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ASTUDYONCOMMODITYMARKET

WITHREFERENCETOKARVY

AProjectreportsubmittedtoJawaharlalNehruTechnologicalUniversity,
Hyderabad,inpartialfulfillmentoftherequirementsfortheawardofthe
degreeof

MASTEROFBUSINESSADMINISTRATION

By

TPAVANKUMAR
Reg.No.10241E0046
UndertheGuidanceof
Y.GAYATHRI
AssociateProfessor

DepartmentofManagementStudies

GokarajuRangarajuInstituteofEngineering&Technology
1

(AffiliatedtoJawaharlalTechnologicalUniversity,Hyderabad)
Hyderabad
20102012

CERTIFICATE
ThisistocertifythattheprojectentitledA Studyon
CommodityMarkethasbeensubmittedbyMr.T.PAVAN
KUMAR(Reg.No.10241E0046)inpartialfulfillmentofthe
requirements for the award of Master of Business
Administration from Jawaharlal Nehru Technological
University, Hyderabad. The results embodied in the project
hasnotbeensubmittedtoanyotherUniversityorInstitution
fortheawardofanyDegreeorDiploma.

(Y.Gayathri) (KVSRaju)
InternalGuide Professor&HOD
AssociateProfessor
DepartmentofManagement
Studies
DepartmentofManagementStudies GRIET

GRIET

(S.RavindraChary)
(ProjectCoordinator)
AssociateProfessor
DepartmentofManagementStudies
GRIET

DECLARATION

IherebydeclarethattheprojectentitledAStudyonCOMMODITY

MARKET atKARVYSTOCKBROKINGLIMITED submittedinpartial


fulfillment of the requirements for award of the degree of MBA at Gokaraju
RangarajuInstituteofEngineeringandTechnology,affiliatedtoJawaharlalNehru
Technological University, Hyderabad, is an authentic work and has not been
submittedtoanyotherUniversity/Instituteforawardofanydegree/diploma .

T.PAVANKUMAR
(10241E0046)
MBA,GRIET
HYDERABAD

ACKNOWLEDGEMENT

FirstlyIwouldliketoexpressourimmensegratitudetowardsourinstitution
GokarajuRangarajuInstituteofEngineering&Technology, whichcreatedagreat
platformtoattainprofoundtechnicalskillsinthefieldofMBA,therebyfulfillingour
mostcherishedgoal.
IwouldthankalltheFINANCEdepartmentof KARVYSTOCKBROKING

LIMITEDspeciallyMr.MUKARJIAsstManagerFinance,andtheemployeesinthe
Finance department for guiding me and helping me in successful completion of the
project.
I am very much thankful to our Y. Gayathri (Internal Guide) Madam for
extendinghercooperationindoingthisproject.

IamalsothankfultoourprojectcoordinatorMr.S.RavindraCharyforextending
hiscooperationincompletionofProject..

Iconveymythankstomybelovedparentsandmyfacultywhohelpedmedirectly
orindirectlyinbringingthisprojectsuccessfully.

T.PAVANKUMAR
(10241E0046)

TABLE OF CONTENTS

CHAPTER NAME

CHAPTER NOS.

PAGENos.

EXECUTIVESUMMARY

INTRODUCTION

210

COMMODITYINDUSTRY

1116

2.1

COMPANYPROFILE

1726

LITERATUREREVIEW

2773

DATAANALYSISANDINTERPRETATION

7477

4.1

ANALYSISANDINTERPRETATIONOF
QUESTIONNAIRE

7891

4.2

CROSSTABSANDCHISQUARETESTS

92101

FAQ'S

102104

FINDINGS

105107

6.1

CONCLUSION

108

6.2

SUGGESTIONS

109110

6.3

ANNEXURE

6.4

BIBLIOGRAPHY

111112
113

CHAPTER1
INTTRODUCTION

COMMODITIESMARKET
INTRODUCTION:
Commodities Futures trading! in India have a long history. The first
commodityfuturesmarketappearedin1875.Butthenewstandardizedformoftradingin
theIndiancapitalmarketisanattractivepackageforallthepeoplewhoearnmoney
throughspeculationbytradingintoFUTURES.Itisawellknownfactandshouldbe
rememberedthatthetradingincommoditiesthroughfuturesexchangesismerely,Old
wineinanewbottle.

Thetradingincommoditieswasstartedwiththefirsttransactionthattookplace
between two individuals. We can relate this to the ancient method of trading i.e.,
BARTERSYSTEM.Thismethodfacedtheinitialhiccupsduetotheproblemslike:store
ofvalue,mediumofexchange,deferredpayment,measureofwealthetc..Thisledtothe
inventionofMONEY.Asthemarketstartedtoexpand,theproblemofscarcitypiledup.

Thefarmers/tradersthenfelttheneedtoprotectthemselvesagainstthefluctuationsin
the price fortheir produce. Inthe ancient times, the commodities traded were the
AgriculturalProduce,whichwasexposedtohigherriski.e.,thenaturalcalamitiesand
had to face the price uncertainty. It was certain that during the scarcity, the farmer
realizedhigherpricesandduringtheoversupplyhehadtoloosehisprofitability.Onthe
otherhand,thetraderhadtopayhigherpriceduringthescarcityandviceversa.Itwasat
thistimethatbothjoinedhandsandenteredintoacontractforthetradei.e.,deliveryof
theproduceaftertheharvest,forapricedecidedearlier.Bythisbothhadreducedthe
futureuncertainty.
One stonestill remained unturned surety ofhonoring the contract on part from
eitheroftheparties.Thisproblemwassettledintheyear1848,whenagroupoftraders
inCHICAGOcameforwardtostandardizethetrading.Theyinitiatedtheconceptofto
arrivecontractandpermittedthefarmerstolockinthepriceupfrontanddeliverthe
grainatacontracteddatelater.ThistradingwascarriedonaplatformcalledCHICAGO

BOARDOFTRADE,oneofthemostpopularcommoditiestradingexchangestoday.It
wasthistimethatthetradingincommodityfuturespickedupandneverlookedback.

Althoughinthe19th centuryonlyagriculturalproducewastradedasafutures
contract,butnow,thecommoditiesofglobaloratleastdomesticimportancearebeing
tradedoverthecommodityfuturesexchanges.Thisformoftradinghasprovedusefulas
adeviceforHEDGINGandSPECULATION.Thecommoditiesthataretradedtodayare:

AgroBasedCommoditiesWheat,Corn,Cotton,Oils,Oilseedsetc..
SoftCommodities..Coffee,Cocoa,Sugaretc
Livestock.LiveCattle,PorkBelliesetc
Energy..CrudeOil,NaturalGas,Gasolineetc
PreciousMetals..Gold,Silver,Platinumetc
OtherMetalsNickel,Aluminum,Copperetc

NEEDANDIMPORTENCEOFSTUDY
Oneofthesinglebestthingsyoucandotofurtheryoureducationintradingcommodities
istokeepthoroughrecordsofyourtrades.Maintaininggoodrecordsrequiresdiscipline,
justlikegoodtrading.Unfortunately,manycommoditytradersdonttakethetimeto
tracktheirtradinghistory,whichcanofferawealthofinformationtoimprovetheirodds
of success Most professional traders, and those who consistently make money from
tradingcommodities,keepdiligentrecordsoftheirtradingactivity.Thesamecannotbe
saidforthemassesthatconsistentlyloseattradingcommodities.
Losingcommoditytradersareeithertoolazytokeeprecordsortheycantstomachto
look attheirmiserable results.Youhave tobe ableto faceyourproblems andstart
workingonsomesolutionsifyouwanttobeasuccessfulcommoditiestrader.Ifyou
cant look at your mistakes and put in the work necessary to learn from them, you
probablyshouldntbetradingcommode

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OBJECTIVESOFTHESTUDY
Tostudytheperceptionofinvestorsincommoditiesmarket.
TostudyaboutmajorexchangestradinginIndiancommoditymarket.
TostudythecommoditytradingpracticesinIndia.
To studytheworkingprocedure, trading andsettlementmechanism for
commodities(GoldandSilver)InIndianstockexchange.
Studyaimsatunderstandingthegovernanceforcommodity
Derivativesexchanges,traders,investorsandotherparticipants.

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SCOPEOFTHESTUDY

ThestudymainlyfocusesonIndiancommoditymarket,itshistoryandlatest
developmentsinthecountryincommoditiesmarket(GoldAndSilver).Thestudy
alsokeepsabirdseyeviewonglobalcommoditymarketanditsdevelopment.The
studyvastlycoveredtheaspectsofcommoditytrading(GoldAndSilver),clearing
andSettlementmechanismsinIndiancommodityexchanges.Thescopeofthestudy
islimitedtoIndiancommoditymarket

Anetworkof2500businesslocationsspreadover500citiesacrossIndiafacilitatesthe
smoothacquisitionandservicingofalargecustomerbase.Mostofourofficesare
connectedwiththecorporateofficeinMumbaiwithcuttingedgenetworking
technology.Thegrouphelpsservicemorethanamillioncustomers,overavarietyof
mediumsviz.online,wecannotstudyallthedataintheorganization.

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RESEARCHMETHODOLOGY
Thepresentstudyisconductedtoprovideinformationtothecompanyregardingthe
investorperceptiontowardscommoditymarket.
ThemainobjectiveofthestudyistounderstandtheCommoditiessectorof
themarket,itstradinginIndiaandmajorlyresearchonHowareCommoditiesused
asAssets(Preferencesonthebasisofwhichtheymakeadecisionbetweenequities
andotherinvestmentzonesandCommodities).

SOURCESOFDATA
Primarydata
Datawascollectedinsystematicmannerbymeetingtheexistinginvestorsincommodity
market&otherindividuals.
Primaryandsecondarydatawereutilizedforthepurposeofthestudybytheresearcher.
Theresearchisaimedtoobtainthedatamainlythroughprimarysources.Surveymethod
hasbeenusedtoobtaininformation.
Secondarydata
Secondarydatawascollectedfromcompaniesandfromcommodities(GoldAndSilver)
tradingwebsites.

TYPEOFRESEARCH
Basedontheobjectivesofthestudy,thedescriptiveresearchmethodisused.Descriptive
studyistakenupwhentheresearcherisinterestedinknowingtheinvestorperceptionin
commoditiesmarket.Theconclusionsarearrivedatfromthecollecteddata.Statistical
toolswereusedtoanalyzethedatacollectedfromthesurvey.

SURVEYMETHOD
AsurveywasconductedamongsttheinvestorsinHyderabadandSecunderabad.The
researcherpersonallymettheinvestors,interviewedthemandgottheirquestionnaires
filled.

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INSTRUMENTDESIGN
Inordertoobtaininformationtheresearcherpreparedastructuredquestionnaire.The
researcherpreparedasinglequestionnaireaccordingtotheneedofthedatafromthe
respondent.

PRETESTINGOFQUESTIONNAIRE
The researcher to remove questions that are of vague and ambiguity in the nature
conducted the pretesting. The samples of 10 respondents were selected and the
questionnairewaspretestedandtheresearchermadenecessarymodifications.

CODINGANDTABULATION
Afterthesurveywasconducted,thedatahadtobeconvertedintostatisticalor
numericalformsothatinferencecouldbedrawnaboutthesamplecollected.Forthis,
everyoptionofeveryquestionwascodedintoalphabets(i.e;theywouldberepresented
inalphabets).Thealphabetswereusedtodenotetheoptionandnorankingorderwas
used.Thecodeddatawasenteredintothedatasheet.Frequencieswerefoundoutfor
eachoptionandthusgivingusthepercentageoftheoptionusage,etc.

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LIMITATIONSOFTHESTUDY
The survey was confirmed to the surroundings of twin cities Hyderabad &
Secundrabad.
Thesizeofsamplewasonly50.
Theinvestorsresponsecouldhavebeenbiased.
Timeof6weekswasconstraintforthestudy.
BrokerscanonlytransactfuturestradesiftheyareregisteredwiththeCFTCand
theNFA.
Onlycertaintypesofcommodities(GoldAndSilver)canbethebasisforfutures
trading.

15

CHAPTERII
INDUSTRYPROFILE
&
COMPANYPROFILE

16

INDUSTRYPROFILE
TheSecuritiesIndustryandFinancialMarketsAssociation(SIFMA)isaleading
securitiesindustrytradegrouprepresentingsecuritiesfirms,banks,andassetmanagement
companiesintheU.S.andHongKong.SIFMAwasformedonNovember1,2006,from
themergerofTheBondMarketAssociationandtheSecuritiesIndustryAssociation.Ithas
officesinNewYorkCityandWashington,D.C.

InOctober2008,SIFMAlaidoffover25%ofitsstaffintheUnitedStatesduetothe
"industryupheaval"whichleftitsmemberfirmsinfinancialstraits,andthelossof
threeofitprimarymemberfirmsLehmanBrothers,BearStearns,andMerrillLynch.
ThedismissalscameatthesametimeastheUnitedStatesCongresspledgedtorevamp
thecountry'sfinancialregulatorystructure.
SIFMAannouncedinMay2009thatitwouldalsosheditsLondonbasedEuropean
operation.ThatoperationwillbemergedintotheLondonInvestmentBanking
Association(LIBA).
The350memberAmericanSecuritizationForum(ASF)formerlyoperatedasaforumof
SIFMA.OnJanuary14,2010,ASFannouncedthatithadchosentoterminateits
affiliationwithSIFMAaswell.

Mission,members,andoffices
USoperation
SIFMAbringstogetherthesharedinterestsofmorethan650securitiesfirms,banks,and
assetmanagers.SIFMA'smissionistopromoteeffectiveandefficientregulation,
facilitatemoreopen,competitive,andefficientglobalcapitalmarkets,championinvestor
education,retirementpreparedness,andsavings,andensurethepublicstrustinthe
securitiesindustryandfinancialmarkets.SIFMArepresentsitsmembersinterestsinthe
U.S.andinHongKong.IthasofficesinNewYorkandWashington,D.C.,andits

17

associatedfirm,theAsiaSecuritiesIndustry&FinancialMarketsAssociation
(ASIFMA),isbasedinHongKong.
InJune2009,SIFMAbeganacampaigntocombatthepopulistoverreactionagainst
WallStreetsroleintheglobalfinancialcrisis.Ithiredtwoaideswhohadworkedfor
HenryPaulsonwhenhewasTreasurySecretary,tohelpcleanseWallStreetsimagein
theeyesofaverageAmericans.Theeffortisaimedatpolicymakersandthemedia
worldwide,anddesignedtobeatbackpublicskepticismoverWallStreetscommitment
tochange.SIFMAispaying$85,000amonthforpolling,lobbying,andpublicrelations
tocounterthe"lynchmob",accordingtoaninternalSIFMAmemo.Ininternalmemos
aboutconfidentialmeetingswithtopfinancialexecutives,SIFMAsaidthatthe
securitiesindustry"mustbeperceivedaspartofthesolution,whichwillallowitto
betterdefendagainstpopulistoverreaction."
InJanuary2010,SIFMAannouncedthatithadhiredthelawfirmSidleyAustinto
considerfilingalawsuitchallengingtheObamaadministration'sbankinglevy.Butan
attorneyfamiliarwiththemattersaid:"IsuspectSIFMAgotoutaheadofitskey
members."OnepersonwithalargebanksaidSIFMAhadnotconsultedthebank
aboutitsposition,andthatitwas"wildlypremature"topursuelegalaction.
InOctober,2010,CEOTimRyanannouncedtheorganization'soppositioninthe
residentialrealestatemarkettoa"systemwidemoratoriumonallforeclosures,"
reactingtoproblemsandpullbacksinthemarketbyanumberofSIFMAmembers,
sayingamoratorium"wouldbecatastrophic."FinancialwriterFelixSalmondrew
attentiontotheposition,termingit"unhelpful,"detailingitas"bizarre"and"sad,...an
inchoateandunhelpfulblastofopposition...[without]constructivesolutions"proposed.
Politicalgivingandlobbying
"SIFMA'spoliticalactioncommitteesgavemorethan$1millionduringthe2006election
season,puttingtheorganizationinthetop25ofallPACs.Itscombined$8.5millionin
spendingonfederallobbyinglastyearplaceditinthetop30.Thefinancialservices

18

industryisthebiggestcorporateplayerinnationalpolitics.Onlyorganizedlabordonates
moremoneytocandidatesforfederaloffices."

Europeanoperation
SIFMAalsohasofficesinLondon,thoughitannouncedinMay2009thatitwouldshed
itsEuropeanoperation.TheEuropeanHighYieldAssociation(EHYA)inLondonisa
tradeassociationrepresentingparticipantsintheEuropeanhighyieldmarket.Members
includebanks,investors,issuers,lawfirms,accountingfirms,financialsponsors,and
otherparticipantsintheEuropeanhighyieldmarket.TheEuropeanSecuritisationForum
(ESF)promotestheefficientgrowthandcontinueddevelopmentofsecuritisation
throughoutEurope.Itadvocatesthepositions,representstheinterests,andservesthe
needsofitsmembersEuropeansecuritisationmarketparticipants.

