Comex SMP

Derivatives and Price Risk Management: A Study of Agricultural Commodity Futures in India
A Seed Money Project Report Prepared by
K.G. Sahadevan, Ph.D Associate Professor Indian Institute of Management Prabandh Nagar, Off Sitapur Road Lucknow 226 013 E-mail: devan@iiml.ac.in
Submitted to
INDIAN INSTITUTE OF MANAGEMENT LUCKNOW MAY 2002
CONTENTS Acknowledgement Executive Summary List of Tables and Figures Chapter 1: Derivatives and Price Risk Management: A Study of Agricultural Commodity Futures in India An Introduction
1.1. Commodity Derivatives and their Uses 1.2. Commodity Derivatives in India 1.3. Objectives of the Study 1.4. Data and Methodology 1.5. The Chapter Scheme
2 3 4
Chapter 2:
Mechanics of Futures Trading

2.1. What is a Commodity Futures Exchange? 2.2. What is Commodity Futures Contract? 2.3. Who are the Participants in Futures Market? 2.4. Commodity Orders 2.5. Role of Clearing House 2.6. Margins 2.7. How does Futures Contract Facilitate Hedging against Price Risk?
11
Chapter 3:
Commodity Futures Exchanges The profile and Regulatory Environment

3.1. The Profile of Futures Exchanges 3.2. Regulation of Commodity Futures
22
Chapter 4:
Price Discovery, Return, Volatility and Market Conditions: An Econometric Analysis

4.1. Is Futures Market Efficient? 4.1.1. Empirical Results 4.2. The Relationship between Price Volatility, Trading Volume, and Market Depth 4.2.1. Emprical Results 4.3. Correlation Analysis 4.4. The Test of Equality of Variances
27
Chapter 5: Conclusions Bibliography Appendi
Constraints and Policy Options
38 41 42 43
I. II. III. IV.
Commodities notified u/s 15 of FCRA 1952 Commodities prohibited for forward contracts u/s 17 of FCRA 1952 Commodities prohibited for NTSD contracts u/s 18(3) of FCRA 1952 Commodities in which section 15 & 18(3) of FCRA 1952 are applied
Agricultural Commodity Futures in India
K.G. Sahadevan, IIM Lucknow

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EXECUTIVE SUMMARY Commodity derivatives have a crucial role to play in the price risk management process especially in any agriculture dominated economy. Derivatives like forwards , futures, options, swaps etc are extensively used in many developed and developing countries in the world. The Chicago Mercantile Exchange; Chicago Board of Trade; NewYork Mercantile Exchange etc in the United States, International Petroleum Exchange, London; London Metal Exchange, London Futures and Options Exchange, etc in the United Kingdom; Sidney Futures Exchange in Australia, Kuala Lumpur Commodity Exchange in Malaysia are some of the leading commodity exchanges in the world engaged in trading of multiple derivatives in commodities. However, they have been utilized in a very limited scale in India. The production, supply and distribution of many agricultural commodities are controlled by the government and only forwards and futures trading are permitted in certain commodity items. The present study is an investigation into the derivative markets in agricultura commodities in India. The study has surveyed the recognized exchanges and their organizational, trading and the regulatory set up for futures trading in commodities. In the light of spot visit to a sample of seven exchanges, the study identifies the problems and prospects of the futures market in agricultural commodities in India. A statistica analysis has also been carried out to evaluate the efficiency of a sample set of markets in price discovery and to understand the interrelationship between prices, volume of transaction, open positions and volatility of the markets. The results of the study revea that many of the commodity futures ex changes fail to provide an efficient hedge against the risk emerging from volatile prices of many farm products in which they carry ou futures trading. The results obtained from a statistical analysis of the data on price discovery in a sample of six com modities traded in four exchanges showed that the futures market in those commodities are not efficient in the sense that the futures prices are not an unbiased predictor of the future ready rates. A quantitative analysis of the relationship between pric e return, volume, market depth and volatility on a sample of twelve markets in six commodity items shows that the market volume and depth are not significantly influenced by the return and volatility o futures as well as ready markets. The results indicate that the futures and ready markets are not integrated. The price volatility in the ready markets does not have any impacts on the market conditions in futures markets. The exchange specific problems like lo volume and market depth, lack of participation of trading members and irregular trading activities along with state intervention in many commodity markets are major ills retarding the growth of futures market. In the presence of these ills no quantitative analysis of market conditions and interrelations would provide meaningful results. A revie of the nature of institutional and policy level constraints facing this segmen calls for more focused and pragmatic approach from government, the regu lator and the exchanges for making the agricultural fut ures markets a vibrant segment for risk management which can play an important role especially in an agriculture dominated economy of India.
LIST OF TABLES AND FIGURES
Page No. Figure-1.1: Figure-2.1: Table-2.1: Table-2.2: Table 3.1: Table 4.1: Table-4.2: Table-4.3: Table-4.4: Table-4.5: Typology of risk management instruments Order and execution flows in electronic futures trade Membership requirements for Trading Members Important Specifications of Futures Contract Profile of Commodity Futures Exchanges Testing the Unbiasedness Hypothesis Relationship between Volume, Return and Volatility Market Depth and Return Volatilities Bartletts Homogeneity of Variance Test Correlation Matrix 6 14 19 20-21 26 32-33 34 35 36 37
CHAPTER 1 DERIVATIVES AND PRICE RISK MANAGEMENT: A STUDY OF AGRICULTURAL COMMODITY FUTURES IN INDIA AN INTRODUCTION
1.1. Commodity Derivatives and their Uses Instability of commodity prices has always been a major concern of the producers as well as the consumers in an agriculture -dominated country like India. Farmers direc exposure to price fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities. There are various ways to cope with this problem. Apart from increasing the stability of the market, various actors in the farm sector can better manage their activities in an environment of unstable prices through derivative markets. These markets serve a risk -shifting function, and can be used to lock -in prices instead of relying on uncertain price developments. There are a number of commodity-linked financial risk management instruments which are used to hedge prices through formal commodity exchanges, over -the-counter (OTC) market and through intermediation by financial and specialized institutions who extend risk management services. (see UNCTAD, 1998 for a comprehensive survey of instruments) These instruments are forward, futures and option contracts, swaps and commodity linked -bonds. While formal exchanges facilitate trade in standardized contracts like futures and options, other instruments like forwards and swaps are tailormade contracts to suit to the requirement of buyers and sellers and are available over-thecounter. In general, these instruments are classified (as shown in figure-1.1) based on the purpose for which they are primarily used for price-hedging, as part of a wider marketing strategy, or for price-hedging in combination with other financial dea ls. While forward contracts and OTC options are trade related instruments , futures, exchange traded options and swaps between banks and customers are primarily price hedging instruments. In the case of swaps between intermediaries and producers, and commodity linked loans and bonds (CL&Bs) price hedging are combined with financial deals. Forwards contracts are mostly OTC agreements to purchase or sell a specific amount of a commodity on a predetermined future date at a predetermined price. The terms and conditions of a forward contract are rigid and both the parties are obligated to give and take physical delivery of the commodity on the expiry of contract. The holders of forward contracts face spot (ready) price risk. When the prevailing spot price of the underlying commodity is higher than the agreed price on expiry of the contract, the buyer gains and the seller looses. The futures contracts are refined version of forwards by which the parties are insulated from bearing spot risk and are traded in o rganize exchanges. A detailed discussion on the futures contracts is presented in the next chapter. Both forwards and futures contracts have specific utility to commodity producers,
merchandisers and consumers. Apart from being a vehicle for risk trans fer among hedgers and from hedgers to speculators, futures markets also play a major role in price discovery
Figure-1.1: Typology of risk management instruments
Risk Management Marketing Organized exchanges Futures Options OTC Finance
OTC Forwards
Swaps
CL&Bs
The price risk refers to the probability of adverse movements in price s of commodities, services or assets. Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would attract only lower price during the harvest season. The forward and futures contracts are efficient risk management tools which insulate buyers and sellers from unexpected changes in future price movements. Thes e contracts enable them to lock-in the prices of the products well in advance. Moreover, futures prices give necessary indications to producers and consumer s about the likely future ready price and demand and supply conditions of the commodity traded. The cash market or ready delivery market on the other hand is a time-tested market system which is used in all forms of business to transfer title of goods. An option contract is the right (but not the obligation) to purchase or sell a certain standard amount of a commodity at a pre -determined price (the strike price) on or before a specified date. It is an option-delivery forward contract. The buyer has option to exercise the option either to buy or to sell the underlying commodity for which he pays premium to the seller. The option which gives the right to buy is the call option and the one which gives the right to sell is the put option. The call option p rotects the holder from the risk of any upward price movements while offering the profit potential from downward price movements o the underlying commodities. Similarly, the holder of a put option protects himself from risk of downward movement of prices of the underling
Agricultural Commodity Futures in India 6 K.G. Sahadevan, IIM Lucknow
