BENEFITS TO INDUSTRY FROM FUTURES TRADING Hedging the price risk associated with futures contractual commitments.

Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk ofdefault faced by banks. * Lending for agricultural sector would go upwith greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agrifinance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges

BENEFITS TO EXCHANGE MEMBER Access to a huge potential market much greater than the securities and cash market in commodities. Robust, scalable, state-of-art technology deployment. Member can trade in multiple commodities from a single point, on real TiME BASIS

Traders would be trained to be Rural Advisors and CommoditySpecialists and through them multiple rural needs would be met, likebank credit, information dissemination, etc.

WHAT MAKES COMMODITY TRADING ATTRACTIVE? A good low-risk portfolio diversifier A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate. Less volatile, compared with, equities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in equities or bonds as there is Little correlation with equity and bond markets. High co-relation with changes in inflation. No securities transaction tax levied.

  

   7. INSTRUMENTS AVAILABLE FOR TRADING In recent years, derivatives have become increasingly popular due to their applications for hedging, speculation and arbitrage. While futures and options are now actively traded on many exchanges,f orward contracts are popular on the OTC market. While at the moment only commodity futures trade on the NCDEX, eventually, as the market grows, we also have commodity options being traded. 7.1 FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy theunderlying asset on a certain specified future date for a certain specified price. The otherparty assumes a short position and agrees to sell the asset on the same date for thesame price. Other contract details like delivery date, price and quantity are negotiatedbilaterally by the parties to the contract. The forward contracts are normally tradedoutside the exchanges. The salient features of forward contracts are: They are bilateral contracts and hence exposed to counterparty risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.

The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged. However forward contracts in certain markets have become very standardised, as in thecase of foreign exchange, thereby reducing transaction costs and increasing transactionsvolume. This process of standardisation reaches its limit in the organised futures market  FUTURES MARKET Futures markets were designed to solve the problems that exist in forward markets. Afutures contract is an agreement between two parties to buy or sell an asset at a certaintime in the future at a certain price. But unlike forward contracts, the futures contractsare standardized and exchange traded. To facilitate liquidity in the futures contracts, theexchange species certain standard features of the contract. It is a standardized contractwith standard underlying instrument, a standard quantity and quality of the underlyinginstrument that can be delivered, (or which can be used for reference purposes insettlement) and a standard timing of such settlement. A futures contract may be offsetprior to maturity by entering into an equal and opposite

transaction. More than 99% offutures transactions are offset this way. The standardized items in a futures contract are: Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. OPTIONS Options are fundamentally different from forward and futures contracts. An option givesthe holder of the option the right to do something. The holder does not have to exercisethis right. In contrast, in a forward or futures contract, the two parties have committedthemselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a futures contract, the purchase of an option requires an up-front payment. There are two basic types of options, call options and put options. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.

HOW THE COMMODITY MARKET WORKS 9.1 WORKING PROCEDURE The futures market is a centralized market place for buyers and sellers from around theworld who meet and enter into commodity futures contracts. Pricing mostly is based onan open cry system, or bids and offers that can be matched electronically. Thecommodity contract will state the price that will be paid and the date of delivery. Almostall futures contracts end without the actual physical delivery of the commodity. There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. Aperson deposits certain amount of say, good X in a ware house and gets a warehousereceipt which allows him to ask for physical delivery of the good from the warehouse butsome one trading in commodity futures need not necessarily posses such a receipt tostrike a deal. A person can buy or sale a commodity future on an exchange based on hisexpectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes(square off) his account or give/take

delivery of the commodity. The broker maintainsan account of all dealing parties in which the daily profit or loss due to changes in thefutures price is recorded. Squiring off is done by taking an opposite contract so that thenet outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity atwarehouse nearest to him and collect the warehouse receipt. The buyer should be ableto take physical delivery at a location of his choice on presenting the warehouse receipt.But at present in India very few warehouses provide delivery for specific commodities

Demat Indicator Delivery process requires 9.2.3 DELIVERY PROCESS REQUIRES: Delivery information submitted on Expiry date. This is done through the delivery request window on the Trading Terminal. Matching delivery information is obtained. 9.2.4 VALIDATION OF DELIVERY INFORMATION: On Client s Net Open Position

On Delivery lot for commodity Excess quantity rejected and cash settled

Matched delivery information 9.2.5 MATCHING PARAMETERS: Commodity Quantity Location Branch Matching limited to the total warehouse capacity Settlement through Depository. Settlement Schedule in Settlement Calendar Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.