settled. When a contract is settled in cash,

it is marked to the market at the end of the last trading day and all positions are declared closed.

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The settlement prince on the last trading day is set equal to the closing spot price of the

underlying asset ensuring the convergence of future prices and the spot prices. For example an

investor took a short position in five long staple cotton futures contracts on December 15 at Rs.

6950. On 20th February, the last trading day of the contract, the spot price of long staple cotton is

Rs. 6725. This is the settlement price for his contract. As a holder of a short position on cotton,

he does not have to actual deliver the underlying cotton but simply takes away the profit of Rs.

225 per trading unit of cotton in the form of cash entities involved in physical settlement.

ENTITLES INVOLVED IN PHYSICAL SETTLEMENT

Physical settlement of commodities involves the following three entities – an accredited

warehouse, registrar & transfer agent and an assayer. We will briefly look at the functions of

each accredited warehouse.

ACCREDITED WAREHOUSE

NCDEX specified accredited warehouses through which delivery of a specific commodity can be

affected and which will facilitate for storage of commodities. For the services provided by them,

warehouses charge a fee that constitutes storage and other charges such as insurance, assaying

and handling charges or any other incidental charges following are the functions of an accredited

warehouse.

FOLLOWING ARE THE FUNCTIONS OF AN ACCREDITED

WAREHOUSE

1.   Earmark separate storage area as specified for the        purpose of storing commodities to be

delivered against        deals made on the exchange. The warehouses are required to meet the

specifications prescribed by the        exchange for storage of commodities.

2. Ensure and coordinate the grading of the commodities received at the warehouse

before they are stored.

3. Store commodities in line with their grade specifications and validity period and

facilitate maintenance of identity. On expiry of such validity period of the grade for

such commodities, the warehouse has to segregate such commodities and store them

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in a separate area so that the same are not mixed with commodities which are within

the validity period as per the grade certificate issued by the approved assayers.

4.

Approved registrar and transfer agents (R&T agents)

The exchange specifies approved R&T agents through whom commodities can be dematerialized

and who facilitate for dematerialization/re-materialization of commodities in the manner

prescribed by the exchange from time to time. The R&T agent performs the following functions.

1. Establishes connectivity with approved warehouses and supports them with

physical infrastructure.

2. Verifies the information regarding the commodities accepted by the accredited

warehouse and assigns the identification number (ISIN) allotted by the depository

in line with the grade/validity period.

3. Further processes the information, and ensures the credit of commodity holding to

the Demat account of the constituent.

4. Ensures that the credit of commodities - £oes only to the demat account of c5 the

constituents held with the exchange empanelled DPs.

5. On receiving a request for re-materialization (physical delivery) through the

depository, arranges for issuance of authorization to the relevant warehouse for

the delivery of commodities.

R&T agents also maintain proper records of beneficiary position of constituents holding

dematerialized commodities in warehouses and in the depository for a period and also as

on a particular date. They are required to furnish the same to the exchange as and when

demanded by the exchange, R&T agents also do the job of co-ordinating with DPs and

warehouses for billing of charges for services rendered on periodic intervals. They also

reconcile dematerialized commodities in the depository and physical commodities at the

warehouses on periodic basis and co-ordinate with all parties concerned for the same

settlement – entity interaction approved assayer.

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Client Broker Exchange

APPROVED ASSAYER

The exchange specifies approved assayers through whom grading of commodities (received at

approved warehouses for delivery against deals made on the exchange), can, be availed by the

constituents of clearing members. Assayers perform the following functions.

Inspect the warehouses identified by the exchange on periodic basis to verify the compliance of

technical/safety parameters detailed in the warehousing accreditation norms of the exchange.

Make available grading facilities to the constituents in respect of the specific commodities traded

on the exchange at specified warehouse. The assayer ensures that the grading to be done (in a

certificate format prescribed by the exchange) in respect of specific commodity is as per the

norms specified by the exchange in the respective contract specifications.

Grading certificate so issued by the assayer specifies the grade as well as the validity period up

to which the commodities would retain the original grade, and the time up to which the

commodities are fit for trading subject to environment changes at the warehouses.

PRICING COMMODITY FUTURES

The process of arriving at a figure at which a person buys and another sells a futures contract for

a specific expiration date is called price discovery. In an active futures market, the process of

price discovery continues from the market’s opening until its close. The prices are freely and

competitively derived. Future prices are therefore considered to be superior to be administered

prices or the prices that are determined privately. Further, the low transaction costs and frequent

trading encourages wide participation in futures markets lessening the opportunity for control by

a few buyers and sellers.

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BANK Clearing Corporation

Depository Participant

NSDL

Ware House

R&T Agent

We try to understand the pricing of commodity futures contracts and look at how the

futures price is related to the spot price of the underlying asset. We study the cost-of-carry

model to understand the dynamics of pricing that constitute the estimation of fair value of futures

the cost of carry model.

.

REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA

At present there are three tiers of regulations of forward/futures trading system in India, namely,

government of India, Forward Markets Commission (FMC) and commodity exchanges. The

need for regulation arises on account of the fact that the benefits of futures markets accrue in

competitive conditions.

Proper regulation is needed to create competitive conditions. In the absence of regulation,

unscrupulous participants could use these leveraged contracts for manipulating prices. This

could have undesirable influence on the spot prices, thereby affecting interests of society at large.

Regulation is also needed to ensure that the market has appropriate risk management system. In

the absence of such a system, a major default could create a chain reaction.

The resultant financial crisis in a futures market could create systematic risk. Regulation is also

needed to ensure fairness and transparency in trading, clearing, settlement and management of

the exchange so as to protect and promote the interest of various stakeholders, particularly non-

member users of the market.

RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets

Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in

commodities notified under section 15 of the Act can be conducted only on the exchanges, which

are granted recognition by the central government (Department of Consumer Affairs, Ministry of

Consumer Affairs, Food and Public Distribution). All the exchanges, which deal with forward

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contracts, are required to obtain certificate of registration from the FMC Besides, they are

subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward

Commission (Regulation) Act and various other legislations, which impinge on their working.

Forward Markets Commission provides regulatory oversight in order to ensure financial integrity

(i.e. to prevent systematic risk of default by one major operator or group of operators), market

integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and

supply conditions) and to protect and promote interest of customers/ nonmembers. It prescribes

the following regulatory measures:

1. Limit on net open position as on close of the trading houses. Some times limit is

also imposed on intra-day net open position. The limit is imposed operator-wise/

and in some cases, also member wise.

2. Circuit filters or limit on price fluctuations to allow cooling of market in the event

of abrupt upswing or downswing in prices.

3. Special margin deposit to be collected on outstanding purchases or sales when

price moves up or down sharply above or below the previous day closing price.

By making further purchases/sales relatively costly, the price rise or fall is

sobered down. This measure is imposed only on the request of the exchange.

4. Circuit breakers or minimum/maximum prices. These are prescribed to prevent

futures prices from failing below as rising above not warranted by prospective

supply and demand factors. This measure is also imposed on the request of the

exchange.

5. Skipping trading in certain derivatives of the contract closing the market for a

specified period and even closing out the contract. These extreme are taken only

in emergency situations.

Besides these regulatory measures, the F.C) R) Act provides that a client’s position cannot be

appropriated by the member of the exchange, except when a written consent is taken within three

days time. The FMC is persuading increasing number of exchanges to switch over to electronic

trading, clearing and settlement which is more customer/friendly. The FMC has also prescribed

simultaneous reporting system for the exchanges following open out cry system.

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These steps facilitate audit trail and make it difficult for the members to indulge in malpractice

like trading ahead of clients, etc. The FMC has also mandated all the exchanges following open

outcry system to display at a prominent place in exchange premises, the name, address,

telephone number of the officer of the commission who can be contacted for any grievance. The

website of the commission also has a provision for the customers to make complaint and send

comments and suggestions to the FMC. Officers of the FMC have been instructed to meet the

members and clients on a random basis, whenever they visit exchanges, to ascertain the situation

on the ground, instead of merely attending meetings of the board of directors and holding

discussions with the office bearers.

RULES GOVERNING INTERMEDIARIES

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules framed

there under, exchanges are governed by its own rules and bye laws (approved by the FMC). In

this section we have brief look at the important regulations that govern NCDEX. For the sake of

convenience/these have been divided into two main divisions pertaining to trading and clearing.

The NCDEX provides an automated trading facility in all the commodities admitted for dealings

on the spot market and derivative market. Trading on the exchange is allowed only through

approved workstation(s) located at locations for the office(s) of a trading member as approved by

the exchange. If LAN or any other way to other workstations at any place connects an approved

workstation of a trading Member it shall require an approval of the exchange.

Each trading member is required to have a unique identification number which is provided by the

exchange and which will be used to log on (sign on) to the trading system. A trading member

has a non-exclusive permission to use the trading system as provided by the exchange in the

ordinary course of business as trading member. He does not have any title rights or interest

whatsoever with respect to trading system/its facilities/ software and the information provided by

the trading system.

For the purpose of accessing the trading system/the member will install and use equipment and

software as specified by the exchange at his own cost. The exchange has the right to inspect

equipment and software used for the purposes of accessing the trading system at any time. The

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cost of the equipment and software supplied by the exchange/installation and maintenance of the

equipment is borne by the trading member and users Trading members are entitled to appoint,

(subject to such terms and conditions/as may be specified by the relevant authority) from time to

time Authorized persons and Approved users.

Trading members have to pass a petrifaction program/which has been prescribed by the

exchange. In case of trading members/other than individuals or sole proprietorships/such

certification program has to be passed by at least one of their

directors/employees/partners/members of governing body.

Each trading member is permitted to appoint a certain number of approved users as notified from

time to time by the exchange. The appointment of approved users is subject to the terms and

conditions prescribed by the exchange. Each approved user is given a unique identification

number through which he will have access to the trading system. An approved user can access

the trading system through a password and can change the password from time to time.