Groups
SIFMAhasthreeproductandcustomerbasedgroupsthatfocusontheU.S.:Capital
Markets,PrivateClient,andAssetManagement.TheCapitalMarketsGroupfocuseson
theprimaryandsecondarymarketsforequityandfixedincomesecurities.Itscustomer
focusisissuers,underwriters,traders,andinstitutionalinvestors.ThePrivateClient
Groupfocusesoninvestmentproductssoldtoprivateclients,aswellasindividual
investoreducation.TheAssetManagementGroupfocusesoninvestmentproductsabout
whichassetmanagersprovideinvestmentadviceorinvestmentmanagementservices,
andoninstitutionalinvestorsandhedgefunds.

Seniormanagement
T.TimothyRyan,Jr.,isSIFMA'sCEO&President.Hetookthepositionafterpullinghis
namefromconsiderationforaTreasuryDepartmentinternationalpolicyadvisorpositionin
April2007,afterproblemswerenotedconcerningRyan'sfinancialportfolio,andherefused
totakecertainstepsdemandedbytheTreasuryDepartment'sethiclawyers.SIFMA'sother
seniormanagementconsistsofKennethE.Bentsen(EVP,PublicPolicyandAdvocacy),
IleaneF.Rosenthal(EVP,GlobalCommunications&Member

19

Engagement),RandySnook(EVP),andIraHammerman(SeniorManagingDirector
&GeneralCounsel).
InAugust2008,SIFMAhiredMichaelPaese,formerDeputyStaffDirectorofthe
CommitteeonFinancialServicesoftheHouseofRepresentatives,asEVP,Global
Advocacy;eightmonthslaterPaeseleftSIFMAtobecomedirectorofgovernment
affairsatGoldmanSachs.ScottDeFife,whohadreportedtoPaese,leftSIFMAin
December2009.
Afterthe2006mergerwhichcreatedSIFMA,theorganizationhadacoCEOstructure,
withtheSIA'sMarcE.LackritzandBMA'sMicahS.Greenfillingthepositions.Asa
2007reportsummarizedit,"Lackritz[then60]ha[d]beenafriend,colleagueandmentor
ofGreen's[then49]fortwodecades."However,withslowerthanhopedforintegration
ofthemergedorganization'soperations,andwithquestionsaboutthehandlingof
executiveloansbyBMA,GreenresignedabruptlythatyearandLackritzassumedthe
roleofsoleCEO.Ninemonthslater,LackritzretiredandT.TimothyRyanwasnamed
CEO.

Boardofdirectors
SIFMA'sChairmanoftheBoardisBlytheMasters(HeadofGlobalCommodities,
JPMorganChase),andViceChairisBernardBeal(CEOofM.R.Beal&Company).
OtherdirectorsincludeSamirAssaf(HSBCBankplc),ShigesukiKashiwagi(Nomura
HoldingsAmericaInc.)andSallieKrawcheck(formerChairman&CEO,CitiGlobal
WealthManagement),amongothers.
PeterMadoff,brotheroffraudsterand"moneymanager"BernardL.Madoff,andchief
complianceofficerandseniormanagingdirectoroftheMadoffinvestmentadvisorand
brokerdealerbusinesses,steppeddownfromtheSIFMABoardofDirectorsin
December2008.HisresignationcameamidgrowingcriticismoftheMadofffirmslinks
toWashington,andhowthoserelationshipsmayhavecontributedtothe$50billion
Madofffraud.

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TheMadofffamilyhadlongstandingtiestoSIFMA.BernardMadoffsatontheboardof
directorsoftheSecuritiesIndustryAssociation,whichmergedwiththeBondMarket
Associationin2006toformSIFMA.PeterMadoffservedtwotermsasamemberof
SIFMAsBoardofDirectors.Overtheyears200008,thetwoMadoffbrothers
personallygave$56,000topoliticalactioncommitteescontrolledbySIFMAorits
predecessororganizationsinadditiontoduespaidtoSIFMAbytheirfirm,andtensof
thousandsofdollarsmoretosponsorSIFMAindustrymeetings.Inaddition,Bernard
Madoff'snieceShanaMadoff,whoservedasacomplianceattorneyattheMadofffirm,
wasactiveontheExecutiveCommitteeofSIFMA'sCompliance&LegalDivision,but
resignedherSIFMApositionshortlyafterheruncle'sarrest.

Finances
In2009SIFMAhad$105millioninbothrevenuesandexpenses.SIFMA'shighest
paidofficersthatyearwereDonaldKittel(thenCFO),$2.1million,MarcLackritz
(thenPresident&CEO),$1.5million,andRandolphSnook(SMD),$1.1million.
SIFMA'shighestpaidofficerin2010wasitsnewPresident&CEOTimRyan(at
approximately$2million,forJanuaryOctober).RyanhadbeenhiredtoreplaceLackritz
inJanuary2008,ata43%($600,000)higherlevelofcompensation,forlessthanafull
year.Inrelatednews,ironically,RyanwroteinaUSATodayeditorialinAugust2009
thatcompensationpracticesatfinancialservicesfirmsshouldalignwithlongterm,not
shortterm,performance.
SIFMA'stopthreehighestpaidofficersinthefiscalyearending31October2011were
CEOTimRyanat$2.43million,ExecutiveVicePresidentRandolphSnookat$1.04
millionandGeneralCounselIraHammermanat$777,000.SIFMAreceivedtotal
revenuethatyearof$75million,hadtotalexpensesof$82million,andfinishedtheyear
withafundbalanceof$40million

21

COMPANYPROFILE
INTRODUCTONTOKARVY
OVERVIEW
KARVY,isapremierintegratedfinancialservicesprovider,andrankedamong
thetopfiveinthecountryinallitsbusinesssegments,servicesover16millionindividual
investors in various capacities, and provides investor services to over 300 corporate,
comprisingthewhoiswhoofCorporateIndia.KARVYcoverstheentirespectrumof
financial services such as Stock broking, Depository Participants, Distribution of
financial products mutual funds, bonds, fixed deposit, equities, Insurance Broking,
Commodities Broking, Personal Finance Advisory Services, Merchant Banking &
CorporateFinance,placementofequity,IPOs,amongothers.Karvyhasaprofessional
managementteamandranksamongthebestintechnology,operationsandresearchof
variousindustrialsegments.
EARLYDAYS
ThebirthofKarvywasonamodestscalein1981.Itbeganwiththevisionand
enterpriseofasmallgroupofpracticingCharteredAccountantswhofoundedtheflagship
company, Karvy Consultants Limited. They started with consulting and financial
accountingautomation,andcarvedinroadsintothefieldofregistryandshareaccounting
by1985.Sincethen,theyhaveutilizedtheirexperienceandsuperlativeexpertisetogo
from strength to strength to better their services, to provide new ones, to innovate,
diversifyandintheprocess,evolvedKarvyasoneofIndiaspremierintegratedfinancial
serviceenterprise.

Thusoverthelast20yearsKarvyhastraveledthesuccessroute,towardsbuilding
areputationasanintegratedfinancialservicesprovider,offeringawidespectrumof
services.Andtheyhavemadethisjourneybytakingtherouteofqualityservice,path
breakinginnovationsinservice,versatilityinserviceandfinally,totalityinservice.

22

Their highly qualified manpower, cuttingedge technology, comprehensive


infrastructureandtotalcustomerfocushassecuredforthemthepositionofanemerging
financial services giant enjoying the confidence and support of an enviable clientele
acrossdiversefieldsinthefinancialworld.

Theirvaluesandvisionofattainingtotalcompetenceintheirservicinghasserved
asthebuildingblockforcreatingagreatfinancialenterprise,whichstandssolidontheir
fortressesoffinancialstrengththeirvariouscompanies.
Withtheexperienceofyearsofholisticfinancialservicingbehindthemandyears
ofcompleteexpertiseintheindustrytolookforwardto,theyhavenowemergedasa
premierintegratedfinancialservicesprovider.

Andtoday,theycanlookwithprideatthefruitsofourmasteryandexperience
comprehensivefinancialservicesthatarecompetentlysegregatedtoserviceandmanage
adiverserangeofcustomerrequirements.

KARVYACHIEVEMENTS
Amongthetop5stockbrokersinIndia(4%ofNSEvolumes)
India'sNo.1Registrar&SecuritiesTransferAgents
Amongthetotop3DepositoryParticipants
LargestNetworkofBranches&BusinessAssociates
ISO9002certifiedoperationsbyDNV
Amongtop10Investmentbankers
LargestDistributorofFinancialProducts
Adjudgedasoneofthetop50ITusesinIndiabyMISAsia
FullFledgedITdrivenoperations

23

KARVYQUALITYPOLICY
To achieve and retain leadership, Karvy shall aim for complete customer
satisfaction,bycombiningitshumanandtechnologicalresources,toprovidesuperior
quality financial services. In the process, Karvy will strive to exceed Customer's
expectations.

QUALITYOBJECTIVES
AspertheQualityPolicy,Karvywill:
Build inhouse processes that will ensure transparent and harmonious
relationshipswithitsclientsandinvestorstoprovidehighqualityofservices.
Establishapartnerrelationshipwithitsinvestorserviceagentsandvendorsthat
willhelpinkeepingupitscommitmentstothecustomers.
Provide high quality of work life for all its employees and equip them with
adequateknowledge&skillssoastorespondtocustomer'sneeds
Continue to uphold the values of honesty & integrity and strive to establish
unparalleledstandardsinbusinessethics.
Usestateofthe art information technology in developing new and innovative
financial products and services to meet the changing needs of investors and
clients.
Strivetobeareliablesourceofvalueaddedfinancialproductsandservicesand
constantlyguidetheindividualsandinstitutionsinmakingajudiciouschoiceof
it.
Strive to keep all stakeholders (shareholders, clients, investors, employees,
suppliersandregulatoryauthorities)proudandsatisfied.

24

About KARVY Group

Karvy has traveled the success route, towards building a reputation as an


integratedfinancialservicesprovider,offeringawidespectrumofservicesfor
over20years.
Karvy,anamelongcommittedtoserviceatitsbest.Afameacquiredthroughthe
range of corporate and retail services including mutual funds, fixed income, equity
investments,insurancetonameafew.Ourvaluesandvisionofattainingtotal
competenceinourservicinghasservedasabuildingblockforcreatingagreatfinancial
enterprise.
ThebirthofKarvywasonamodestscaleintheyear1982.Itbeganwiththe
vision and enterprise of a small group of practicing Chartered Accountants based in
Hyderabad,whofoundedKarvy.Westartedwithconsultingandfinancialaccounting
automation,andthencarvedinroadsintothefieldofRegistryandShareTransfers.
Sincethen,wehaveutilizedourqualityexperienceandsuperlativeexpertisetogo
fromstrengthtostrengthtoprovidebetterandnewservicestotheinvestors.Andtoday,
we can look with pride at the fruits of our experience into comprehensive financial
servicesproviderintheCountry.

25

KARVYGroupcompaniesare:

Karvy Consultants Limited

hefirstsecuritiesregistrytoreceiveISO9002certificationinIndia.Registered
withSEBIasCategoryIRegistrar,isNumber1RegistrarintheCountry.Theawardof
being Most Admired Registrar is one among many of the acknowledgements we
receivedforourcustomerfriendlyandcompetentservices.

Karvy Stock Broking Limited

The company, Member of National Stock Exchange (NSE), offers a


comprehensiverangeofservicesinthestockmarketthroughthebenefitsofindepth
researchoncrucialmarketdynamics,donebyqualifiedteamofexperts.Apartfromstock
broking activities, the company also provides Depository Participant Services to its
corporateandretailcustomers.

Karvy Investor Services Limited

RegisteredwithSEBIasaCategoryIMerchantBankerandrankedamongthetop
10merchantbankersinthecountry,thecompanyhasbuiltareputationasaprofessional
advisorinstructuringIPOstakeoverassignmentsandbuybackexercises.

Karvy Computer share Private Limited

26

Karvy Global Services Limited

Karvy Global Services is the global services arm of the Karvy Group of
Companiesengagedinthebusinessofoffshorebusinessprocessoutsourcingintheareas
ofhumanresourceoutsourcing,financeandaccountingoperationsoutsourcing,research
andanalyticsandbackofficeprocessingoperations.

Karvy Comtrade Limited

The company provides investment, advisory and brokerage services in Indian


CommoditiesMarkets.Andmostimportantly,weofferawidereachthroughourbranch
networkofover225brancheslocatedacross180cities.

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

ThecompanyisintodistributionofFinancialProducts.Itdistributesawiderange

offinancialproductsandservicesfrominsurancetocreditcardsandloans.Thecompany
providessoundadvisoryservicestosuitthedifferentinvestmentneedsofcustomers.
27

KarvyCommoditiesBrokingPvtLimited

AtKarvyCommodities,wearefocusedontakingcommoditiestradingtonew
dimensions of reliability and profitability. We have made commodities trading, an
essentiallyageoldpractice,intoasophisticatedandscientificinvestmentoption.

Hereweenabletradeinallgoodsandproductsofagriculturalandmineralorigin
thatincludelucrativecommoditieslikegoldandsilverandpopularitemslikeoil,pulses
andcottonthroughawellsystematizedtradingplatform.

Our technological and infrastructural strengths and especially our streetsmart


skillsmakeusanidealbroker.Ourservicematrixisholisticwithagamutofadvantages,
thefirstandforemostbeingourlegacyofhumanresources,technologyandinfrastructure
thatcomesfrombeingpartoftheKarvyGroup.

Our wide national network, spanning the length and breadth of India, further
supportstheseadvantages.Regulartradingworkshops andseminarsareconductedto
honetradingstrategiestoperfection.Everymovemadeisacalculatedone,basedon
reliableresearchthatisconvertedintovaluableinformationthroughdaily,weeklyand
monthlynewsletters,callsandintradayalerts.Adedicatedteamcommittedtogiving
hasslefreeservicewhilethebrokerageratesofferedareextremelycompetitiveprovides
further,personalizedservicehere.

Ourcommitmenttoexcelinthissectorstemsfromtheimmenseimportancethose
commoditiesbrokinghastoacrosssectionofinvestorsfarmers,exporters,importers,
manufacturersandtheGovernmentofIndiaitself.

28

AboutKarvyCommoditiesBrokingPrivateLimited
Commodities market, contrary to the beliefs of many people, has been in
existenceinIndiathroughtheages.HowevertherecentattemptbytheGovernmentto
permitMulticommodityNationallevelsexchangeshasindeedgivenit,ashotinthearm.
AsaresulttwoexchangesMultiCommodityExchange(MCX)andNationalCommodity
andderivativesExchange(NCDEX)havecomeintobeing.Theseexchanges,byvirtueof
their high profile promoters and stakeholders, bundle in themselves, online trading
facilities,robustsurveillancemeasuresandahasslefreesettlementsystem.Thefutures
contractsavailableonawidespectrumofcommoditieslikeGold,Silver,Cotton,Steel,
Soyaoil,Soyabeans,Wheat,Sugar,Channaetc.,provideexcellentopportunities for
hedgingtherisksofthefarmers,importers,exporters,tradersandlargescaleconsumers.
They also make open an avenue for quality investments in precious metals. The
commoditiesmarket,asthemovementsofthestockmarketordebtmarketdonotaffectit
providestremendousopportunitiesforbetterdiversificationofrisk.Realizingthisfact,
evenmutualfundsarecontemplatingofenteringintothismarket.

KarvyCommoditiesBrokingPrivateLimitedisanotherventureoftheprestigious
Karvygroup.Withourwellestablishedpresenceinthemultifariousfacetsofthemodern
Financialservicesindustryfromstockbrokingtoregistryservices,itisindeedapleasure
forustomakeforayintothecommoditiesderivativesmarketwhichopensyetanother
doorforustodeliverourservicetoourbelovedcustomersandtheinvestorpublicat
large.

WiththehighqualityinfrastructurealreadyinplaceandacommittedGovernment
providingcontinuousimpetus,itistheresponsibilityofus,theintermediariestodeliver
thesebenefitsatthedoorstepsofouresteemedcustomers.Withourexpertiseinfinancial
services, existence across the lengths and breadths of the country and an enviable
technological edge, we are all set to bring to you, the pleasure of investing in this
burgeoningmarket,

29

Whichcantouchuponthelivesofavastmajorityofthepopulationfromthe
farmertothecorporatealike?Weareconfidentthatthecommodityfuturescanbegood.

TheCompanyprovidesinvestment,advisoryandbrokerageservices inIndian
CommoditiesMarkets.Andmostimportantly,weofferawidereachthroughourbranch
networkofover225brancheslocatedacross180cities.

THEKARVYCREDO.
OurClients,OurFocus.
Clientsarethereasonforourbeing.
Personalizedservice,professionalcare;proactivenessarethevaluesthathelpus
nurtureenduringrelationshipswithourclients

Respectfortheindividual.
Eachandeveryindividualisanessentialbuildingblockofourorganization.
Wearethekilnsthathoneindividualstoperfection.Betheyouremployees,shareholders
orinvestors.Wedosobyupholdingtheirdignity&pride,inculcatingtrustandachieving
asensitivebalanceoftheirprofessionalandpersonallives.

