1Analysis of commodity indices in the global shipping trade

COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged. It covers
physical product (food, metals, and electricity) markets but not the ways that services,
including those of governments, nor investment nor debt, can be seen as a commodity.

HISTORY OF COMMODITY MARKET

y Modern Commodity Market have their roots in the trading of agricultural
products.
y Wheat and corn, cattle and pigs, were widely tradedusing standard
instruments in the 19th century in theUnited States.
y Historically, in ancient times Sumerian use of sheepor goats, or other

peoples using pigs, rare seashells, orother items as commodity money, have
tradedcontracts in the delivery of such items, to render tradeitself more smooth and
predictable.

SIZE OF THE MARKET

y The trading of commodities includes physical tradingof food items, Energy
andMetals, etc. and trading ofderivatives.
y In the five years up to 2007, the values of global physical exports of

commodities increased by 17% while the notional value outstanding of commodity. OTC
derivatives increased more than 500% andcommodity derivative trading on exchanges
morethan 200%.

2Analysis of commodity indices in the global shipping trade

y Agricultural contracts trading grew by 32% in 2007, energy 29% and
industrial metals by 30%.
y Precious metals trading grew by 3%, with higher volume in New York being
partially offset by declining volume inTokyo.
y OTC trading accounts for the majority of trading in gold and silver.
LIST OF TRADED COMMODITY

y Agricultural (Grains, and Food and Fiber)

y Livestock & Meat

y Energy

y Precious metals

y Industrial metals

Agricultural Products
Corn, Oats, Rough Rice, Soybeans, Rapeseed, SoybeanMeal, Soybean Oil,
Wheat, Cocoa, CoffeeC, Cotton No.2, Sugar No.11, Sugar No.14.
Livestock and meat
Lean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.

Energy
WTICrude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast
Gasoline, RBOB Gasoline,Propane, Uranium

3Analysis of commodity indices in the global shipping trade

Precious Metal
Gold,Platinum,Palladium, Silver.
Industrial Metals
Copper,Lead, Zinc,Tin, Aluminum, aluminum alloy, Nickel, aluminum
alloy, Recycled steel.COMMODITY EXCHANGES
y Abuja Securities and Commodities Exchange

y Bhatinda Om & Oil Exchange Bathinda

y BrazilianMercantile and Futures Exchange

y Chicago Board ofTrade

y ChicagoMercantile Exchange

y Commodity Exchange Bratislava, JSC

y Dalian Commodity Exchange

y Dubai Mercantile Exchange

y Intercontinental Exchange

y Minneapolis Grain Exchange

y Multi Commodity Exchange

y National Commodity and Derivatives Exchange

y National Multi-Commodity Exchange of India Ltd

y New YorkMercantile Exchange

y New York Board ofTrade

y London Metal Exchange

y Winnipeg Commodity Exchange

4Analysis of commodity indices in the global shipping trade

RECENT TRENDS IN COMMODITYMARKET
y The 2008 global boom in commodity prices ± for everything from coal to
corn ± was fueled by heated demand from the likes of China and India.
y Speculation in forward markets.
y Farmers are expected to face a sharp drop in crop prices as a result of bad
rainfall.
y Other commodities, such as steel, are also expected to fall due to lower

demand .
Basics of Futures Trading
Perhaps the biggest advantage to trading futures contracts is the leverage provided

by the exchange.However, controlling large contracts with relatively low amounts of

capital can create high levels of volatility. As a result, many traders will argue that
leverage is actually a disadvantage. Regardless of your opinion on leverage and margin
requirements, it is important that you fully understand the concepts.

Before a customer can establish a position he is required to make a minimum ³good faith
deposit,´ or margin, to assure the performance of his obligations. A margin deposit is, in
essence, a performance bond, which is usually between 5% and 10% of the underlying
contract value. A good faith deposit indicates the buyer or seller¶s willingness and
capability to compensate the opposite party to a transaction

5Analysis of commodity indices in the global shipping trade

Because margin requirements are low, hedgers are given the ability to lock in
pricing of cash market goods without tying up a lot of capital. It would be
counterproductive for a hedger who handles large quantities to put up 100% of the
value of the hedged commodity.The exchange grants margin discounts to those
that are deemed to be ³bonefied´ hedgers, due to the fact that the underlying cash
position is seen as collateral to secure the capital risked in the futures market.

Low margins make speculation in the futures markets very attractive, without the
advantage of leverage the rate of return on most commodities would be marginal.
The exchanges are responsible for setting margin requirements, but brokerage

firms have discretion to require higher deposits. Generally, the initial margin is
sufficient to cover the maximum daily price fluctuations. It is not uncommon for
margin requirements to fluctuate with the volatility of the market. A maintenance
level is established below the initial margin, usually 75% of the initial
margin. Once a trader's good faith deposit falls below this threshold additional
funds must be deposited or positions must be liquidated.This is known as a margin
call.

Orders
There are several types of orders that can be placed. In order to maximize
efficiency and profitability, traders must be comfortable in executing each of the
following options.
Market Order: The purpose of a market order is to execute a trade immediately at

the best possible price. Such orders give traders the ability to enter or exit a trade quickly,
but do not guarantee a favorable price.This order should be used when time is more
valuable than price.
6Analysis of commodity indices in the global shipping trade
Limit Order: Limit orders are used to buy or sell at a specified price or better, and

will only be filled at the state price or one that is more favorable. For a sell limit
order ³better´ means higher, for buy limit orders ³better´ means lower.
Stop Order:This type of order is usually placed to close a position; its name is
derived from the fact that, if placed properly, it will ³stop loss´ should the market
go against a trader¶s position.Most traders chose to place a stop order at the time
that they enter a position. By definition, a sell stop will be placed below the market
while a buy stop will be placed above. All orders are day orders unless specified
otherwise and are canceled at the end of the trading day. By entering the order
GTC (good µtil canceled), the order will be working in each trading session until
canceled by the trader.
Executi
on
Many
beginni
ng
traders
are
unawar
e of the
mecha
nics of
executi
ng a
futures
trade.
When
you
call
your
broker,
an
order
ticket
is
comple
ted and
time
stampe
d in
order
to keep
accurat
e track
of the
time
and
specifi
cs of
each
order.T
he
broker
then
transmi
ts the
order
to his
firm¶s
trading
desk
located
on the
floor
of the
exchan
ge
either
by a
comput
erized
trading
platfor
m or
by
phone.
The
order
clerk
then
fills
out an
order
card;
time
stamps
it, and
hands
it to a
runner
who
will
take it
directl
y to a
broker
in the
pit.The
pit
broker
will
execut
e the
order
by
open
outcry
and
record
the
executi
on on
the
card
before
it is
given
back to
the
runner.
The
runner
takes
the
execut
ed
order
back to
the
desk
where
the
order
clerk
time
stamps
the
card
one
more
time
before
the fill
is
reporte
d to
your
broker