The trading member or its approved users are required to maintain complete secrecy of its

password. Any trade or transaction done by use of password of any approved user of the trading

member, will be binding on such trading member. Approved user shall be required to change his

password at the end of the password expiry period.

TRADING DAYS

The exchange operates on all days except Saturday and Sunday and on holidays that it declares

from time to time. Other than the regular trading hours, trading members are provided a facility

to place orders offline i.e. outside trading hours. These are stored by the system but get traded

only once the market opens for trading on the following working day.

The types of order books, trade books, price a limit, matching rules and other parameters

pertaining to each or all of these sessions are specified by the exchange to the members via its

circulars or notices issued from time to time. Members can place orders on the trading system

during these sessions, within the regulations prescribed by the exchange as per these bye laws,

rules and regulations, from time to time.

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TRADING HOURS AND TRADING CYCLE

The exchange announces the normal trading hours/open period in advance from time to time. In

case necessary, the exchange can extend or reduce the trading hours by notifying the members.

Trading cycle for each commodity/derivative contract has a standard period, during which it will

be available for trading.

CONTRACT EXPIRATION

Derivatives contracts expire on a pre-determined date and time up to which the contract is

available for trading. This is notified by the exchange in advance. The contract expiration

period will not exceed twelve months or as the exchange may specify from time to time.

TRADING PARAMETERS

The exchange from time to time specifies various trading parameters relating to the trading

system. Every trading member is required to specify the buy or sell orders as either an open

order or a close order for derivatives contracts. The exchange also prescribes different order

books that shall be maintained on the trading system and also specifies various conditions on the

order that will make it eligible to place it in those books.

The exchange specifies the minimum disclosed quantity for orders that will be allowed for each

commodity/derivatives contract. It also prescribed the number of days after which Good Till

Cancelled orders will be cancelled by the system. It specifies parameters like lot size in which

orders can be placed, price steps in which shall be entered on the trading system, position limits

in respect of each commodity etc.

FAILURE OF TRADING MEMBER TERMINAL

In the event of failure of trading member’s workstation and/ or the loss of access to the trading

system, the exchange can at its discretion undertake to carry out on behalf of the trading member

the necessary functions which the trading member is eligible for. Only requests made in writing

in a clear and precise manner by the trading member would be considered. The trading member

is accountable for the functions executed by the exchange on its behalf and has to indemnity the

exchange against any losses or costs incurred by the exchange.

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TRADE OPERATIONS

Trading members have to ensure that appropriate confirmed order instructions are obtained from

the constituents before placement of an order on the system. They have to keep relevant records

or documents concerning the order and trading system order number and copies of the order

confirmation slip/modification slip must be made available to the constituents.

The trading member has to disclose to the exchange at the time of order entry whether the order

is on his own account or on behalf of constituents and also specify orders for buy or sell as open

or close orders. Trading members are solely responsible for the accuracy of details of orders

entered into the trading system including orders entered on behalf of their constituents. Traders

generated on the system are irrevocable and blocked in 1. The exchange specifies from time to

time the market types and the manner if any, in which trade cancellation can be effected.

Where a trade cancellation is permitted and trading member wishes to cancel a trade, it can be

done only with the approval of the exchange.

MARGIN REQUIREMENTS

Subject to the provisions as contained in the exchange bye-laws and such other regulations as

may be in force, every clearing member/in respect of the trades in which he is party to, has to

deposit a margin with exchange authorities.

The exchange prescribes from time to time the commodities/derivatives contracts, the settlement

periods and trade types for which margin would be attracted.

The exchange levies initial margin on derivatives contracts using the concept of Value at Risk

(VaR) or any other concept as the exchange may decide from time to time. The margin is

charged so as to cover one-day loss that can be countered on the position on 99% of the days.

Additional margins may be levied for deliverable positions, on the basis of VaR from the expiry

of the contract till the actual settlement date plus a mark-up for default.

The margin has to be deposited with the exchange within the time notified by the exchange. The

exchange also prescribes categories of securities that would be eligible for a margin deposit, as

well as the method of valuation and amount of securities that would be required to be deposited

against the margin amount.

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The procedure for refund/adjustment of margins is also specified by the exchange from time to

time. The exchange can impose upon any particular trading member or category of trading

member any special or other margin requirement. On failure to deposit margin/s as required

under this clause, the exchange/clearing house can withdraw the trading facility of the trading

member. After the pay-out, the clearing house releases all margins.

CLEARING

As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes

clearing of trades executed on the NCDEX, All deals executed on the Exchange are cleared and

settled by the trading members on the settlement date by the trading members themselves as

clearing members or through other professional clearing members in accordance with these

regulations/bye laws and rules of the exchange.

LAST DAY OF TRADING

Last trading day for a derivative contract in any commodity is the date as specified in the

respective commodity contract. If the last trading day as specified in the respective commodity

contract is a holiday, the last trading day is taken to be the previous working day of exchange.