commodities while he benefits from the potential gain of an increase in prices. The premium which the buyer of put or call option pays up-front is the only cost he incurs for protecting himself from unfavourable future price variations. Commodity swap is a long -term price risk management instrumen available over the counter to meet specific hedging needs without requiring physical delivery o commodities. It is a financial transaction by which parties exchange cash flows emerging from the variation of the prices o underlying commodities in the future according to prearranged formula. The exchange of cash flows at specified intervals on the basis of fixed and variable prices for a notional quantity of commodity is affected through an intermediary who functions as an arranger of the contract. For example, in a fixed-tovariable price swap between the producer and consumer of a particular commodity where one party pays to the other an amount calculated using the variable price and receives an amount calculated using the fixed price, while the other party pays an amount based on the fixed price and receives an amount based on the variable price for a notional quantity of commodity. The swaps are used for locking -in future prices for a ong period. Commodity-linked loans are a combination of a bank loan with a commodity swap. It is an agreement to link the repayment amount of principal and/or interest to the price of a specific commodity or to an index of commodity prices. These loans are useful to market participants who want to ensure a positive correlation between debt service requirements and commodity prices. Commodity bonds are bonds in which the yield to maturity is linked mainly to the price of the underlying commodity. Instea d of a fixed interest rate and a fixed amount paid a maturity, the pay -off of a commodity bonds principal and dividends are expressed in terms of the commodity price. The primary motivation for a commodity producer to issue a commodity-linked bond is to raise investment capital while insuring through the use o a single instrument that the return from investment is not affected by changes in the price of commodity. Therefore, the ultimate objective in using this instrument is to acquire protection from dverse movements in interest rates and spot commodity prices. 1.2. Commodity Derivatives in India Commodity derivatives have a crucial role to play in the price risk management process especially in any agriculture dominated economy. Derivatives like fo rwards, futures, options, swaps etc are extensively used in many developed and developing countries in the world. The Chicago Mercantile Exchange; Chicago Board of Trade; NewYork Mercantile Exchange; International Petroleum Exchange, London; London Metal Exchange; London Futures and Options Exchange; Marche a Terme International de France; Sidney Futures Exchange; Singapore International Monetary Exchange; The Singapore Commodity Exchange; Kuala Lumpur Commodity Exchange ; Bolsa de Mercadorias & Futuros (in Brazil), the Buenos Aires Grain Exchange; Shanghai Metals Exchange; China Commod ty Futures Exchange; Beijing Commodity Exchange, etc are some of the leading commodity exchanges in the world engaged in trading of derivatives in commodities. However, they have been utilized in a very limited scale in India
Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices . The production, supply and distribution of many agricultural commodities are controlled by the government and only forwards and futures trading are permitted in certain commodity items. Free trade in many commodity items is restricted under the Essential Commodities Ac , 195 , and forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act, 1952. The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd., and formal organized futures t rading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Gujrati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East India Cotton Association. Many exchanges came up in the agricultural centres in north India before world war broke out and engaged in wheat futures until it was prohibited. The exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this period. The futures trade in spices was firs organized by IPSTA in Cochin in 1957. Futures in gold and silver began in Mumabi in 1920 and continued until it was prohibited by the government by mid-1950s. Later, futures trade was altogether banned by t he government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the pre-independence period. Options on cotton were traded until the along with futures were banned in 1939. However, the government withdrew the ban on futures with passage of Forward Contract (Regulation) Act in 1952. After the ban of futures trade many exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the Khusro Committee in 1980 government reintroduced futures on some selected commodities including cotton, jute, potatoes, etc. Further in 1993 an expert committee on forward markets under the chairmanship of Prof. K.N. Kabra was appointed by the government of India and the report of the committee was submitted in 1994 which recommended the reintroduction of futures already banned and to introduce futures on many more commodities including silver. In tune with the ongoing economic liberalization, the National Agricultural Policy 2000 has envisaged external and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedg ing the risk emerging from price fluctuations. In line with the proposal many more agricultural commodities are being brought under futures trading. In India, currently there are 15 commodity exchanges actively undertaking trading in domestic futures contracts, while two of them, viz., India Pepper and Spice Trade
Association (IPST ), Cochin and the Bombay Commodity Exchange (BCE) Ltd. have been recently upgraded to international exchanges to deal in international contracts in pepper and castor oil respectively. Another 8 exchanges are proposed and some of them are expected to start operation shortly. There are 4 exchanges which are specifically approved for undertaking forward deals in cotton. more detailed accoun of these exchanges has been presented in chapter 3. The proposed study is primarily based on the visit of seven leading exchanges viz., IPST Cochin, which deal in domestic and international contracts in pepper; BCE Ltd., a mult -commodity international exchange where futures in castor oil, castor seed, sunflower oi , RBD Palmolein etc are traded; The East Indi Cotton Association (EICA) Ltd., Bombay, which is a specialized exchange dealing in forwards and futures in cotton; South India Cotton Association (SICA , Coimbatore which deals in forward contracts in cotton; Coffee Futures Exchange India Ltd., (COFEI) Bangalore wh ich undertakes coffee futures trading; Kanpur Commodity Exchange (KCE) which deals with futures contracts in mustard oil and gur; and The Chamber of Commerce, Hapur which undertakes futures trading in gur and potatoes. 1.3. Objectives of the Study The proposed study has the following objectives: To study the contract specifications, mechanics of futures trading and price discovery in the select commodities and exchanges. To study how successful these exchanges are in India in price discovery and in providing hedge against price risk in the underlying commodities. To carry out an econometric analysis of price volatility and market conditions, and spot (ready) and futures prices behavior. To identify the bottlenecks in commodity trading and possible policy solutions for improving the futures markets in India. 1.4. Data and Methodology The availability of data has been a major constraint of the study. Futures trading on commodities except on pepper was introduced only in 1997 -98. While daily futures and comparable ready price data were available for pepper, the relevant data on other commodities are available for the last 2 -3 years that too only monthly data for many of them. Due to the difficulty in getting uniform frequency data series he study has utilized weekly as well as monthly data on various parameters of futures trading in some selected commodities. The study as mentioned above is based on a visit to seven exchanges. However, the coverage of the study is not limited to these seven samples. For statistical analysis commodities other than the ones traded in these exchanges are also chosen wherever the data are available. The necessary data are collected from official records of the exchanges which are visited, and the data relating to othe r exchanges are collected from various reports and publications of Forward Markets Commission. The information
relating to the organization of exchanges, terms and conditions of futures contracts, structure of clearinghouse and delivery mechanism, and other details about trading are collected from the bye-laws of the respective exchanges. To the possible extent, amendments to these bye-laws have been incorporated in the study The study has utilized ordinary least square (OLS) method for estimating regre ssion equations. The problem of serial correlation has been diagnosed and the iterative Cochrane-Orcutt procedure has been used for making necessary adjustments in coefficient estimates. The study has used Wald chi-square procedure for restriction on coefficients to test market efficiency and unbiasedness of futures prices. For empirical testing of relationship between futures and ready price return, their volatility, trade volume, market depth, regression as well as correlation methods have been resorte d. Bartletts homogeneity of variance test has been used for testing the integration between ready and futures markets. 1.5. The Chapter Scheme The remainder of the report has been organized as follows. The chapter 1 has already dealt with various derivative instruments available in commodity markets world -over and their utility for hedging risk against price changes, and the current status and the evolution of futures markets in commodities in India. The functioning of futures exchanges with trading details, contract specifications, and organizational structure of and membership requirements in various exchanges in India as well as in clearinghouses has been described in chapter 2. Chapter 3 provides a brief profile of commodity futures exchanges and their regulatory framework in India. An econometric analysis or testing market efficiency in terms of better price discovery mechanism, for testing the interrelationship between return, volatility and market conditions, and correlation between various parameters of some selected markets are carried out in chapter 4. In the light of visit to some of the exchanges problems confronting the futures segment have been identified for taking necessary policy initiatives. Chapter 5 summarises these constraint and policy solutions for transforming the commodity futures segment a vibrant, mass participatory and transparent one. The summary of the study, bibliography and appendices are presented at the end of the report.
