COMMODITY

Working Of Commodities
MARKETS
Exchanges In India

Presented By:
Ankur Gupta
Ankur Rohatgi
Kaustav Sarkar
Nishaad Mahendru
Commodities Exchange
A commodities exchange is an exchange where various
commodities and derivatives products are traded.

Most commodity markets across the world trade in

agricultural products and other raw materials (like wheat,
barley, sugar, maize, cotton, cocoa, coffee, milk products,
pork bellies, oil, metals, etc.) and contracts based on them.

These contracts can include spot prices, forwards, futures

and options on futures. Other sophisticated products may
include interest rates, environmental instruments, swaps, or
ocean freight contracts.
Continued……
Commodities exchanges usually trade futures contracts on
commodities, such as trading contracts to receive something, say
corn, in a certain month.

A farmer raising corn can sell a future contract on his corn,

which will not be harvested for several months, and guarantee
the price he will be paid when he delivers; a breakfast cereal
producer buys the contract now and guarantees the price will not
go up when it is delivered. This protects the farmer from price
drops and the buyer from price rises.

Speculators and investors also buy and sell the futures contracts
to make a profit and provide liquidity to the system.
Commodity Ecosystem
 Commodity Market Structure
Quality
Certification Spo t Mark et
Agencies
Hedger
Warehouses (Exporters/
Millers/
Industry)

Producers
Commodities (Farmers/
Clearing Bank
Ecosystem Co-operatives/
Institutional)

Traders
Transporters/ (Speculators)
Support Arbitrageurs/
Agencies Client)
Consumers
(Retail/
Gl oba l C ommo di ti es Institutional)
Mark et
 COMMODITY MARKETS - OVERVIEW

Indian commodity market – set for paradigm

shift
Four licenses recently issued by Govt. of India to set-up
National Online Multi Commodity Exchanges – to ensure a
transparent price discovery and risk management mechanism
List of commodities for futures trade – increased from 11 in
1990 to over 100 in 2003
Reforms with regard to sale, storage and movement of
commodities initiated
Shift from administered pricing to free market pricing – WTO
regime
Overseas hedging has been allowed in metals
Petro-products marketing companies have been allowed to
hedge prices
Institutionalization of agriculture
India’s Place in World Market
COMMODITY INDIA WORLD SHARE RANK
RICE (PADDY) 240 2049 11.71 THIRD
WHEAT 74 599 12.35 SECOND
PULSES 13 55 23.64 FIRST
GROUNDNUT 6 35 17.14 SECOND
RAPESEED 6 40 15.00 THIRD
SUGARCANE 315 1278 24.65 SECOND
TEA 0.75 2.99 25.08 FIRST
COFFEE(GREEN) 0.28 7.28 3.85 EIGTH
JUTE AND JUTE FIBERS 1.74 4.02 43.30 SECOND
COTTON (LINT) 2.06 18.84 10.09 THIRD
 Participants in Commodity Futures
Δ Farmers/ Producers

Δ Merchandisers/ Traders

Δ Importers

Δ Exporters

Δ Consumers/ Industry

Δ Commodity Financers

Δ Agriculture Credit providing agencies

Δ Corporate having price risk exposure in commodities

 Commodity Exchange in India

The Government of India permitted establishment of National

level Multi-Commodity exchanges in the year 2002. They are
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd
(NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at
Ahmedabad.
Who regulates the commodity
exchanges?

Just as SEBI regulates the stock exchanges,

commodity exchanges are regulated by Forwards
Market Commission (FMC); Forwards Market
Commission is under the purview of the Ministry
of Food, Agriculture and Public Distribution.
Different types of commodities that are
traded
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities: Wheat, Corn, Cotton,
Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc
 Nation-wide Multi Exchanges vis-a-vis
Regional Exchanges
•Better Reach in all parts of the country

•Wider base for speculators from other markets including securities market

•Broad basing of the underlying commodity

•Industry diffused in several parts of the country may also

directly participate

•Few commodities can be projected viable for an international futures

Contract, with participation from global player

•Best management practices, end of day mark to market, online margining

and surveillance, daily pay-in & pay-out are some of the features to woo the
players
How risky are these markets
compared to stock & bond markets?
Commodity prices are generally less volatile than the
stocks and this has been statistically proven. Therefore
it's relatively safer to trade in commodities.

Also the regulatory authorities ensure through

continuous vigil that the commodity prices are market-
driven and free from manipulations.

However all investments are subject to market risk and

depends on the individual decision. There is risk of loss
while trading in commodity futures like any other
financial instruments.
Are the trades/ settlement
guaranteed by the exchanges?
YES, the commodity exchanges have got some of the most high
profile corporate as their promoters.