On the expiry date of contracts, the trading members/ clearing members have to give delivery

information as prescribed by the exchange from time to time. If a trading member/clearing

member fails to submit such information during the trading hours on the expiry date for the

contract/the deals have to be settled as per the settlement calendar applicable for such deals, in

cash-together with penalty as stipulated by the exchange deals entered into through the exchange.

The clearing member cannot operate the clearing account for any other purpose.

INTRODUCTION TO THE GOLD

A very ductile and malleable, brilliant yellow precious metal that is resistant to air and water

corrosion. It is a precious metal that is very soft when pure (24 Kt). Gold is the most malleable

(hammerable) and ductile (able to be made into wire) metal. Gold is alloyed (mixed with other

metals, usually silver and copper) to make it less expressive and harder. The purity of gold

jewelry is measured in karats. Some countries hallmark gold with a three-digit number that

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indicates the parts per thousand of gold. In this system. “750” means 750/1000gold (equal to

18K); “500” means 500/1000 gold (equal to 12K). Alloyed gold comes in many colors.

WORLD GOLD MARKETS

London as the great clearing house

New York as the home of futures trading

Zurich as a physical tumtable

Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions.

Tokyo where TOCOM sets the mood of Japan

Mumbai under India’s liberalized gold regime.

24 HOURS ROUND THE CLOCK MARKET

Hong Kong Gold Market

Zurich Gold Market

London Gold Market

New York Market

INDIA GOLD MARKET

Gold is valued in India as a savings and investment vehicle and is the second preferred

investment after bank deposits

India is the world’s largest consumer of gold to jewellery as investment.

In July “1997 the RBI authorized the commercial banks to import gold for sale or loan to

jewelers and exporters. At present, 13 banks are active in the import of gold.

This reduced the disparity between international and domestic prices of gold from 57

percent during 1986 to 1991 to 8.5 percent in 2001.

The gold hoarding tendency is well ingrained in Indian society.

70

Domestic consumption is dictated by monsoon/harvest and marriage season. Indian

jewelry off take is sensitive to price increase and even more so to volatility.

In the cities gold is facing competition from the stock market and a wide range of

consumer goods.

Facilities for refining, assaying, making them into standard bars in India, as compared to

the rest of the world, are insignificant, both qualitatively and quantitatively.

Major gold production countries

South Africa, United States, Australia, China, Canada, Russia, Indonesia, Peru,

Uzbekistan, Papua New Guinea, China, Brazil, Chile, Philippines, Mali, Mexico,

Argentina, Zimbabwe& Colombia.

Market Moving Factors

Aboveground supply from sales by central bank, reclaimed scrap and official gold loans

Producer/miner hedging interest

World macro-economic factors – US Dollar, interest rate

Comparative returns on stock markets

Domestic demand based on monsoon and agricultural output, Fine gold content.

THE PURITY OF GOLD ARTICLES IS GENERALLY DESCRIBED IN THREE WAYS.

Percent % (Parts of gold per

100)

Fineness (Parts of gold per

1000)

Karats (parts of gold per 24)

100% 999 Fine 24 Karats

91.60% 916 Fine 22 Karats

75.00% 750 Fine 18 Karats

58.50% 583 Fine 14 Karats

41.60% 416 Fine 10 Karats

71

FINE GOLD CONTENT

The minimum fineness is 995 parts per 1000 fine gold and gold said to be 100 fine is marked

down to 999.9 fine. The following fine gold contents of other bar weights are accepted by the

London Bullion Market Association (LBMA). These bars are available at the spot Loco-London

price plus a premium which varies dependent on prevailing market conditions in different

locations

TECHNICAL VS. FUNDAMENTAL ANALYSIS

Technical analysis and fundamental analysis are the two main schools of thought in the financial

market. As we’ve mentioned, technical analysis looks at the price movement of a security and

uses this data to predict its Future price movements. Fundamental analysis, on the other hand,

looks at economic factor, know as fundamentals. Let’s get into the details of how this two

approaches differ, the criticism against technical analysis and how technical and fundamental

analysis can be used together to analyze securities.

FUNDAMENTAL ANALYSIS

At the most basic level, by looking at the balance sheet, cash flow statement and income

statement, a fundamental analyst tries to determine a company’s value. In financial terms, an

analyst attempts to measure a company’s intrinsic value. In this approach, investment decisions

are fairly easy to make –if the price of a stock trades below its intrinsic value, it’s a good

investment. Although this is an oversimplification (fundamental analysis goes beyond just the

financial statements) for the purpose of this tutorial, this simple tenet holds true.

TECHNICAL ANALYSIS

Technical traders, on the other hand, believe there is no reason to analyze a company’s

fundamental because these are all accounted for in the stock’s price. Technicians believe that all

72

the information they need about a stock can be found in its chart. While a fundamental analyst

starts with the financial statements.