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CHAPTER 2 MECHANICS OF FUTURES TRADING
Futures are a segment of derivative markets. The value of a futures contract is derived from the spot (ready) price of the commodity underlying the contract. Therefore, they are called derivatives of spot market. The buying and selling of futures contracts take place in organized exchanges. The members of exchanges are authorized to carryout trading in futures. The trading members buy and sell futures contrac for their own account and for the account of non-trading members and other clients. All other persons interested to trade in futures contracts as clients must get themselves registered with the exchange as registered non-members. 2.1. What is a Commodity Futures Exchange? Exchange is an association of members which provides all organizati onal support for carrying out futures trading in a formal environment. These exchanges are managed by the Board of Directors which is composed primarily of the members of the association. There are also representatives of the government and public nominated by the Forward Markets Commission. The majority of members of the Board have been chosen fro among the members of the Association who have trading and business interest in the exchange. The Board is assisted by the chief executive officer and his team in day-to-day administration. There are different classes of members who capitalize the exchange by way of participation in the form of equity, admission fee, security deposits, registration fee etc. The membership requirement for trading members in so me selected exchanges are presented in table-2.1. a. Ordinary Members: They are the promoters who have the right to have own -account transactions without having the right to execute transactions in the trading ring. They have to place orders with trading me mbers or others who have the right to trade in the exchange. b. Trading Members: These members execute buy and sell orders in the trading ring o the exchange on their account, on account of ordinary members and other clients. c. Trading-cum-Clearing Members: They have the right to trade and also to participate in clearing and settlement in respect of transactions carried out on their account and on account of their clients. d. Institutional Clearing Members: They have the right to participate in clearing and settlement on behalf of other members but do not have the trading rights. e. Designated Clearing Bank: It provides banking facilities in respect of pay-in, pay-out and other monetary settlements. The composition of the members in an exchange however varies. In so me exchanges there are exclusive clearing members, broker members and registered non -members in addition to the above category of members.
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2.2. What is Commodity Futures Contract? Futures contracts are an improved variant of forward contracts. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price, with settlement expected to take place at a future date. While forward contracts are mainly over-the-counter and tailor-made which are settled by physical delivery futures are standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question, with each canceling the other out. The futures contracts are standardized in terms of quality and quantity, and place and date of delivery of the commodity. The commodity futures contracts in India as defined by the FMC has the following features: (a) Trading in futures is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members o the association in accordance with the procedure laid down in the Rules an d Bye-laws of the association. It is invariably entered into for a standard variety known as the basis variety with permission to deliver other identified varieties known as tenderable varieties. The units of price quotation and trading are fixed in t ese contracts, parties to the contracts not being capable of altering these units. The delivery periods are specified. The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centres. In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.
(b)
(c) (d) (e)
(f)
The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. The major terms and conditions of contracts traded in six sample exchanges in India are presented in table-2.2. These terms are standardized and applicable across the trading community in the respective exchanges and are framed to promote trade in the respective commodity For example, the contract size is important for better management of risk by the customer. It has implications for the amount of money that can be gained or lost relative to a given change in price levels. I also affects the margins required and the commission charged. Similarly, the margin to be deposited with the clearing house has implications for the cash position of customers because it blocks cash for the period of the contract to which he is a party The strength and weaknesses of contract specifications are discussed under constraints and policy options in chapter 5.
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2.3. Who are the Participants in Futures Market? Broadly, speculators who take positions in the market in an attempt to benefit from a correct anticipation of future price movements, and hedgers who transact in futures market with an objective of offsetting a price risk on the physical market for a particular commodity make the futures market in that commodity. Although it is difficult to draw a line of distinction between hedgers and speculators, the former category consists of manufacturing companies, merchandisers, and farmers. Manufacturing companies who use the commodity as a raw material buy futures to ensure its uninterrupted supply of guaranteed quality at a predetermined price, which facilitates immunity against price fluctuations. While exporters in addition to using the price discovery mechanism for getting better prices for their commodities seek to hedge a gainst their overseas exposure by way of locking-in the price by way of buying futures contracts, the importers utilize the liquid futures market for the purpose of hedging their outstanding position by way of selling futures contracts. Futures market helps farmers taking informed decisions about their crop pattern on the basis of the futures prices and reduces the risk associated with variations in their sales revenue due to unpredictable future supply demand conditions. Above all, there are a large number of brokers who intermediate between hedgers and speculators create the market for futures contracts. 2.4. Commodity Orders The buy and sell orders for commodity futures are executed on the trading floor where floor brokers congregate during the trading hours stipulated by the exchange. The floor brokers/trading members on receipt of orders from clients or from their office transmits the same to others on the trading floor by hand signal and by calling out the orders (in an open outcry system they would like to place and price. After trade is made with another floor broker who takes the opposite side of the transaction for another customer or for his own account, the details of transactions are passed on to the clearing house through a transaction slip on the basis o which the clearinghouse verifies the match and adds to its records. Following the experiences of stock exchanges with electronic screen based trading commodity exchanges are also moving from outdated open outcry system to automated trading system. Many leading commodity exchanges in the world including Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), International Petroleum Exchange (IPE), London, have already computerized the trading activities. In India, coffee futures exchange, Bangalore has already put in place the screen based trading and many others are in the process of computerization. To add to modernization efforts, the Bombay Commodity Exchange (BCE) has initiated for a common electronic trading platform connecting all commodity exchanges to conduct screen based trading. In electronic trading, trading takes place through a centralized computer network system to which all buy and sell orders and their respective prices are keyed in from various terminals of trading members. The deal takes place when the central computer finds matching price quotes for buy and sell. The entire procedural steps involved in electronic
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trading beginning from placing the buy/sell order to the confirmation of the transaction have been shown in figure -2.1 below. Figure-2.1: Order and execution flows in electronic futures trade
Buyer
Order input
Seller
Order input
Computer
Verification of order
Computer
Verification of order
Check credit risk

Legitimate orders are transferred
Check credit risk

Legitimate orders are transferred
Electronic trading
Orders are matched
2.5. Role of Clearing House Clearinghouse is the organizational set up adjunct to the futures exchange which handles all back-office operations including matching up of each buy and sell transactions, execution, clearing and reporting of all transactions, settlement of all transactions on maturity by paying the price difference or by arranging physical delivery , etc., and assumes all counterparty risk on behalf of buyer and seller. It is important to understand that the futures market is designed to provide a proxy for the ready (spot) market and thereby acts as a pricing mechanism and not as part of, or as a substitute for, the ready market. The buyer or seller of futures contracts has two options before the maturity of the contract. First, the buyer (seller) may take (give) physical delivery of the commodity at the delivery point approved by the exchange after the contract matur es. The second option which distinguishes futures from forward contracts is that the buyer (seller) can offset the contract by selling (buying) the same amount of commodity and squaring off his position. For squaring of a position, the buyer (seller) is not obligated to sell (buy)
Confirmation Clearing Member
Confirmation
Execution
Transfer of positions
Clearing House
Position and margin settlements
Clearing Member
14
