Commodity Trading An Indian Perspective

COMMODITY TRADING AN INDIAN PERSPECTIVE
INTRODUCTION: India has a long history of commodity futures trading, extending over one hundred and twenty-five years. Still, such trading was interrupted suddenly since the mid-seventies in the fond hope of ushering in an elusive socialistic pattern of society. As the country embarked on economic liberalization policies and signed the A!! Agreement in the early nineties, the government realized the need for futures trading to strengthen the competitiveness of Indian agriculture and the commodity trade and industry. "utures trading began to be permitted in several commodities, and the ushering in of the #$st %entury saw the emergence of new &ational %ommodity 'xchanges with countrywide reach for trading in almost all primary commodities and their products. A commodity futures contract is essentially a financial instrument. "ollowing the absence of futures trading in commodities for nearly four decades, the new generation of %ommodity producers, processors, market functionaries, financial organizations, broking agencies and investors at large are, unfortunately, unaware at present of the economic utility, the operational techni(ues and the financial advantages of such trading. !he )ulti %ommodity 'xchange of India *)%+, the premier &ew -rder 'xchange in the country is, therefore, launching this %ommodity "utures 'ducation Series to provide valuable insights into the rationale for such trading, and the trading practices and regulatory procedures prevailing at the 'xchange. "or easy understanding and simplification of various issues and nuances involved in commodity futures trading, a convenient (uestionanswer approach is adopted.
ALLIANCE BUSINESS ACADEMY
COMMODITY: A. %ommodity includes all kinds of goods. "%.A defines /goods/ as /every kind of movable property other than actionable claims, money and securities/. "utures0 trading is organized in such goods or commodities as are permitted by the %entral overnment. At present, all goods and products of agricultural *including plantation,, mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the "%.A. !he national commodity exchanges have been recognized by the %entral overnment for organizing trading in all permissible commodities which include precious *gold 1 silver, and nonferrous metals2 cereals and pulses2 ginned and unginned cotton2 oilseeds, oils and oilcakes2 raw 3ute and 3ute goods2 sugar and gaur2 potatoes and onions2 coffee and tea2 rubber and spices, etc. FUTURES CONTRACT: A. A futures contract is a type of /forward contract/. "%.A defines forward contract as /a contract for the delivery of goods and which is not a ready delivery contract/. 4nder the Act, a ready delivery contract is one, which provides for the delivery of goods and the payment of price there fore, either immediately or within such period not exceeding $$ days after the date of the contract, sub3ect to such conditions as may be prescribed by the %entral overnment. A ready delivery contract is re(uired by law to be fulfilled by giving and taking the physical delivery of goods. In market parlance, the ready delivery contracts are commonly known as /spot/ or /cash/ contracts. All contracts in commodities providing for delivery of goods and5or payment of price
after $$ days from the date of the contract are /forward/ contracts. "orward contracts are of two types - /Specific 6elivery %ontracts/ and /"utures %ontracts/. Specific delivery contracts provide for the actual delivery of specific (uantities and types of goods during a specified future period, and 7. In which the names of both the buyer and the seller are mentioned. !he term 0"utures contract0 is nowhere defined in the "%.A. 7ut the Act implies that it is a forward contract, which is not a specific delivery contract. 8owever, being a forward contract, it is necessarily /a contract for the delivery of goods/. A futures contract in which delivery is not intended is void *i.e., not enforceable by law,, and is, therefore, not permitted for trading at any commodity exchange. THE SALIENT FEATURES OF A COMMODITY FUTURES CONTRACT: A commodity futures contract is a tradable standardized contract, the terms of 9hich are set in advance by the commodity exchange organizing trading in it: !he futures contract is for a specified variety of a commodity, known as the /basis/, though (uite a few other similar varieties, both inferior and superior, are allowed to be deliverable or tender able for delivery against the specified futures contract. !he (uality parameters of the /basis/ and the permissible tender able varieties2 the delivery months and schedules2 the places of delivery2 the /on/ and /off/ allowances for the (uality differences and the transport costs2 the tradable lots2 the modes of price (uotes2 the procedures for regular periodical *mostly daily, clearings2 the payment of prescribed clearing and margin monies2 the transaction, clearing and other fees2 the arbitration, survey and other dispute redressing methods2 the manner of settlement of outstanding transactions after the last trading day, the penalties
for non issuance or non-acceptance of deliveries, etc., are all predetermined by the rules and regulations of the commodity exchange. %onse(uently, the parties to the contract are re(uired to negotiate only the (uantity to be bought and sold, and the price. 'verything else is prescribed by the 'xchange. 7ecause of the standardized nature of the futures contract, it can be traded with ease at a moment0s notice. PHYSICAL AND FUTURES COMMODITY MARKETS: A KIND OF STATUTORY FRAMEWORK FOR REGULATING COMMODITY FUTURES EXISTS IN INDIA: A. %ommodity futures contracts and the commodity exchanges organizing trading in such contracts are regulated by the overnment of India under the "orward %ontracts *.egulation, Act, $;<# *"%.A or the Act,, and the .ules framed there under. !he nodal agency for such regulation is the "orward )arkets %ommission *")%,, situated at )umbai, which functions under the aegis of the )inistry of %onsumer Affairs, "ood 1 =ublic 6istribution of the %entral overnment
PRICE RISK MANAGEMENT COMMODITY FUTURES MARKET PERFORMANCE IN THE ECONOMIC FUNCTION: !he two ma3or economic functions of a commodity futures market are price risk )anagement and price discovery. Among these, the price risk management is by far the most important, and is the of a commodity futures market. !he need for price risk management, through what is commonly called /hedging/, arises from price risks in most commodities. !he larger, the more fre(uent and the more unforeseen is the price variability in a commodity, the greater is the price risk in it. 9hereas insurance companies offer suitable policies to cover the risks of physical commodity losses due to fire, pilferage, transport mishaps, etc., they do not cover similarly the risks of value losses
resulting from adverse price variations. !he reason for this is obvious. !he value losses emerging from price risks are much larger and the probability of the recurrence is far more fre(uent than the physical losses in both the (uantity and (uality of goods caused by accidental fires and mishaps, or occasional thefts. %ommodity producers, merchants, stockiest and importers face the risks of large value >osses on their production, purchases, stocks and imports from the fall in prices. >ikewise, the processors, manufacturers, exporters and other market functionaries, entering into forward sale commitments in either the domestic or export markets, are exposed to heavy risks from adverse price changes. !rue, price variability may also lead to windfalls, when prices move favorably. In the long run, such gains may even offset the losses from adverse price movements. 7ut the losses, when incurred, are, at times, so huge that these may often cause insolvencies. !he greater the exposure to commodity price risks, the greater is the share of the commodity in the total earnings or production costs. 8ence, the need for price risks management or hedging through the use of futures contracts. 8edging involves buying or selling of a standardized futures contract against the corresponding sale or purchase respectively of the e(uivalent physical commodity. !he benefits of hedging flow from the relationship between the prices of contracts *either ready or forward, for physical delivery and those of futures contracts. So long as these two sets of prices move in close unison and display a parallel *or closely parallel, relationship, losses in the physical market are offset, either fully or substantially, by the gains in the futures market. 8edging thus performs the economic function of helping to reduce significantly, if not eliminate altogether, the losses emanating from the price risks in commodities.
COMMODITY FUTURES EXCHANGE WITH RESPECT TO PRICE DISCOVERY AND PRICE RISK MANAGEMENT: 4nlike the physical market, a futures market facilitates offsetting the trades without exchanging physical goods until the expiry of a contract. As a result, futures market attracts hedgers for risk management, and encourages considerable external competition from those who possess market information and price 3udgment to trade as traders in these commodities. 9hile hedgers 8ave long-term perspective of the market, the traders or arbitragers2 prefer an immediate view of the market. 8owever, all these users participate in buying and selling of commodities based on various domestic and global parameters Such as price, demand and supply, climatic and market related information. !hese factors, together, result in efficient price discovery, allowing large number of buyers and sellers to trade on the exchange. )%+ is communicating these prices all across the globe to make the market more efficient and to enhance the utility of this price discovery function. PRICE RISK MANAGEMENT: 8edging is the practice of off-setting the price risk inherent in any cash market position by taking an e(ual but opposite position in the futures market. !his techni(ue is very useful in case of any long-term re(uirements for which the prices have to be firmed to (uote a sale price but to avoid buying the physical commodity immediately to prevent blocking of funds and incurring large holding costs.
HEDGERS: !he details of hedging can be somewhat complex but the principle is simple. 8edgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level-weeks or months in advance--for something they later intend to buy or sell in !he cash market *such as at a grain elevator or in the bond market,. In this way they attempt to protect themselves against the risk of an unfavorable price change in the interim. -r hedgers may use futures to lock in an acceptable margin between their purchase cost and their selling price. %onsider this example? A 3ewelry manufacturer will need to buy additional gold from his supplier in six months. 7etween now and then, however, he fears the price of gold may Increase. !hat could be a problem because he has already published his catalog for a year ahead. !o lock in the price level at which gold is presently being (uoted for delivery in six months, he buys a futures contract at a price of, say, @A<B an ounce. If, six months later, the cash market price of gold has risen to @ACB, he will have to pay his supplier that amount to ac(uire gold. 8owever, the extra @#B an ounce cost will be offset by a @#B an ounce profit when the futures contract bought at @A<B is sold for @ACB. In effect, the hedge provided insurance against an increase in the price of gold. It locked in a net cost of @A<B, regardless of what happened to the cash market price of gold. 8ad the price of gold declined instead of risen, he would have incurred a loss on his futures position but this would have been offset by the lower cost of ac(uiring gold in the cash market. !he number and variety of hedging possibilities is practically limitless. A cattle feeder can hedge against a decline in livestock prices and a meat packer or supermarket chain can hedge against an increase in livestock prices.
7orrowers can hedge against higher interest rates, and lenders against lower interest rates. Investors can hedge against an overall decline in stock prices, and those who anticipate having money to invest can hedge against an increase in the over-all level of stock prices. And the list goes on. 9hatever the hedging strategy, the common denominator is that hedgers willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes. SPECULATORS: 9ere you to speculate in futures contracts, the person taking the opposite side of your trade on any given occasion could be a hedger or it might well be another speculator--someone whose opinion about the probable direction of prices differs from your own. !he arithmetic of speculation in futures contracts--including the opportunities it offers and the risks it involves--will be discussed in detail later on. "or now, suffice it to say that speculators are individuals and firms who seek to profit from anticipated increases or decreases in futures prices. In so doing, they help provide the risk capital needed to facilitate hedging. Someone who expects a futures price to increase would purchase futures contracts in the hope of later bring able to sell them at a higher price. !his is known as /going long./ %onversely, someone who expects a futures price to decline would sell futures contracts in the hope of later being able to buy back identical and offsetting contracts at a lower price. !he practice of selling futures contracts in anticipation of lower prices is known as /going short./ -ne of the attractive features of futures trading is that it is e(ually easy to profit from declining prices *by selling, as it is to profit from rising prices *by buying,.
FLOOR TRADERS: =ersons known as floor traders or locals, who buy and sell for their own accounts on the trading floors of the exchanges, are the least known and understood of all futures market participants. Det their role is an important one. >ike specialists and market makers at securities exchanges, they help to provide market li(uidity. If there isn0t a hedger or another speculator who is immediately willing to take the other side of your order at or near the going price, the chances are there will be an independent floor trader who will do so, in the hope of minutes or even seconds later being able to make an offsetting trade at a small profit. In the grain markets, for example, there is fre(uently only one-fourth of a cent a bushel difference between the prices at which a floor trader buys and sells. "loor traders, of course, have no guarantee they will realize a profit. !hey may end up losing money on any given trade. !heir presence, however, makes for more li(uid and competitive markets. It should be pointed out, however, that unlike market makers or specialists, floor traders are not obligated to maintain a li(uid market or to take the opposite side of customer orders. Reasons for !"#n$ f!%!res &on%ra&%s He($ers Reasons for Se''#n$ f!%!res &on%ra&%s
!o lock in a price and !o lock in a price and thereby obtain protection thereby obtain protection against rising prices against declining prices from rising !o profit from declining prices
S)e&!'a%ors an( !o profit f'oor Tra(ers prices
THE PROCESS OF PRICE DISCOVERY?