TYPES OF MOVING AVERAGES

There are a number of different types of moving averages that vary in the way they are calculate,

but how each average is interpreted remains the same. The calculations only differ in regards to

the weighting that they place on the price data, shifting from equal weighting of each price point

to more weight being placed on recent data .The three most common types of moving averages

are

SIMPLE MOVING AVERAGE (SMA)

This is the most common method used to calculate the moving average of price. It simply takes

the sum of all of the past closing prices over the time period and divides the result by the number

of price used in the calculation. For example, in a 10-day moving average, the last 10 closing are

added together and then divided by 10.

LINEAR WEIGHTED AVERAGE

This moving average indicator is the least common out of the three and is used to address the

problem of the equal weighting. Taking the sum of all the closing prices over a certain time

period and multiplying them by the position of the data point and then dividing by the sum of the

number of periods calculate the linear weighted moving average. For example ,in a five –day

linear weighted average ,five multiplies today’s closing price ,yesterday’s by four and so on until

the first day in the period range is reached .These numbers are hen added together and divided by

the sum of the multipliers.

EXPONENTIAL MOVING AVERAGE (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent data

point and is regarded as much more efficient than the linear weighted average. Having an

understanding of the calculation is not generally required for most trades because most charting

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packages do the calculation for you. The most important thing to remember about the

exponential moving average is that it is more responsive to new information relative to the

simple moving average. This responsiveness is one of the key factors of why this is the moving

average of choice among many technical traders.

GOLD CONTRACTS

In India we have 4 types of gold contracts available in mcx.

Gold-1000 grams

Goldmini- 100 grams

Goldhni-1000 grams

Goldguinea-8 grams

Gold -1000 grams

It is a 1000 grams lot available in mcx and big investor can invest in this gold lots.

Gold hni-1000 grams

It is a1000 grams lot available in mcx so, here who has registered as a HNI in mcx he will

take the gold HNI contracts at a time .number of contracts like it called as bulk deals.

Goldmini-100 grams

the medium investor can invest in goldmine and the lot size is 100 grams.

Goldguinea-8 grams

It is especially for small investors the lot size is 8 grams.

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CHAPTER - IV

75

DATA ANALYSIS &INTERPRETATIONS

Gold-1000 grams

The below table shows 3 days moving averages.

DateClose(Rs)

3 DAYS MOVING AVERAGE

1-Jan-10 16747 02-Jan-10 16794 04-Jan-10 16889 168105-Jan-10 16897 168606-Jan-10 16923 169037-Jan-10 16888 16902.666678-Jan-10 16906 16905.666679-Jan-10 16957 16917

11-Jan-10 17092 1698512-Jan-10 16929 16992.6666713-Jan-10 16858 16959.6666714-Jan-10 16957 16914.6666715-Jan-10 16899 16904.6666716-Jan-10 16912 16922.6666718-Jan-10 16892 1690119-Jan-10 16994 16932.6666720-Jan-10 16756 16880.6666721-Jan-10 16598 16782.6666722-Jan-10 16519 16624.3333323-Jan-10 16551 1655625-Jan-10 16518 16529.3333327-Jan-10 16503 1652428-Jan-10 16353 1645829-Jan-10 16317 1639130-Jan-10 16317 163291-Feb-10 16620 164182-Feb-10 16754 16563.666673-Feb-10 16647 16673.666674-Feb-10 16152 16517.666675-Feb-10 16106 16301.666676-Feb-10 16286 16181.33333

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8-Feb-10 16276 16222.666679-Feb-10 16319 16293.66667

10-Feb-10 16277 16290.6666711-Feb-10 16474 16356.6666712-Feb-10 16452 1640113-Feb-10 16503 16476.3333315-Feb-10 16605 1652016-Feb-10 16731 1661317-Feb-10 16756 16697.3333318-Feb-10 16775 1675419-Feb-10 16857 1679620-Feb-10 16816 1681622-Feb-10 16692 16788.3333323-Feb-10 16591 16699.6666724-Feb-10 16488 16590.3333325-Feb-10 16694 1659126-Feb-10 16772 16651.3333327-Feb-10 16789 16751.66667

1-Mar-10 16796 16785.666672-Mar-10 17020 16868.333333-Mar-10 17028 169484-Mar-10 16956 17001.333335-Mar-10 16901 16961.666676-Mar-10 16907 16921.333338-Mar-10 16739 168499-Mar-10 16727 16791

10-Mar-10 16484 1665011-Mar-10 16526 1657912-Mar-10 16447 16485.6666713-Mar-10 16452 1647515-Mar-10 16538 1647916-Mar-10 16718 16569.3333317-Mar-10 16687 16647.6666718-Mar-10 16768 16724.3333319-Mar-10 16509 16654.6666720-Mar-10 16506 16594.3333322-Mar-10 16416 1647723-Mar-10 16445 16455.6666724-Mar-10 16295 16385.3333325-Mar-10 16261 16333.6666726-Mar-10 16349 16301.6666727-Mar-10 16390 16333.3333329-Mar-10 16319 16352.6666730-Mar-10 16291 16333.3333331-Mar-10 16295 16301.66667

1-Apr-10 16391 16325.666673-Apr-10 16424 163705-Apr-10 16377 16397.33333

77

GOLD 3 DAYS MOVING AVERAGES

The below graph shows daily prices like closing prices of the gold in the form of the

technical tool indicator simple moving averages.