Multi Commodity exchange of India, promoted by Financial

Technologies Ltd has got on board institutions such as SBI, HDFC
Bank, Canara Bank, Corporation Bank, Bank of India, Union Bank
of India, Bank of Baroda.

The National Commodity and Derivatives Exchange (NCDEX) has

got NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as the
major share-holders.

Such a high profile share-holding provides these exchanges valuable

experience, knowledge and also high standards of operations .

Also the exchange guarantees the settlement of trades and so

eliminates the counter-party risk in the transactions.
Different segments in the
commodities market
The commodities market exits in two distinct forms
namely the Over the Counter (OTC) market and the
Exchange based market.

Also, as in equities, there exists the spot and the

derivatives segment. The spot markets are essentially
over the counter markets and the participation is
restricted to people who are involved with that
commodity say the farmer, processor, wholesaler etc.

Majority of the derivative trading takes place through

exchange-based markets with standardized contracts,
settlements etc.
What are Commodity Futures?
Commodity Futures are contracts to buy specific quantity of a particular
commodity at a future date.
It is similar to the Index futures and Stock futures but the underlying
happens to be commodities instead of Stocks and indices.

Commodity futures market has been in existence in India for centuries.

The Government of India banned futures trading in certain commodities
in 70s.
However trading in commodity futures has been permitted again by the
government in order to help the Commodity producers, traders and
investors.
World-wide, commodity exchanges originated before the other financial
exchanges. In fact, most of the derivatives instruments had their birth in
commodity exchanges.
Who benefits from dealing in
commodity futures and how?
If you are an investor, commodities futures represent a good form of
investment because of the following reasons:

Diversification – The returns from commodities market are free from

the direct influence of the equity and debt market, which means that
they are capable of being used as effective hedging instruments
providing better diversification.

Less Manipulations - Commodities markets, as they are governed by

international price movements are less prone to rigging or price
manipulations by individuals.

High Leverage – The margins in the commodity futures market are

less than the F&O section of the equity market.
Continued……….
If you are an importer or an exporter, commodities futures can help
you in
the following ways:

Hedge against price fluctuations – Wide fluctuations in the

prices of import or export products can directly affect your
bottom-line as the price at which you import/export is fixed
before-hand.
Commodity futures help you to procure or sell the commodities
at a price decided months before the actual transaction, thereby
ironing out any fluctuation in prices that happen subsequently
 Continued………
If you are a producer of a commodity, futures can help you as
follows:

Lock-in the price for your produce – If you are a farmer, there is
every chance that the price of your produce may come down
drastically at the time of harvest. By taking positions in commodity
futures you can effectively lock-in the price at which you wish to
sell your produce.

Assured demand – Any glut in the market can make you wait
unendingly for a buyer. Selling commodity futures contract can give
you assured demand at the time of harvest.

Increase in holding power – You can store the underlying

commodity in exchange approved warehouse and sell in the futures
to realize the future value of the commodity.
Continued….
If you are a large scale consumer of a product, here is how this
market can help you:

Control your cost – If you are an industrialist, the raw material

cost dictates the final price of your output. Any sudden rise in the
price of raw materials can compel you to pass on the hike to your
customers and make your products unattractive in the market. By
buying commodity futures, you can fix the price of your raw
material.

Ensure continuous supply – Any shortfall in the supply of raw

materials can stall your production and make you default on your
sale obligations. You can avoid this risk by buying a commodity
futures contract by which you are assured of supply of a fixed
quantity of materials at a pre-decided price at the appointed time.
Are there physical deliveries in
commodity futures exchanges?

YES, the exchanges, in order to maintain the futures prices

in line with the spot market, have made available
provisions of settlement of contracts by physical delivery.

They also make sure that the price of futures and spot
prices coincide during the settlement so that the arbitrage
opportunities do not exist.
How the deliveries are made
possible?
The exchange has enlisted certain cities for specific commodities as
the delivery centers.

The seller of commodity futures, upon expiry of the contract may

choose to deliver physical stock instead of settling the positions by
cash, in which case he would be required to deliver the stocks to the
specified warehouses.

The buyer of the commodity futures, if he is interested in physical

delivery would be matched with a seller and would be required to
take delivery of the specified quantity of stock from the designated
warehouse.

In case of NCDEX it is mandatory to open a Demat account with an

approved DP by the buyer and seller if they wish to take/ give
delivery of goods.
Opportunities

Speculation
Hedging
Arbitrage
Working of Commodity Exchange
Settlement Of Future Contracts
How would contracts settle?
What would be the settlement period?
Are deliveries compulsory?
How would the settlement take place in
commodity futures market?
Neat Trading terminal
Delivery Information
Thank You