"utures prices increase and decrease largely because of the myriad factors that influence buyers0 and sellers0 3udgments about what a particular commodity will be worth at a given time in the future *anywhere from less than a month to more than two years,. As new supply and demand developments occur and as new and more current information becomes available, these 3udgments are reassessed and the price of a particular futures contract may be bid upward or downward. !he process of reassessment--of price discovery--is continuous. !hus, in Eanuary, the price of a Euly futures contract would reflect the consensus of buyers0 and sellers0 opinions at that time as to what the value of a commodity or item will be when the contract expires in Euly. -n any given day, with the arrival of new or more accurate information, the price of the Euly futures contract might increase or decrease in response to changing expectations. %ompetitive price discovery is a ma3or economic function--and, indeed, a ma3or economic benefit--of futures trading. !he trading floor of a futures exchange is where available information about the future value of a commodity or item is translated into the language of price. In summary, futures prices are an ever changing barometer of supply and demand and, in a dynamic market, the only certainty is that prices will change. AFTER THE CLOSING ELL: -nce a closing bell signals the end of a day0s trading, the exchange0s clearing organization matches each purchase made that day with its corresponding sale and tallies each member firm0s gains or losses based on that day0s price changes--a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day. 'ach firm, in turn, calculates the gains and losses for each of its customers having futures contracts.
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ains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. !hus, if a speculator were to have, say, a @ABB profit as a result of the day0s price changes, that amount would be immediately credited to his brokerage account and, unless re(uired for other purposes, could be withdrawn. -n the other hand, if the day0s price changes had resulted in a @ABB loss, his account would be immediately debited for that amount. !he process 3ust described is known as a daily cash settlement and is an important feature of futures trading. As will be seen when we discuss margin re(uirements, it is also the reason a customer who incurs a loss on a futures position may be called on to deposit additional funds to his account. THE ARITHMETIC OF FUTURES TRADING: !o say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. =erhaps more so than in any other form of speculation or investment, gains and losses in futures trading are highly leveraged. An understanding of leverage--and of how it can work to your advantage or disadvantage--is crucial to an understanding of futures trading. As mentioned in the introduction, the leverage of futures trading stems from the fact that only a relatively small amount of money *known as initial margin, is re(uired to buy or sell a futures contract. -n a particular day, a margin deposit of only @$,BBB might enable you to buy or sell a futures contract covering @#<,BBB worth of soybeans. -r for @F,BBB, you might be able to purchase a futures contract covering common stocks worth @$BB,BBB. !he smaller the margin in relation to the value of the futures contract, the greater the leverage. If you speculate in futures contracts and the price moves in the
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direction you anticipated, high leverage can produce large profits in relation to your initial margin. %onversely, if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin. >everage is a two-edged sword. "or example, assume that in anticipation of rising stock prices you buy one Eune S1= <BB stock index futures contract at a time when the Eune index is trading at $#BB. And assume your initial margin re(uirement is @#<,BBB. Since the value of the futures contract is @#<B times the index, each $ point change in the index represents a @#<B gain or loss. !hus, an increase in the index from $#BB to $ABB would double your @#<,BBB margin deposit and a decrease from $#BB to $$BB would wipe it out. !hat0s a $BBG gain or loss as the result of only an H $5#G change in the stock indexI Said another way, while buying *or selling, a futures contract provides exactly the same dollars and cents profit potential as owning *or selling short, the actual commodities or items covered by the contract, low margin re(uirements sharply increase the percentage profit or loss potential. "or example, it can be one thing to have the value of your portfolio of common stocks decline from @$BB,BBB to @;J,BBB *a FG loss, but (uite another *at least emotionally, to deposit @F,BBB as margin for a futures contract and end up losing that much or more as the result of only a FG price decline. "uturesK trading thus re(uires not only the necessary financial resources but also the necessary financial and emotional temperament.
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ASIC TRADING STRATEGIES: 'ven if you should decide to participate in futures trading in a way that doesn0t involve having to make day-to-day trading decisions *such as a managed account or commodity pool,, it is nonetheless useful to understand the dollars and cents of how futures trading gains and losses are realized. And, of course, if you intend to trade your own account, such an understanding is essential. 6ozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. 8ere is a brief description and illustration of several basic strategies. 7uying * oing >ong, to =rofit from an 'xpected =rice Increase Someone expecting the price of a particular commodity or item to increase over from a given period of time can seek to profit by buying futures contracts. If correct in forecasting the direction and timing of the price change, the futures contract can later be sold for the higher price, thereby yielding a profit.L If the price declines rather than increases, the trade will result in a loss. 7ecause of leverage, the gain or loss may be greater than the initial margin deposit. For e*a+)'e, assume it0s now Eanuary, the Euly soybean futures contract is presently (uoted at @F.BB, and over the coming months you expect the price to increase. Dou decide to deposit the re(uired initial margin of, say, @$,<BB and buy one Euly soybean futures contract. "urther assume that by April the Euly soybean futures price has risen to @F.JB and you decide to take your profit by selling. Since each contract is for <,BBB bushels, your JB-cent a bushel profit would be <,BBB bushels x JB cents or @#,BBB less transaction costs.
=rice
per Malue of <,BBB bushel
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bushel Eanuary April 7uy $ Euly soybean futures contract Sell $ Euly soybean futures contract ain other. @F.BB @F.JB @ .JB
contract @AB,BBB @A#,BBB @ #,BBB
"or simplicity examples do not take into account commissions and !ransaction costs. !hese costs are important, however, and you should be sure you fully understand them. Suppose, however, that rather than rising to @F.JB, the Euly soybean futures price had declined to @<.FB and that, in order to avoid the possibility of further loss, you elect to sell the contract at that price. -n <,BBB bushels your JB-cent a bushel loss would thus come to @#,BBB plus transaction costs. =rice per bushel Eanuary 7uy $ Euly soybean futures contract Sell $ Euly bean futures %ontract >oss @F.BB Malue of <,BBB bushel contract @AB,BBB
April
@<.FB @ .JB
@#H,BBB @ #,BBB
&ote that the loss in this example exceeded your @$,<BB initial margin. Dour broker would then call upon you, as needed, for additional margin funds to cover the loss. * oing short, to profit from an expected price decrease !he only way going short to profit from an expected price decrease differs from
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going long to profit from an expected price increase is the se(uence of the trades. Instead of first buying a futures contract, you first sell a futures contract. !he gain per unit will be the amount by which the purchase price is below the earlier selling price. "or example, assume that in Eanuary your research or other available information indicates a probable decrease in cattle prices over the next several months. In the hope of profiting, you deposit an initial margin of @#,BBB and sell one April live cattle futures contract at a price of, say, F< cents a pound. 'ach contract is for JB,BBB pounds, meaning each $ cent a pound change in price will increase or decrease the value of the futures contract by @JBB. If, by )arch, the price has declined to FB cents a pound, an offsetting futures contract can be purchased at < cents a pound below the original selling price. -n the JB,BBB pound contract, that0s a gain of < cents x JB,BBB lbs. or @#,BBB less transaction costs. =rice pound Eanuary )arch Sell $ April live cattle futures contract 7uy $ April live cattle futures contract ain F< cents FB cents < cents per Malue of JB,BBB
pound contract @#F,BBB @#J,BBB @ #,BBB
Assume you were wrong. Instead of decreasing, the April live cattle futures price increases--to, say, CB cents a pound by the time in )arch when you eventually li(uidate your short futures position through an offsetting purchase. !he outcome would be as follows?
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=rice per Malue of JB,BBB pound Eanuary )arch Sell $ April live cattle futures contract 7uy $ April live cattle futures contract >oss F< cents CB cents < cents pound contract @#F,BBB @#H,BBB @ #,BBB
In this example, the loss of < cents a pound on the futures transaction resulted in a total loss of the @#,BBB you deposited as initial margin plus transaction costs.
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RESEARCH DESIGN: STATEMENT OF PRO LEM:
=rice
differences
in
the
commodities
between
exchanges,
portfolio
construction with a pair of commodities and suggesting of optimal investment platform in India.
TITLE OF THE PRO-ECT: COMMODITY TRADING AN INDIAN PERSPECTIVE OVERVIEW: A commodity futures contract is essentially a financial instrument. "ollowing the absence of futures trading in commodities for nearly four decades, the new generation of commodity producers, processors, market functionaries, financial organizations. SCOPE: !he study includes study of ten commodities taken from two exchanges in India, the study restricts to construction of portfolio of pairs of commodities.
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O -ECTIVES: !o Study of commodity market in India. !o %onstruction of commodity portfolio. !o find risk and return of various commodities taken for study. !o "ind out of correlation and variance between commodities which are traded in the two exchanges.
!o "ind out of the arbitrage opportunity between the two exchanges. !o find out the suitable optimal exchange for an investor to trade on various commodities. RESEARCH METHODOLOGY: TYPE OF STUDY: "or the purpose of the study descriptive analysis is
done where the prices of commodities are taken and returns are calculated based on the market data. SAMPLING: S#.e? !en commodities are taken from two exchanges for a period of time with a duration of three months considering the historical information from both the exchanges Selection? &on probabilistic convenient sampling.
SOURCES OF DATA: Secondary data have been considered for evaluation.
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!he prices of a set of ten commodities are taken for the study from commodities exchanges.
LIMITATIONS OF THE STUDY : Study of ten commodities from two exchanges. =ortfolio construction is restricted to pairs of commodities. =ortfolio constructed on historical prices. As the methodology uses the statistical tools, hence constraints of statistics are applicable.
PLAN OF ANALYSIS:
COVARIANCE MATRIX:
In the study covariance matrix has been calculated by the following ways and means? PURPOSE:
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!o compute the variance-covariance matrix of a matrix. DESCRIPTION !he variance-covariance matrix computes the covariance between each of the columns of a data matrix. !hat is, row i and column 3 of the variance-covariance matrix is the covariance between column i and column 3 of the original matrix. !he diagonal elements *i.e., iN3, are the variances of the columns. !he variancecovariance matrix is symmetric *since the variance-covariance of column i with column 3 is the same as the variance-covariance of column 3 with column .
PORTFOLIO VARIANCE : %onsider a portfolio of n risky assets. >et r- the vector of expected returns and I be the variance-covariance matrix of the n risky assets over the investment horizon. So? is a diagonal matrix containing the standard deviation *o3, of the n assets on its diagonal and zero for all other elements of the matrix. As the diagonal matrices are positive definite, it is obvious that the variance-covariance matrix I can be positive definite only if the correlation matrix %n is positive definite.
CORRELATION MATRIX ? %orrelation matrix is used to find out the relation between pairs of commodities and it provides a guide for the investor to invest on the best combination of commodities.9hen historical data on asset returns are available over a period of time, the linear correlation coefficients between the asset returns can be estimated. enerally, only the linear correlations are considered. If all the asset returns are normally distributed, then the linear
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correlations between returns are the true correlations An important (uestion is whether these values for correlation coefficients can be used directly to (uantify the portfolio variance the portfolio variance can be expressed as a function of the correlation coefficients in that. 4nless the correlation matrix O, is positive definite, the portfolio variance can be negative. Since by definition the variance is the second central moment about the expected mean, it has to be positive. A correlation matrix is either positive definite or positive semi-definite because the variance of a vector of random primary variables is always greater than or e(ual to zero, and it is positive definite if there are no linear dependencies among the primary variables. !his is an important theoretical re(uirement that is often ignored. A conse(uence of ignoring this re(uirement is that the determinant of the correlation matrix can be negative implying that the derived portfolio variance can some how be negative. !herefore, a correlation matrix developed from a set of correlation coefficients that are estimated from historical data for asset returns should and must be positive definite. !his can be ensured by adopting the following procedure. "irst,. "or example, it could be according to the analyst0s confidence in their relationship with other asset returns. !he asset return that is selected as the /best/ is numbered one and the /worst/ numbered n *when there are n asset returns in the optimization exercise,. !he correlation coefficient between asset returns numbered $ and # is considered to be true because the # + # correlation matrix is always positive definite.