GOLD 3 DAYS MOVING AVG

0

5000

10000

15000

20000

25000

30000

35000

40000

1/1/

2010

1/15

/201

0

1/29

/201

0

2/12

/201

0

2/26

/201

0

3/12

/201

0

3/26

/201

0

MONTHS

VA

LUE

S 3 DAYS MOVING AVERAGE

Close(Rs)

INTERPRETATION

As above data we are taken GOLD Price moving from January 1st to April 5th , on 1st

January it is closed on 16747 in between the period on Jan 11th it is closed to 17092 , latterly on

29th Jan it came down to 16317, on 2nd Feb. it is increased to 16754 , on 5th Feb. again it is come

down to 16106 , end of the contract on 5th April it is closed to 16377.

If you see total data the gold is highly fluctuated because the gold leads the economy.

78

GOLDGUINEA 8 GRAMS

The below table shows 3 days moving averages.

DateClose(Rs

)3 days moving

average1-Feb-10 13183 02-Feb-10 13324 03-Feb-10 13258 132554-Feb-10 12896 13159.333335-Feb-10 12846 130006-Feb-10 12998 12913.333338-Feb-10 12976 129409-Feb-10 12991 12988.33333

10-Feb-10 12966 12977.6666711-Feb-10 13081 13012.6666712-Feb-10 13079 1304213-Feb-10 13118 13092.6666715-Feb-10 13146 13114.3333316-Feb-10 13298 13187.3333317-Feb-10 13298 13247.3333318-Feb-10 13296 13297.3333319-Feb-10 13364 13319.3333320-Feb-10 13354 1333822-Feb-10 13286 13334.6666723-Feb-10 13210 13283.3333324-Feb-10 13111 13202.3333325-Feb-10 13224 13181.6666726-Feb-10 13288 13207.6666727-Feb-10 13294 13268.66667

1-Mar-10 13299 13293.666672-Mar-10 13436 133433-Mar-10 13439 13391.333334-Mar-10 13404 13426.333335-Mar-10 13377 13406.666676-Mar-10 13383 133888-Mar-10 13268 13342.666679-Mar-10 13251 13300.66667

10-Mar-10 13128 13215.6666711-Mar-10 13146 1317512-Mar-10 13097 13123.6666713-Mar-10 13091 13111.3333315-Mar-10 13131 13106.3333316-Mar-10 13230 13150.6666717-Mar-10 13223 13194.6666718-Mar-10 13260 13237.6666719-Mar-10 13125 13202.6666720-Mar-10 13110 1316522-Mar-10 13042 13092.3333323-Mar-10 13056 13069.33333

79

24-Mar-10 12956 1301825-Mar-10 12924 12978.6666726-Mar-10 12975 12951.6666727-Mar-10 12986 12961.6666729-Mar-10 12951 12970.6666730-Mar-10 12931 1295631-Mar-10 12952 12944.66667

1-Apr-10 13005 12962.666673-Apr-10 13019 129925-Apr-10 12992 13005.33333

GOLD GUINEA 3 DAYS MOVING AVERAGE

The below graph shows daily prices like closing prices of the gold guinea in the form

of the technical tool indicator simple moving averages.

GOLD GUINEA 8 grams

05000

1000015000200002500030000

2/1/

2010

2/8/

2010

2/15

/2010

2/22

/2010

3/1/

2010

3/8/

2010

3/15

/2010

3/22

/2010

3/29

/2010

4/5/

2010

MONTHS

VA

LU

ES

3 days moving average

Close(Rs)

INTERPRETATION

As above data we are taken GOLD GUINEA Price moving from February 1 st to April 5th,

on 1st February it is closed on 13183 in between the period on Feb. 19 th it is closed to 13364 ,

latterly on 26th Feb. it came down to 13288, on 3rd march it is increased to 13439 , on 30th march

again it is come down to 12931 , end of the contract on 5th April it is closed to 12992.

If you see total data the gold is highly fluctuated because the gold leads the economy.

80

GOLDMINI-100 GRAMS

The below table shows 3 days moving averages of goldmini.