the original contract. Instead, the clearinghouse may substitute any contract of the same specifications in the process of daily matching. As delivery time approaches, virtually all contracts are settled by offset as those who have bought (long) sell to those who have sold (short). This offsetting reduces the open position in the account of all traders as they approach the maturity date of the contract. The contracts, if any, which remain unsettled by offset until maturity date are settled by physical delivery. The clearinghouse plays a major role in the process explained above by intermediating between the buyer and seller. There is no clearinghouse in a forward market due to which buyers and sellers face counterparty risk. In a futures exchange all transactions are routed through and guaranteed by the clearinghouse which automatically becomes a counterpart to each transaction. It assumes the position of counterpart to both sides o the transaction. It sells contract to the buyer and buys the identical contract from the seller. Therefore, traders obtain a position vis --vis the clearing house. It ensures default risk-free transactions and provides financial guarantee on the strength of funds contributed by its members a through collection of margins (discussed in section 2.3), nd marking-to-market all outstanding contracts, position limits imposed on traders, fixing the daily price limits and settlement guarantee fund. The organizational structure and membership requirements of clearinghouses vary from one exchange to the other. The Bombay Commodity Exchange and Cochin peppe exchange have set up separate independent corporations (namely, Prime Commodities Clearing Corporation of India Ltd, and First Commodities Clearing Corporation of India Ltd., respectively) for handling clearing and guarantee of all futures transactions in the respective exchanges. While coffee exchange has clearing house as a separate division of the exchange, many other exchanges like Chamber of Commerce, Hapur; Kanpu Commodity Exchange and cotton exchange in Bombay run in-house clearinghouse as part of the respective exchanges. The clearing and guaranty are managed in these exchanges by a separate committee (normally called the Clearing House Committee). The membership in the clearinghouse requires capital contribution in the form of equity, security deposit, admission fee, registration fee, guarantee fund contribution in addition to networth requirement depending on its organizational structure. For example, in the Bombay Commodity Exchange the minimum capital requirement for membership in its clearinghouse as applicable to trading-cum-clearing members is Rs. 50,000 each toward equity and security deposit, Rs. 500 as annual subscription , and additionally, members are required to have networth of Rs. 3 lakhs. Similarly, coffee exchange prescribed Rs. 5 lakh each towards equity and guarantee fund contribution and Rs. 40,000 towards admission fee for a trading-cum-clearing member. However, in e xchanges where clearing house is a part of the exchange the payment requirements are lower. For example, Kanpur Commodity Exchange prescribed only Rs. 25,000, Rs. 1000 and Rs. 500 respectively towards security deposit, registration fee and annual fee for a clearingcum-trading member. For ensuring financial integrity of the exchange and for counterparty risk -free trade position (exposure) limits have been imposed on clearing members. These limits which
15
are stringent in some cases and are liberal in other cases are normally linked to the members contribution towards equity capital or security deposit or a combination of bot and settlement guarantee fund. In Bombay Commodity Exchange the exposure limit of a clearing member is the sum of 50 times the face value of contribution to equity capital o the clearinghouse and 30 times the security deposit the member has maintained with the clearinghouse. While coffee exchange prescribes the limit of 80 times the sum of members equity investment and the contribu tion to the guarantee fund, the cotton exchange, Bombay, has stipulated a liberal exposure limit on open positions. It has a limit of 200 and 1500 units (recall that one contract unit is equivalent to 93.5 quintals respectively for composite and institu ional members. The Cochin pepper exchange has fixed a net exposure limit of 60 units (equivalent to 1500 quintals) for domestic contract and 90 units (equivalent to 2250 quintals) for international contract . Moreover, enough financial strength is ensured in case the clearinghouse faces default by setting up of settlement guarantee fund. The Kanpur Commodity Exchange maintains a trade guarantee fund with a corpus of Rs. 100 lakhs while the coffee exchange in addition to a guarantee fund the exchange has substituted itself as party to clear all transactions. Yet another check on the possible default is through prescribing maximum price fluctuation on any trading day which helps limit the probable profit/loss from each unit of transaction. The relevant data on permitted price limit has been presented in table-2.2. I is clear from the table that the maximum profit/loss potential from trade in each contract unit varies from as low as Rs. 800 for potato futures in Chamber of Commerce, Hapur to as high as Rs. 15,000 in pepper exchange, Cochin. Similarly, given the permissible open position of 200 units for a trading-cum-clearing member and maximum price fluctuation of Rs. 150 per 100 kg for cotton futures in the cotton exchange, Bombay, the maximum potential loss/profit in a trading day works out to be Rs. 28.05 lakhs! 2.6. Margins Margins (also called clearing margins) are goo -faith deposits kept with a clearinghouse usually in the form of cash. There are two types of margins to be maintained by the trader with the clearinghouse: initial margin and maintenance or variation margins. Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded. Margins are deposited with the clearing house in advance against the expected exposure of the trading member on his account and on account of the clients. This amount in turn is collected from the clients by the member who executes trade for them. Generally, the margin is payable on the net exposure of the member. Net exposure is the sum of gross exposure (buy quantity or sale quantity, whichever is higher, multiplied by the current price of the contract) on account of trades executed through him for each of his clien s and gross exposure of trades carried out on his own account. However, for squaring-off transactions carried out only at the clients level, fresh margins are not required. The margin is refundable after the client liquidates his position or after the maturity of the contract. Maintenance margin which usually ranges from 60 to 80 per cent of initial margin is als required by the exchange. Variation margin is to compensate the risk borne by the
16
clearinghouse on account of price volatility of the commodity underlying the contract to which it is a counterparty. A debit in the margin account due to adverse market conditions and consequent change in the value of contract would lead to initial margin falling below the maintenance level. The clearinghouse restores initial margin through margin calls to the client for collecting variation margin. In case of an increase in value of the contract, marking-to-market ensures that the holder gets the payment equivalent to the difference between the initial contract value and its change over the life time of the contract on the basis of its daily price movements. If the member is not able to pay the variation margin, he is bound to square off his position or else the clearing house will be liquidating the position. The margins have important bearing on the success of futures. As they are non-interest bearing deposits payable to the clearinghouse up-front working capital of any trading entity gets blocked to that extent. While a higher margin requirement prevents traders from participating in trading, a lower margin makes the clearinghouse vulnerable to any default due to its weak financial strength otherwise. Internationally, many developed exchanges maintain a low margin on positions due to their better financial strength along with massive volume of trade resulting in large income accruing to them. However, this has not been the case with many exchanges in India. For example, as shown in table 2.2 the initial margin liability for transacting the minimum lot size in pepper is Rs. 30,000 for domestic contracts and US$ 312.50 for international contracts. Similarly, the volume of transactions (see table 3.1 in chapter 3) these clearinghouses deal in many exchanges in India is abysmally low making their existence financially unviable. Most of the exchanges in additions to keeping mandatory margins maintain a settlement guarantee fund. The fund set up with the contribution from members of clearing house is used for guaranteeing financial performance of all members. This fund absorbs losses not covered by margin deposits of the defaulted member. The clearinghouse ensures this by settling the default transactions by properly compensating the traders paying the amount of difference at the closing out rate. 2.7. How does Futures Contract Facilitate Hedging against Price Risk? The futures contracts are designed to deal directly with the credit risk involved in locking-in prices and obtaining forward cover. These contracts can be used for hedging price risk and discovering future prices. For commodities that compe te in world or national markets, such as coffee, there are many relatively small producers scattered over a wide geographic area. These widely dispersed producers find it difficult to know wha prices are available, and the opportunity for producer, proce ssor, and merchandiser to ascertain their likely cost for coffee and develop long range plans is limited. Futures trading, used in the Midwest for grains and similar farm commodities since 1859, and adapted for coffee in 1955, provides the industry with a guide to what coffee is worth now as well as todays best estimate for the future. Moreover, since all transactions are guaranteed through a central body, clearing house, which is the counter party to each buyer and seller ensuring zero default risk, market participants need not worry about thei counterparts creditworthiness.