HYPOTHESIS TESTING: H/: T0ere #s no (#fferen&e #n re%!rns 1e%2een %0e %2o e*&0an$es H3: T0ere #s (#fferen&e #n re%!rns 1e%2een %0e %2o e*&0an$es
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A t-test was conducted to find out whether there is any difference in returns leading to arbitrage between the two exchanges. !he t-test was conducted with help of returns and variances of the portfolios from the two exchanges. !he result showed that there is arbitrage opportunity between the exchanges for a certain pair of commodities which leads to optimal investments and maximum returns.
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INDUSTRY PROFILE: COMMODITY TRADING AN INVESTOR4S PERSPECTIVE: Po#n%s %o 1e &ons#(ere( 1" #n5es%ors #n %er+s of #n5es%#n$ #n &o++o(#%#es +ar6e%: "ollow the trends. !his is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not /one of the crowd./ "utures traders *and futures brokers, are highly individualistic. Apply money management techni(ues to your trading. !rade with the trends, rather than trying to pick tops and bottoms %alculate the risk5reward ratio before putting a trade on, then guard against the risk of holding it too long 'stablish trading plans before the market opening to eliminate emotional reactions "ollow the plan. -nce a position is established and stops are selected, do not get out unless the stop is reached, or the fundamental reason for taking the position changes 4se technical signals *charts, to maintain discipline P the vast ma3ority of traders are not emotionally e(uipped to stay disciplined without some technical tools. 4se discipline to eliminate impulse trading 8ave a disciplined, detailed trading plan for each trade2 i.e., entry, ob3ective, exit, with no changes unless hard data changes. 6isciplined money management means intelligent trading allocation and risk management. !he overall ob3ective is end-of-year bottom line, not each individual trade
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4se a disciplined trade selection system...an organized, systematic process to eliminate impulse or emotional trading !rade with a plan P not with hope, greed, or fear. =lan where you will get in the market, plan how much you will risk on the trade, and plan where you will take your profits. >earn to trade from the short side. )ost people would rather own something *go long, than owe something *go short,. )arkets can *and should, also be traded frown the short side. 7roker5client psychology must be in tune, or else the broker and client should part company early in the program. %lient and broker should be in touch repeatedly, so when the time comes, both parties are mentally programmed to take the necessary action without delay Anyone who is inclined to speculate in futures should look at speculation as a business, and treat it as such. 6o not regard it as a pure gamble, as so many people do. If speculation is a business, anyone in that business should learn and understand it to the best of his ability. Approach the markets with a reasonable time goal. 9hen you open an account with a broker, don0t 3ust decide on the amount of money, decide on the length of time you should trade. !his approach helps you conserve your e(uity, and helps avoid the >as Megas approach of /9ell, I0ll trade till my stake runs out./ 'xperience shows that many who have been at it over a long period of time end up making money. Always use stop orders, always...always... always. as#&s of F!%!res %ra(#n$ for an #n5es%or:
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!rading commodity futures and options is not for everyone. It is a volatile, complex, and risky business. 7efore you invest any money in futures or options contracts, you should? %onsider the financial experience, goals, and financial resources and know how much can afford to lose above and beyond your initial payment. 4nderstand commodity futures and option contracts and obligations in entering into those contracts. 4nderstand exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents broker is re(uired to give you. !he brochures will provide with general information about trading commodity futures and options. 9e encourage you to ask more (uestions and gather more information before you open an account. !he also issues consumer advisories to alert the public to warning signs of possible fraudulent activity and offer precautions individuals should take before committing funds. 9e encourage you to review these advisories before you trade. Additionally, you may wish to visit the &ational "utures Association *&"A, Investor Services web site for more information and related publications. A(5an%a$es of %ra(#n$ #n &o++o(#%#es for an #n5es%or: Le5era$e---4nlike the stock market, where you might have to actually spend up to @$BB,BBB to buy @$BB,BBB worth of a stock, through margin deposits, a commodities trader can leverage hundreds of thousands of dollars worth of a commodity for pennies on the dollar. Go5ern+en% re$!'a%e(---!he futures markets are so crucial to the well being of our nation, that the government established the %ommodity "utures
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!rading %ommission *%"!%, to oversee the industry. !here is also a selfregulatory body, the &ational "utures Association *&"A,, to further monitor the activity of all market professionals. 9e also encourage you to check the background of any broker or brokerage that you may plan to trade with . L#7!#(#%"---!he 4.S. futures markets are the largest in the world in terms of trading 5o'!+e and dollars, transacting hundreds of millions of dollars daily. Lo2 %ransa&%#on &os%s ---"or example, if you thought the price of coffee was going higher, you could attempt to locate a seller and buy AC,<BB lbs. of coffee, *the standardized size of one coffee futures contract,. Dou could have the coffee shipped to a warehouse, and insure it until the price hopefully rose. 9hen you felt the price wasnKt going any higher, you would have to find a buyer, ship it to them, and hopefully receive your money. Instead, by depositing margin, *approximately @J,#BB in this example, from your A>!AM'S! 9orldwide !rading, Inc. trading account, and going long a coffee futures contract, you could trade coffee *or any other commodity, without the hassle of locating a buyer and seller, and without incurring the extra costs of transportation, storage and insurance. Dour only true cost would be your commissions and fees. O)%#ons---buyers have virtually unlimited gain potential with limited risk.
Ho2 #s Mone" Ma(e an( Los% Tra(#n$ Co++o(#%" F!%!res8 GOING LONG 9 SHORT: oing >-& 1 S8-.!Qto make a profit on anything re(uires that
something be bought and sold, and that you sell at a higher price than you buy. 9hen trading a futures contract it doesnKt matter if you initially sell or buy, as long as you do both before the contract comes due. If you were bearish you would sell, or another word would be go short. If you were bullish you would want to buy, or go long.
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:Ho2 %o se'' so+e%0#n$ %0a% #s no% o2n, or 20" 2o!'( one 1!" so+e%0#n$ 20#&0 #s no% nee(e(:; !he answer is simple. 9hen trading futures, you never actually buy or sell anything tangible2 you are 3ust contracting to do so at a future date. Dou are merely taking a buying or selling position as a speculator, expecting to profit from rising or falling prices. Dou have no intention of making or taking delivery of the commodity you are trading, your only goal is to buy low and sell high, or vice-versa. 7efore the contract expires you will need to relieve your contractual obligation to take or make delivery by offse%%#n$ *also known as !n2#n(, or '#7!#(a%e, your initial position. !herefore, if you originally entered a short position, to exit you would buy, and if you had originally entered a long position, to exit you would sell.
LEVERAGE: !he following contains mathematical examples of leverage in the commodity markets. &o representation is being made that any account has, or is likely to achieve profits similar to those shown in these examples. If I buy a bushel of corn from a farmer for @#.F< per bushel, and it subse(uently rises to @#.;< per bushel, havenKt I only made AB cents: If you only purchased one bushel of corn, you would be correct. 9hat if you had purchased <,BBB bushels *the e(uivalent of $ future contract, of corn: At @#.F<5bushel + <,BBB bushels you would need to have spent @$A,#<B to initially purchase the corn. If you had a storage silo and the extra cash, and the price rose AB-cents, you would have made @$,<BB *AB cents + <,BBB bushels N @$,<BB, less storage, insurance, transportation, and opportunity costs. If the price dropped AB-cents, you would have lost @$,<BB...less storage, insurance, transportation and opportunity costs. 9hat if you donKt have an extra @$A,#<B in your pocket, or a grain silo to store the corn: !he good news is you donKt need @$A,#<B, or a grain silo in the backyard. 9ith only approximately @FBB as a margin deposit, you could go
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long $ corn futures contract with your A>!AM'S! 9orldwide !rading, Inc. broker and if the price of the corn contract rose AB-cents, you would reap the same dollar reward...@$,<BB...earning #<BG on margin, *less fees 1 commissions,. Dou would incur no silo storage, delivery, or insurance costs.
R#s6 D#s&'os!re -- 8owever, it is important to realize that if you had bought a corn futures contract and prices dropped AB-cents you would be losing @$,<BB plus fees and commissions. >everage can work for or against you. If you wanted to buy every stock listed in the S&P 500 indexes, it would take hundreds of thousands of dollars. As a commodity speculator, you could leverage the e(uivalent value of our countryKs <BB largest stocks with one futures contract, using approximately ;BG less money, and with far less in transaction costs. ro6ers ro'e #n )ro5#(#n$ ser5#&e for an #n5es%or #n &o++o(#%" +ar6e%: !he vast ma3ority of individuals, especially new traders, need a broker to execute trades on their behalf because trading futures is not as simple and straightforward as trading stocks. !raders should open an account with a broker. 'nter into an agreement by executing the )ember-%onstituent Agreement. . R All clients will have to maintain a margin account with us. R %lients are re(uested to read all paperwork including the disclosure forms and fill out the forms as accurately as possible. %lients shall have to furnish all supporting documents before the client account is opened. -pen a 7ank Account.
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%lients intending to take5give physical delivery will have to comply with the following additional formalities?
-btain Sales !ax .egistration where the delivery center of the commodity traded in is located. E'e&%ron#& for+ of &o++o(#%" %ra(#n$: The move to electronic trading in the commodities markets, ongoing deregulation and the pressure to increase trading margins are all making it more important than ever for you to improve trading efficiencies. Now theres a unique trading solution that lets you execute across multiple execution Menues P fully integrated within your desktop. !he .outing for %ommodities technology facilitates an open and neutral order .outing hub hosted by energy traders and incorporating !ray portKs trading technology. It allows continued connection by traders to their existing trading poolsL and easier future connection to other execution venues. 'xecute on the best price for each instrument and carry out trades across multiple marketplaces simultaneously. It all adds up to increased productivity and a competitive advantage so crucial in todayKs fast-paced energy markets. !rader for %ommodities to meet your needs. 9ith -rder .outing for %ommodities, youKre able to? !rade more, at lower risk, increasing both company profits and individual bonuses ain increased trading confidence from being able to instantly compare prices from your execution venues Increase trading volume without alerting the market and raising prices .educe the number of trading screens and hardware providing for less distraction and maintenance on the desktop
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.educe error costs and resource demands and optimize reconciliation and settlement using the consolidated feed of deal ticket information from the multiple execution venues to your mid- and back-office systems. COMPANIES PROFILE: In the area of commodity trading in India there a two exchanges with which an investor can invest on commodities and earn profit. !he two exchanges are MCX <MERCANTILE COMMODITY EXCHANGE= an( NCDEX <NATIONAL COMMODITY AND DERIVATIVES EXCHANGE=; <MCX= MERCANTILE COMMODITY EXCHANGE: )%+ an independent and de-mutulised multi commodity exchange has permanent recognition from overnment of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Sey shareholders of )%+ are "inancial !echnologies *India, >td., State 7ank of India, 86"% 7ank, State 7ank of Indore, State 7ank of 8yderabad, State 7ank of Saurashtra, S7I >ife Insurance %o. >td., 4nion 7ank of India, 7ank -f India, 7ank -f 7aroda, %anara 7ank, %orporation 7ank. 8ead(uartered in )umbai, )%+ is led by an expert management team with deep domain knowledge of the commodity futures markets. !hrough the integration of dedicated resources, robust technology and scalable infrastructure, since inception )%+ has recorded many first to its credit. )%+ has built strategic alliances with some of the largest players in commodities eco-system, namely, 7ombay 7ullion Association, 7ombay )etal 'xchange, Solvent 'xtractors0 Association of India, =ulses Importers Association, Shetkari Sanghatana, 4nited =lanters Association of India and India =epper and Spice !rade Association. !oday )%+ is offering spectacular growth opportunities and advantages to a large cross section of the participants including =roducers 5 =rocessors, !raders, %orporate, .egional !rading %enters, Importers, 'xporters, %ooperatives, Industry Associations, amongst others )%+ being nation-wide commodity exchange, offering
30
multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.