DateClose(Rs

)

3 DAYS MOVING AVERAGE

6-Jan-10 16942 07-Jan-10 16914 08-Jan-10 16912 16922.666679-Jan-10 16980 16935.33333

11-Jan-10 17103 16998.3333312-Jan-10 16971 1701813-Jan-10 16888 16987.3333314-Jan-10 16973 1694415-Jan-10 16930 16930.3333316-Jan-10 16943 16948.6666718-Jan-10 16927 16933.3333319-Jan-10 17024 16964.6666720-Jan-10 16801 16917.3333321-Jan-10 16626 1681722-Jan-10 16555 16660.6666723-Jan-10 16571 1658425-Jan-10 16548 1655827-Jan-10 16526 16548.3333328-Jan-10 16372 1648229-Jan-10 16329 1640930-Jan-10 16343 163481-Feb-10 16647 16439.666672-Feb-10 16766 16585.333333-Feb-10 16659 16690.666674-Feb-10 16165 165305-Feb-10 16106 163106-Feb-10 16294 16188.333338-Feb-10 16279 16226.333339-Feb-10 16328 16300.33333

10-Feb-10 16287 1629811-Feb-10 16471 1636212-Feb-10 16450 16402.6666713-Feb-10 16500 16473.6666715-Feb-10 16598 1651616-Feb-10 16732 1661017-Feb-10 16757 16695.6666718-Feb-10 16779 1675619-Feb-10 16860 16798.6666720-Feb-10 16822 16820.3333322-Feb-10 16703 1679523-Feb-10 16599 1670824-Feb-10 16494 16598.6666725-Feb-10 16696 16596.33333

81

26-Feb-10 16773 16654.3333327-Feb-10 16790 16753

1-Mar-10 16799 16787.333332-Mar-10 17017 16868.666673-Mar-10 17023 16946.333334-Mar-10 16955 16998.333335-Mar-10 16905 169616-Mar-10 16913 16924.333338-Mar-10 16748 16855.333339-Mar-10 16736 16799

10-Mar-10 16499 1666111-Mar-10 16540 16591.6666712-Mar-10 16458 1649913-Mar-10 16463 1648715-Mar-10 16541 16487.3333316-Mar-10 16710 16571.3333317-Mar-10 16680 16643.6666718-Mar-10 16750 16713.3333319-Mar-10 16502 1664420-Mar-10 16498 16583.3333322-Mar-10 16415 16471.6666723-Mar-10 16439 16450.6666724-Mar-10 16295 1638325-Mar-10 16254 16329.3333326-Mar-10 16324 1629127-Mar-10 16356 16311.3333329-Mar-10 16261 16313.6666730-Mar-10 16242 16286.3333331-Mar-10 16232 16245

1-Apr-10 16377 16283.666673-Apr-10 16427 16345.333335-Apr-10 16377 16393.66667

GOLDMINI 3 DAYS MOVING AVERAGE

82

The below graph shows daily prices like closing prices of the goldmine in the form of the

technical tool indicator simple moving averages.

GOLD MINI 100 grams

05000

10000150002000025000300003500040000

1/6/

2010

1/20

/2010

2/3/

2010

2/17

/2010

3/3/

2010

3/17

/2010

3/31

/2010

MONTHS

VA

LU

ES

3 DAYS MONING AVERAGE

Close(Rs)

INTERPRETATION

As above data we are taken GOLD MINI Price moving from January 6th to April 5th, on

6th January it is closed on 16942, in between the period on 11th Jan it is closed to 17103 ,

latterly on 5th Feb. it came down to 16106, on 3rd march it is increased to 17023 , on 25th march

again it is come down to 16254 , end of the contract on 5th April it is closed to 16377.

If you see total data the gold is highly fluctuated because the gold leads the economy.

83

GOLD HNI –(1000 ) 3 DAYS MOVING AVERAGES

The below table shows 3 days moving averages of gold hni.

Date Close(Rs)

3 DAYS MOVING AVERAGE

1-Jan-10 16835 02-Jan-10 16835 04-Jan-10 16667 167795-Jan-10 16667 167236-Jan-10 16667 166677-Jan-10 16834 16722.666678-Jan-10 16834 16778.333339-Jan-10 16834 16834

11-Jan-10 16834 1683412-Jan-10 16834 1683413-Jan-10 16834 1683414-Jan-10 16834 1683415-Jan-10 16834 1683416-Jan-10 16834 1683418-Jan-10 16834 1683419-Jan-10 16834 1683420-Jan-10 16834 1683421-Jan-10 16666 1677822-Jan-10 16499 16666.3333323-Jan-10 16499 16554.6666725-Jan-10 16499 1649927-Jan-10 16499 1649928-Jan-10 16499 1649929-Jan-10 16334 1644430-Jan-10 16334 163891-Feb-10 16334 163342-Feb-10 16334 163343-Feb-10 16497 16388.333334-Feb-10 16497 16442.666675-Feb-10 16332 164426-Feb-10 16332 163878-Feb-10 16332 163329-Feb-10 16332 16332

10-Feb-10 16332 1633211-Feb-10 16332 1633212-Feb-10 16332 1633213-Feb-10 16332 1633215-Feb-10 16332 1633216-Feb-10 16332 1633217-Feb-10 16495 16386.3333318-Feb-10 16495 16440.6666719-Feb-10 16495 16495

84

20-Feb-10 16495 1649522-Feb-10 16495 1649523-Feb-10 16495 1649524-Feb-10 16495 1649525-Feb-10 16495 1649526-Feb-10 16660 1655027-Feb-10 16660 16605

1-Mar-10 16660 166602-Mar-10 16660 166603-Mar-10 16827 16715.666674-Mar-10 16827 16771.333335-Mar-10 16827 168276-Mar-10 16827 168278-Mar-10 16827 168279-Mar-10 16827 16827