17
Hedge is a purchase or sale on a futures market intended to offset a price risk on the physical (ready) market. It involves establishing a position in the futures market agains ones position or firm commitments in the physical market. The producers who seek to protect themselves from an expected decline in prices of their commodity in future go for short hedge (also called sell hedge). He undertakes the following o perations in the market to lock-in the price in advance which he is going to receive after the product i ready for physical sale. We assume that the producer anticipates a harvest of 5 metric tonnes (equivalent to 2 units of contracts in Cochin pepper exchange) of pepper in March, the futures price for March delivery of the specific variety of pepper is Rs. 8400 per quintal (Rs. 2.10 lakh per unit , and the prevailing (say, October) ready market price is Rs. 8100 per quintal. a) In October, the producer goes short (sells) in the futures market selling 2 March futures contracts at Rs. 8400 per quintal. This is called price fixing. b) In the delivery month, futures prices dropped to Rs. 8200 per quintal and the producer sells pepper in the ready market for Rs. 8200. c) Simultaneously, he closes out his short position in futures by buying (long position) 2 March futures contracts at Rs. 8200 per quintal. The result is that the producer sold futures contract at Rs. 8400 and bought the same futures contract at Rs. 8200 per quintal making a net gain of Rs. 200 per quintal or Rs. 5000 per contract. For the physical sale, the producer received the market price of Rs. 8200 prevailing on the day of the sale and the gain of Rs. 200 per quintal from closing-out of futures contracts makes him to realize Rs. 8400 per quintal as initially locked -in by price-fixing. If the price realized in the ready market is lower than the price in future contract, the loss on the physical market is compensated by the higher price realized on the future contract. On the other hand, if the price in the ready market is higher than in futures contract, the gain in the ready market is offset by the loss on the repurchase of the futures contract. Since futures market prices move in tandem with the ready m arket prices over the course of time tending to converge as the contract matures, a gain in the futures market in a developed commodity market under normal conditions, will be offset by a loss in the ready market, or vice versa. However, market imperfec ions will lead to the basis risk emerging from the mismatch between the gain/loss from the futures market not compensated by loss/gain in the ready market. This issue has been discussed further in chapter 4 in the light of some empirical evidence.
18
Table-2.1: Membership requirements for Trading Members

Exchange East India Cotton Association, Mumbai Coffee Futures Exchange, Bangalor * The Kanpur Commodity Exchange, Kanpur The Bombay Commodity Exchange, Mumbai. The Chamber of Commerce, Hapur. Deposit/Equity (Rs.) 25,000 1 lakh 10,000 50,000 Registration fee (Rs.) 2,000 10,000 1,000 1 lakh Annual (Rs.) 1,500 Nil 100 2,000 subscription
5000
Rs. 5000
Rs. 600
* Coffee exchange is a public limited company with authorized equity capital of Rs. 2 crore.
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Table-2.2: Important Specifications of Futures Contracts

Commodity/ Exchange Contract Unit an Lot size (LS) Maximum Price Fluctuation on any trading day A Price Results in Change of profit/loss per contract unit Rs. 150 per 100 kg Rs. 14025.00 Initial Margin (IM)/ IM Liability Variation Margin for one lot (VM) Clearing Contracts (duration in months)
1
Cotton; East India Cotton Association, Mumbai
55 bales (93.5 quintals) LS: 55 bales.
IM: Rs. 10,000 pe unit over and above the free limit of 300 units. VM: 2.5 to 7.5 % of BMP depending on 2 variation in the BMP IM: Rs. 6 per Kilo fo Plantation A, and Rs.3.00 per kilo fo Robesta Cherry AB.
Rs. 10,000
Daily at settlement price
Dec.(7), Feb.(7), Apr.(6), June (5), Sep. (6)
Coffee; Coffee Futures Exchange, Bangalore
1000/600 kgs for raw/proc essed coffee LS: 1000/600 Kgs
Rs.3/1.50 per Kg for Plantation A/R.C. AB Rs.125/Rs. 60 per bag of 50kg for Arabica/ Rob.Chy Rs. 30 per quintal over the clearing rate on the last day of the previous week.
Rs. 1800.00 for Plantation A and Rs. 900 for RB AB Rs. 2500/ Rs.1200 for Arabica/ Robes. Cherry Rs. 1200.00
Rs. 3,600 for Plantation A (Rs. 1800 for Robesta Chery AB)
Jan., Mar., May, July, Sep., and Nov. (18 months)
Gur; The Chamber of Commerce, Hapur
4000 Kgs (40 quintals) LS: 400 Kgs (40 quintals)
IM: Rs. 500 per unit Rs. 500 upto 100 units Rs.600 for each unit above 100 units. VM: 2 to 4 % of the BMP depending on 3 variation in the BMP
Mar. (4), May (3), July (3), Dec. (6)
Potato; The Chamber of Commerce, Hapur
4000 Kgs (40 quintals) LS: 400 Kgs (40 quintals) 2 Metric Tonnes
Rs. 20 per quintal over the clearing rate on the last day of the previous week. Rs. 65 per 100 Kg
Rs. 800.00
IM: Rs. 500 per unit up to 100 units and Rs. 600 per unit for above 100 units. VM: 2 to 4 % of the BMP depending on 3 variation in the BMP IM: 1.5 % per unit for net open position ranging between 6250 and 2.5% for 251-500. VM: 2% of the BMP if closing price rises/falls by more than 10 % of BMP and 4% if it is more than 15%.
Rs. 500
Mar.(6), July (5), Oct. (4)
Mustard Seed; The Kanpur Commodit Exchange, Kanpur
Rs. 1300.00
1.5 % of the value of contract.
Dail clearing
May (6), July (4), Oct. (4), Jan. (9)
LS: 2 Metric Tonnes
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Commodity/ Exchange
Contract Unit an Lot size (LS)
Maximum Price Fluctuation on any trading day A Price Results in Change of profit/loss per contract unit 4% of the 4 OCP of the previous day Depends on the closing price.
Initial Margin (IM)/ IM Liability Variation Margin for one lot (VM)
Clearing
Contracts (duration in months)
The Bombay Commodit Exchange, Mumbai.
1 Metric Tonne LS: 1 Metric Tonne
IM: No margin if 5 Gross Exposure < Rs. 10 lakh, 1.5 % for Rs. 10 50 lakh, Rs. 0.6 lakh +3% of the GE in excess of Rs. 50 lakh. Delivery period margin: 10% if the GE < Rs. 50lakh, Rs. 5lakh + 20% if the GE > Rs. 50lakh IM: US$ 125 and 375 per tonne respectively for net open position up to 150 and from 151 to 225 tonnes. Rs. 1200, 1600, 2000 and Rs. 2800 per quintal for net open position up to 100, 150, 200 and above 200 tonnes respectively
Varies depending on the value of contract.
Daily at official closing price
Feb., Apr., June, Aug, Oct., and 6 Dec. (6months)
Pepper Exchange, Cochin8
2.5 Metric Tonnes LS: 2.5 M.T and 15 M.T as deliverable quantit
US$ 125 per tonne for international contracts and Rs. 600 per quintal for domestic contracts.
US$ 312.50 and Rs. 15000.00 for international and domestic contracts respectively.
US$ 312.50 for international contract and Rs. 30,000 for domestic contract.
Dail clearing and settlement
For all 12 months in an year (6months)
SM: 10, 20 and 30 % respectively of th 7 BMP if it increases >20%, >30% and >40% IM and SM represent initial margin and special margin respectively. Price limit and margins vary from time to time. 1. Delivery month of the contract. 2. Bench Mark Price is the average of the opening, highest, lowest and the closing prices of the first three trading days of commencement month of any contract. 3. Bench Mark Price is arrived at by taking the average of the opening, highest, lowest and closing prices of the commencement day of trading of any contract. 4. The official closing price (OCP) is the weighted average price of the trades executed during the last 30 minutes of the trading session. 5. Gross Exposure (GE) means the sum total of net outstanding position. 6. Delivery month relating to international castor oil contracts and all other specifications are common fo all commodities traded in Bombay Commodity Exchange. 7. The Bench Mark Price (BMP) is determined by taking the weighted average of the transacted price of all the contracts traded on the first five days of the contract.