WINNING EDGE: Va'!e Pro)os#%#on > )%+0s most important differentiator and strength is that it is an independent and a de-mutualized exchange since inception. !his is further strengthened by participation from different constituents of the market, such as banks, financial institutions, warehousing companies and other stakeholders of the marketplace. )oreover, experienced professionals with deep knowledge of the commodity markets as well as exchange management experience manage )%+. Ne!%ra' I+a$e > )%+ has de-mutualized status from inception that allows formation of a broad, collaborative business partnership. S%ra%e$#& E7!#%" Par%ners0#)s > )%+ has consolidated it base by entering into strategic e(uity partnership with leading nationalized banks like State 7ank of India, 86"% 7ank, State 7ank of Indore, State 7ank of 8yderabad, State 7ank of Saurashtra, S7I >ife Insurance %o. >td., 4nion 7ank of India, 7ank -f India, 7ank -f 7aroda, %anara 7ank, %orporation 7ank. Tra(e S!))or% > )%+ has already tied up exclusively with some of the largest players in this eco-system, namely, 7ombay 7ullion Association, 7ombay )etal 'xchange, Solvent 'xtractors0 Association of India, =ulses Importers Association, Shetkari Sanghatana, 4nited =lanters Association of India and India =epper and Spice !rade Association. FTIL: Te&0no'o$" Par%ner > It is here that )%+ gets the strategic advantage of having "inancial !echnologies *India, >td. as its technology partner for delivering technologically advanced solutions to market participants. "!I>0s proven class of end-to-end 'xchange !rading technologies addressing !rading 5 Surveillance 5
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%learing and Settlement operations would deliver a cutting-edge to the )%+ !rade >ife %ycle i.e. =re-!rade, !rade and =ost-!rade operations. In addition to its *technology, technological capabilities, "!I> also brings to )%+ its deep engagements with technology giants such as )icrosoft 5 Intel and 8= which would be used to gain the competitive edge in gaining foothold in global markets
enef#%s %o In(!s%r"

8edging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. 'fficient price discovery prevents seasonal price volatility. reater flexibility, certainty and transparency in procuring commodities would aid bank lending. "acilitate Informed lending 8edged positions of producers and processors would reduce the risk of default faced by banks >ending for agricultural sector would go up with greater transparency in pricing and storage. %ommodity 'xchanges to act as distribution network to retail agri-finance from 7anks to rural households. =rovide trading limit finance to !raders in commodities 'xchanges
PRODUCTS TRADED IN THE EXCHANGE: old, old ), old 8&I, Silver, Silver ), Silver 8&I %astor Seeds, %astor Seeds )ustard Seed, )ustard Seed -il,
*6isa,, Soy Seeds, %astor -il, .efined Soy -il, Soy meal, .76 =almolein, %rude =alm -il, roundnut -il, Sesame Seed,
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%ottonseed, %ottonseed -ilcake
=epper, .ed %hilli, Eeera, !urmeric Steel >ong,
Steel "lat, %opper, &ickel, !in Sapas, >ong Staple %otton, )edium Staple %otton%hana, 4rad, Dellow =eas, !ur .ice, 7asmati .ice, 9heat, )aize, Sarbati .ice %rude -il .ubber, 7andhani, uar Seed, ur, Sugar )-AB, Sugar S-AB, uarseed 7andhani, )entha -il. uargum uargum, %ashew Sernel,
NCDEX <NATIONAL COMMODITY AND DERIVATIVES EXCHANGE=: &ational %ommodity 1 6erivatives 'xchange >imited *&%6'+, is a professionally managed online multi commodity exchange promoted by I%I%I 7ank >imited *I%I%I 7ank,, >ife Insurance %orporation of India *>I%,, &ational 7ank for Agriculture and .ural 6evelopment *&A7A.6, and &ational Stock 'xchange of India >imited *&S',. =un3ab &ational 7ank *=&7,, %.ISI> >imited *formerly the %redit .ating Information Services of India >imited,, Indian "armers "ertilizer %ooperative >imited *I""%-, and %anara 7ank by subscribing to the e(uity shares have 3oined the initial promoters as shareholders of the 'xchange. &%6'+ is the only commodity exchange in the country promoted by national level institutions. !his uni(ue parentage enables it to offer a bou(uet of benefits, which are currently in short supply in the commodity markets. !he institutional promoters of &%6'+ are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills.
&%6'+ is a public limited company incorporated on April #A, #BBA under the %ompanies Act, $;<F. It obtained its %ertificate for %ommencement of 7usiness on )ay ;, #BBA. It has commenced its operations on 6ecember $<, #BBA. &%6'+ is a nation-level, technology driven de-mutualized on-line commodity exchange with an independent 7oard of 6irectors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class
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commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. &%6'+ is regulated by "orward )arket %ommission in respect of futures trading in commodities. 7esides, &%6'+ is sub3ected to various laws of the land like the %ompanies Act, Stamp Act, %ontracts Act, "orward %ommission *.egulation, Act and various other legislations, which impinge on its working. &%6'+ is located in )umbai and offers facilities to its members in more than A;B centers throughout India. !he reach will gradually be expanded to more centers. &%6'+ currently facilitates trading of thirty six commodities - %ashew, %astor Seed, %hana, %hilli, %offee, %otton, %otton Seed -ilcake, %rude =alm -il, 'xpeller )ustard -il, old, uar gum, uar Seeds, ur, Eeera, Eute sacking bags, )ild Steel Ingot, )ulberry reen %ocoons, =epper, .apeseed - )ustard Seed ,.aw Eute, .76
=almolein, .efined Soy -il, .ice, .ubber, Sesame Seeds, Silk, Silver, Soy 7ean, Sugar, !ur, !urmeric, 4rad *7lack )atpe,, 9heat, Dellow =eas, Dellow .ed )aize 1 Dellow Soybean )eal. At subse(uent phases trading in more commodities would be facilitated
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RESEARCH ORGANISATIONS ROLE IN COMMODITIES TRADING: REUTERS?

Stay ahead of the game as a player in the fast-paced commodities markets, you know what you need P but you donKt have time to search for it. .euters !rader for %ommodities can help you stay one step ahead of the game. &ow the most soughtafter commodities content from .euters is offered in an easy-to use desktop and available in cost-effective packages to suit your precise needs. %hoose from marketspecific packages P such as commodities only, energy only or commodities and energy P and pay only for what you need. 9ith .euters !rader for %ommodities, you get specially designed commodities workbooks. -r take advantage of the open, flexible architecture and create your own. All within an easy-to-navigate screen, so you can be (uick on your feet. All the specialist data, news 1 applications P all in one place .euters !rader for %ommodities puts all the information and tools you need to stay on top of the markets in one flexible desktop. !hat means news2 reports, prices and more are available from easy-to-navigate displays, designed by market professionals to reflect the way you work. )aximize your productivity with a wide range of market overviews, models and calculators. =re-built displays provide easy point-and-click functionality so you can focus on analyzing and acting on the latest market moves. =lus .euters )essaging, built specifically for the needs of the financial community, lets you communicate with your customers and colleagues in real-time, as well as secure a complete audit trail to meet compliance re(uirements. !he flexibility to customize .euters !rader for %ommodities offers supreme flexibility, enabling you to incorporate in-house and third-party data, link prices and (uotes and create displays that reflect your exact needs. -r let .euters 6esktop 6esigners custom-build worksheets and analytical tools for you and your company. 4nbeatable news reporting &o one delivers the news like .euters. As the worldKs largest international news agency, our specialist commodities and energy reporters
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P backed by a network of over #,BBB .euterKs 3ournalists P provide timely, accurate coverage to keep you informed. .euters has been delivering commodities news for more than $<B years, and continues with the same dedication today. !hat tradition of excellence is built on a consistent commitment to the .euters !rust =rinciples, the values that drive every news item we put our name to? speed, accuracy and freedom from bias. !he result is focused, real-time news at its best, delivering the breaking headlines and the market insight you need to make decisions with confidence. "ollow every market move easily filter and search for stories. et alerts, breaking commodities news, weather reports and more delivered direct to your desktop. 9ith .euters, you get the most comprehensive news coverage possible with 3ust a click of the button. Ho2 &an one 1enef#% fro+ Re!%ers Tra(er for Co++o(#%#es8 Mar6e% +a6ers 9 %ra(ers: .eceive a fully integrated desktop solution for pre-trade market analysis. .eadymade displays provide a snapshot of activity to help you make a market based on both technical and fundamental factors. 'asy access to information enables fast price discovery and a competitive advantage over your counterparts. ro6ers: 6onKt miss a single beat in the fast-paced commodities and energy markets. 9ith access to in-depth data, comprehensive news and a wide range of analytical tools, .euters !rader for %ommodities enables you to follow every market move with confidence. Ana'"s%s: !he best advice depends on the best market intelligence. 9ith .euters !rader for %ommodities, you get all the expert tools to understand your markets and the issues affecting them the (uality you expect from .euters 'xperience, (uality, integrity. !hese have been the building blocks of .euters for over $<B years, which have helped us become the leading global provider of news, financial information and technology. -ur strength is our uni(ue ability to offer customers around the world a
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combination of content, technology and connectivity to gain a competitive advantage. EXPERTISE: As the largest international news organization in the world, our reputation is built on core values of accuracy, speed and balanced reporting to uncover the market moving news on the commodities you follow. "-7 pricing: )ergers: 7asis changes: &ew government rules: 9e deliver the facts (uickly and put news into context to help you make decisions with confidence -ur 3ournalists are experts in their field who draw on their knowledge, experience and contacts to produce news with authority. !he strength of our political, general, financial markets and macro-economic reporting complements our commodities news to constantly keep you up to date on the events and factors that affect your market. 9e draw on the expertise of people in the market to give you the edge in yours. !hrough our agreements with organizations such as %.4 International *base metals,, Sov'con *agriculture,, "- >ight *sugar,, Ivan 9ong *palm oil,, -il 9orld *oilseeds,, 4S6A *crops,, 4S %ensus 7ureau *oilseeds, and others we give you consolidated access to the voices of authority in your market P meaning you donKt have to waste time searching for them. THE COMPETITIVE EDGE: -ur unrivalled network of reporters talking to companies in their own languages means we get the tip-offs and are able to immediately track down stories by tapping our local insight and contacts. As a result, we routinely break stories first. 9e cover all the significant news that affects and drives the market. .euterKs fast, accurate and expert coverage of political, economic, energy, debt and
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e(uity markets gives commodities players a comprehensive view of all the factors moving the market P from hurricanes to wars to corporate mergers. 4ni(ue products are built into your .euters service. In base metals, our )etals =roduction 6atabase gives you capacity and production details on all ma3or base smelters and alumina plants around the world. In oilseeds, our canola crushing calculator page yields real-time margins in %anadian dollars, euro and yen, based on %7-! and 9%' prices. -ur position as the leading commodities news provider means our 3ournalists get access, often exclusively, to the people who move the markets. .euterKs global muscle means that we marshal resources (uickly to cover the big events that matter to you P from >)' week to global trade talks to farm reform. UNRIVALLED GLO AL REACH: -ur HB-strong team of commodities reporters globally brings you breaking news and exclusives in 'nglish, "rench, =ortuguese, Spanish, %hinese and fourteen other languages to help you form your decisions each day. .euters commodities news service draws on the work of our entire network of #,ABB reporting staff, in nearly #BB newsrooms worldwide, to provide local insight and access to key market players. 9e bring you the big picture on commodities industries and the companies competing in them. -ur market reporting is anchored around the key futures markets in %hicago, &ew Dork, >ondon, the "ar 'ast and South America, and is complemented by daily news coverage of crops, smelters and mines, weather, cash markets, ports and regulators in all corners of the globe. 9e bring you exclusive polls, surveys, forecasts and interviews to offer uni(ue insight into the expectations of key market participants.