Teamwork.
Noneofusismoreimportantthanallofus.
EachteammemberisthefaceofKarvy.Togetherweofferdiverseserviceswithspeed,
accuracyandqualitytodeliveronlyoneproduct:excellence.Transparency,cooperation,
invaluable individual contributions for a collective goal, and respecting individual
uniquenesswithinacorporatewhole,arehowwedeliveragainandagain.

ResponsibleCitizenship.

30

Asocialbalancesheetisasrewardingasabusinessone.
Asaresponsiblecorporatecitizen,ourdutyistofosterabetterenvironmentinthesociety
whereweliveandwork.Abidingbyitsnorms,andbehavingresponsiblytowardsthe
environment,issomeofourgrowinginitiativestowardsrealizingit.

Integrity.
Everythingelseissecondary.
Professionalandpersonalethicsareourbedrock.Wetakeprideinanenvironmentthat
encourageshonestyandtheopportunitytolearnfromfailuresthancamouflagethem.We
insistonconsistencybetweenworksandactions.

31

CHAPTERIII
LITERATUREREVIEW

32

INTRODUCTION

Until1990,theGoldControlActforbadetheprivateholdingofgoldbarsinIndia.There
wasphysicalinvestmentinsmuggledtentolabars,butitwaslimitedandoftenamounted
tokeepingafewbarsreadytobemadeintojewelleryforafamilywedding.Gold
investmentessentiallywasin22caratjewellery.
ReserveBankofIndia
Since1990,investmentinsmallbars,bothimportedtentolasandlocallymadesmall
bars,whichhaveproliferatedfromlocalrefineries,hasincreasedsubstantially.GFMS
estimatethatinvestmenthasexceeded100tonnes(3.2millionoz)insomeyears,
althoughitishardtosegregatetrueinvestmentfromstocksheldbythe16,000or
moregolddealersspreadacrossIndia.Certainlygoldhasbeenusedtoconcealwealth,
especiallyduringthemid1990s,whenthelocalrupeepriceincreasedsteadily.

Itwasalsoaugmentedin1998whenover40tonnes(1.3millionoz)ofgoldfrom
bondsoriginallyissuedbytheReserveBankofIndiawererestitutedtothepublic.
Inthecities,however,goldishavingtocompetewiththestockmarket,investmentin
internetindustries,andawiderangeofconsumergoods.Intheruralareas22carat
jewelleryremainsthebasicinvestment.
TheGoldDepositScheme
Thegovernmentannouncedanewinitiativeinits1999/2000budgettotapthehoardof
privategoldinIndiabypermittingcommercialbankstotakegolddepositsofbars,coins
orjewelleryagainstpaymentofinterest.Interestlevelscanbesetbyeachbank,and
depositsmustbeforthreetosevenyears.Interestandanycapitalgainsonthegoldwill
beexemptfromtax.Thebankscanlendthegoldtolocalfabricatorsorsellitinthe
Indianmarketortolocalbanks.However,thedepositorhastodeclaretheoriginofthe
gold,sothatmetalboughtillegallytohidewealthcannotbedeposited.TheStateBankof

33

Indiawasthefirsttoacceptdeposits.Todate,theamountofgoldcollectedunderthis
scheme(lessthan10tonnesor0.32millionoz)hasfallenwellshortofthe100tonnes
(3.2millionoz)thatwasmentionedwhenitwaslaunched.
TheintroductionofamoderngoldmarketinIndia:

1990 Abolition of the longstanding Gold Control Act, which had forbidden the
holdingof'primary'orbargoldexceptbyauthoriseddealersandgoldsmithsandsought
tolimitjewelleryholdingsoffamilies.
Importswerethenpermittedinthreestages.
1992NonResidentIndians(NRIs)onavisittoIndiawereeachallowedtobringinupto
5kilos(160.7oz)onpaymentofasmalldutyofsixpercent.Thisallocationwasraised
to10kilosin1997.

1994GolddealerscouldbidforaSpecialImportLicence(SIL)whichwasissuedfora
varietyofluxuryimports.

1997OpenGeneralLicence(OGL)wasintroduced,pavingthewayforsubstantialdirect
importsbylocalbanksfromtheinternationalmarket,thuspartlyeliminatingtheregional
suppliesfromDubai,SingaporeandHongKong.

TheOGLsystemhasalsolargelyeclipsedimportsbyNRIsandSILs.Additionally,
significanttemporaryimportsarepermittedunderanExportReplenishmentscheme
forjewellerymanufacturersworkingforexportindesignatedspecialzones.

In2001unofficialimportsfellbecauseofareductioninimportduties,pushingdown
thelocalpremiumandmakingsmugglingless profitable.Tentolabarsarestillthe
preferredformofgoldinIndia,accountingfor95%ofimports.

34

PreciousMetalbullswilltellyoutobuythedips.Thismeans,waitforthepriceto
temporarilydeflate,andthenpurchaseyourposition.Itisawaytomaximizedollarsfor
goldandsilverpurchasedwhilemaintainingasteadybuyingprograminthatmetal.
Thesameconceptcouldbeusedforanyfundorstock,aswell.
ThismorningIwoketofindgoldandsilverhadtumbled.Thisdoesn'tsurpriseme
anymorebecausegoldandsilverhavebecomehottermarkets,andtherewillbemore
speculationinthem.AsIwroteinMr.MarketSpeaks:FlighttoSafety,themarketis
slowingmovingawayfromlongtermdebt,lookingforsafetyofprincipaland
inflationprotection.Goldandsilvermarketshavebenefitedfromthismovement.
Goldhassteadilybeenmovingrelativelysidewaysthelasttwodays,asseeninthe
followingKitcochart.ButalsonoticethesharpdropoffonJan20that
approximately8am.

Silverlookedexactlythesame.Thesharpdownwardmovehappenedaboutthe
sametime.

SoItookalookata5minutegoldchartandfounda15minutesharpdrop,which
Icircledinred.
Ihavewrittenbeforeabouthowsharp,quickmovementsinliquidmarketsdon'tsignal
normalpriceaction.Evenonbadnews,liquidmarketstaketimetoreactandrespond
becausetheyaretradedbypeople.Andpeopletaketimetomakedecisionsonthe
overallbalanceofthenewsinagivenmarketinagiventimeframe.
SoIdecidedtotakealookatwhatthenewswasinthepreciousmetalsmarket.CNBC
didn'thavemuch.

35

Ongold,BloombergBusinessweekhadapieceoneveryonegettingoutofgold.
Definitelybearish.TheStreetagreedwiththatassessment,commentingthatinterestrate
hikesinBrazilandbuyingofUSDollarsweakenedgolddemanddomestically.Butthe
articlealsonotesthatChinacontinuestobuygoldinBrazil.TheWallStreetJournal
reportsgoldweaknessonimprovingeconomicconditions.
Bloomberghadapieceaboutsilverprofittakingpotentiallyloweringsilver20%.
Definitelybearishandtimely.IalsofoundanarticlefromFMXConnectonsilver,
discussingreasonsforsilvercontangoyesterday.
ThetwomainreasonsFMXoutlinesforthismovementinsilverwouldeitherbean
interestratemove(none)ormetalsdeliveryissues.Ifmetalsdeliveryissues,thenthisis
bullishforsilver(andpotentiallygold)asacomplementaryinflationprotection
investment.
BenDavieshascommentedbeforeonacomingshortsqueezeinthegoldandsilver
markets.SohasTedButler.AndRobertLenzner.Isitfinallytime,orisitprofittaking
inthesilvermarketthathasbeenhoveringaround$30forawhile?
Onthewhole,itsoundslikethereisbearishsentimentandbullishsentimentongoldand
silver,whichsoundslikeaperfectlynormalmarketcondition.Thatiswhythesharp
pricemovementsoververysmalltimeframes,asnotedinthechartsabove,isdisturbing.
Evenifalargeshareofthemarketdecidedtotakeprofitsandsell,itisnotlikelytohave
happenedwithina15minutewindowat8aminthemorning.Thissmellsofmarket
manipulationtome.
Onbalance,Iremainbullishongoldandsilver.Idon'tbuypaperversionsofthese
investmentsasIthinkthosemarketsarefractionalreserveduponmeagerphysicalmetal
backing.Irecommendinvestinginthephysicalmetals.Andthecurrentpriceaction
soundslikeaperfectopportunitytopurchasegoldandsilveronthecheap.
Iwillcontinuetofollowgoldandsilvernewsandvetteitoutinareasonablemanner.If
themarketsturnbearishuponarealeconomicrecovery,thenImaychangemyposition.

36

AndIwillwriteaboutitwhenIdo.Butfornow,Iamnotbuyingthegoldandsilver
marketstopstory.Ithinkwearefirmlygoingtheotherdirection,regardlessofwhat
thismorning'spriceactivityissaying.

FINANCIALDERIVATIVES
Thetermderivativesrefertoalargenumberoffinancialinstrumentswhosevalue
isderivedfromtheunderlyingassets.Derivativeinstrumentsliketheoptionsandfutures
facilitatethetradinginfinancialcontracts.Themostimportantunderlyinginstrumentsin
themarketareintheformofEquity,treasurybills,andforeignexchange.Thetradingin
thefinancialderivativeshasattractedtheprominentplayersoftheequitymarkets.

Theprimarypurposeofaderivativecontractistotransferriskfromonepartyto
anotheri.e.riskistransferredfromapartythatwantstogetridofittoanotherpartyi.e.
willing to take it. The major players seen in the derivatives segment are the
SPECULATORS whose sole objective is to buy and sell for a profit alone. The
HEDGERSaretheotherbreedsofplayers,whoaimmerelytohaveahedgepositions.
Theyareriskfreeinvestorswhoseintentionistohaveasafetymechanismandwishto
protecttheirportfolio.Nevertheless,theyarepursuedasacheapandefficientwayof
movingriskwithintheeconomicsystem.Buttheworldofderivativesisriddledwith
jargonsmakingitmoreawesome.

ThetradinginequitythroughthederivativesinIndiawasintroducedintheyear
2000bytheSecuritiesandExchangeBoardofIndia[SEBI]andthiswasdescribedasthe
Indiasderivativeexplosion.Althoughthistookadefiniteformin2000buttheidea
wasinitiatedintheyear1995.itwasthenintheyear2000thatSEBIpermittedthe
tradingtheintheoptionsontheplatformsofIndiaspremierexchangeplatformsi.e.,the
National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange
[BSE]intheindividualsecurities.Butthefuturescontractstook17longmonthstoget
launchedonNovember092001.

37

Thetradinginoptionsandfuturesintheindividualstockswerepermittedtotrade
onthestablestocksonly.Thesmallandhighlyvolatilestockswereanexemptionfrom
thetradeinderivatives.Futuresandoptionsareimportanttoolsthathelptheinvestorsto
deriveprofit.Thefuturesfacilitatetheinvestortoenterintoacontracttodeliverthe
underlyingsecurityatafuturedatewhereas,theoptionsallowittohisdiscretionasto
whetherhewantstobuy(call)orsell(put)thecontract.

Thecurrenttradingbehaviorinthederivativessegmentrevealsthatsinglestock
futurescontinuestoaccountforasizeableproportion.Arecentreportindicatesthatthe
trading in the individual stock futures in the Indian exchanges has reached global
volumes.Onepossiblereasonforsuchabehaviorofthetradercouldbethatfutures
closelyresembletheerstwhileBADLAsystem.

COMMODITYDERIVATIVES
Commoditymarketisanimportantconstituentofthefinancialmarketsofany
country.Itisthemarketwhereawiderangeofproducts,viz.,preciousmetals,base
metals,crudeoil,energyandsoftcommoditieslikepalmoil,coffeeetc.aretraded.Itis
importanttodevelopavibrant,activeandliquidcommoditymarket.Thiswouldhelp
investors hedge their commodity risk, take speculative positions in commodities and
exploitarbitrageopportunitiesinthemarket.

The need for a futures market in the commodities, especially, in the primary
commodities was emphasized because such a market not only provides ample
opportunities for effective management of price risk, but also, assists inefficient
discovery of prices which can serve as a reference for the trade in the physical
commoditiesinboththeexternalaswellasintheinternalmarket.

India,acommoditybasedeconomywheretwothirdoftheonebillionpopulation
dependsonagriculturalcommodities,surprisinglyhasanunderdevelopedcommodity
market.Unlikethephysicalmarket,futuresmarketstradesincommodityarelargelyused

38

asriskmanagement(hedging)mechanismoneitherphysicalcommodityitselforopen
positionsincommoditystock.

Therewasanefforttorevivethesemarketsbutallwentinvainduetoimproper
infrastructure and facilities. However, after India joined the WORLD TRADE
ORGANIZATION the need to protect the agricultural community against the price
fluctuations cropped up. The National agricultural policy 2000 was formulated and
proposedtoexpandthecoverageofthefuturesmarkettominimizethevolatilityinthe
commoditiespricesandhedgingtheriskarisingoutofthefluctuationsintheprices.Asa
resultofthisthereisastandardizedformofcommodityfuturestradinginthecountry,
todayandalotnumberofpeopleareactiveinthecommoditiesexchanges,takingittoa
greathigh.

TheactiveplayersintheseexchangesareTraders,SpeculatorsandtheHedgers.It
issaidthatnowadaysthepricesofthecommoditiesinthePhysicalMarket(Mandis)is
derivedinaccordancetothespotpricesinthecommodityexchanges.
Clearly,inthenascentstage,thederivativesmarketinIndiaisheadingintheright
direction. In the terms of the number of contracts in a single commodity/stock it is
probablythelargestmarketglobally.Itisnolongeramarketthatcanbeignoredbyany
oftheseriousparticipants.TheIndianeconomy,now,isatthevergeofgreaterexpansion
the any other economies in the globe today. This has attracted a large number of
institutionalinvestors,boththeIndianaswellasforeign,toinvestintotheIndian
stocksandcommodities,therebybringinginalotofforexreserves.Aspredictedbythe
popularinvestmentGurusandthegreatEconomistsworldwide,India will be a

major player in the global economy by the end of this


decad . We canconcludethat,withtheinstitutionalparticipationsettoincreaseanda
broaderproductrolloutinevitable,themarketcanonlywidenanddeepenfurther.

39

TRADINGINSTRUMENTS
Derivativesintherecenttimeshavebecomeverypopularbecauseoftheirwide
application.Beforegettingintothehardtalksaboutthecommoditiestrade,letusknow
aboutthetradinginstrumentsinthederivatives,astheyaresimilarlyapplicabletothe
commoditiesderivatives.
Thereare4typesofDerivativesinstrument:
Forwardcontract
Futurecontract
Optionscontract
Swap

FuturesandOptionsareactivelyusedinmanyexchangeswhereas;Forwardsand
SwapsaremostlytradeOvertheCounter(OTC).

FORWARDSCONTRACT
Aspotorcashmarketisthemostcommonlyusedfortrading.Amajorityofour
daytodaytransactionsareinthecashmarket.Inadditiontothecashpurchase,another
waytradingisbyenteringintoaForwardcontract.AForwardcontractisanagreement
tobuyorsellanassetonaspecifieddateofaspecifiedprice.Thesecontractsareusually
entered between a financial institution and its corporate clients or two financial
institutions themselves. In the context to the Commodity trading, prior to the
standardization, the trade was carried out as a forwards contract between the
Associations,ProducersandTraders.WheretheAssociationusedtoactascounterforthe
trade.

40

Aforwardcontracthasbeeninexistenceintheorganizedcommoditiesexchanges
forquitesometimes.ThefirstforwardcontractprobablystartedinJapanintheearly18th
century,while theestablishmentofthe CHICAGO BOARD OF TRADE (CBOT) in
1848ledtothestartofaformalcommoditiesexchangeintheUSA.
Forward contracts are very useful in HEDGING and SPECULATION. The
essentialideaofenteringintotheforwardcontractistoHedgethepricetheretoavoidthe
pricerisk.Byenteringintoaforwardcontractoneisassuredofthepriceatwhichthe
goods/assets are boughtandsold.The classic Hedging examplewouldbethatofan
exporterwhoexpectstoreceivepaymentinforeigncurrencyafterthreemonths.Asheis
exposedtogreateramountofriskinthefluctuationsintheexchangerates,hecan,with
theuseofforwards,lockintheratetodayandreducetheuncertainty.Similarly,ifa
speculatorhastheinformationofanupswinginthepricesoftheasset,hecangolongon
theforwardmarketinsteadofthecashmarketandbooktheprofitwhenthetargetpriceis
achieved.
The forward contract is settled at the maturity date. The holder of the short
positiondeliverstheassetstotheholderofthelongpositiononthematurityagainsta
cashpaymentthatequalstothedeliverypricebythebuyer.Thepriceagreedinthe
forwardscontractistheDILIVERYPRICE.Sincethedeliverypriceischosenatthetime
ofenteringintothecontract,thevalueofthecontractbecomeszerotoboththeparties
andcostsnothingtoeithertheholderofthelongpositionortotheholderoftheshort
position.