21
CHAPTER 3 COMMODITY FUTURES EXCHANGES THE PROFILE AND REGULATORY ENVIRONMENT
3.1. The Profile of Futures Exchanges Presently, 15 exchanges are in operation in India carrying out futures trading activities in as many as 30 commodity ite ms (details are given in table-3.1). Moreover, per ission has been given to another two exchanges viz., The First Commodities Exchange of India Ltd, Kochi (for copra/coconut, its oil and oilcake), and Keshav Commodity Exchange Ltd., Delhi (for potato), where futures trading is expected to start soon. The government has also permitted four exchanges viz., East India Cotton Association, Mumbai; The Central Gujarat Cotton Dealers Association, Vadodara; The South India Cotton Association, Coimbatore; and The Ahmedabad Cotton Merchants Association, Ahmedabad, for conducting NTSD contracts (explained below) in cotton. Lately, as part of further liberalization of trade in agriculture and dismantling o Essential Commodities Act (ECA), 1955 futures trade in sugar has been permitted and three new exchanges viz., e-Commodities Limited, Mumbai; NCS Infotech Ltd., Hyderabad; and e -Sugar India.Com, Mumbai, have been given approval for conducting sugar futures. A brief profile of the exchanges which are currently in operation has been presented in table-3.1. Many of these exchanges have become weaker in spite of considerable membership strength and potential for large volume of trade. Some of the observations drawn on the basis of visit to six of these exchanges have been presented in the later part of this paper. The number of members who are actively involved in trading in all these exchanges is abysmally low. Any attempt to revive the exchanges and rejuvenate the futures market in India needs an investigation into why members shy away from trading. It is interesting to note that even in case of commodities in which very active domestic and international ready market exists with volatile prices, futures trade in those commodities are no attraction to the merchandisers. The pepper exchange located in Cochin which is known for futures trade in spices for over five decades has not attracted many traders. It is the only exchange in the world engaged in trading of futures in pepper. Kerala being the producer of lions share (around 95 per cent) of pepper in India and Cochin being the port city where majority of pepper exporters are operating the existing futures exchange is expected to have a larger role to play. However, in spite of having more than 150 members in the exchange, only around 10 members cubicles in the trading ring found to have the presence of their representatives during the trading hour. A further inquiry in to the issue reveals that these members have been trading for generations and no new member is coming forward to the business. The members f the exchange still choose to retain the status of the exchange as a single-commodity exchange!
22
The Bombay Commodity Exchange arguably the richest exchange in India in terms of it infrastructure is also facing the problem of empty trading ring. Though he exchange has membership strength close to 600, only less than 5 members are actively trading. It is clear from the data given in table-3.1 that the volume in castor seed futures declined from 2.53 lakh tonnes during 1996-97 to just 10,000 tonnes during 2000-01. The cotton exchange in Mumbai which is one of the oldest exchanges in the country has a different story to tell. Cotton has a long tradition of futures trading in India. Cotton futures started in 1857 and continued until it was suspended in 19 66. Cotton has large potential for futures trading due to its uncontrolled and uncertain supply and variability of prices. While prices within a crop season fluctuate between 7.5 to 26.2 per cent in the last decade, its output varied as much as 14 per ce nt from one year to the next. It has a very strong domestic and international market. India is the third largest producer and the second largest consumer of cotton in the world. Moreover, cotton is placed under OGL list with zero import duty, and quota system for its exports is likely to be dismantled by 2005. Nevertheless, the present status of cotton exchange and the Indian cotton futures contract is no different from other exchanges. Although the exchange has membership strength over 400, not more t han 10 members actively trade in the exchange. It is often argued by the exchange authorities that the governments indirect control on supply of cotton and on prices by its procurement makes the futures market unattractive. Futures market in many other commodities indeed shows that there is scope for the rejuvenation of this sector in the country. The buoyant trading activities in the newly started National Board of Trade at Indore, the old exchanges like the Chamber of Commerce, Hapur; Viajai Beopar Ch amber, Muzaffarnagar; Ahmedabad Commodity Exchange; Bhatinda oil exchange; The East India Jute Exchange, Calcutta, etc., are the indications of prospects of futures trade in agricultural commodities. 3.2. Regulation of Commodity Futures Merchandising and stockholding of many commodities in India have always been regulated through various legislations like the Essential Commodities Act, 1955 (ECA, 1955) and Forward Contracts (Regulation) Act, 1952, (FCRA, 1952) and Prevention of Blackmarketing and Maintenance of Supplies of Commodities Act, 1980. The ECA, 1955 gives powers to control production, supply, distribution, etc. of essential commodities for maintaining or increasing supplies and for securing their equitable distribution and availability at fair prices. Using the powers under the ECA, 1955 various Ministries/Departments of the Central Government have issued control orders for regulating production/distribution/quality aspects/movement etc. pertaining to the commodities which are essential and admi nistered by them. The FCRA, 1952 provided for 3-tier regulatory system for commodity futures trading in India: (a) an association recognized by the Government of India on the recommendation of Forward Market Commission, (b) the Forward Markets Commission and (c) the Central Government Stock exchanges and futures markets being a part of the Union list their regulation is the responsibility of the central government. All types of forward contracts in India are
23
governed by the provisions of the FCRA, 1952. The Act divides commodities into three categories with reference to extent of regulation, viz., (a) the commodities in which futures trading can be organized under the auspices of recognized association, (b) the commodities in which futures trading is proh ibited and (c) the free commodities which are neither regulated nor prohibited. While options in goods are prohibited by the FCRA, 1952, the ready delivery contracts remain outside its purview. The ready delivery contract as defined by the Act is the one which provides for the delivery of goods and payment of a price therefor, either immediately or within a period not exceeding eleven days after the date of the contract. All ready delivery contracts where the delivery of goods and/or payment for goods is not completed within eleven days from the date of the contract are forward contracts. The Act classified forward contracts into two: (a) specific delivery contracts and (b) other than specific delivery contracts or futures contracts. Specific delivery contract means a forward contract which provides for the actual delivery of specific qualities or types of goods during a specified time period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned. The specific delivery contracts are of two types: transferable and non-transferable. The distinction between the transferable specific delivery (TSD) contracts and non transferable specific delivery (NTSD) contracts is based on the transferability of the rights or obligations under the contract. Forward trading in TSD and NTSD contracts are regulated by the government. As per the section 15 of the FCRA, 1952 every forward contract in notified goods (currently 36 commodity items) which is entered into excep those between members of a recognized association or through or with any such membe is treated as illegal or void (see appendix I for the list). As per the section 17(1) of the Act, 82 items are prohibited for forward cont ract (see appendix II for the list). The section 18(1) of the Act exempts the NTSD contracts from the regulatory provisions. However, over the years the regulatory provisions of the Act were applied to the NTSD contracts and 79 commodity items are curren tly prohibited for NTSD contracts under section 17 of the Act (see appendix III for the list). Moreover, another 15 commodity items are brought under the regulatory provisions of the section 15 of the Act out of which trading in the NTSD contract has been suspended in 12 items (see appendix IV for the list). At present, the NTSD contracts in cotton, raw jute and jute goods are permitted only between, through or with the members of the associations specifically recognized for the purpose. Subsequent to the report of the Committee on Forward Markets (known as the Kabra Committee) submitted in 1994 the government has so far permitted futures trading in nearly 35 commodities under the auspices of 23 commodity exchanges located in different parts of the country. The commodities in which futures trading is permitted are: pepper, turmeric, gur, castorseed, Hessian, jute sacking, cotton, potato, castor oil soyabean and its oil and cake, coffee, mustardseed and its oil and oilcake, ground nut and its oil, sunflower oil, copra/coconut and its oil and oilcake, cottonseed and its oil and oilcake, kapas, RBD palmolein, rice bran and its oil and oilcake, sesame seed and its oil and oilcake, safflower seed and its oil and oilcake, and sugar. This list may get enlarged
24
with the repeal of ECA, 1955 and with further liberalization of farm sector as envisaged in the National Agricultural Policy, 2000 and the Union Budget, 2002-03. The exchanges are required to get prior approval of the FMC for opening of each contract in commodities which are notified under the relevant sections in FCRA 1952. Regulation is essential especially in a private ownership and market oriented system t ensure the necessary checks and balances in the system. However, stringent and continuous regulation for long period of time would do no good to the system. The initial stringent regulation should ensure that a foolproof and growth oriented control system in terms of set up of the exchange and its sound management, a clearinghouse which can promote trade and its financial integrity, sound and facilitating contract terms and conditions, etc. is in place. The exchanges are already assumed to be self-regulatory agencies. Their role must get strengthened further along with FMC minimizing its role as a facilitator making the existing regulation an appropriate regulation.