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PRODUCT PROFILE: In India there a large number of commodities on which trading are being done. In brief descriptions of various products are as fallows?Go'(: old the most prominent of all precious metals, is widely sought after throughout the world for both its investment (ualities and industrial properties. Indeed, gold traditionally has served three functions? as a monetary instrument, as a financial asset and as a raw material primarily used in 3ewelry and decorative ob3ects as an investment, gold typically is viewed as a financial asset that will maintain its value during times of political, social or economic distress. As such, gold can provide individual and institutional investors alike a portfolio safety net against sharp downward spikes in complementary assets such as stocks and bonds. )illions of people all over the world continue to use gold as a hedge against inflation and as a basic form of savings. S#'5er: Soft, lustrous, white silver was one of the first metals known to humans. "or the ancient citizens, silver was an ob3ect of amazing beauty, instilled with the mystic (ualities of the moon, whose dark and mysterious nature it seemed to mirror. -nce a standard in the world monetary system, today silver plays an important role as both a financial investment and industrial material. Investors often purchase physical silver in either bullion bar or coin form, with the ma3ority of metal presently bought in the 4nited States, ermany, and %anada In emerging markets, investment demand for silver also is vibrant. 8owever, in these countries, silver tends to be held in the form of 3ewelry, ornaments, and religious ob3ects that are easily melted down and resold.
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Co%%on: %otton is the single most important textile fiber in the world, accounting for over JB percent of total world fiber production. 9hile some HB countries from around the globe produce cotton, the 4nited States, %hina, and India together provide over half the world0s cotton. !he world0s four largest producing and consuming countries are %hina, the 4nited States, India, and =akistan. !ogether these four account for around FB percent of world cotton production and consumption. India is the third-largest producer of cotton and the second-largest consumer. %otton accounts for more than C<G of India0s annual fibre consumption in the spinning mills and more than <HG of its annual fibre consumption in the textile sector. !extile industry in India *ma3or share of which is constituted by cotton, currently adds about $JG to the industrial production and JG to the gross domestic product * 6=,. It provides employment to about A< million persons. !ogether with allied agriculture sector, it provides employment to over ;B million people. !he contribution of this industry to the gross export earnings of the country is over ABG while it adds only CHG to the gross import bill of the country. At the average price of .s J<5kg of over $CB lakh bales *average annual consumption, $ bale N $CB kg, raw cotton traded in the country, the market size of raw cotton in India is over .s. $AB million So"a1ean: !he ma3or Indian soybean growing region is in the central state of )adhya =radesh. Soybean production in India has increased in the last decade, although yields are among the worlds poorest. India imposes prohibitive barriers on oilseed imports, so its domestic crushing is limited to the oilseeds that can be produced within the country. 6omestically produced soybeans are highly valued for the vegetable oil, as India is the world0s largest vegetable oil importer. India is a much smaller consumer of soybean meal, and exports its surplus to other Asian countries. India is the world0s leading importer of edible oils and is likely to remain an important source of global import demand for the foreseeable future. Income and population growth and key
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changes in trade policy are important contributors to India0s increasing consumption and imports. So"a1ean o#': In #BB#5BA, India consumed more than ;.;H million metric tons *mmt, of edible oils, up from 3ust over # mmt annually in the early $;CBs, placing India behind only %hina and the 'uropean 4nion in total edible oil consumption. Although influenced by an array of policies affecting domestic oil suppliesTthrough changes in oilseed production, the efficiency of the processing sector, and imports - consumption growth has been propelled by the demands of a rapidly expanding population. Pa'+ o#': =alm oil has played a positive role in the world oils and fats supply and demand e(uation largely due to its techno-economic advantages and versatility as well as some of the developments in the world in relation to security of supply, health and environment. !he ma3or markets for palm oil are in the developing countries Although these markets have great potential, there are always markets impediments as many of these developing countries institute measures to curtail imports to protect their domestic farming community, self-sufficiency ob3ectives or cope with financial constraints including shortage of foreign exchange. India, which is one of the largest importer and consumer of edible oils in the 9orld, imports more than A million tons of palm oil annually *mainly from )alaysia, followed by Indonesia,. !his implies that the country is dependent on palm oil imports for over #<G of its annual edible oil re(uirement. !here has been a sharp rise in the imports of palm oil into the country during the last five years. !he composition of the Indian palm oil import basket has also undergone a change during the past < years. %rude oil has almost replaced refined oil imports owing to the differential duty between the two.
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Cas%or: %astor seed is one of the commodities where India en3oys supremacy as far as production and export is concerned. India contributes C<B,BBB tons annually, and accounts for over FBG of the entire global production. 6uring #BBA-BJ India produced B.FCmn tons of castor seeds. Around the world, castor seed is cultivated because of commercial importance of its oil. India is also the biggest exporter of castor oil. It corners about CBG of the global castor oil trade. iven the preference for castor oil, particularly from the industrial sector, it is constantly in demand, which is estimated at about ##B,BBB tons per annum. Although, %astor is highly poisonous plant, it is an important non-edible oilseed crop. !he seed leaves and stem of castor are poisonous to humans and livestock if consumed. %astor oil is obtained through pressing the seeds, followed by solvent extraction of the pressed cake. !he uni(ueness derived from this oil is the presence of a hydroxyl fatty acid known as ricinoleic acid *$#- hydroxyl-cis-;-octadecenoic acid, which constitutes around ;BG of the total fatty acids of the oil. %astor -il is also distinguished from other vegetable oils by its high specific gravity, thickness and hydroxyl value. Cas%or !ses )ore than castor seeds, as mentioned earlier, it is castor oil that generates high in demand. %astor oil is used for manufacturing various other products. In 4S, products such as nylon-$$, hydrogenated oil, dehydrated oil and its fatty acids, sulfated and sulfonated oil, sebacic acid, ethoxylated oil, polyurethanes, and oxidized and polymerized oil are turned out with the input of castor oil. %astor oil is also used in a wide range of cosmetics, toiletries, and transparent soaps. %astor oil and its derivatives are also used in lubricating formulations. %astor oil is used either in crude form or in the refined hydrogenated form. %astor %ake is an excellent fertilizer because of high content of & *F.JG,, =hosphoric Acid *#.<<G, and =otash *$G, and moisture retention.
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Ma?or )ro(!&#n$ re$#ons %astor is grown especially in arid and semi arid region. %astor is originated in the tropical belt of both India and Africa. It is cultivated in AB different countries on a commercial scale. India, %hina, 7razil, 4SS., !hailand 'thiopia and =hilippines are ma3or castor growing regions. !hey account for about HHG of the world0s production. 8istorically, 7razil, %hina and India have been the key producing countries meeting global re(uirements. In%erna%#ona' s&enar#o %ountries from tropical regions dominate castor market. India is the ma3or producer with FJ G share in the world castor market, followed by %hina and 7razil with #A G and C G share respectively. !he world castor seed production fluctuates between $.# to $.Hmn tons. In(#an s&enar#o In India, with the onset of monsoon *Euly to August,, the castor sowing commences and harvested around 6ecember or Eanuary. !he seedpods are dried, de-podded and brought to the market yards during 6ecember or Eanuary for trading. %astor is cultivated for the commercial importance of its oil. IndiaKs castor production fluctuates between B.F to B.;mn tons a year. In the year #BBA-BJ, IndiaKs castor production was B.Hmn tons. Indian castor variety contents JHG oil of which J#G can be extracted. IndiaKs consumption of castor oil and its derivatives estimated at about $BB,BBB tons. Indian climate is more suitable for castor cultivation and hence it is the largest producer of this commodity. u3arat *)ehsana and 7anaskantha districts, is the largest producer with B.AFmn tons of castor production during #BBA-BJ. Andhra =radesh with production at B.$Jmn tons and .a3asthan with B.$Bmn tons are other ma3or castor producers in the country.
43
Co))er: %opper *>atin cuprum, from the island of %yprus, is believed to have been mined for over <,BBB years. It occasionally occurs natively, and is found in many minerals such as cuprite, malachite, azurite, chalcopyrite, and bornite. %opper is amongst the largest consumed metal in the world. In fact it ranks third after steel and aluminum. 4ntil the mid-<Bs copper consumption kept in pace with the production. Since !hen, the global copper consumption has steadily outgrown the production, in $;;B by JG, and consumption patterns shifted towards the rapidly developing Asian countries. Ma?or Pro(!&ers %opper is considered to be a native of America. >arge copper ore deposits are found in the 4S, %hile, =eru, and %anada apart from African countries such as Uambia, Uaire. !he most important copper ores are the sulfides, the oxides, and carbonates. "rom these, copper is obtained by smelting, leaching, and by electrolysis. )a3or copper producing countries are %hile *#JG of the global mine production, and the 4nited States *$;G,. Usa$e !he electrical industry is one of the greatest users of copper. Iron0s alloys -- brass and bronze -- are very important? all American coins are copper alloys and gun metals also contain copper. %opper has wide use as an agricultural poison and as an algaecide in water purification. %opper compounds, such as "ehling0s solution, are widely used in analytical chemistry tests for sugar. G'o1a' S&enar#o lobal economy coming out of recession is seen lending impetus to metals demand currently. 9hile the 4S and the 'uropean economies are still reeling under pressure, Asian economy has been doing well. &o doubting fact that 4S and 'uropean economies, being industrial economies, are the largest copper consumer. 8owever, the strengthening of Asian economy led by %hina and other Asian countries, the region has emerged as biggest consumer due to growing
44
industrialization and population growth. %hinaKs economy has been growing at a phenomenal rate and the country is consuming everything from scrap to concentrate to cathode to feed its rapidly building downstream industry. %hina0s copper industry continues to astonish, with consumption rising by $<G last year. It is expected to grow $BG per year for the rest of this decade. %hina now accounts for #BG of world consumption of copper sheet and strip, and usage in cable, wire, tube and pipe. In(#an S&enar#o Indian copper industry is dominated by three ma3or players namely 8indalco, Sterlite Industries and 8industan %opper. 6uring the last decade, production capacity for refined has increased almost meeting the demand for refined copper. !he scenario remained subdued for most of "DBJ due to lack of demand. overnments increasing thrust on infrastructure development, which includes development of power sector, and pick up in industrial activity is likely to help generate demand for copper lately. In fact, the domestic mineral production recorded a A.AG growth in Eune #BBJ as compared to that of the corresponding month of previous year. IndiaKs industrial activity continues to report stronger growth during the last four (uarters. As a result, leading copper manufacturers such as 8industan %opper, 8indalco, and Sterlite Industries have witnessed increase in production. 8indalco and Sterlite Industries have evinced interest in overseas ac(uisition in order to meet growing demand. STEEL: G'o1a' S&enar#o:> i. In #BB# 9orld %rude Steel output at ;B# million metric tons was FG more than the previous year. ii. %hina remained the worldKs largest %rude Steel producer in #BB# also *$H# million metric tons, followed by Eapan *$BH million metric tons, and 4SA *;#million metric tons,. India occupied the ; th position *#H.H million metric tons,. iii. 4SA was the largest importer of steel in #BB$ followed by %hina and ermany.
45
iv.