Thesalientfeaturesofaforwardscontractare:
Itisabilateralcontractandhenceisexposedtocounterpartyrisk.
Everycontractisuniqueandiscustomdesignedinthetermsof:expirationdate
andtheassettypeandquality.
Thecontractpriceisnotavailableinthepublicdomain.
Ontheexpiration,thecontractistobesettledbythedeliveryoftheasset.
Ofthepartywishestoreversethecontract,hehastogotothesamecounterparty,which
mayresultoattractsomecharges.

41

FUTURESCONTRACT
Financial futures represent the most significant
financial
innovations of the last twenty years. AsquotedbyMERTON
MILLER,
anoblelauret1999.
The father of financial derivatives is Leo Me lamed. The first exchange that
traded in the financial derivatives was INTERNATIONAL MONETARY MARKET,
wingoftheChicagoMercantileExchange,Chicago,intheyear1972.

Thefuturesmarketwasdesignedtosolvetheproblems,existingintheforwards
market.Afinancialfutureisanagreementbetweentwopartiestobuyorsellastandard
quantityofaspecifiedgood/assetonafuturedateatanagreedprice.Accordingly,future
contractsarepromises:thepersonwhoinitiallysellsthecontractpromisestodelivera
specifiedunderlyingassettoadesignateddeliverypointduringacertainmonth,called
deliverymonth. Theunderlyingassetcould,wellbe,acommodity,stockmarketindex,
individualstock,currency,interestratesetc..Thepartytothecontractwhodeterminesto
payapriceforthegoodsisassumedtotakealongposition,whiletheotherwhoagreesto
sellisassumedtobetakingashortposition.

Thefuturescontractsarestandardizedinthetermsof:
Quantityoftheunderlyingassets.
Qualityoftheunderlyingassets.
Dateandmonthofthedelivery.
Unitsofthepricequotationsandminimumpricechange,and
Locationofthesettlement.
Itis duetothestandardizationthatthefutures contracthasanedgewiththe
forwardcontract,inthetermsof:Liquidity,safetyandthesecuritytohonoring
thecontractwhichisotherwisenotsecuredinanOTCtradingforwardscontract.

42

In short, futures contract is an exchangetraded version of the usual forward


contract.Therearehowever,significantdifferencesbetweenthetwoandthesamecanbe
appreciatedfromtheabovediscussion.

BenefitstoIndustryfromFuturestrading:
Hedgingthepriceriskassociatedwithfuturescontractualcommitments.
Spacedoutpurchasespossibleratherthanlargecashpurchasesanditsstorage.
Efficientpricediscoverypreventsseasonalpricevolatility.
Greaterflexibility,certaintyandtransparencyinprocuringcommoditieswould
aidbanklending.
Facilitateinformedlending.
Hedgedpositionsofproducersandprocessorswouldreducetheriskofdefault
facedbybanks.
Lendingforagriculturalsectorwouldgoupwithgreatertransparencyinpricing
andstorage.
CommodityExchangestoactasdistributionnetworktoretailagrifinancefrom
Bankstoruralhouseholds.
ProvidetradinglimitfinancetoTradersincommoditiesExchanges.

OPTIONSCONTRACT
Optionshaveexistedoveralongperiodbutweretradedoverthecounter(OTC)
only.Thesecontractsarefundamentallydifferentfromthatoffuturesandforwards.In
the recent years options have become fundamental to the working of global capital
markets.Theyaretradedonawidevarietyofunderlyingassetsonboth,theexchanges
andOTC.Optionslikethefuturesarealsoavailableonmanytraditionalproductssuchas
equities,stockindices,commoditiesandforeignexchangeinterestratesetc.,optionsare

43

used as a derivate instrument only in financial capital market in India and not in
commodityderivatives.Itisintheprocessinintroduction.

Options,likefutures,alsospeculativeinnature.Optionsisalegalcontractwhich,
facilitatetheholderofthecontract,therightbutnottheobligationstobuyorsellthe
underlyingassetatthefixedrateonafuturedate.Itshouldbehighlightedthat,unlike
thatthefuturesandforwardcontracttheoptionsgivesthebuyerofthecontract,theright
toenterintoacontractandhedoesnthavetonecessarilyexercisetherighttogive,take
thedelivery.WhenacontractismadethebuyerhastopaysomemoneyasaPremium
tothesellertoacquiresucharight.
Optionsarebasicallyoftwotypes.

Call options
Put options
Calloptions:Acalloptionsgivesthebuyertherighttobuytheunderlyingasset
atastrikepricespecifiedintheoption.Theprofit/lossdependsontheexpirationdateof
thecontractifthespotpriceexceedsthestrikepricetheholderofthecontractbooksa
profitandviceversa.Higherthespotpricemoreistheprofit.

Putoptions:Aputoptiongivethebuyertherighttoselltheunderlyingassetat
thestrikepricespecifiedintheoption.Theprofit/lossthatthebuyermakesontheoption
dependsonthespotpriceoftheunderlyingasset.Ifthespotpriceisbelowthestrike
pricehemakesprofitandviceversa.Ifthespotpriceishigherthanthestrikepricehe
willwaituptotheexpiryorelsebooktheprofitearly.

SWAPS:
Swapsweredevelopedasalongtermpriceriskmanagementinstrumentavailable
ontheoverthecountermarket.Swapsareprivateagreementsbetweentwopartiesto
exchangecashflowsinthefutureaccordingtoaprearrangedformula.Theseagreements

44

areusedtomanageriskinthefinancialmarketsandexploittheavailableopportunityfor
arbitrageinthecapitalmarket.

A swap, generically, is an exchange. In the financial parlance it refers to an


exchangeofaseriesofcashflowsagainstanotherseriesofcashflows.Swapsarealso
usedintheasset/liabilitymanagementtoobtaincosteffectivefinancingandtogenerate
higherriskadjustedreturns.Withswaps,producerscaneffectivelyfix,i.e.lockin,the
pricestheyreceiveoverthemediumtolongterm,andconsumerscanfixthepricesthey
havetopay.Nodeliveryoftheassetisinvolved;themechanismofswapsispurely
financial.

Theswapsmarketoriginatedinthelate1970s,whensimultaneousloanswere
arrange between British and the US entities to bypass regulatory barriers on the
movementofforeigncurrency.thelandmarktransaction

BetweentheWorldBankandtheIBMinaugust1981,pavedthewayforthe
developmentofamarketthathasgrownfromanominalvolumeintheearly1980stoan
outstandingturnoverofUS$46.380tnin1999.

Theswapsmarketoffersseveraladvantageslike:
These agreements are undertaken privately while transactions using exchange
tradedderivativesarepublic.
Since the swaps products are not standardized, counter parties can customize
cashflowstreamstosuittheirrequirements
Theswapscanberegardedasportfoliosofforwardcontracts.Thetwocommonly
usedswapsare:
Interestrateswaps:Theseentailswappingonlytheinterestrelatedcashflowsbetween
thepartiesinthesamecurrency.

45

Currencyswaps:Theseentailswappingbothprincipalandinterestbetweentheparties,
with the cash flows in one direction being in a different currency than those in the
oppositedirection.

PARTICIPANTSINTHEDERIVATIVEMARKET
Therearethreemajorparticipantsinthederivativesmarket.Theyare:

Hedgers
Speculators
Arbitragers

HEDGERS
Heisthepersonwhoentersthederivativesmarkettolockintheirpricestoavoid
exposuretoadversemovementsinthepriceofanasset.Whilesuchlockingmaynotbe
extremelyprofitabletheextentoflossisknownandcanbeminimized.Theyareinthe
positionwheretheyfaceriskassociatedwiththepriceofanasset.Theyusederivativesto
reduceoreliminaterisk.

Forexample,afarmermayusefuturesoroptionstoestablishthepriceforhis
croplongbeforeheharvestsit.Variousfactorsaffectthesupplyanddemandforthat
crop,causingpricestoriseandfalloverthegrowingseason.Thefarmercanwatchthe
pricesdiscoveredintradingattheCBOTand,whentheyreflectthepricehewants,will
sellfuturescontractstoassurehimofafixedpriceforhiscrop.

Aperfecthedgeisalmostimpossible.WhilehedgingBasisriskcouldarise.Basis
=SpotpriceofassettobehedgedFuturespriceofthecontractused.Basisriskarisesas
aresultofthefollowinguncertainties:

Theexactdatewhentheassetwillbeboughtorsoldmaynotbeknown.The
hedgemayrequirethattheFuturescontractbeclosedbeforeexpiration.

46

PRICE
FUTURESPRICE
BAS
SPOTPRICE
EXPIRYDATETIME

SPECULATORS:
A speculator is a one who accepts the risk that hedgers wish to transfer. A
speculatortakespositionsonexpectationsoffuturespricemovementsandinorderto
makeaprofit.Ingeneralaspeculatorbuyfuturescontractswhenheexpectfuturesprices
toriseandsellfuturescontractwhenheexpectsfuturespricestofall,buthasnodesireto
actuallyownthephysicalcommodity.

Speculatorswishtobetonthefuturemovementinthepriceofanasset.Theyuse
derivativestogetextraleverage.Theytakepositionsinthemarketandassumeriskto
profitfromfluctuationsintheprices.Infact,thespeculatorsconsumetheinformation,
makeforecastaboutthepricesandputtheirmoneyintheseforecast.Bytakingpositions,
they are betting that the price would go up or they are betting it would go down.
Dependingontheirperception,theymaylongorshortpositionsonthefuturesor/and
options,ormayholdspreadpositions.

ARBITRAGEURS
Simultaneouspurchaseofsecuritiesinonemarketwherethepricesthereofarelowand
salethereofinanothermarket,wherethepricethereofiscomparativelyhigher.Theseare
donewhenthesamesecuritiesarebeenquotedatdifferentpricesinthetwomarkets,with

aviewtomakeaprofitandcarriedonwiththeconceivedintentiontoderiveadvantage
47

fromdifferenceinpricesofsecuritiesprevailinginthetwomarkets.AsdefinedbyThe
InstituteofCharteredAccountantsofIndia.

Arbitrageursthriveonthemarketimperfections.Theyprofitbytradingongiven
commodities, or items, that are in the business to take advantage of a discrepancy
betweenpricesintwodifferentmarkets.If,forexample,theyseethefuturepricesofan
assetgettingoutoflinewiththecashprice,theywilltakeoffsettingpositionsinthetwo
marketstolockinaprofit.

Thus,thearbitrageinvolvesmakingrisklessprofitbysimultaneouslyentering
intotransactionsintwoormoremarkets.Withtheintroductionofderivatetradingthe
scopeofarbitrageursactivitiesextendstoarbitrageovertimei.e.,hecanbuysecurities
inanindextodayandsellthefutures,maturinginthemonthortwo.

TRADINGOFCOMMODITYDERIVATIVESININDIA
TradingofallthederivativesinIndiaiscarriedover:
Exchanges
Overthecounter

EXCHANGETRADING
Anasset(commodity/stock),whenistradedoveranorganizedexchangeisitis
termed,tobetradedontheExchange.Thistypeoftradingisthegeneraltradingwhich
weseeonthemajorexchangesworldover.Thesettlementintheexchangetradingis
highlystandardized.

OVERTHECOUNTERTRADING
An asset (commodity/stock) is traded over the counter usually because the
companyissmallandunabletomeetlistingrequirementsoftheexchangesandfacilitates
thetradinginthoseareaswheretheexchangesarenotlocated.Alsoknownasunlisted

48

theassetsaretradedbybrokers/dealerswhonegotiatedirectlywithoneanotherover
computernetworksandbyphone.

Instruments such as bonds do not trade on a formal exchange and are thus
considered overthecounter securities.Investmentbanksmakingmarketsforspecific
issuestrademostdebtinstruments.Ifsomeonewantstobuyorsellabond,theycallthe
bankthatmakesthemarketinthatasset.

ExchangeVsOTCTrading
TheOTCderivativesmarketshavewitnessedrathersharpgrowthoverthelast
fewyears,whichhaveaccompaniedthemodernizationofcommercialandinvestment
bankingandglobalizationoffinancialactivities.Therecentdevelopmentsininformation
technology have contributed to a great extent to these developments. While both
exchangetradedandOTCderivativecontractsoffermanybenefits,theformerhaverigid
structurescomparedtothelatter.Ithasbeenwidelydiscussedthatthehighlyleveraged
institutions and their OTC derivative positions were the main cause ofturbulence in
financial markets in 1998. These episodes of turbulence revealed the risks posed to
marketstabilityoriginatinginfeaturesofOTCderivativeinstrumentsandmarkets.
TheOTCderivativesmarketshavethefollowingfeaturescomparedtoexchangetraded
derivatives:
Themanagementofcounterparty(credit)riskisdecentralizedandlocatedwithin
individualinstitutions.

There are no formal centralized limits on individual positions, leverage, or


margining.
Therearenoformalrulesforriskandburdensharing,

There are no formal rules or mechanisms for ensuring market stability and
integrity,andforsafeguardingthecollectiveinterestsofmarketparticipants,

49

TheOTCcontractsaregenerally,notregulatedbyaregulatoryauthorityandthe
exchangesselfregulatoryorganization,althoughtheyareaffectedindirectlyby
nationallegalsystems,bankingsupervisionandmarketsurveillance.

COMMODITIESMARKET..
GlobalPerspective
Oilaccountsfor40percentoftheworld'stotalenergy
demand.Theworldconsumesabout76millionbbl/dayofoil.
UnitedStates(20millionbbl/d),followedbyChina(5.6millionbbl/d)andJapan(5.4
millionbbl/d)arethetopoilconsumingcountries.
Balancerecoverablereservewasestimatedatabout142.7billiontons(in2002),ofwhich
OPECwas112billiontons

50

Themajorcommoditiestradingexchangesgloballyare:

ChicagoBoardOfTrade(COBOT).U.S.A.
NewYorkMercantileExchange(NYMEX).U.S.A.
LondonMetalExchange(LME).UnitedKingdom.
TokyoCommodityExchange(TOCOM).Japan
InternationalPetroleumExchange(IPE).
LondonMetalExchange(LME).UnitedKingdom
SydneyFuturesExchange(SFE).Australia
BrazilianFuturesExchange(BBF).Brazil
WinnipegCommodityExchange(WCE).Canada
MarcheaTermeInternationaldeFrance(MATIF).France
HongKongFuturesExchange(HKFE).HongKong
NewZealandFutures&OptionsExchange(NZFOE).NewZealand
RussianCommodityandRawMaterialsExchange.Russia
SingaporeInternationalMonetaryExchange(SIMEX).Singapore
SouthAfricanFuturesExchange(SAFEX).SouthAfrica
DalianCommodityExchange.China
ShanghaiMetalExchange(SME).China

51

ChicagoBoardOfTrade(CBOT)
The Chicago Board of Trade (CBOT), established in 1848, is a leading futures and
optionsonfuturesexchange.Morethan3,600CBOTmemberstrade50differentfutures
andoptionsproductsattheexchangethroughopenauctionand/orelectronically.Volume
attheexchangein2003wasarecordbreaking454millioncontracts.

Initsearlyhistory,theCBOTtradedonlyagriculturalcommoditiessuchascorn,
wheat,oatsandsoybeans.Futurescontractsattheexchangeevolvedovertheyearsto
include nonstorable agricultural commodities and nonagricultural products like gold
andsilver.TheCBOT'sfirstfinancialfuturescontract,launchedinOctober1975,was
based on Government National Mortgage Association mortgagebacked certificates.
Sincethatintroduction,futurestradinghasbeeninitiatedinmanyfinancialinstruments,
includingU.S.Treasurybondsandnotes,stockindexes,andswaps,tonamebutafew.
Anothermarketinnovation,optionsonfutures,wasintroducedin1982.

Formorethan150years,theprimarymethodoftradingattheCBOTwasopen
auction, which involved traders meeting facetoface in trading pits to buy and sell
futurescontracts.Buttobettermeettheneedsofagrowingglobaleconomy,theCBOT
successfullylauncheditsfirstelectronictradingsystemin1994.Duringthelastdecade,
astheuseofelectronictradinghasbecomemoreprevalent,theexchangehasupgradedits
electronictradingsystemseveraltimes.Mostrecently,onJanuary1,2004,theCBOT
debuteditsnewelectronicplatformpoweredbythecuttingedgetradingtechnology.As
of1stJanuary2004,theChicagoMercantileExchangeisprovidingclearingandrelated
servicesforallCBOTproducts

52

NewYorkMercantileExchange(NYMEX)
TheNYMEXinitscurrentformwascreatedin1994bythemergeroftheformer
NewYorkMercantileExchangeandtheCommodityExchangeofNewYork(COMEX).
Togethertherepresentoneoftheworld'slargestmarketsincommoditiestrading.

Itdealsinfutures(andoptions)inoilproducts,suchascrudeoil,heatingoil,
leadedregulargasoline,naturalgas,propaneandinraremetals,suchasplatinumand
palladium. It also deals in gold and silver, aluminum and copper, sharing with the
LondonMetalExchangeadominantroleintheworldmetaltrading.