25
Table 3.1: Profile of Commodity Futures Exchanges Exchange Active Member

2000 42 3 6 2 Kanpur Commodity Exchange, Kanpur. The East India Cotton Association, Mumbai. The Chamber of Commerce, Hapu 15 36 26 Coffee Futures E xch ange Ltd., Bangalore. Ahmedabad Commodity Exchange Ltd. The Rajkot Seeds Oil & Bullion Merchant Association Ltd National Board of Trade Ltd., Indor 5 38 12 9 8 17 36 34 5 36 8 5 7 21 26 4 55 9 2001 31 7 5 2 -
Commodity Traded
Pepper Pepper (intl.) Castor seed Castor oil RBD Palmol Mustard seed, oil and cake Cotton Potato Gur Coffee Castor seed Castor seed 1996-97 0.86 (765) 2.53 (279) 0.79 (29) 29.28 (1655) 54.84 (5981) 19.85 (2167) 40.71 (2281) 29.81 (1936) 2.45 (144) 8.51 (548) 41.38 (15604) 0.83 (149)
Volume in lakh tonnes (Value in Rs. Crore)

1997-98 1.56 (2834) 0.25 (30) 1.76 (56) 30.10 (2760) 68.76 (8006) 21.36 (2495) 44.06 (3429) 23.60 (1896) 3.25 (248) 28.60 (2231) 26.60 (7342) 0.81 (152) 1998-99 1.73 (3411) .007 (15) 0.11 (17) 0.02 (9) 0.09 (5) 23.85 (2162) 44.91 (6854) 16.77 (2562) 61.34 (9518) 20.41 (1813) 3.58 (304) 4.51 (383) 25.21 (5022) 2.43 (569) 0.01 (6) 1999-00 1.24 (2862) 0.40 (106) 0.9 (15) 0.04 (14) 0.35 (143) 0.22 (5) 23.79 (2236) 30.68 (5220) 16.35 (2811) 1.093 (261) 47.48 (4510) 21.88 (2263) 4.1 (389) 8.24 (787) 5.58 (1234) 0.003 (0.81) 0.0002 (0.03) 2000-01 1.29 (2580) 0.02 (5.6) 0.10 (14) 0.01 (5) 0.04 (9) 0.108 (14) 0.21 (139) 0.52 (14) 28.80 (2555) 0.50 (289) 24.73 (3469) 18.94 (2761) 32.56 (7874) 0.13 (31) 31.28 (2877) 21.24 (2060) 3.7 (311) 7.78 (668) 7.88 (1703) 0.0008 (0.22) 0.002 (0.21)
1999 India Pepper and Spice 55 Trade Association, Cochin. The Bombay Commodity Exchang Ltd., Mumbai. 8 3
48 4 35 16
51 35 15
Vijai Beopar Chamber Ltd., Muzaffarnagar Bhatinda Om Oil & Oilseeds Exchang Ltd Bhatinda The Meerut Agro Commodities Exchang Co. Ltd., Meerut The Rajdhani Oils and Oilseeds Exchang Ltd., Delhi. The East India Jute & Hessian Exchang Ltd., Calcutta. The Spices & Oilseeds Exchange Ltd., Sangli
40 16
Soy seed, oil & cake Mustard seed & Mustard oil Gur Gur
10
11
11
Gur
17
21
24
Gur
57 1 -
40 1 3
71 1 7
Sackin Hessia Turmeric
Source: Forward Markets Commission, Mumbai.
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CHAPTER 4 PRICE DISCOVERY, RETURN, VOLATILITY AND MARKET CONDITIONS: AN ECONOMETRIC ANALYSIS
4.1. Is Futures Market Efficient? Futures trade assumes significance in a volatile ready market and price risk management because of the price discovery. The price discovery is the process of determining the price of a commodity, based on supply and demand factors. The expectations theory hypothesises that the current futures price is a consensus forecast of th e value of the ready (spot) price in the future. For example, todays 180 day pepper futures rate is a market forecast of the ready rate that will exist in 180 days. The futures market for a commodity is said to be efficient when the n-period futures rate (Ft,n) is equal to the future ready rate (St+n). The efficient market ensures that the average difference between todays futures rate (with n day maturity) and the subsequent ready rate n days later was zero. The difference, if any, represents both th e futures rates forecasting error and the opportunity for gain (or loss) from open positions in the market. The efficiency of the futures market is usually examined by testing the unbiasedness of futures rate as a predictor of the future ready rate. The hypothesis that the premium or discount in the futures market is an unbiased linea predictor of the price change in the corresponding ready market may be tested using the regression equation:
DS i t +1 = + FP i t + u i t +1 ,
t=1,,T, i=1,,N (commodities) in which
(1)
DS i t +1 ( S i t +1 S i t ) and FP i t ( F i t S i t ),
where St and St+1 are the logarithm of the ready rate at time t and t+1 respectively, Ft is the logarithm of the futures rate established at time t for period t+1, and ut+1 is an error term. In this form, the unbiasedness hypothesis implies that and . Such a restriction is consistent with a model of a competitive market with no transaction costs, risk-neutral speculators and market expectations which are rational. For that model, we should have Et DS i t +1 = FP i t , (2) Where Et is the mathematical expectation operator conditional upon some information set. The test relation (1) and the joint null hypothesis of rational expectations and no risk premium implicit in (2) can be related by decomposing the actual change in the spot rate into two orthogonal components:
27
DS i t +1 = Et DS i t +1 + ( DS i t +1 Et DS i t + 1 )
(3)
Substituting (2) into (3) yields (1) under the null hypothesis. Testing the unbiasedness hypothesis involves estimating regression equation (1) and dete rmining whether the coefficient estimates of and are significantly different from zero and one respectively. Alternatively, futures rate is an unbiased predictor of the future ready rate, if the average forecast error ( et+1 in (1)) is not significantl y different from zero. The optimal forecas would be one that minimizes the average of the squared forecast errors i.e., minimum mean square errors (MSE) over the sample period. The forecast error (et+1) represents the speculative profit for traders who buy futures contracts a Ft and sell in the ready marke at St+1. The forecast error is unlikely to be consistently large and positive because large profits would attract speculators buying futures resulting increase in Ft and decrease in et+1, thus removing profits. 4.1.1. Empirical Results The test results based on the estimates of the equation (1) have been presented in table-2. The study has utilized the OLS method to estimate the equation for daily futures prices o six commodities viz., pepper, cotton, castor seed and castor oil, mustard seed and gur traded in pepper exchange in Cochin, cotton exchange in Mumbai, Bombay Commodit Exchange and Kanpur Commodity Exchange respectively. The coefficient estimates of the equation are corrected for ser al correlation by using iterative Cochrane -Orcutt procedure and the autoregressive parameter ( ) estimates are reported. For each commodity item daily prices of multiple contracts have been used for estimation. The price data used for the analysis have been sourced from the respective exchanges directly. To test the unbiasedness and whether futures prices are the optimal forecaster of the future ready prices, the restriction 0 and =1 has been tested by estimating equation (1) by OLS and by using Wald chi-square test of the joint hypothesis that =0 and =1. The joint null hypothesis that =0 and =1 is rejected in all sample cases baring two (Mustard seed, July 2000 and Gur, March 1998 contracts) out of 25 sample futures contracts. The significant Wald chi-square test statistics indicate that futures markets are not efficient in predicting the future ready prices. This result is rather expected given the fact that many exchanges have thin trade volumes and infrequent trading. In spite of a developed ready market in most of these commodities, futures markets do not attract traders. The results also testify the fact that the futures contracts are not perfect hedge against the variations in ready prices. A perfect hedge guarantees that the profit or lo ss on the futures contracts fully offsets the loss or profit on the physical transactions in the ready market. Any disparity between the futures price for a specific maturity contract and the ready prices in physical market on the day of the maturity of futures contract exposes the participants to basis risk. The users of futures markets face this risk because the specific physical commodity they wish to hedge does not have the same price development as tha of the standardized futures contract. There may be many imperfections in the market for
the commodities under study which would make ready prices deviate from the corresponding futures prices. The export oriented commodity like pepper the prices in ready market are to certain extent driven by the unexpected changes in exchange rate which are not factored into the futures prices and by the demand situation in international market. Secondly, in cases where government intervenes to manipulate the market by affecting supply (e.g., cotton) the relation between futures prices and ready market prices may get distorted. Thirdly, in most cases futures exchanges are not located in the area where very developed ready market exists. Though gur futures are traded in Kanpur and Hapur exchanges, this particular co mmodity has ready market spreading across the country. Finally, most of the agricultural products are produced in unorganized sector involving thousands of smallholdings and there are many intermediaries between farmer and wholesaler/exporter. This makes the supply and price development in ready marke unpredictable. 4.2. The Relationship between Price Volatility, Trading Volume, and Market Depth The present study examines the interactions betwee return volatility, trading volume and market depth using the price, volume and open position data from twelve futures markets in six commodities. The commodity items and name of exchanges are lis ed in table-4.1. Theories predict a positive contemporaneous correlation between trading volume and price volatility. Evidence from empirical studies such as those by Jones, Kaul, and Lipson (1994); Bessembinder and Senguin (1993); and Gallant, Rossi, and Tauchen (1992) proved that return volatility and volume are positively related. It is expected that higher the market depth lower would be the price volatility. The present study investigates the relationship of volume and market depth with return and volatility and specifies their relationship in the following estimatable form: FV = + FR + SD + e it 1 it 2 it it FM it = + FD + SD + w 1 it 2 it it