Eapan was the largest exporter of steel in #BB$ followed by .ussia and 4kraine.
v -ther significant recent developments in the global steel scenario have been? vi !he crisis of excess capacity and prevalence of market distorting practices in the global steel market has induced protectionist measures from a number of steel trading countries. !o address these issues a series of high level intergovernmental meetings have been held under the auspices of the -'%6. As a part of the long-term solution to global steel over-capacity, the proponents of the -'%6 steel deliberations are of the view that subsidies and related government support have caused and are causing significant distortions in the steel markets and these will be re(uired to be reduced and where possible eliminated. vii. viii. ix. In )arch #BB# the 4S =resident announced imposition of temporary safeguard measures on import of key steel products into 4SA. In retaliation to the 4S action '4 has also imposed provisional safeguard measures against import certain steel products. %hina, %anada and !hailand are some of the other countries that have initiated safeguard investigations against import of steel products into their countries. In(#an S&enar#o India produces A# P AA million tons of steel per annum, which is mainly construction steel. India imports its entire re(uirement of specialized steel such as for razor blades, car body etc. !he A P J integrated steel plants produce #J m tons and the small steel manufacturers produce H m tons. !he important ports for steel import and export are Mizak and %hennai. India also exports construction steel to countries like %hina, which is of excess. !he important organizations are Steel %orporation of India and the Small Steel =roducers Association.
46
Mar6e% S&enar#o After liberalization, with large scale addition to steel making capacity, there is no shortage of iron and steel materials in the country. Apparent consumption of steel increased from $J.HJ million tonnes in $;;$;# to #H.;B million tonnes in #BB#-BA. !he production of steel in #BB#-BA is A#.H< million tonnes as against AB.FA million tonnes in #BB$-B# thereby registering an increase of C.#G. !he demand of steel has been firmed up both at home as well as internationally. 'fforts are being made to boost demand particularly in rural areas and also to increase exports. =rices of iron and steel have witnessed a steady rise over the last few months. 6omestic prices have firmed up in the face of strong demand P both domestic and foreign. Pro(!&%#on Steel industry was de-licensed and decontrolled in $;;$ and $;;# respectively. India is the ;th largest producer of steel in the world. In #BB#-BA, finished steel production was A#.H< million tonnes. =ig iron production in #BB#-BA was <.#F million tonnes. Sponge iron production was F.;BH million tonnes in #BB#-#BBA. In #BB#-BA, nearly A#G of crude steel production was by public sector the remaining FHG was by private sector. In #BB#-BA, the integrated steel plants produced JA.<G of finished steel and the remaining <F.<G was by the secondary producers.
W0ea%:
47
In%erna%#ona' s&enar#o Pro(!&#n$ Re$#ons 9orldwide wheat is grown in Asia, Africa, 'urope and America. -n basis of area maximum acreage comes from India that accounts for $AG of total world acreage, followed by '4, .ussia, %hina, 4SA, Australia, %anada and Sazakhstan. !otal acreage is around #$C million hectare which keeps fluctuating between #$B million hectare to #AB million hectare in general. Pro(!&%#on 9orld production of wheat hovers around <H< million tons. )aximum contribution comes from 'uropean 4nion, which comprises #< countries followed, by %hina, India, and 4nited states. 9heat production as we interpret from above graph has been fluctuating over last $B years. 9heat production reached its peak in $;;C but thereafter it showed declining trend. In the year #BBJ wheat production as per estimate of 4S6A would be around <H< million tons. Pe))er: a&6$ro!n(: =epper plant is a native of the )alabar %oast in Serala. It played a ma3or role in luring the colonial power, which sub3ugated India for centuries. !he 7ritish even took pepper to other countries for cultivation to ensure an uninterrupted supply. At present India accounts for more than #B per cent of the world output of pepper and is also one of the largest consumer and exporter of pepper. -f the various varieties, the black garbled pepper is the ma3or item of export from India. !he other forms of pepper exported include long pepper, light black and pinheads, black ungarbled pepper, dehydrated green pepper, pepper pinheads, freeze dried green pepper, frozen pepper, white pepper and crushed5ground pepper. Serala is the largest producer of pepper accounting for over ;< per cent of IndiaKs total output.
48
=epper is cultivated in Serala in Idukki, Sottayam, %annanore, %alicut and 9ayanad. =epper is also cultivated in Sarnataka, !amil &adu, A1& Islands and =ondicherry. In recent years, other states like Andhra =radesh, -rissa, 9est 7engal, Assam, !ripura, )eghalaya, etc. have also started showing interest in taking up the cultivation of pepper. In fact, its cultivation on a commercial scale in Andaman 1 &icobar islands was taken up only about $B-$# years back. Pro(!&%#on !he production of pepper in India rose from <<,ACB tonnes in $;;F to F<,BBB tonnes in $;;C,FH,BBB tonnes in $;;H before failing to F<,BBB tonnes in #BB$. According to the industry, the production of pepper in the country was F<,BBB tonnes in $;;C-;H, C<,BBB tonnes in $;;H-;;, CB,BBB tonnes in $;;;-#S and C;,BBB tonnes in #BBB-B$. !rade has estimated the production of pepper in India at <<,BBB-FB,BBB tonnes in #BB$-B#. !he production in #BB#-BA was expected to be lower than in #BB$-B#, at around <B,BBB tonnes, due to poor weather conditions during Euly-September #BB#. In September #BB#, the trade was expecting the output to fall to JB,BBB-J<,BBB tonnes and 4=ASI had estimated the output at J#,BBB tonnes. In August #BB#, while the Arecanut 1 Spices 6evelopment %enter *AS6%, had estimated IndiaKs #BB$-B# pepper output at $.BB lakh tones, the trade had put it at F<,BBB tonnes and the International =epper %ommunity at HB,BBB tonnes. !he farmers were expecting the #BB#- BA production to drop to <B,BBB tonnes because of unfavorable weather conditions. Ma?or %ra(#n$ &en%res %ochin is the ma3or trading centre for black pepper even though upcountry markets such as Sulthan 7athery *ma3or producing centre in Serala, also have emerged in the recent past as trading centres. Internationally, Singapore, &ew Dork and .otterdam are among the ma3or trading centres. In recent years &agpur, Indore and 6elhi have become ma3or trading centers for pepper for the central and the northern regions of the country. !raders in Idukki and
49
9ayanad destricts in Serala, %hikmagalur and %oorg in Sarnataka and
udalur in
!amil &adu send pepper clandestinely to these centers without paying any sales tax. According to the trade, the tax avoidance is around .s.$B-$# crores every year in Serala and Sarnataka. India has fairly successful story in black pepper futures and is the only country to have an exchange for pepper futures. Attempts for internationalizing pepper futures markets have not succeeded so far. R!11er: In%erna%#ona' S&enar#o: 9orldwide, the automobile industry is the single largest consumer of natural rubber in the form of auto tyres and tubes and certain other parts and accessories. "or instance, Eapan0s 7ridgestone %orporation is world0s third largest producer of tyres. It consumes A lakh tonnes of natural rubber annually to produce FH different types of tyres. Italy0s =irelli SpA consumes $, #B,BBB tonnes of natural rubber in the production of tyres. 'conomic recession anywhere first hits this industry before any other industry. !herefore, the world price of rubber goes through a cycle of few years of boom followed by a few years of busts with the state of world economy. Wor'( Pro(!&%#on: 9orld production has been fairly stable in the last three years even though it was unstable in the last $B years. 9herein IndiaKs production has showed consistent increase with an average growth rate of about F percent during the last $B years. Indian consumption has also shown steady growth except in #BB$ where it showed a slight fall. Significant variation in world production and consumption are source of concern on the price front for Indian rubber sector in the free market regime where global pressure of imports and exports could make the rubber prices more volatile. About JC per cent of the natural rubber consumed in the country goes into the production of auto tyres and tubes, $A percent in cycle tyres and tubes, $B per cent in footwear, C per cent in belts and hoses, F per cent in camel black, < per cent in
50
latex foam, J per cent n dipped rubber goods and H per cent in other rubber products. !his fairly establishes the diffused nature of consumption of natural rubber. Do+es%#& S&enar#o: In #BB$, India was the third largest producer and fourth largest consumer of natural rubber in the world. India produces about F lakh tons of rubber *worth around .s. ABBB crore, annually and over ;B percent of the production is in the southern state of Serala. Indian rubber industry comprises A# tyre factories, about #<B medium scale units and F,BBB small-scale units *of which about FBB are well-established units, manufacturing every conceivable rubber product from toy balloons to aero tyres. !he industry has an annual turnover of .s. $#,BBB crores E&ono+#& S#$n#f#&an&e: .ubber is a significant commodity for Serala economy and any price falls follows political ramifications in the state. =rice increases are also not received well by the tyre manufactures and other consuming industries. )oreover, large number of small growers, significant presence of growersK cooperatives, state administered procurement programmes, inconsistent import and export policies and manufacturing facilities spread across the country are factors that has made rubber prices significantly volatile. 9e expect rubber futures could help the rubber cooperatives who has commitment to provide remunerative prices to growers significantly because futures contracts will help them to decide the procurement price, will help to design forward contracts to suit the needs of growers2 and also will help growers through price discovery. Industries with natural rubber as the raw material too would be able take advantage of rubber futures to manage the price risk in a better way. )ost traded grades in India are .SSJ *.ibbed Smoked Sheet, and .SS< and Sottayam and Sochi in Serala are the ma3or trading centres. ANALYSIS AND INTERPRETATION?
51
In the study the criteria for commodity selection is done on the basis of availability of historical prices. !he prices are taken on the basis of expiry date of the contract. !he prices are of those commodities which are commonly traded in both )%+ and &%6'+. !he commodities size is for a period of three months, i.e. one hundred days. !he lists of commodities taken for the study are as follows? 9heat Soya seed Silver old
.ice %hana !urmeric Dellow peas .ubber. CALCULATION OF AVERAGE DAILY RETURN: !he calculation of avg returns on the commodities is done with both the exchanges with the historical data taken and the values are as follows?
MCX A5$ Da#'" Re%!rns >/;/@A /;33A /;/BA /;/3A /;/@A >/;/CA >/;33A /;/CA /;3/A >/;/CA NCDEX A5$ Da#'" Re%!rns >/;/3A >/;/CA >/;/@A >/;/@A /;//A /;/BA /;/DA >/;/EA >/;/FA /;3BA
20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er
52
CALCULATION OF ETA, <SYSTEMATIC, UNSYSTEMATIC RISK=:
!he calculation is done to find out the level of risk in both the exchanges, and also the level of systematic and unsystematic risk on all the commodities taken as a sample. MCX : e%a 20ea% so"a s#'5er 20ea% $o'( so"a r#&e s#'5er &0ana $o'( $!r r#&e %!r+er#& &0ana "e''o2 )eas $!r r!11er
%!r+er#& "e''o2 )eas r!11er NCCEX: e%a
s"s r#s6 >/;BGDHFH /;/E/FGH /;3@DGGH s"s r#s6 >/;BGDHFH /;/CDGCH /;/E/FGH >/;/33/D/ /;3@DGGH /;/3F/C/ /;/CDGCH /;/B/HDD >/;/33/D/ /;BH3BEH /;/3F/C/ /;/EH@33 /;/B/HDD /;/3F/C/
/;BH3BEH /;/EH@33 /;/3F/C/
!n s"s /;/////EH /;//////F /;/////BB !n s"s /;/////EH /;//////G /;//////F /;/////// /;/////BB /;/////// /;//////G /;/////// /;/////// /;/////FE /;/////// /;//////@ /;/////// /;///////
/;/////FE /;//////@ /;///////
/;////CE@ /;////H/H /;////CD3 /;////CE@ /;////3EB /;////H/H /;////GCC /;////CD3 /;////DHD /;////3EB /;///BHC/ /;////GCC /;///FBFH /;////DHD /;///H3/G /;///BHC/ /;////DHD
/;///FBFH /;///H3/G /;////DHD
53
CORRELATION ANALYSIS: !he correlations between the returns of all the selected commodities on both of the exchanges were examined. It was found that there was significant strong correlation *almost e(ual to V$, between commodity prices on the two exchanges, indicating that prices on the two exchanges were very closely related. "urthermore, there was significant correlation between certain pairs of commodities. !he commodities which are to be found significantly correlated are as fallows? soya-gur rubber-chana peas-turmeric. 9ith regard to the first pair of combination of commodities of soya-gur there is a correlation of B.#BCJ$H *with a significance of B.B$HCB<,. In the next pair of commodities consisting of rubber-chana there is a correlation of $.BBBBBB *with a significance of B.BBBBBB,. "or the last pair of commodities of peas-turmeric there is a correlation of B.AAJ<<$ *with a significance of B.BBBA$J,. "urther, several pairs of commodities were negatively correlated, though not significantly.