LondonMetalsExchange
TheLondonMetalExchangeistheworld'spremiernonferrousmetalsmarket
with highly liquid contracts and a worldwide reputation. It is innovative while
maintainingitstraditionalstrengthsandremainsclosetoitscoreusersbyensuringits
contractscontinuetomeetthehighexpectations ofindustry.Asaresult,itishighly
successfulwithaturnoverinexcessofUS$3,000billionperannum.Italsocontributesto
theUKsinvisibleearningstothesumofmorethan250millioninoverseasearnings
eachyear.
Theoriginsofthe LondonMetalExchange canbetracedasfarbackasthe
openingoftheRoyalExchangein1571.Thisiswheremetaltradersfirstbegantomeet
onaregularbasis.However,itwasin1877thattheLondonMetalMarketandExchange
CompanywereformedasadirectresultofBritain'sindustrialrevolutionofthe19th
century.ThisledtoamassiveincreaseintheUKsconsumptionofmetal,whichrequired
theimportofenormoustonnagesfromabroad.Merchantventureswereinvestinglarge
sumsofmoneyinthisactivityandwereexposedtogreatrisk,notonlybecausethe
voyageswerehazardousbutalsobecausethecargoescouldlosevalueiftherewasafall
inpriceduringthetimeittookforthemetaltoreachBritain.

53

INDIANPERSPECTIVE
TherearethreemajorexchangesforthecommoditytradinginIndia.Theyare:
TheNationalCommoditiesandDerivativesExchangeLtd.(NCDEX)
MultiCommoditiesExchangeofIndiaLtd.(MCX)
NationalMultiCommodityExchangeLtd.(NMCE)

NationalCommodity&DerivativesExchangeLimited(NCDEX)
TheNationalCommoditiesandDerivativesExchangeLtdisaprofessionallymanaged
onlinemulticommodityexchangepromotedbyICICIBankLimited(ICICIBank),Life
Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development(NABARD)andNationalStockExchangeofIndiaLimited(NSE).Punjab
NationalBank(PNB),CRISILLimited(formerlytheCreditRatingInformationServices
ofIndiaLimited),IndianFarmersFertilizerCooperativeLimited(IFFCO)andCanara
Bank bysubscribingtotheequityshareshavejoinedtheinitialpromotersas
shareholdersoftheExchange.NCDEXistheonlycommodityexchangeinthecountry
promoted by national level institutions. This unique parentage enables it to offer a
bouquetofbenefits,whicharecurrentlyinshortsupplyinthecommoditymarkets.The
institutionalpromotersofNCDEXareprominentplayersintheirrespectivefieldsand
bringwiththeminstitutionalbuildingexperience,trust,nationwidereach,technologyand
riskmanagementskills.

NCDEXisapubliclimitedcompanyincorporatedonApril23,2003underthe
CompaniesAct,1956.ItobtaineditsCertificateforCommencementofBusinessonMay
9,2003.IthascommenceditsoperationsonDecember15,2003

54

NCDEXisanationlevel,technologydrivendemutualizedonlinecommodity
exchange with an independent Board of Directors and professionals not having any
vested interest in commodity markets. It is committed to provide a worldclass
commodityexchangeplatformformarketparticipantstotradeinawidespectrumof
commodityderivativesdrivenbybestglobalpractices,professionalismandtransparency.

ForwardMarketCommissionregulatesNCDEXinrespectoffuturestradingin
commodities. Besides, NCDEX is subjected to various laws of the land like the
CompaniesAct,StampAct,ContractsAct,ForwardCommission(Regulation)Actand
variousotherlegislations,whichimpingeonitsworking.

NCDEXislocatedinMumbaiandoffersfacilitiestoitsmembersinmorethan
390centersthroughoutIndia.Thereachwillgraduallybeexpandedtomorecenters.
NCDEXcurrentlyfacilitatestradingofthirtysixcommoditiesCashew,CastorSeed,
Chana,Chilli,Coffee,Cotton,CottonSeedOilcake,CrudePalmOil,ExpellerMustard
Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot,
MulberryGreenCocoons,Pepper,RapeseedMustardSeed,RawJute,RBDPalmolein,
Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,
Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow
SoybeanMeal.Atsubsequentphasestradinginmorecommoditieswouldbefacilitated.

55

MultiCommoditiesExchangeofIndiaLtd(MCX)

MCX an independent and demutulised multi commodity


exchangehaspermanentrecognitionfromGovernmentofIndia
forfacilitatingonlinetrading,clearingandsettlementoperations
forcommodityfuturesmarketsacrossthecountry.Key
shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
NABARD,NSE,HDFCBank,StateBankofIndore,StateBankofHyderabad,State
BankofSaurashtra,SBILifeInsuranceCo.Ltd.,UnionBankofIndia,BankOfIndia,
BankOfBaroda,CanaraBank,CorporationBank.

Head quartered in Mumbai, an expert management team with deep domain


knowledgeofthecommodityfuturesmarketsleadsMCX.Throughtheintegrationof
dedicatedresources,robusttechnologyandscalableinfrastructure,sinceinceptionMCX
hasrecordedmanyfirsttoitscredit.

InauguratedinNovember2003byMr.MukeshAmbani,Chairman&Managing
Director, Reliance Industries Ltd, MCX offers futures trading in the following
commoditycategories:
AgriCommodities,
Bullion,MetalsFerrous&Nonferrous,
Pulses,
Oils&Oilseeds,
Energy,Plantations,
Spices
MCXhasbuiltstrategicallianceswithsomeofthelargestplayersincommodities
ecosystem, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana,

UnitedPlantersAssociationofIndiaandIndiaPepperandSpiceTradeAssociation.
56

Today MCX is offering spectacular growthopportunities and advantages to a


large cross section of the participants including Producers / Processors, Traders,
Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry
Associations, amongst others MCX being nationwide commodity exchange, offering
multiple commodities for trading with wide reach and penetration and robust
infrastructure,iswellplacedtotapthisvastpotential.

VisionandMissionoftheMultiCommoditiesexchangeofIndia.
The vision of MCX is to revolutionize the Indian commodity markets by
empoweringthemarketparticipantsthroughinnovativeproductofferingsandbusiness
rulessothatthebenefitsoffuturesmarketscanbefullyrealized.Offering'unparalleled
efficiencies','unlimitedgrowth'and'infiniteopportunities'toallthemarketparticipants.

AtMCXwebelievethatperformanceexcellenceandaffordabilitywouldbethe
keydriversinpromotingandpopularizingCommoditiesFuturestradinginthecountry.
Exchangesintheneweconomywillbedrivenbystrongserviceavailabilitybackedby
superiortechnologyandMCXiswellpoisedtoemergeasthe"ExchangeofChoice"for
thecommodityfuturestradingcommunity.

57

COMMODITIES
SYMBOLS

Gold,GoldHNI,GoldM,IGold,Silver,
SilverHNI,SilverM
Castor
Oil,
Castor
Seeds,
Castor
Seeds
(Disa),
Cottonseed,
Crude Palm Oil,Groundnut
Oil,
Kapasia Khalli (Cottonseed
Oilcake),
MustardSeed
(Hapur),
Mustard
Seed
(Jaipur),
Mustard
/Rapeseed
Oil,
MustardSeed(Sirsa),RBDPalmolein,
RefinedSoy
Oil,SesameSeed,SoyamealSoyaSeed
Cardamom,Jeera,Pepper,RedChilli,
Turmeric
Aluminium,Copper,Nickel,SpongeIron,
SteelFlat,
Steel
Long
(Bhavnagar),
SteelLong(Gobindgarh),Tin
Cotton
Long
Staple
,
Cotton
Medium
Staple,
CottonShortStaple,Kapas
Chana,Masur,Tur,Urad,YellowPeas,

BasmatiRice,Maize,Rice,SarbatiRice,
Wheat
BrentCrudeOil,CrudeOil,

FurnaceOil

CashewKernel,Rubber
HighDensity
Polypropylene
(PP),

Polyethylene

(HDPE),

GuarSeed,Guargum,Gur,MenthaOil,
SugarM30,SugarS30,
58

Multi-Commodity Exchange, MCX


COMMODITY

UNIT
OF UNITOF
TRADING
PRICE
QUOTATION

YIELD/Re.
MOVEMENT

YIELD/TIC
TRADING
or
TIC SESSION
VALUE

PRECIOUSMETALS
GOLDM

10gm

100gm

10.00

1.00

10.00

10:00AM11:30PM

GOLD

10gm

1000gm

100.00

1.00

100.00

10:00AM11:30PM

SILVERM

1KG

5KG

5.00

1.00

5.00

10:00AM11:30PM

SILVER

1KG

30KG

30.00

1.00

30.00

10:00AM11:30PM

AGRICULTURALPRODUCTS
SOYA

1QT

10QT

10.00

0.05

0.50

SOYAOIL

10KG

1000KG

100.00

0.05

5.00

10KG

1000KG

100.00

0.05

5.00

10KG

1000KG

100.00

0.05

5.00

CASTOR

100KG

1MT

10.00

0.25

2.50

CASTOROIL

10KG

1MT

100.00

0.10

10.00

GROUNDNUT 10KG
OIL

1MT

100.00

0.10

10.00

GAURSEED

100KG

5MT

50.00

1.00

50.00

100KG

1MT

10.00

1.00

10.00

20KG

4MT

200.00

0.10

20.00

PALMOLEIN
OILCRUDE
PALMOLEIN
OILRBD

BLACK
PEPPER
KAPAS

10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM5:00PM
&

INDUSTRIALMETALS
STEELLONG

1MT

25MT

25.00

0.50

12.50

STEELFLAT

1MT

25MT

25.00

0.50

12.50

COPPER

1KG

1MT

1000.00

0.05

50.00

NICKEL

1KG

250KG

250.00

0.50

125.00

TIN

1KG

500KG

500.00

0.25

125.00

59

10:00AM5:00PM
&
10:00AM5:00PM
&
10:00AM11:30PM
10:00AM5:00PM
&
10:00AM5:00PM

TheNationalMultiCommodityExchangeofIndialtd.
ThefirststateoftheartdemutualizedmulticommodityExchange,
NMCEcommencedfuturestradingin24commoditieson26thNovember,
2002onanationalscaleandthebasketofcommoditieshasgrownsubstantially
sincethentoincludecashcrops,foodgrains,plantations,spices,oilseeds,metals&
bullionamongothers.NMCEwasthefirstExchangetotakeuptheissueofdifferential
treatmentofspeculativeloss.ItwasalsothefirstExchangetoenrollparticipation
ofhighnetworthcorporatesecuritiesbrokersincommodityderivativesmarket.
NMCEhasalsomadeimmensecontributioninraisingawarenessaboutand
catalyzingimplementationofpolicyreformsinthecommoditysector..Itwasthe
Exchange,whichshowedawaytointroducewarehousereceiptsystemwithinexisting
legalandregulatoryframework.ItwasthefirstExchangetocompletethecontractual
groundworkfordematerializationofthewarehousereceipts.Innovationisthewayoflife
atNMCE.

National Multi Commodity Exchange of India Ltd. (NMCE), promoted by


commodityrelevantpublicinstitutions,viz.,CentralWarehousingCorporation(CWC),
National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat
AgroIndustries Corporation Limited (GAICL), Gujarat State Agricultural Marketing
Board (GSAMB),NationalInstitute ofAgriculturalMarketing(NIAM),andNeptune
OverseasLimited(NOL).ThePunjabNationalBank(PNB)tookequityoftheExchange
toestablishthatlinkage.Eventoday,NMCEistheonlyExchangeinIndiatohavesuch
investment and technical support from the commodity relevant institutions. These
institutionsarerepresentedontheBoardofDirectorsoftheExchangeandalsoonvarious
committeessetupbytheExchange.Theexperiencedandqualifiedprofessionalswith
impeccableintegrityandexpertisemanagethedaytodayoperationsoftheExchange.
Noneofthemhaveanytradinginterest.

60

Vision
NationalMultiCommodityExchangeofIndiaLimitediscommittedtoprovide
worldclassservicesofonlinescreenbasedFuturesTradingofpermittedcommodities
and efficient Clearing and guaranteed settlement, while complying with Statutory /
Regulatoryrequirements.Weshallstrivetoensurecontinualimprovementofcustomer
servicesandremainqualityleaderamongstallcommodityexchanges.

Mission
ContinuousimprovementinCustomerSatisfaction.
ImprovingefficiencyofmarketingthroughonlinetradinginDematerialization
form.Minimizingofsettlementrisks.
Improvingefficiencyofoperationsbyprovidingbest
infrastructure.Rationalizingthetransactionfeestooptimumlevel.
Implementingbestqualitystandardsandtestingintunewithtrade
practices.Improvingfacilitiesforstructuredfinance.
Improvingqualityofservicesrenderedbysuppliers.
PromotingawarenessaboutonlinefeaturestradingservicesofNMCEacrossthelength
andbreadthofthecountry.

TurnoveroftheIndiancommodityfuturesmarket
TurnoveronCommodityFuturesMarkets
Exchange
NCDEX
NBOT
MCX
NMCE
ALLEXCHANGES

200910
1490
53014
2456
23842
129364

NCDEXTRADINGSYSTEM
61

(Rs.InCrores)
201011
54011
51038
30695
7943
170720

Atradingsystemisasystemofrulesandguidelinesofthewholetrading
process.Thesystemincludes:
Firstinthesystem,theTICKERforeachcommodityisshownonthetrading
terminal.Generallyitisstandardizedforalltheexchangesinacountry,butnevertheless,
itmaydifferbetweentheexchangesinsamecountry.
Firstly,theFormatforTickersislikethis:
CCCGGGLLL

CCCthreelettersforthecommodity.
GGGthreelettersforthegrade.

Whereverthereisnoparticulargrade,eitherSTD(standard)orGR1(grade1)hasbeen
used.
LLLthreelettersforthedeliverylocation.
Eg.SYOREFINDSYO:SoyOil,REF:Refined,IND:Indore

Nowletshavealookattheformatofthetickersforallthecommodities
thataretradedinNCDEX:
GLD100MUM
SLV100DEL
SYBGR1IND
SYOREFIND
RMSGR1JPR
RMOEXPJPR
RBDPLNKAK
CPOSTDKDL
CTMJ34BTD
CTLS06ABD

:Gold+100%pure+Mumbai
:Silver+100%pure+Delhi
:SoyBean+GR1+Indore
:SoyOil+Refined+Indore
:Rape/Mustard+GR1+Jaipur
:Rape/MustardOil+Expeller+Jaipur
:RBD+PalmOlein+Kakinada
:CrudePalmOil+STD+Kandla
:CottonMediumStapleLength+J34+Bhatinda
:CottonLongStapleLength+S06+Ahmedabad

INSTRUMENTTYPEinNCDEXistodenotewhetherthetickerisafuturescontract
oraspotpricebeingdisseminatedoranoptionscontract

62

COMDTYusedforcommodityspotpricedissemination
FUTCOMusedforfuturesoncommodity
OPTCOMusedforoptionsonfuturesoncommodity
CONTRACTEXPIRY:

ContractExpiryfortheFutures&Optionscontractwillbewrittenas
20mmmYYYY.2020thofeverymonthacontractexpires.
mmmusedtodenotethemonth,e.g.DEC,JANetc
YYYYusedtodenotetheyeare.g.2003,2004etc

Forthespotprice,noexpirydatewillbedisplayedorrequiredasthepositionsinspot
marketareforperpetuity(Spotmarketnotyetstarted).
WHATTOQUOTEFORBUY/SELL
Goldforbuyingfuturesofsay500gm,youwillneedtoenterQuantityas500,and
priceinRs/10gm

Silverforbuyingfuturesofsay25Kg,youwillneedtoenterQuantityas25andthe
priceinRs/Kg

Alloilsandoilseedsforbuyingfuturesofsay5MT,youwillneedtoenterQuantity
as5and
ThepriceforSoyBeaninRs/Quintal
ThepriceforRapeseed/MustardSeedinRs/20
KgThepriceforalledibleoilsinRs/10Kg

Cottonforbuyingfuturesofsay44bales,youwillneedtoenterQuantityas44and
thepriceinRs/Quintal

63

ORDERTYPES:
Therearemajor,twotypesoforders,regularlotordersandqualifiers.

Regularlotorder
MarketOrder:Itisatypeoforderwhereinboththebuyerandselleragreesfor
atransactionatcurrentmarketprice(CMP).

LimitOrder:Anorderthatcanbeexecutedonlyataspecifiedpriceorone
favorablefortheinvestor.HenceforaselleralimitpriceisaboveCurrentMarketPrice
(CMP)andforabuyeritisbelowtheCurrentMarketPrice(CMP)
Qualifier
StopLoss:Anorderthatisputtocurbexcesslosstothecustomer.Henceforaseller
(whoalreadyhasabuy)astoplossorderisbelowCMPandforbuyer(whoalreadyholds
asell)astoplossorderisaboveCMP.

FuturesSpread(SB)specifieddifferencebetweentwodifferentcalendarmonthsin
samecommodity.ItalsocalledjustSpreadsbetting.
ImmediateorCancel(IOC)

2L Order (2L) Opposite positions taken in two different months (arbitraging) e.g.
buyingMarchcontractandsellingAprilcontract.