10-Mar-10 16827 1682711-Mar-10 16659 1677112-Mar-10 16492 16659.3333313-Mar-10 16492 16547.6666715-Mar-10 16327 1643716-Mar-10 16327 1638217-Mar-10 16490 16381.3333318-Mar-10 16490 16435.6666719-Mar-10 16490 1649020-Mar-10 16490 1649022-Mar-10 16490 1649023-Mar-10 16490 1649024-Mar-10 16325 1643525-Mar-10 16325 1638026-Mar-10 16325 1632527-Mar-10 16325 1632529-Mar-10 16162 16270.6666730-Mar-10 16162 16216.3333331-Mar-10 16000 16108

1-Apr-10 16000 160543-Apr-10 16000 160005-Apr-10 16160 16053.33333

GOLDHNI 3 DAYS MOVING AVERAGES

85

The below graph shows daily prices like closing prices of the gold hni in the form of the technical tool indicator simple moving averages.

GOLD HNI 1000 grams

05000

10000150002000025000300003500040000

1/1/

2010

1/15

/201

0

1/29

/201

0

2/12

/201

0

2/26

/201

0

3/12

/201

0

3/26

/201

0MONTHS

VA

LU

ES

3 DAYS MOVING AVERAGE

Close(Rs)

INTERPRETATION

As above data we are taken GOLD HNI Price moving from January 1st to April 5th , on

1st January it is closed on 16835 in between the period on Jan 26th it is closed to 16666 , latterly

on 6 Feb. it came down to 16332, on 10 march it is increased to 16827 , on 27th march again it

is come down to 16325 , end of the contract on 5th April it is closed to 16160.

If you see total data the gold is highly fluctuated because the gold leads the economy.

ANALYSIS AND INTERPRITATIONS OF THE GRAPH

86

The above graphs shows daily prices like closing prices of the precious metal commodity (gold)

in the form of the technical tour indicator “simple moving avarage”

The moving avarage is the graph shows the moving trends of the index of gold futures for the six

months period data are tekan in to consideration of defferant gold contracts.

Moving avarage is used in-order to analyse the past trends of the particular commodity (gold)

and helping interpretations for the analyst and investors whether to buy, hold or sell particular

commodity in the near future.

In this particular graphs we have taken three days moving avarages on daily basis for period of

six months. Three days moving avarage is generally consider for interpreting the short term

trends are intraday trading on a daily terms.

In commodity market most of the investors are trading in intra-day points, they generally make

both buy and sell signals in a day. The buyers and sellers mainly follow three days moving

avarages.

Here volumes are not taken in to concideration for analysis porpos. Even they effect the high-low

in the market. This analysis is based only on each day trading closing prices.

ANALYSIS FOR GOLD

In this starting contract the closing prices of three days moving averages which indicate a step

increasing in the commodity future and it happens in the january as there was no fluctuation in

commodity market and from the january onwards there were high incresing of gold prices. The

moving average shows a incresing trend in the commodity market which shows a very bullish

trend,because of high incresing trend and also the closing prices of the contract period.

CONCLUSSION OF GOLD ANALYSIS

87

In the lost six months the market was showing more of buying signals than sellings.this

shows a good trend for gold in near future for long term investors and prices might rise and

mostly investor are earning profit if analyse the market proporly.

88

CHAPTER - V

89

FINDINGS & SUGGESTIONS

FINDINGS

The investment made in this is for short period of time and most of the trading is intra-

day in nature i.e. buy and sell on same day to make profit. Here daily volumes and

trends are consider.

The prices of gold had shown significant raise in the six months.

Dollor prices are one of the important factor, which need to track constently.

Future and options derivatives contract avaliable in theworld commodity market .In

india options contracts have not been permitted by the government.

There is scope for better and huge profit especially in commodities market for

investors.

Ex: openning price of contract is Rs.11400 and closing price of contract is

Rs.12650, at the end of the contract the investor can get Rs.1250 as profit.

90

SUGGESTIONS

Innvestors should try to understand the technical part of analyzing the prices of bullion commodities so tat they can earn huge profits,as fundamental analysis doesn’t give sharp trends of future when compared to technical analysis.

The investor should always try to go for long positions right from the beginning of the contract,as it is exhibites a large scale.

In commodity market though there is a possibility of physical delivery of the contracts,there arise the requirement of warehouse facility that is not required in case of eqity market.

The farmers and traders are not fully aware of the existence of the commodity exchange in india,which has to be advertised regularly.

91

BIBLIOGRAPHY

Journals &Articles(1) Jangaih Paladi and c.Anitha raman,commodity market_ A relook ,in

icfai reader.

Books (1) Financial claims &derivatives -by David N King.

(2) Futures & options -by Franklin R Edward.

Websites (1) Market data is available from the URL

http://www.mcxindia.com/market/date wise

(2) Company data available from the URL

http://www.ise.com/webform/view page

92