!his suggests that portfolios of pairs of commodities should be considered for returnrisk analysis.
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CALCULATION OF MINIMUM VARIANCE PORTFOLIOS <PAIRS OF COMMODITIES=: MCX: CODE 20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er 20ea% /;@/ /;BH /;FC /;3@ /;FD /;HE /;DC /;GH /;EF /;// /;@/ /;EE /;@3 /;G@ /;@F /;DH /;H3 /;3E /;BD 3;// /;BH /;@/ /;EE /;HG /;EE /;DE /;CF /;CF /;CB /;// So"a /;EE /;@/ /;BH /;DB /;BH /;HH /;/D /;/D /;/G 3;// /;FC /;BH /;@/ /;33 /;FG /;HC /;E3 /;G/ /;EF /;// s#'5er /;@3 /;EE /;@/ /;GC /;@B /;D3 /;BC /;B/ /;BD 3;//
55
CODE CODE CODE 20ea% so"a 20ea% 20ea% s#'5er so"a so"a $o'( s#'5er s#'5er r#&e $o'( $o'( &0ana r#&e r#&e $!r &0ana &0ana %!r+er#& $!r $!r "e''o2 )eas %!r+er#& %!r+er#& r!11er "e''o2 "e''o2 )eas )eas r!11er r!11er NCDEX: CODE CODE 20ea% so"a 20ea% s#'5er so"a $o'( s#'5er r#&e $o'( &0ana r#&e $!r &0ana %!r+er#& $!r "e''o2 %!r+er#& )eas "e''o2 r!11er )eas r!11er
$!r /;@/ /;DC /;HF /;/D /;FF /;BC /;3@ /;/G /;@/ /;BE /;B@ /;BB /;DH /;@/ /;H/ /;D@ /;GE /;@E
$o'( %!r+er#& 20ea% /;3@ /;G@ /;DB /;HG /;@/ /;H3 /;GH /;3E /;GC /;33 /;DD /;CF /;/D /;CF /;@/ /;@/ /;@D /;E3 /;B/ /;G/ /;GH /;3E /;G@/;BB /;CB /;CE /;EG /;/H /;@/ /;EH /;B/ /;G/ /;CB /;/G /;E@ /;EG /;GE /;CE /;3H /;/H /;HE /;@/ /;H@ /;D@ /;CH /;/E /;E/ /;H@ /;@/ /;@/ /;// 3;// /;3H /;DB /;FH /;HG
r#&e C0ana Ye''o2 )eas /;@F r!11er /;HE s#'5er/;DH /;FD So"a /;BH /;EE /;HH /;DE /;HE /;DH /;HF /;DD /;FF /;@D /;EF /;BD /;@B /;FG /;D3 /;HC /;HH /;DE /;@/ /;HC /;D3 /;/G /;3E /;CB /;@/ /;GH /;BB /;EG /;D3 /;HC /;D3 /;HC /;@/ /;@/ /;BD /;EF /;@/ /;@/ /;@C /;F3 /;BB /;EG /;B/ >/;H3 3;H3 /;/E /;F3 /;CH /;G/ /;@C /;@/ /;@/ /;@C /;F3 /;DB /;@D /;FF /;BB /;EH /;EG /;HG /;BE /;EG /;BB /;@/ /;@/ /;HB /;DG /;BG /;EB /;3D /;G/ /;GF /;B/ /;GE /;3H /;EG /;BB /;EC /;DC /;H3 /;FH /;EG /;@E /;B3 /;BB /;GF /;3D /;GE /;3H /;FD /;@F /;HG /;DB /;DB /;HG /;// 3;// /;// 3;// /;GF /;3D /;C3 /;GC /;33 /;@/ /;@/ /;/C 3;// 3;// /;// /;// 3;// 3;//
/;// 3;// /;//
3;// 3;// /;// /;// /;//
$o'( $!r /;3@ /;G/ /;DH /;HE 3;H3 /;B3 /;EC /;@/ /;H3 /;DC /;GD /;/C /;C3 /;DG /;H@ /;D@ /;C3 /;3H /;GE /;ED /;@/ /;@/ /;CG /;BB /;EG /;ED /;BF /;// /;// 3;// %!r+er#& /;G@ /;B/ /;H/ /;E/ >/;H3 /;@F /;FD /;@/ /;DB /;HG /;3F /;BF /;ED /;HB /;DC /;H3 /;/C /;F3 /;@C /;BF /;EG /;BB /;/B /;@/ /;@/ /;C/ /;3/ 3;// /;// 3;// "e''o2 /;@/ /;HG /;GE /;3H /;FF /;/C /;C3 /;3F /;33 /;GC /;@/ /;/B /;CG /;BE /;/G /;CB /;D@ /;/D /;CF /;H3 /;BF /;ED /;CB /;3/ /;C/ /;@/ /;@/ /;// /;// 3;//
r#&e /;@/ r!11er /;DB /;@D /;GD /;@/ /;EH /;H@ /;DC /;/G 3;//
&0ana /;B@ /;E@ /;DG /;HB /;EB /;BG /;@G /;FB /;HB /;DG /;B@ /;E@ /;EH /;BE /;HD /;DF /;@/ /;@/ /;3B /;GG /;GE /;F3 /;@C /;3H /;3C /;G3 /;@C /;F3 /;@@ /;F@ /;CF /;/D /;BD /;EF /;GG /;3B /;// 3;// /;// 3;//
Ca'&!'a%#on of &o5ar#an&e +a%r#*: Co5ar#an&e +a%r#* M&*: 20ea% 20ea% so"a s#'5er $o'( r#&e /;///3/FEB@E >/;//////EB// >/;/////EC/HG >/;/////3/DG3 >/;//////FF/C So"a >/;//////EB// /;////H/EF/3 /;/////BF@FG >/;//////CE@/ /;/////@3DDF s#'5er > /;/////EC/HG /;/////BF@FG /;////CGH3GB /;/////D@3GC > /;/////@EB3B $o'( >/;/////3/DG3 >/;//////CE@/ /;/////D@3GC /;////3G/EEH >/;//////BHGE
56
COMMODITY TRADING AN INDIAN PERSPECTIVE &0ana $!r %!r+er#& "e''o2 )eas r!11er /;/////BF3GE >/;/////DFB@C /;////BBEF// >/;/////HE3HB /;/////BF3GE r#&e 20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er Co5ar#an&e +a%r#* n&(e* 20ea% so"a 20ea% s#'5er $o'( so"a r#&e s#'5er &0ana $o'( $!r r#&e %!r+er#& &0ana "e''o2 )eas $!r r!11er %!r+er#& "e''o2 )eas r!11er >/;//////FF/C /;/////@3DDF >/;/////@EB3B >/;//////BHGE /;////GCC@FG >/;//////3D/3 /;/////@FHDC >/;////3CFE/H /;/////F@DC/ >/;//////3D/3 > >/;/////3@FG3 /;//////EH@/ /;////3EEG33 /;///////F@E > /;/////3HFDD /;////3DHECH > /;/////BD33C /;////3E3@HG > >/;/////3@FG3 /;//////EH@/ C0ana /;/////BF3GE >/;/////3@FG3 >/;//////EH@/ >/;//////BGH/ >/;//////3D/3 /;////DHDF3@ >/;/////EC@EH /;/////B/@/F /;/////EF/BF /;////DHDF3@ >/;//////BGH/ >/;/////BBDE@ /;/////HBDCG >/;/////@/C/F >/;//////BGH/ $!r >/;/////DFB@C /;////3EEG33 /;///////F@E >/;/////BBDE@ /;/////@FHDC >/;/////EC@EH /;///BHC/D@G /;////3@3B/G /;/////HDEHG >/;/////EC@EH
"e''o2 )eas r!11er /;////3F3@DG >/;/////BFFFF >/;////3FD@@E 20ea% So"a s#'5er $o'( /;////3F@C3@ >/;////BGDBC/ /;////3HEC// /;///3@@D3BC /;/////EGD@3 /;/////3/FBF > /;/////@HDDB >/;////3F3/@D >/;/////F/D/E /;/////HFD/B /;/////BCEBF >/;/////3HB3D >/;/////F@GHE /;/////EGD@3 /;////GFED@G /;////B3DDFF /;/////D3BE/ /;////3FGGHD /;////@DD3BB /;/////@EEFD /;/////3/FBF /;////B3DDFF /;///3B3BEEG /;////FF/GFC >/;/////EFC/D >/;////BDC/HF >/;/////B@DH@ >/;/////HFD/B /;/////D3BE/ /;////FF/GFC /;////B@@C3H >/;/////BGGD/ >/;///33GB@BG >/;////3@/HDC >/;/////33FG@ >/;////3CFCGF >/;/////@HFBB /;//////BBEB /;////E@HC3B >/;////FCB@@B >/;/////H3HCB >/;/////3DG// /;////3C/DBD /;/////FBFC3 /;/////F3/C@ >/;////FCB@@B /;//3/CCHH3@ /;////EGDDDC >/;/////33@CF /;////3ECDDD >/;/////FGEBE >/;/////3FHB >/;/////H3HCB /;////EGDDDC /;///BB3@3HH /;////3F3@DG /;////3F@C3@ /;/////@HDDB /;/////BCEBF >/;/////BFFFF >/;////BGDBC/ >/;////3F3/@D >/;/////3HB3 >/;////3FD@@E /;////3HEC// >/;/////F/D/E >/;/////F@GH
%!r+er#&
57
COMMODITY TRADING AN INDIAN PERSPECTIVE r#&e 20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er >/;/////33FG@ >/;////3CFCGF >/;/////@HFBB /;//////BBEB /;///3@BE@F@ >/;////33@/FH /;////3B@FCF /;////3FGGHD /;////@DD3BB /;/////@EEFD C0ana >/;/////3DG// /;////3C/DBD /;/////FBFC3 /;/////F3/C@ >/;////33@/FH /;////@/FGD/ /;////3//HFB >/;/////EFC/D >/;////BDC/HF >/;/////B@DH@ $!r >/;/////33@CF /;////3ECDDD >/;/////FGEBE >/;/////3FHB/ /;////3B@FCF /;////3//HFB /;///BE33D3C >/;/////BGGD/ >/;///33GB@BG >/;////3@/HDC
20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er Por%fo'#o re%!rns: M&*:
%!r+er#& "e''o2 )eas r!11er /;////3F3@DG >/;/////BFFFF >/;////3FD@@E /;////3F@C3@ >/;////BGDBC/ /;////3HEC// /;/////@HDDB >/;////3F3/@D >/;/////F/D/E /;/////BCEBF >/;/////3HB3D >/;/////F@GHE /;////3FGGHD /;////@DD3BB /;/////@EEFD >/;/////EFC/D >/;////BDC/HF >/;/////B@DH@ >/;/////BGGD/ >/;///33GB@BG >/;////3@/HDC /;////E@HC3B >/;////FCB@@B >/;/////H3HCB >/;////FCB@@B /;//3/CCHH3@ /;////EGDDDC >/;/////H3HCB /;////EGDDDC /;///BB3@3HH
20ea% So"a s#'5er $o'( >/;///@3BCC >/;///3FF/@@ /;//3/CB@3F >/;///3GDC@C /;///GECEDG /;///3@GEHG >/;///FBBG@B /;///F@E//H G;F@DCCE>/@ E;@BH3@E>/@ >H;FBEBE>/@ /;///CD/FDE /;///HFGHBF /;///3@/E@E >/;///D@D/HE /;///FHF3@B >/;///FECCDC >/;///3F3BE >/;///CHB3CG /;///CE >/;///B3FF3@ >/;/////3EG /;///E//BE3 /;//3/GH/HH /;///H3CE@D /;///3/FFD@ /;///@GB/BB /;//3/G3H@C /;///HDDGDC /;///3H@@B3 >/;///@3H/3F >/;///GCFCFC >/;///GC@//C >/;///GC@/3
58
COMMODITY TRADING AN INDIAN PERSPECTIVE r#&e 20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er C0ana $!r %!r+er#& "e''o2 )eas r!11er
/;///@BH >/;///H3 G;@GE>/@ /;///D/D /;///D3G >/;///GC
>/;///GC@/D >/;///CFD/E >/;///DDH33
>/;//3B >/;///F /;///CF@/G3 > >/;///D/@@F /;///BB /;///C@HD@B /;///C@GCHH > > >/;///GC@/D >/;///C /;///GCFC@C /;///GCFC@G
>/;///GC@/ED
N&(e*: Por%fo'#o re%!rns: )or%fo'#o re%!rn 20ea% so"a s#'5er $o'( r#&e &0ana $!r %!r+er#& "e''o2 )eas r!11er 20ea% so"a s#'5er $o'( >/;///33@/CG >/;///HGCEBD >/;///C3E3C3 >/;///BEBCCD >/;///EF@CCC >/;///FE@CGB >/;///3ECFHE >/;///D/GFCF >/;///@FC3FF >/;///@H3C >F;E@BGHE>/@ >/;///@DHFHH >/;///B@FGHG >/;///F@H/E >F;HFHECE>/@ >/;///3G/FF@ >3;3/G3@E>/@ >/;///H/GEC /;///HH/D/@ >/;///D/BG3C >/;///3FB@HC >/;///FH3/@ >/;///BCGHCC >/;///G3BHHH >/;///DBC//B >/;///@EE/G >/;///H@HHBE >/;///GDGGEB >/;///FDDHC@ >/;///@BG@3 >/;///33@/3E /;//33@3C3 /;//33@3CHG /;//33@3CH@
59