3LOrder(3L)Oppositepositionstakenintwodifferentmonthsandeitherbuy/sell
positiontakeninothermonth.E.g.buyingMarchcontractandsellingAprilcontractand
64

buyinginMaycontract.Henceinthiscaseonepositionineitherofthecontractsisnot
arbitraged.

TIMEVALIDITYOFTRADES
DayValidonlyforthatday.

GoodTillDate(GTD)Validtothedatespecified(forspecifiedno.ofdays),Max7
days.
GoodTillCanceled(GTC)Validtillcancelled,Max7days.

SETTLEMENTPROCESSINCOMMODITIESFUTURES
InthisEducationSeries,weshallhavealookintohowsettlementisdoneincase
ofcommoditiesfutures.Thesettlementprocedureismoreorlesssameasincaseofstock
futures,nevertheless,therearesomekeydifferencesintheprocedurebythevirtueofthe
underlyingasset,whichisacommodity.

Now,wewilllookintokeytwokeyissueswhichaffectthesettlementprocess.
Firstbeingwhethertheunderlyingassetofthefutureisdeliverable(thisdependson
exchange)andtheotherwhethertheunderlyingassetisinaphysicalformoronlyin
electronicform.
Table.1:Comparisonbetweenstockfuturesandcommodityfutures .
Instrument

Deliverable

ElectronicForm

PhysicalFrom

StockFutures

No*

Yes

No

CommodityFutures

Yes

Yes

Yes

InmanydevelopedfinancialmarketslikeJapan,US,UK,Euroland,stockfuturescan
accounttodelivery.

65

FromTable.1itisclearthatthestockfuturesinIndiadonotendupindelivery,
implyingapersonwhohastakenlongpositioncannotaskfordeliveryofrealstockafter
theexpiryofthecontractevenifheiswillingfortakingdelivery.

Again since, the delivery is not possible, an investor cannot settle his short
positionwiththerealstock;neithercanhetakedeliveryofstocksifhehastakenlong
position.Hehastomarktomarketattheendoffuturecontractsettlement.

Butincaseofcommodityfutures,deliveryofunderlyingcommodityispossible.
Thedeliverycanbetakenbothintheelectronicformandphysicalform.

In case of electronic form the delivery quantity is transferred to/from the


investorsDPaccount.
Incaseofphysicalform,thedeliveryquantityistransferredto/fromthestocking
point.
Now,wearriveatanimportantpoint,whenandhowaresettlementsdone?
DailySettlementsaredoneonmarktomarketbasis.
AndattheexpiryofthecontractFinalSettlementisdone.
DailyMarktoMarket(MTM)SettlementisdoneforeachClient:

Attheendofeverytradingday,forallthetrades,thisisdonetillthedateoftheContract
expiry.
AdailysettlementisdonetotakecareofDAILYPRICEFLUCTUATIONforalltrades.
FinalSettlementwillbedoneforeachClient:

66

ThisonexpiryoftheContractwillhandletheFINALobligationoftheMemberforall
tradesinthatcontract.
HowisDailyMTMdone?
Calculatingthedailyprofitsandlossesfortheclient/investordoestheDailySettlement.
ProfitsandLossesaredeterminedonthepositionsforclient/investor,foreachclientand
foreachcontract
AlltradesaremarkedtothemarketattheDailySettlementPricewhichisequalto
Closingpricefortheday.
AtotalMarktoMarketProfitorLossiscalculatedfortheeveryclient/investor.
Table.2ExampleofDailyMTM
Branch1

Branch2

Client1
ContractA

Client2

ContractB

ContractA

Client3
ContractA

ContractB

Buy400@50 Sell200@150 Sell700@48 Buy200@63 Buy150@160


Sell200@55 Sell150@190 Buy500@40
Closingrate

400X8=

A58

3200

B180

200X3=
(600)

PROFIT

PROFIT

/(LOSS)

2600

TOTAL
MTM

200X30=
(6000)
150X10=

700X10=
(7000)
500X18=

Sell150@170
150X20=

200X5=

3000

(1000)

150X10=

1500

9000

LOSS

PROFIT

LOSS

PROFIT

2000

(1000)

1500

(4500)

LOSS(1900)

(1500)

PROFIT2500

67

Settlements Procedure - Daily MTM Settlement


KCBPL BANK

Client 1,
2
load

BRANCH 2

of
Margi
n and
MTM
files
at*TWS Trading Work
EOD
Station

Margins

Chart 1:
Procedure for
Daily MTM

Initial
Margin Call
Any special
Margin

68

Fu
nds
tra
nsa
cti
on
flo
w

Client 1

E
x
c
h
a
n
g
e
C
l
e
a
ri
n
g
H
o
u
s
e
(

NCDEX/ MCX)

WhenisDailyMTMSettlementdone?
TheinformationonMTMamount(paidorreceived)bytheBrokingMember
(KCBPL)isgiventhrutheExtranetattheendoftheday,sameinformationispassedon
totheBrokingMember(KCBPL)branches.
Actual payment and receipt offunds will be made bythe Client on the next
tradingdayi.e.T+1.(Tbeingthetradedate)
HowdoestheTransferoffundshappen?
PaymentwillbedonethroughadesignatedClearingbankoftheExchange.
TheBrokingMember(KCBPL)makesarrangementforfundsinhisSettlementA/cwith
thebank.
The Clearing Corporation (NSCCL) will send instruction to the Bank for
debiting/creditingtheBrokingMember(KCBPL)account.
Whataretheotherpaymentstobemade?
Besides the MTM, the Broking Member (KCBPL) will make Daily Margin
payments.
MarginfileswillbedownloadedontheExtranet
BrokingMember(KCBPL)arrangesforfundsintheSettlementA/c
TheClearingCorporationdebitsthefundsonthenextdayafterthetradingdate.
Whathappensincaseoffailure?
IftheBrokingMember(KCBPL)failstomakethepaymentofMTMorMargin
amount,tradingterminalisdisabledimmediately.
TradingwillcommenceondepositoffundsbytheBrokingMember(KCBPL).
WhereistheinformationonDailySettlementavailable?
AllinformationpertainingtoSettlementsisavailableontheBrokingMember
(KCBPL)Extranet.
ThisisavailableinspecificfoldersfortheBrokingMember(KCBPL).

69

HowdoIaccesstheExtranet?
ThrutheVSAT/LeasedLinesconnectivityusingFTPprotocol
LoginusingTradingmemberIdandpasswordduringnontradinghours.(HereTrading
MemberisKCBPL)
NowletshaveabrieflookatthesequenceofEvents.

Opening new positions and Closing of


open positions by Member
Daily
MTM Settlement and Margins

Determination of positions for each


Member

During
the period
of contract
till
date of
expiry.
Calc
ulated at
the end of
every

On the
Date of expiry
after the
trading hours.
As per
settlement calendar
for each
contract.

Trading
Day,
Payments
on T+1.

Final Settlement of all open


positions

Settlement ontheContractelectronicform(DPA/c)and

Chart.2
Settlemen
ts Sequence
of events
From Chart.2 the last

ofallthe Expiry Date isin physical form, the final


open
positions.

called Finalsettlement in case of


Settlement. commodities futures varies

T
he

By thefromstockfutures.
virtue

of

Settlement commodities
done for futures being

Open Buy deliverable,


and Sell
both

in
events is the Final
positions
event in the sequence of

70

Thefuturessettlementincaseofcommoditiesfuturesisdoneinthefollowingways:
Cashsettlement:Mostoftheopenpositionsendupincashsettlementatthe
end/expiryofacontract.Infactabout99%ofthepositionsendupincashsettlement.
ElectronicForm:Somepositionsendupindelivery,theamount/volumeofa
commoditythataclientmarksfordeliveryistransferredintotheclientsDPA/c.
PhysicalForm:Veryless,almostnegligibledeliveryhappensinthephysical

form.(About0.10.5%oftotalopenpositions)
Howfinalpositionsaredetermined?
Broking Member A
Client 1

Broking Member B

Client 2

Client 3
Contract Y

Contract

Contract

Contract

Day 1

400 S

700 B

400 S

200 B

Day 2

400 S

400 B

200 B

Date of

400 S

300 B

400 B

Contract X 400 S
Contract Y 300 B

500 S

500 S

Contract Y
500- 400 = 100S

CanactualdeliveryofthecommoditybedoneonExpiry?
ABrokingMember(KCBPL)cangiveandtakedeliveryofcommoditiesforan
investor/clientoronproprietarytradesdone,bycompletingtheDeliveryformalitiesand
givingdeliveryinformationtotheExchange
WhatareproceduresrequiredbeforeDelivery?
Opening a Clearing Member (KCBPL) Pool account for the purpose of
settlements.
BeneficiaryDemataccountforowntransactions.
OpeningofClientsDemataccountwiththeempanelledDP.

71

Howisthedeliveryinformationprocessed?
TheinformationsubmittedbytheMembersismatchedatNCDEXattheendoftheday
Alltrades,whicharematched,arelockedfordelivery
ADeliveryRequestnumberisgeneratedforalldeliveryinformationsubmitted

Settlements Deliveries

Workflow
Download of KCBPL net positions
on expiry

Howdoesthematchingofdelivery
informationtakeplace?

Vali

datio

nof

deliv

ery

infor

mati

on

On

Delivery
Information

Counter party
Information

Submission of
Delivery
information

and matching of

Matching of
Information

Direct
delivery
Between
Buyers and
Sellers

omm
odity

Excessquantityis
rejectedandiscash
settled.Matchinglimited
tothetotalcapacityatthe
WarehouseMatchingis
doneforthedeliveries
basedonCommodity
Location

Delivery thru Depository

7
2

SETTLEMENTCALENDAR
Commodity

Physical Settlement schedule for


Pay-in/Pay-outs

Soya bean
Refined Soya bean oil
Rapeseed Mustard Seed
Rapeseed Mustard Seed Oil
RBD Palmolein
PLATINUM
Medium Staple Cotton
Long Staple Cotton

T+7
T +7
T +7
T +7
T +7
T +7
T +10
T +10

Gold

T +2

Silver

T +4

SettlementPayin
PayinwilltakeplaceondateasspecifiedinSettlement
Calendar.Commodities:
SellerensuresDematofcommoditiespriortopayin.
InstructiontoDPbysellertomovecommoditiestoKCBPLPoolA/c.
PayinofcommoditiesonSettlementDatethruKCBPLpoolA/c.
Funds:
PayinoffundsThrutheClearingbankoftheMemberonthePayinday.

SettlementPayout
PayoutwilltakeplaceondateasspecifiedinSettlement
Calendar.Commodities
CreditgivenintotheBuyermemberKCBPLPoolA/c.
InstructionbyKCBPLtotransferfrompoolA/ctobuyerclientsDemataccount.
SubsequentRematofcommoditiesandphysicalmovementhandledbybuyer.
Fun
73

ADVANTAGESOFTRADING/INVESTINGINCOMMODITIES
BenefitstotheIndustry,ExportersandImporters:
1. Hedging the price risk associated with future contractual commitments. For
instance,letstakeacaseofaSoyBeanexporterwhoseexportcommitmentis
onemonthnow(presentmarketpriceisRs.1700perquintal).Asperhisanalysts
recommendations,thepricesareexpectedtorise(toanextantofRs.1800per
quintal)afteronemonth,whenhehascommittedforexport.Nowletsassume
thathisexportcommitmentis10000quintals.
Time

MarketPrice

Today

Export
Commitment
Nil

Afteronemonth

10000

1800

Instance1:Withnohedging.
SalePrice:Rs.1850.

CostPrice:Rs.1800.
So,netprofit/quintal=Rs.50.
NetProfitofdeal=Rs.50x10000=Rs.5,
00,000.Instance2:WithHedging:
SalePrice:Rs.1850.
CostPrice:Rs.1700.(whereintheexportergoeslong(buys)
today)So,netprofit/quintal=Rs.150.
NetProfitofdeal=Rs.150x10000=15,00,000.
Anincreaseof200%netprofit.

1700

74

2.Efficientpricediscovery:
With the starting of national wide commodities markets, regional price
differencesincommoditiespricesarecontrolled.Hence,nowthecostofacommodityis
almostsamethroughoutthecountry.Priortothistherewaslotofpricedifferencesof
commoditiesatvariousplaces.Example,thepriceofGoldinHyderabadwasdifferent
frompriceofGoldinMumbai,butnowthisdisparityiscurbedtoanextant,thoughsome
pricestillexistsbetweentheexchanges.
3.BenefitstotheBanks:
NowtheproducerandconsumerofthecommoditycangoforHedgingtheir
positionshence,theloaneroffunds(Bank)isclearofthereceivables.Thus,Hedged
positions of producers and consumers would reduce the risk of default faced by the
banks.
Lendingforagriculturalsectorwouldgoupwithgreatertransparencyinpricing
andstorage.
4.Benefitstotheclients:
The commodity prices move with strong broad based fundamentals. Hence, the
commoditypricesdonotmoveinanerraticfashion.
ThepricemovementsarealsoduetoGlobalpricemovementsofaparticularcommodity
hence,thingslikeinsidertrading,andpricemanipulationsdonotexistincommodities
markets.
Acommodityisalwaystradable.Andalsoneveracommoditypricecanbezero.In
caseofstocks,acompanymaybedelisted,hence,itmaygonontradableorthevirtual
pricebeingzero

75

FACTORSEFFECTINGCOMMODITIESMARKET
Beforestartingthissectionletsdividecommoditiesintodifferentclasses:
PreciousMetals:Gold,Silver.
BaseMetals:Steel,Aluminum*,HighGradeCopper,Nickel,Zinc,Tin.
Agricultural:
Grains:Soy,SoyOil,Rice,andRice
Oil*.Softs:Cotton,Coffee*,Sugar.
Energy:CrudeOil,NaturalGas.**
Factorsaffectingthepricesofcommodities:
Thefactorsaffectingthepricesofvariouscommoditiescanbedividedintotwo:
GenericFactors:
These are the factors affecting all the commodity prices in
general.DemandandSupply.
Indian Rupee Vs other
currencies.Export/Importparity.
Politicalenvironment.
SpecificFactors:
Thesearethefactorsaffectingaparticularcommodityoraclassofcommodities.
PreciousMetals:
Stockmarketdynamics.
Geopoliticaltensions.

US dollar Vs other major


currencies.Globalmacroeconomics.
Minersreports.
Agricultural:
Climatic conditions.
Cropproduction.
Government regulations.
Exportrejection/orders.

76

Softs:
Climatic conditions.
Cropproduction.

Importduty.
IndustrialMetals:
Industrialdemand.
Substitutemetalssupply.
Government regulations.
Infrastructureprojects.

Energy:
Production.
Newexcavations.
Geopoliticaltensions.

77

CHAPTER4
DATAANALYSISANDINTERPRETATION

MultiCommoditiesExchangeofIndiaLtd(MCX)GoldPrice
Date

OpenPrice HighPrice LowPrice ClosePrice Traded Qty TradedValue Open

78
(Rs.)

(Rs.)

(Rs.)

(Rs.)