COMMODITY TRADING AN INDIAN PERSPECTIVE r#&e 20ea% 20ea% so"a So"a s#'5er s#'5er $o'( $o'( r#&e r#&e &0ana &0ana $!r $!r %!r+er#& %!r+er#& "e''o2 "e''o2 )eas )eas r!11er r!11er Por%fo'#o 5ar#an&e: +&* 20ea% so"a /;///3/ /;////D /;////@ /;////G /;////@ /;////@ /;///3B /;///H3 /;///3G /;///3/ s#'5er /;////H /;////D /;////3 /;////D /;////H /;///BB /;///HG /;///BD /;////H /;///3/ /;////G /;////F /;////@ /;///3H /;///BE /;///3E /;///3/ $o'( &0ana "e''o2 )eas $!r r!11er %!r+er#&
/;///3@F G;/HE>/@ @;/GBCFE>/@ /;///3F /;///B/EG@B G;EDE>/@ H;3BD@@E>/@ /;///CHE /;//33/DG3 /;///CDDH/G /;///3@F /;//33/DDEC @;/GBBDE>/@
/;///BEH /;///3DG E;@CE>/@ /;///D/G /;///C/B /;///BEH /;///BBH/B E;@CE>/@
/;////B /;////D /;////F /;///B/ /;///F/ /;///BE /;////B
r#&e
&0ana
$!r
%!r+er#&
"e''o2 )eas
r!11er
/;////C /;////F /;///3F /;///BE /;///B/ /;////C
/;////D /;///3F /;///HH /;///BH /;////D
/;///BF /;///BB /;///3@ /;///BF
/;///FH /;///BE /;///FH
/;///H3 /;///H3
/;////D
60
N&(e*: Por%fo'#o 5ar#an&e: 20ea% So"a /;///3D /;////G /;////E /;///33 /;////G /;////C /;///3H /;////C /;///G@ /;///3D s#'5er /;////C /;////E /;////D /;////D /;////@ /;///3G /;////@ /;///C3 /;////C /;///3B /;///3G /;////E /;////E /;///3F /;////D /;///GG /;///3B $o'(
/;////H /;///33 /;////H /;///BH /;////@ /;//3/@ /;////H
r#&e 20ea% so"a s#'5er $o'( R#&e &0ana G!r T!r+er#& "e''o2 )eas R!11er
C0ana
$!r
%!r+er#&
"e''o2 )eas
r!11er
/;///3@ /;////G /;///3F /;////C /;///CF /;///3@
/;////@ /;///B3 /;////H /;///CE /;////@
/;///BE /;///3E /;///D3 /;///BE
/;////G /;///C/ /;////G
/;//333 /;//333
/;///BB
61
62
COMMODITY TRADING AN INDIAN PERSPECTIVE TEST FOR DIFFERENCES IN RETURNS COMMODITIES wheat/wheat 20ea%Iso"a W0ea%Is#'5er W0ea%I$o'( W0ea%Ir#&e W0ea%I&0ana 20ea%I$!r W0ea%I%!r+er#& 20ea%I"e''o2)eas W0ea%Ir!11er Soya/soya so"aIs#'5er So"aI$o'( so"aIr#&e So"aI&0ana so"aI$!r so"aI%!r+er#& so"aI"e''o2)eas So"aIr!11er si !er/si !er S#'5erI$o'( S#'5erIr#&e s#'5erI&0ana S#'5erI$!r s#'5erI%!r+er#& s#'5erI"e''o2)eas s#'5erIr!11er go %/go % % %es% 5a'!es ETWEEN THE EXCHANGES: % %es% 5a'!es /;EDE//@HEB /;BDGGD//3 /;BC3HEBFBC /;HFB/EDDGC /;F/DHHEDC@ >F;GHGE/@/3B /;@H3BDF/FD >/;DGBD@G/@3 >/;33@HHEDB3 /;DDEH/FG/B /;F@B@EH@3D >B;3DC3B@D >3;HF@3/FGFF >/;CGH/GE3GG >/;B@C3H@BCE >/;FCE33G@GE >B;@EGG3BGC >3;33/CFH3E@ /;/BH@/EECG >/;FEF/DHD >3;HH/DDFCCG /;G/G@E@G3F 3;//CGH/@E@ >/;CCH3E3/DD /;EDDGCE@DG >3;3D@CF/E/B >B;@EGGC3F3
COMMODITIES
>/;HC/E@/@EE $o'(Ir#&e /;H/CGFC3H@ $o'(I&0ana /;3BD3C/E3H $o'(I$!r >/;BGB/BC3HH $o'(I%!r+er#& /;/3GCEDD/3 $o'(I"e''o2)eas >/;GD3EBCFFF $o'(Ir!11er >3;3@@BB3ECB rice/rice /;@EHHCB@E r#&eI&0ana /;E/@/DBGGB r#&eI$!r >/;HC/GEEC@H r#&eI%!r+er#& H;DFBGFBFC@ r#&eI"e''o2)eas B;/C/@G/3GC r#&eIr!11er B;G@H3@//DB chana/chana B;/H@CHFDDG &0anaI$!r 3;3/DDEDCF C0anaI%!r+er#& 3;/EEB@@G3E &0anaI"e''o2)eas /;CGBF3@HFG C0anaIr!11er 3;B3/@CDBEB gur/gur >H;E3/FHGD3B $!rI%!r+er#& /;DFHH3EGFH $!rI"e''o2)eas /;E3D3G3@3@ G!rIr!11er /;C/GCC/C3 Tur"eric/tur"eric >/;DCE@3HFD@ T!r+er#&I"e''o2)eas >/;/DHEFHH3B T!r+er#&Ir!11er ye ow#eas/ye ow#ea /;@G/3FDDC s /;DF3H@DE/F Ye''o2)easIr!11er >B;/EFG/GBD3 ru$$er/ru$$er 3;FH@BHDBHD
63
"rom the above table we can figure out some commodities which have the paired combination which can be traded on the exchanges based upon the t-test done on the commodities. In the above table the J>K figures represent the combination of those commodities which are best suited to be traded on ncdex , and the JLK figures represent the combination of those commodities which are best suited to be traded on mcx.
!here are a set of commodities which can be traded much in mcx exchange for a better return on the investment done and can be considered as optimal investment option for an investor.
&heat/gur Soya/ru$$er Si !er/ru$$er Ru$$er/ru$$er ye ow#eas/ru$$er Gur/ru$$er Gur/gur Chana/ru$$er Chana/chana Rice/ru$$er Go %/ru$$er
'()(**++(,-+ '.),(/0.12(+ '+)/,01/1+2( '+)*,11-(0( '()(2*-0/,/+ '()../220--1 '()((/-0.(,* '+)*,11(+1'().0*(/0100 '+)(2-(+*2 '0)1.1,/*/(+
64
!here are a set of commodities which can be traded much in ncdex exchange for a better return on the investment done and can be considered as optimal investment option for an investor.
soya/soya soya/si !er soya/go % soya/rice soya/chana soya/gur soya/#ea Go %/go % Tur"eric/ye ow#eas
()//-1./*,* +)/-/*1/(1+)1*.(*//2+ +)/.*-.0221 ()(/22,2-0 ()/,,+**1(, ()+(/*-2+,+ ()0.*+.2+.2 .)20+10+0-*
65
FINDINGS:
%ommodity market in India, the methodology of trading in India, and the institutions involved in the process of investment in commodities. !he correlations between the returns of all the selected commodities on both of the exchanges were examined. It was found that there was significant strong correlation *almost e(ual to V$, between commodity prices on the two exchanges, indicating that prices on the two exchanges were very closely related.
"urthermore, there was significant correlation between certain pairs of commodities. !he commodities which are to be found significantly correlated are as fallows? $W soya-gur #W rubber-chana AW peas-turmeric. 9ith regard to the first pair of combination of commodities of soya-gur there is a correlation of B.#BCJ$H *with a significance of B.B$HCB<,. In the next pair of commodities consisting of rubber-chana there is a correlation of $.BBBBBB *with a significance of B.BBBBBB,
"or the last pair of commodities of peas-turmeric there is a correlation of B.AAJ<<$ *with a significance of B.BBBA$J,. !here was an arbitrage opportunity for the investor and he could buy for lesser in another exchange sell more in those exchanges where prices are high .
66
RECOMMENDATIONS: According to the study done it is found that there is possibility of arbitrage between the two commodity exchanges, there are chances for an investor to short sell in those exchange where the prices are higher and they can earn more profit. !he analysis can be carried out further by taking another list of commodities which are traded in both the exchanges and a better portfolio of commodities can be constructed for the benefit of the investors in the market. !he time duration for the analysis can be extended and analysis could be done for obtaining different results. -ptimal investment option for an investor in the commodity market.
.
67
CONCLUSION: A commodity futures contract is a tradable standardized contract, the terms of which are set in advance by the commodity exchange organizing trading in it. !he futures contract is for a specified variety of a commodity, known as the /basis,/ though (uite a few other similar varieties, both inferior and superior, are allowed to be deliverable or tender able for delivery against the specified futures contract.
!he %ommodity market in India, its methodology of trading, and the institutions involved in the process of investment in commodities have revolutionized the investment decisions for a trader, providing a new alternative for e(uity trading and investment in India. Although the prices of commodities traded in the two exchanges are strongly related, it is possible with particular pairs of selected commodities to make profit while trading in commodity exchange. !here can be an arbitrage opportunity between the two exchanges because of which an investor can trade on the exchanges which gives maximum return on the pair of commodities selected upon. -nly in India there is physical delivery of commodities on the basis of prices traded and also the volumes, this would be a benefiting way of making money by investments in commodities. In brief we can say that commodity trading is a better investment option for an investor replacing investment in e(uity market.
68
#1'#o$ra)0": www.mcxindia.com www.ncdexindia.com www.motilaloswal.com www.reuters.com www.cbot.com www.commodity,com
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