(Rs Lakhs)

Intrest

01/12/2011

29322.00

29404.00

29130.00

29347.00

32964.00

964924.64

11224.00

02/12/2011

29187.00

29318.00

29130.00

29150.00

31540.00

921256.65

11901.00

03/12/2011

29172.00

29205.00

29159.00

29181.00

1048.00

30589.77

11707.00

03/12/2011

29172.00

29205.00

29159.00

29181.00

1030.00

30064.17

11710.00

05/12/2011

29191.00

29258.00

29011.00

29198.00

33267.00

969614.06

11864.00

06/12/2011

29000.00

29000.00

28731.00

29047.00

37285.00

1076415.90

12273.00

07/12/2011

28998.00

29279.00

28998.00

28953.00

39156.00

1141215.83

13146.00

08/12/2011

29285.00

29433.00

28948.00

29247.00

56046.00

1637449.32

12437.00

09/12/2011

29072.00

29219.00

29021.00

29096.00

37759.00

1099994.65

12285.00

10/12/2011

29106.00

29121.00

29090.00

29153.00

1610.00

46862.09

12174.00

12/12/2011

29090.00

29090.00

28836.00

29106.00

10637.00

307504.07

12237.00

12/12/2011

29090.00

29090.00

28750.00

29106.00

50769.00

1465563.81

12323.00

13/12/2011

28810.00

29027.00

28780.00

28847.00

44578.00

1288315.01

11232.00

14/12/2011

28810.00

28810.00

27858.00

28871.00

78007.00

2219846.53

13219.00

15/12/2011

28060.00

28060.00

27287.00

28183.00

81084.00

2247361.15

13219.00

16/12/2011

27550.00

27574.00

27047.00

27531.00

55922.00

1534142.54

13958.00

17/12/2011

27536.00

27649.00

27530.00

27492.00

3218.00

88842.43

13714.00

19/12/2011

27612.00

27795.00

27500.00

27636.00

41299.00

1141015.89

13390.00

20/12/2011

27685.00

27905.00

27652.00

27692.00

36253.00

1007859.71

13002.00

21/12/2011

27920.00

28106.00

27733.00

27867.00

50556.00

1410822.97

13602.00

22/12/2011

27751.00

27806.00

27591.00

27809.00

41797.00

1158060.59

13985.00

23/12/2011

27747.00

27820.00

27721.00

27698.00

21581.00

599348.65

14416.00

24/12/2011

27783.00

27804.00

27775.00

27779.00

1272.00

35353.53

13635.00

26/12/2011

27785.00

27789.00

27741.00

27796.00

3384.00

93955.41

13906.00

27/12/2011

27744.00

27744.00

27534.00

27779.00

19103.00

528005.55

14052.00

28/12/2011

27626.00

27720.00

27150.00

27651.00

41264.00

1134684.50

14053.00

29/12/2011

27201.00

27218.00

26517.00

27281.00

72155.00

1937220.62

14009.00

30/12/2011

26941.00

27523.00

26941.00

26836.00

51335.00

1398093.61

13097.00

31/12/2011

27410.00

27410.00

27310.00

27441.00

2314.00

63249.17

13030.00

02/01/2012

27300.00

27414.00

27271.00

27329.00

6260.00

171161.35

13516.00

03/01/2012

27448.00

27779.00

27414.00

27382.00

53552.00

1479522.08

12692.00

79

04/01/201
2

27701.00

27888.00

27540.00

27656.00

61964.00

1717523.94

12646.00

05/01/201
2

27812.00

27875.00

27681.00

27852.00

28096.00

780500.14

13365.00

05/01/201
2

27812.00

27875.00

27540.00

27852.00

63541.00

1761984.09

12512.00

06/01/201
2

27830.00

27945.00

27652.00

27821.00

55124.00

1533407.71

12616.00

07/01/201
2

27764.00

27768.00

27732.00

27755.00

1287.00

35714.48

12270.00

FUTUREMARKET
BUYER

SELLER

07/01/2012(Buying)

27764.00

27755.00

07/01/2012(Cl.,period)

1287.00

1287.00

Profit

9.80

Loss

57.00

Loss500x9.80=4900,Profit500x9.800=4900
Becausebuyerfuturepricewillincreaseso,hecangetprofit.Sellerfuturepricealso
increaseso,profitdecrease,Incasesellerfuturewilldecrease,andhecangetprofit.
TheclosingpriceofGoldMetalattheendofthecontractperiodis1287.00andthis
isconsideredassettlementprice.

MultiCommoditiesExchangeofIndiaLtd(MCX)SilverPrice

80

Date

OpenPric
e

HighPric
e

LowPric
e

ClosePric
e

(Rs.)

(Rs.)

(Rs.)

(Rs.)

Traded
Qty

TradedValu
e

Open

(Rs Lakhs)

Intrest

01/12/201
1

57775.00

58223.00

57167.00

57787.00

62253.00

1077736.24

8686.00

02/12/2011

57324.00

58183.00

57026.00

57322.00

64536.00

1115955.42

10190.0
0

03/12/201
1

57100.00

57211.00

57079.00

57131.00

1688.00

28954.39

9942.00

03/12/2011

57100.00

57211.00

57079.00

57131.00

1699.00

29143.13

9945.00

05/12/201
1

57197.00

57598.00

56707.00

57196.00

52664.00

904353.96

11064.0
0

06/12/2011

56601.00

57084.00

55902.00

56840.00

63542.00

1074535.26

11287.0
0

07/12/201
1

57188.00

57549.00

56888.00

56972.00

57284.00

983728.00

10400.0
0

08/12/2011

57273.00

57834.00

55951.00

57190.00

83606.00

1426495.90

12880.0
0

09/12/201
1

56499.00

57100.00

56173.00

56237.00

63276.00

1075418.21

10727.0
0

10/12/2011

57037.00

57050.00

56902.00

56952.00

1265.00

21611.54

10213.0
0

12/12/201
1

56817.00

56817.00

56222.00

56933.00

12000.00

202926.20

11304.0
0

12/12/2011

56817.00

56817.00

55960.00

56933.00

64803.00

1093359.41

12535.0
0

13/12/201
1

56198.00

57400.00

56198.00

56143.00

59596.00

1013114.13

10828.0
0

14/12/2011

56400.00

56480.00

53455.00

56578.00

116679.00

1925007.46

16868.0
0

15/12/201
1

54248.00

54248.00

52316.00

54332.00

117672.00

1877774.75

15725.0
0

16/12/2011

53650.00

54030.00

52890.00

53604.00

64453.00

1034390.91

15901.0
0

17/12/201
1

53500.00

53770.00

53500.00

53458.00

2292.00

36913.87

15361.0
0

19/12/2011

53400.00

53400.00

52544.00

53714.00

66174.00

1049889.56

17290.0
0

20/12/201
1

52795.00

53575.00

52595.00

52961.00

54513.00

870659.27

16315.0
0

21/12/2011

53519.00

54184.00

52937.00

53487.00

74897.00

1201975.47

17565.0
0

22/12/201
1

53000.00

53460.00

52690.00

53148.00

55729.00

886508.17

18406.0
0

23/12/2011

53000.00

53348.00

52982.00

52894.00

23265.00

371395.10

17565.0
0

24/12/201
1

53155.00

53155.00

53000.00

53067.00

1285.00

20472.94

17444.0
0

26/12/2011

53147.00

53200.00

52888.00

53112.00

4593.00

73106.10

17607.0
0

27/12/201
1

53014.00

53099.00

52588.00

53137.00

26882.00

426082.79

18970.0
0

28/12/2011

52590.00

52806.00

50281.00

52711.00

71365.00

1104036.34

21392.0
0

29/12/201
1

50505.00

50505.00

48562.00

50636.00

105158.00

1560534.55

19509.0
0

30/12/2011

50500.00

51951.00

50265.00

50218.00

74859.00

1147326.04

17909.0
0

31/12/201
1

51200.00

51289.00

50905.00

51445.00

3432.00

52599.63

17946.0
0

02/01/2012

51000.00

51381.00

51000.00

51029.00

8501.00

130695.91

18358.0
0

81

03/01/201
2

51493.00

53500.00

51493.00

51330.00

83622.00

1316435.77

16074.0
0

04/01/201
2

53000.00

53420.00

52411.00

53109.00

51543.00

817346.63

04/01/201
2

53000.00

53420.00

52260.00

53109.00

91228.00

1445464.68

05/01/201
2

52900.00

52988.00

52116.00

52761.00

41343.00

651637.99

05/01/201
2

52900.00

52988.00

51861.00

52761.00

90469.00

1422027.02

15891.0
0

06/01/201
2

52625.00

52758.00

51548.00

52740.00

81008.00

1270404.84

17990.00

07/01/201
2

51789.00

51892.00

51688.00

51868.00

2339.00

36343.83

16233.00
15587.0
0
17663.00

18143.0
0

FUTUREMARKET
BUYER
07/01/2012(Buying)
07/01/2012(Cl.,period)
Profit

SELLER

51789.00

51868.00

2339.00

2339.00

23.69

Loss

68.27

Loss500x68.27=34135,Profit500x23.69=11845
Becausebuyerfuturepricewillincreaseso,hecangetprofit.Sellerfuturepricealso
increaseso,profitdecrease,Incasesellerfuturewilldecrease,andhecangetprofit.
TheclosingpriceofSilverMetalattheendofthecontractperiodis2339.00andthis

isconsideredassettlementprice.
82

4.1Analysis&InterpretationoftheQuestionnaire
Allthequestionsareanalyzedquestionwiseforeasierunderstandingand
properinterrelationaftertheanalysisisdone.
Thesearetheanalysisofasampleof50peoplewhoincludepeoplefromall
walksoflifelikebusinessmen,students,investors,traders,employeesetc.

Eachquestionisdetailedwiththeno,ofpeoplewhohavemarkedthatas
theanswer,providedwiththegraphformakingiteasytounderstandand
interpret.
1. Occupation
Options

Responds

Salaries

17

SelfEmployed

25

Retired

Others(Ifso,specify___________)

83

As per the chart we can identify that most of the individuals are self
employedandprobablyrunthereownbusiness.WiththeboomofITand
financesectorintheearly20th centurythenumberofjobsinboththe
sectorshaveincreasedalotandresultedinemploymentindifferentareas
whichhashelpedthecountryinmanyways.

84

2.

AnnualIncome
Options

Responds

Lessthan5lakhs

17

5lakhs10lakhs

10lakhs15lakhs

13

15lakhs20lakhs

Above20lakhs

12

Dependingontheageoftheindividualsarewellasotherfactors,thechart
highlightsthatmostoftheinvestorsarefromayoungagegroupandhavea
salaryoflessthan5lakhsperannum.Ontheotherhandthewehavelotsof
guyswithincomeover20lakhssignifyingthefactsthattheinvestorsare
eitherrichpeoplewhowanttoincreasethereassetsoryoungoneswhoare
tryingtocomeupwithvariousmethodstoreachthetopnotch.

3.

Percentageofyourincomeyouinvest?
Options

Responds

None
Under5%

17

5to10%

13

10to15%

12

Above15%

Fromthesamplewhotookthequestionnaire,alargechunkofindividualstendto
investlessthan5%oftheirincomewhichisunderstandableinagrowingcountrylike
Indiawheresomanypeoplearebelowthepovertylineandstruggletomakeends
meet.Thecharthighlightsthefactthatonly8%ofthepeopleinvest15%ofthere
incomeinvariouscommoditiesorpolicies.Maybeifmoreoftheinvestorsorhigher
incomegroupwereinthesample,thechartswouldgiveadifferentpicture.

4.

Wheredoyouinvest?
Options

Responds

MutualFunds

Equities/Derivatives

19

Insurance(IncludesULIP)

12

Commodityfutures

12

Others(Ifso,specify___________)

Equityinvestmentgenerallyreferstothebuyingandholdingofsharesofstockin
the marketbyindividualsandfundsinanticipationofincomefromdividendsand
capitalgainasthevalueofthestockrises.Equitiesalongwithinsurancepolicieslike
ULIP which have long term benefits are what customers opt for. As the chart
highlightsasparefewgoformutualfundsandcommoditiesfutureasitishighrisk.

5.

Whydoyouinvestintrading?

Options

Responds

Awareness

29

PeerInfluence

Conservatism

Lookingforassistance

13

Inthistechsavvyworldofcomputersandnumbers,everyoneisinaratraceto
outdoeachother.Tradingisawaytoincreasethecapitalofonescompanyor
businesswiththehopethatthebusinesswouldbeabletogeneratemoreprofit
thantheinterestcharges.Mostoftheyoungstersintodaysworldinvestinsome
sortoftrading.Someofitisduetopeersinfluenceaswell.Thereisalargevariety
ofpopulationwhoarenotawareonhowtotradeandneedguidance.Various
onlinesiteshavebeensetupwithstepstepproceduresexplainingthesame.

88

6.

Howdoyourateyourrisktakingapatite?

Options

Responds

RiskSeeker

13

RiskAverse

17

Moderate

20

NoAnswer

Majorityofthepeopleinthisworldwouldthinkstwicebeforeinvesting
theresavings.Everyindividualwantstoincreasehissavingsandhavea
lavishlifestyle.Asthechartshowthereareveryfewguyswhotakebigtime
risksrelatedtotheresavingsandinvestments.Mostofthemareriskaverse
andabout50%ofthemcomeintothemoderatecategory.Themoderate
onesdoadetailedinvestigationbeforeinvestingandtradingtheresavings.

7.

Whatwouldyouusecommoditiesfor?

89

Options

Responds

Trading

21

ReasonableReturns

Investing

21

NoAnswer

Tradingisadirectexchangeofgoodsandservices.Tradingcanalsorefertothe
actionperformedbytradersandothermarketagentsinthefinancialmarkets.
Commoditiesaremostoftenusedintradingandininvestmentofproducts.

Investingistheactiveredirectionofresources:frombeingconsumedtoday,
tocreatingbenefitsinthefuture;theuseofassetstoearnincomeorprofits.
Theuseofcommoditiesintradingandinvestmentcanresultinhugeprofits
inthelongterm.

8.

Howwouldyoupreferwhentradingincommodities?

90

Options

Responds

Trading

MidTerm(13months)

ShortTerm(upto1month)

17

LongTerm(312month)

29

A commodity is some good for which there demand is, but which is
suppliedwithoutqualitativedifferentiationacrossamarket.Itisaproduct
thatisthesamenomatterwhoproducesit,suchaspetroleum,notebook
paper,ormilk.Inotherwords,copperiscopper.Thepriceofcopperis
universal,andfluctuatesdailybasedonglobalsupplyanddemand.

91

9.

Youprefertoinvestincommodities(futures)thathave?
Options

Responds

HighRisk,HighReturn

MediumRisk,MediumReturn

33

LowRisk,LowReturn

Peoplealwayswanttoinvestincommoditieswheretheyhavemorethan
50%chanceofgettingaprofit.Keepingthefutureinmindcustomerstend
toinvestincommoditieswhichhavemediumriskandmediumreturn,rather
thaninvestinginhighriskonesasitisahugegamble.Itmightpayoffonce
inawhilebutitmightresultinendingallyoursavingaswell.

10.DoyouknowinvestmentincommoditiescanbeclassedasanAsset?

92
Options

Responds

Yes

37

No

13

Commoditiesspeculationisabouttheriskiestplacetodeployyoursavings:it's
reallyinadifferentcategorythaninvesting.Commoditiesexchangesarcreally
superchargedbeltingparlorsmadeupofaseriesofhyperactivemarketswhere
youcanbetonthepricemovementsofavarietyofproducts.Thelistincludes
preciousmetals,rawmaterials,grainsandmeal,ailandgasevenfinancial
productslikeTreasurybills.
Thoughtheycarrybigrisksforindividualinvestors,commoditiesmarketswere
originallysetuplohelpspreadtheriskofpricechangesamongalargepoolof
players.Usingfuturescontracts,forexample,aTannercansellacropbefore
its planted,eventhoughhemightgetabetterpriceinthefuture(whichis
wherethenamecomesfrom.)Ifaboomindemanddrivesuppricesbyharvest
time,thebuyerofthefuturescontractwins.
Butifabumpercropfloodsthemarketandpricesplunge,ourspeculatorcouldlose
everything.Nomatterwhathappens,thefarmerhasenoughmoneyinthe

93

banktobuythefornextyear'scrop,Hencecommoditiescanbeclassifiedus

anasset.

11.

InwhichofthefollowingtypesofCommoditiesdoyouprefertoinvest?
Options

Responds

94
Bullions(GoldandSilver)

17

Metals(Copper,Lead,Nickleetc)

10

Agri

Energy

10

Mixed

AnewsurveyfromNewYorkbasedhedgefundOspraieManagement
LLChadshownthatgoldisamongthefivebestcommodityinvestment.
Expertssayrisingcostsarehinderingtheexplorationbygoldproducers
suchasBarrickGoldCorp,theworldslargestgoldminingcompany.
Thepastdecadehasseenadramatictransformationintheenergysector
withagradual,butsteadymovementfromastateowned,monopolistic
industry to a more open and competitive sector based on freemarket
principles.ThebullionslikeGoldandsilveralwayshasanedgeinthe
market but commodities like energy and metals are picking up But
preciousmetalswillalwayshavetheirstandwhenitcomestopeoples
sentimentsofinvestingtheirmoneyinGoldnSilver.
12. Ifyoutradeincommodities,howdoyourateitwhencomparedtoEquitiesona

scaleof5?
95
Options

Responds

11

29

10

Morethanhalfofthesampletrustsbothcommoditiesandequitiesforputtingtheir
moneyinit.Thoughcommoditieshasstarteddecadesafterwhichequitytrading
started,itsgrowthistremendouswithitsturnoveralmostequalormorethanequity
tuneoverintodayscenario.
Othershavetheirownopinionoftheirinvestmentsandprefermoreofequitiesor
more of commodities according to their past experience, performance, liking,
comfortzone.

4.2CROSSTABS
Question3
Options

Male

Female

None

Under5%

510%

13

1015%

Above15%

Question9

Options

Male

Female

HR/HR

MR/MR

23

11

LR/LR

98

CHISQUARETESTS
1. Chisquareanalysisbetweenquestions2andquestion3.
HO:Annualincomeisnotrelatedtothe%ofincomeyouinvestin
commodities.H1:Annualincomeisrelatedtothe%ofincomeyouinvestin
commodities.TABLES
CaseProcessingSummary
Cases
Valid

Missing

Total

Percent

Percent

Percent

62

100.0%

.0%

62

100.0%

Annualincome%of
incomeinvested

Annualincome*%ofincomeinvestedCrosstabulation
Count
%ofincomeinvested
Under5%

5to

10to15% Above

10%
Annual

Total

15%

12

17

5to10lakhs

10to15lakhs

13

15to20lakhs

Above20

12

12

12

17

13

13

62

income
Lessthan5
lakhs

lakhs
Total

99

ChiSquareTests
Value

Dt.

Asymp.Sig.(2
sided)

PearsonChiSquare

1.683E2a 20

.000

LikelihoodRatio

149.593

.000

NofValidCases

62

20

1. 30 cells (100.0%) have expected countless than 5. The minimum


expectedcountis45.
Comments:
FromtheanalysiswecanseethatthePearsonchisquareis<0.05thereforeweacceptH1.

ThereforeAnnualincomeisrelatedtothe%ofincomeyouinvestincommodities.

100

2. Chiquareanalysisbetweenquestions1andquestion4.
HO:Occupationisnotrelatedtowhereweinvest.
H1:Occupationisrelatedtowhereweinvest.

TABLES:
CaseProcessingSummary
Cases
Valid

Missing

Percent

62

100.0%

Total

Percent

Percent

62

100.0%

Occupation*place
ofinvestment

.0%

Occupation*WhereyouInvestCrosstabulation
Count
Placeofinvested
Equity

Occupation

Commodity

Bank Mutual

future

Insurance

Total

funds

Rentalincome

Horserace

Lottery

Bankinterest

CapitalGains

Retired

Salaried

17

Selfemployed

12

25

Others

Total

12

17

12

12

62

101

ChiSquareTests
Value

Dt.

Asymp.Sig.(2
sided)

PearsonChiSquare

1.328E2a 45

.000

LikelihoodRatio

122.798

.000

NofValidCases

62

45

1. 59 cells (98.3%) have expected count less than 5. The minimum


expectedcountis02.
Comments:
FromtheanalysiswecanseethatthePearsonchisquarevalueis<0.05
thereforeweacceptH1.
Thereforeoccupationisrelatedtowhereweinvest.

3.Chisquareanalysisbetweenquestions2andquestion
6.102

HO:Annualincomeisnotrelatedtotherisktakingapatite.
H1:Annualincomeisrelatedtotherisktakingapatite.
TABLES:
CaseProcessingSummary
Cases
Valid

Missing

Total

Percent

Percent

Percent

62

100.0%

.0%

62

100.0%

Annualincome%of
risktakingapitite

Annualincome*Risktakingapatite.Crosstabulation
Count
Risktakingapitite

Annualincome

Total

Risk

Risk

seeker

averse

Moderate

Total

12

12

Lessthan5lakhs

13

17

5to10lakhs

10to15lakhs

13

15to20lakhs

Above20lakhs

12

12

12

13

16

21

62

ChiSquareTests
103

Value

Dt.

Asymp.Sig.(2
sided)

PearsonChiSquare

1.386E2a 15

.000

LikelihoodRatio

132.972

.000

NofValidCases

62

15

1. 23 cells (95.8%) have expected countless than 5. The minimum


expectedcountis77.

Comments:
FromtheanalysiswecanseethatthePearsonchisquareis<0.05thereforewe
acceptH1.
ThereforeAnnualincomeisrelatedtotherisktakingapatite.

4. Chisquareanalysisbetweenquestions6andquestion11.
104

HO:risktakingapatiteisnotrelatedtothetypeofcommoditiesyouprefertoinvest.
H1:risktakingapatiteisrelatedtothetypeofcommoditiesyouprefertoinvest.

CaseProcessingSummary
Cases
Valid

Missing

Percent

62

100.0%

Total

Percent

Percent

risktakingapatite*
typeofcommodities

.0%

62

100.0%

Risktakingapetite*TypeofcommoditiesCrosstabulation
Count
Investmentpreference
Bullions
Risktaking

Metals

Agri

Energy

Mixed

Total

12

12

Riskseeker

13

Riskaverse

16

Moderate

21

12

17

11

10

62

apatite

Total

ChiSquareTests

105
Value

Dt.

Asymp.Sig.(2
sided)

PearsonChiSquare

83.799a 15

.000

LikelihoodRatio

80.907

.000

NofValidCases

62

15

1. 23cells(95.8%)haveexpectedcountlessthan5.Theminimumexpected
countis97.
Comments:

FromtheanalysiswecanseethatthePearsonchisquarevalueis<0.05therefore
weacceptH1.
Thereforerisktakingapatiteisrelatedtothetypeofcommoditiesyouprefertoinvest

106

CHAPTER5
FAQ'sAboutCommodities
MattisthePresidentofOptimusTradingGroup,whichisafuturesbrokeragefirmthat
specializesinonlinefuturestradingandmanagedfuturesaccounts.Matthasbeen
involvedinthefuturesindustryformorethanadecadeandheunderstandstheneeds
andstrugglesofthecommoditytraderinthiseverexpandingandchanging
environment,
17. Manyreadersoutherearenewtothecommoditiesmarketsandarewonderingthe
bestwaytogetinvolvedincommodities.Someguidancefrommarketsexperiences?

1. Yes;chooseamarketthatdoesnotcarryalotofleverage,relativetoyouraccount
size,placeatradeononecontractandseehowyoureactemotionallytothefluctuations.
If you are comfortable with the ups and downs it means that you have the right
temperamentforthesemarkets.
Here is what you should do prior to placing the first trade to become even more
comfortable: track 10 commodities and familiarize yourself with their leverage, their
dailyfluctuationsandthenchooseafuturecontractthatyoufeelcomfortablewith.

Ofcourse,thisisonlythebeginning.Thekeyisindevelopingalongtermmethodology,
i.e.: a reason to buy and/or sell contracts. Money management (risk) is an essential
componentindevelopingEIsuccessfulmethodology,
Q.BestServicerecommended:theuseofafullservicecommoditybrokeroranonline
discountcommoditybroker?
A,Alwaysbelievethatinthelongruntradingonlineshouldbethetrader'sultimate
goal.

107

Beginningtradersshouldseektheassistanceofaprofessionallominimizeerrorsandto
develop confidence in order placement, margin requirements and even the trading
platformsavailable.Brokersshouldbeabletoprovidetechnologyalongwithadviceto
beginner traders. In The long run, believe Thai clients should Learn to become
independent and selfreliant lo trade according lo their own risk tolerance, lime
constraintsoravailabilityandlodevelopdiscipline.
17.Whatmistakesdocommonlytradersmakeinthecommoditiesmarkets?
1. Ingeneralterms,it'sthelackofplanningandpreparation,Tliemistakescouldrange
frommisunderstandingthevolatility,lolackofmoneymanagementorjustnothavinga
methodology.However,partoftradingismakingmistakes,andhopefullylearningfrom
thesemistakes.
Learningthecontractsizes,thevariousexchangeordersanddevelopingsome
technicalanalysisskillscouldhelptremendously.
17. Dotradersreceiveanytypeofhelpiftheytradeonlineoraretheylefttocompletely
fendforthemselves?
1. Partofanygoodbrokerageisgivingcustomerstechnicalsupportfortheplatform
they'vechosen.Guidanceisgivenaslothefunctionalityofthetradingplatform,order
statusand/orotherissuesthatmightariseforselfdirecttraders.
Customersshouldalwaysshopforbrokersthatgivethemtimelyandextensive
support.
Q.isthereaminimumbalancethatthatisrecommendedforopeninganaccounttotrade
commodities?
A.Yes.Rs.25,000issomethingthatcustomersshouldconsider.Theabilitytowithstand
fluctuations, having sufficient margins is the key to survival in this market. Smaller
accounts can be successful, but the leverage could cause higher fluctuations in their
accounts.Neverovertradeanddon'toverleverageyouraccount.

108

Q.Someinvestorsfeeltheydonthavethetimeorknowledgetotradecommodities.Can
managedfuturesmightworkforthem?
A.Lackoftimeisabigconsiderationandcanpreventatraderfromtakingprofits(or
cutting losses) in & timely fashion. Some traders can be very knowledgeable about
commodities but applying their methodology and developing the emotional make up
necessarytotradeisanothermatter
Iftheaboveconditionsapplytosomeonewhowantstoparticipateinthecommodities
markets,managedfuturescouldbeaverygoodsolution.
17.

Whatshouldinvestorsexamineaboutamanagedfuturesfundtodecideifthey

shouldInvestinit?
1. Herearethefactorstoconsider;
Trackrecord
Monthlyandintradaydrawdown(measuresofvolatility)
MoneyUndermanagement
Typeofcontractstradedandmeriskassociatedwiththem
LiquidityofdiecontractsTraded
17. What financial requirements does someone have to meet in order to trade
commoditiesoropenamanagedfuturesaccount?
1. Typically,managedfuturesaccountsrequirehigherlevelsofcapital.Theycanstart
fromRs,25,000andhigherHowever,regardlessoftheamountrequired,fundsinvested
inthistypeofinvestmentshouldberiskcapital.Keepinmindthatmanagedaccounts
cananddogothroughdrawdownsandvolatility.
RecommendedishavingaminimumnetworthofRs.2,50,000/andriskcapitalof
Rs.50,000/alsoasaminimumrequirement.

109

CHAPTER6
FINDINGS
CONCLUSION
SUGGESTIONS
BIBLIOGRAPHY

110

FINDINGS

AfteralmosttwoyearsthatcommoditytradingisfindingfavorwithIndianinvestorsand
isbeenseenasaseparateassetclasswithgoodgrowthopportunities.Fordiversification
ofportfoliobeyondshares,fixeddepositsandmutualfunds,commoditytradingoffersa
goodoptionforlongterminvestorsandarbitrageursandspeculators.And,now,with
dailyglobalvolumesincommoditytradingtouchingthreelimesthatofequities,trading
incommoditiescannotbeignoredbyIndianinvestors.

From all the information given above, we underhand the importance of trading in
commoditymarket.TheboomingeconomyofIndiaIspushingthegrowthofcommodity
trading for various types of investors of higher level where people have another
opportunity to invest their money in one of the other best diversifying sector
Commodities.
Thequestionnaireansweredalltherequiredquestionsoffromageneralpointofview
thatinvestorsconsidercommoditiesisImportantasequitiesthoughitisnotverynewto
allthepeopleinvestingtheirmoneyintheexchanges.Theturnoverthatcommodityis
havingisquietanexamplethatwehaveacceptedcommoditiesasanotherinvestingzone
forourinvestments.
Further,wehaveunderstoodthatCommoditycanbeusedasanassetbuildingtoolfora
longtermprocesswiththeexampleofGoldbypayinglessthanthatisnormallyrequired
bythepersonbuyingitphysically.HenceCOMMODITYCANBEUSED
ASANASSETCLASS

1 DuetotheincreasingofinflationinthecountrytheGoldandsilvergotverymuch
importanceanditwasincreasedandthecommoditiesmarket.
2 Itshownthatthemoreofthegivenshareisknownascommoditiesi.e.67%and
othergotverylessascomparedtocommodities.

111

1 MajorityoftheInvestorstradeintheCommoditiesMarketbutfewDone&Left
duetoLosses&SettlementProblems.

2 Investorspurchasedcommoditiesfromkarvybecauseofthecompanyspolicies
andinformationavailability.
3 Mostoftheinvestorsfeelthatcommoditytradingidverygoodandremaining
saysgoodforinvesting
4 TradinginCommoditiesFuturesisMoreBeneficial&MoreLeveraginggotmore
percentage.

5 DuetotheincreaseintheservicesinthecountrytheServicestheypreferfroma
FinancialAdvisoryInstitutionistelephone.
6 MostoftheinvestorspreferringKarvyforinvestinginthecommoditymarket.

112

CONCLUSION
Commoditiesmarket,contrarytothebeliefsofmanypeoplehasbeeninexistencein
Indiathroughtheages.HowevertherecentattemptbytheGovernmenttopermit
MulticommodityNationallevelsexchangeshasindeedgivenit,ashotinthearm.
Commodityincludesallkindsofgoods.FCRAdefinesgoodsaseverykindof
movable property other than actionable claims, money and securities. Futures
tradingareorganizedinsuchgoodsorcommoditiesasarepermittedbytheCentral
Government. Firstly, the price movements are more predictable, purely based on
demand and supply of that commodity, unlike in other markets where price
manipulationsareverymuchpossible,hencetheinvestorisfixed.

To that extent market price risk is reduced. Secondly, the markets are working
virtually round the clock,(NCDEX works from 10:00 AM to 4:00 PM and next
sessionfrom7:00PMto11:00PM)soanydrasticnewsisdigested.Incaseofother
marketsthisprovisionisnotthere,justthinkofSeptember11 th episode,nextday
equity markets opened far down and the Investors are left hanging. The future
contracts availableonawidespectrumofcommodities likeGold,Silver,Cotton,
Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent
opportunitiesforhedgingtherisksoftheformers,importers,exporters,tradersand
largescaleconsumer.KarvyCommoditiesBrokingPrivateLimitedisanotherventure
oftheprestigiouskarvygroup.Withourwellestablishpresenceinthemultifarious
facets of the modern financial services industry from Stock Broking to registry
services.

113

SUGGESTIONS
1 Investingincommoditiesasanassetisalwaysgoodforlongterm.
2 Investwithatleastdoublethemarginmoneythatisrequiredforaparticular
commodity.
Ex:Ifinvestingincopper,marginisRs.20,000andpriceofcopperinJanuaryis
Rs.150/withatargetofRs.250/in68months,keepRs.40,000/extraincaseof
furtherfallintheprices(ifitfallsbelow150/)tobeonasaferside.
3 It'sagoodinstrumentdiversification,
4 CommodityMutualFundscanbeincreased.
5 CommoditymarketpresentlydealswithFUTUREScontractandmostprobably
OPTIONSareprovided,itwouldbeconvenienttotheinvestors.

6 Asthefundmanagerstakedecisionswithmutualfundinvestment,itwouldbe
anotheroptionforhimtoinvestthroughmutualfundsincommoditymarket.

7 IfGovernmenttakesthiscommoditymarketintoawarenessforthefarmers,it
wouldbebetterforthemtotaketheirowndecisionsforcommoditywhichthey
wanttotrade.

8 Asthereisanoptionforthetradertotakethephysicaldelivery,itwouldbebetter
iftheGovernmentcutsthetaxrateforthephysicaldeliveryofgoods.

9 Avoid buying shares of the company which are not traded on your stock
exchange.
10 Investormustshowinterestinsteadyandfastgrowthsharesonly.

114

1 AvoidbuyingTurnrounds(makinglosscontinuously),Cyclical(cyclesofgood
andbadperformance),Dogshares(veryinactiveorpassive).
2 AvoidcompanieswithlowPIEratiorelativetothemarketasalways.
3 IftheinvestorisconfidentofEPSmovingupandexpectsPIEtoincreaseaswell
sticktothesharesandbepatients.

115

ANNEXURE
COMMODITYASANASSETCLASS
Name
Age
Gender[]Male

[]Female

EducationQualification:

1. Occupation:
Salaried
Self Employed
Retired
Others(Ifso,specify___________________)
2. AnnualIncome
Lessthan5lakhs
5lakhs10lakhs
10lakhs15lakhs
15lakhs20lakhs
Above20lakhs
3. Percentageofyourincomeyouinvest?
[
4.

]None []Under5% []5to10%[]10to15%[]Above15%

Wheredoyouinvest?
[ ]Equities/Derivatives

[ ]MutualFunds

[ ]CommodityFutures

[ ]Insurance(IncludesULIP)

[ ]Others(Ifso,specify________________________)
5. Whydoyouinvestintrading?
116

6.

[ ]Awareness

[ ]Conservatism

[ ]PeerInfluence

[ ]Lookingforassistance

Howdoyourateyourrisktakingapatite?
[ ]Riskseeking

7.

8.

9.

[]Moderate

[]RiskAverse

[]NoAnswer

Whatwouldyouusecommoditiesfor?
[ ]Trading

[ ]Investing

[ ]ReasonableReturns

[ ]NoAnswer

Howwouldyoupreferwhentradingincommodities?
[ ]Trading

[ ]ShortTerm(Upto1month)

[ ]MidTerm(13months

[ ]LongTerm(312months)

Youprefertoinvestincommodities(futures)thathave?
[ ]HighRisk,HighReturn

[ ]MediumRisk,MediumReturn

[ ]LowRisk,LowReturn
10.

DoyouknowinvestmentincommoditiescanbeclassedasanAsset?
[ ]Yes

11.

[ ]No

InwhichofthefollowingtypesofCommoditiesdoyouprefertoinvest?
[ ]Bullions(GoldandSilver)

[ ]Metals(Copper,Lead,Nickleetc.)

[ ]Agri

[ ]Energy

[ ]Mixed
12. Ifyoutradeincommodities,howdoyourateitwhencomparedtoEquitiesona
scaleof5?
1

Less

5
Better

117

BIBLIOGRAPHY
1. DonaldE.Fisher,RonaldJ.Jordan,SecuritiesAnalysisand
PortfolioManagement,,1999,sixthedition,futuresandoptions
Pageno:404435,489,493.PrenticehallofIndia
2. Sharpe W.F. Alexander J. Bailey, investments, 1998, 5th edition, Derivatives,
PrenticeHallofIndia,.
3. SCHAUM"S out lines, investments,2nd edition, new chapters on
futureAndoptions.
Karvyfinapolies,Monthlyeditions,Broachersofkarvycomtrade.

WEBSITES:
KARVYLEARNING
CENTREwww.karvy.com
www.karvycommodities.com
www.ncdex.com
www.mcx.com
www.derivativesindia.com

Thankyou

118