th
(4) (5)
where FVit is the futures trading volume for the i commodity at time t, FR, FM, and FD represent return, depth and volatility of futures, and SD measures volatility of the ready market prices. The return is calculated from the closing price (Pcit) data as log(Pci,t/Pci,t-1). The open interest (position) is taken as a proxy for market depth because it reflects the current willingness of futures traders to risk their capital in the futures position, which indicates the level of market depth. As traders take positions in response to a perceived deviation of price from intrinsic value, volatility of futures and ready price returns are defined as the deviations from their respective mean values. The coefficients 1 and 2 in equation (4) expected to have positive values while 1 and 2 in equation (5) have negative and positive values respectively. The market becomes deepe and busy when return volatility is lower and vice versa. If the volatility of the ready market is high, on the contrary, futures market b ecomes more active and deeper. The study has used month-end total open position, total volume and month -end closing prices
29
of the contract closes to expiration. The study covers a period of 38 months from Januar 1999 to August 2001. 4.2.1. Emprical Results The equations (4) and (5) have been estimated for all sample futures markets using the OLS method and making necessary adjustments for autocorrelation in their residuals. The tables 4.2 and 4.3 report the estimates of equations (4) and (5) respe ctively. The test of relationship between volume, futures price return and ready price volatility does not provide any uniform evidence across the markets. The futures price return found to have statistically significant and expected positive relationship with the volume of futures trade only in gur exchange, Bhatinda and pepper exchange, Cochin. Similarly, spot price volatility has significant role in explaining volume of trade in gur in Meerut exchange, castorseed in the Bombay Commodity Exchange and pepper in Cochin pepper exchange. The price volatility in the ready market is expected to influence the volume in futures market if both the markets are better integrated. Bombay and Cochin being the major exports centres price variations in ready market have an immediate impact in the futures market as it gives forward cover against ready price risk. The statistically significan 2 coefficient signifies that the futures markets are more utilized for hedging price risk than for making speculative transactions. The overall results in table-4.2 indicate that price return volatility in futures and ready markets do not determine the v olume of trade in futures markets. Similarly, the estimates of equation (5) reported in table -4.3 show that the net open positions in futures markets are not determined by ready and futures price return volatilities in any of the markets except for gur in Bhatinda exchange and Castorseed in Bombay Commodity Exchange. 4.3. Correlation Analysis Studies have shown that return volatility is positively related to the level of volume o trade, and inversely to the market depth. In a deep market the pressu re on prices woul be lower making the price return volatility lower. The correlation of futures and ready price returns with volume and open positions and between the two return series are presented in table-4.5. In most cases the correlation coefficients are very low except the one between futures and ready returns. The gur market shows very insignificant correlation between the futures and ready returns. This is expected when country-wide demand and supply conditions drive futures prices while the local ready markets are primarily influenced by the supply and demand factors in a particular region . The hig correlations in other markets are the indications of better integration between the ready and futures markets. In an ideal situation, the developm ents in the ready market have immediate impact on the market conditions in futures market and vice versa. The futures markets in export commodities like castorseed, cotton and pepper have been driven by ready market condition in those commodities and also the exchanges deal in these commodities are situated in developed commercial centres where domestic and international trades take place.
30
The coefficient of correlation between volume of transactions and futures price return shows very low values in mo t of the markets. This is expected in a market where trad volume is low with less frequent quotations available for futures transactions. Similarly, the coefficient of correlation between net open positions (market depth) and price return shows low values with negative sign in most markets . If the return is high, the holders square off their transactions and they hold on to the contract when return is low. 4.4. The Test of Equality of Variances The price and return behaviour in futures and ready ma rkets may differ. However, both the markets would be better integrated if the market is matured. Higher price volatility in the ready marke would make the futures market more active as it provides hedge agains the risk and provide better opportunity f r speculators for booking profit. The uniform and interdependent behaviour of the two markets has been verified by testing the equality of variances of futures and ready market price changes using Bartletts statistic. According to the tes here is evidence to reject the null hypothesis of equal variances if 2 distribution with ( -1) degrees of
freedom. The results of Bartletts homogeneity of variance test are reported in table-4.4. The test statistic is significant only in case of gur in Bhatinda exchange and potato in Hapur exchange signifying that these two markets are better aligned with their respective ready markets. An essential condition for a vibrant futures marke in any commodity is the presence of an active ready market in t e particular commodity in the region where the exchange is located. This proximity and interdependence make risk management more efficient and accessible to various participants. A highly volatile ready market boosts trading activity in utures and a resultant increase in the volume of activity which would eventually reduce futures price volatility. To conclude, a quantitative analysis of the relationship between price return, volume, market depth and volatility on a sample of twelve mark ets in six commodity items showed that the market volume and depth are not significantly influenced by the return and volatility of futures as well as ready markets. The results indicated that the futures and ready markets are not integrated. The price v olatility in the ready markets did not have any impacts on the market conditions in futures markets. The exchange specific problems like low volume and market depth, lack of participation of trading members and irregular trading activities along with state intervention in many commodity markets are major ills retarding the growth of futures market. In the presence of these ills no quantitative analysis of market conditions and interrelations would provide meaningful results.
31
Table 4.1: Testing the Unbiasedness Hypothesis
Commodity
Contract (NOBS) June 1999 (117) Jan. 2000 (75) Dec. 1999 (51) Nov. 2000 (143) Dec. 2000 (142) June 2000 (126) Feb. 2000 (80) April 2000 (119) Sep. 2000 (114) Sep. 1999 (73) Sep. 2000 (78) June 2000 (60) Dec. 2000 (87) Feb. 2001 (64) Apr. 2001 (34)

0.04 (2.72)* -1.00 (-9.4)* -0.07 (-1.15) -0.59 (10.92* -0.23 (-1.22) -0.01 (-0.70) -0.17 (-16.37)* 0.08 (2.88)* 0.01 (1.05) 0.01 (2.47)* -0.12 (-2.73) -0.04 (-0.96) -0.04 (-1.14) -0.02 (-0.64) -0.02 (-1.14)

-0.05 (-0.46) 0.43 (2.56)* 0.33 (1.88)** 0.06 (0.51) 0.02 (0.17) -0.05 (-0.52) 0.34 (2.63)* 0.94 (29.29)* 0.55 (10.34)* 0.69 (10.03)* 0.13 (1.61) 0.64 (6.33)* 0.12 (1.76)*** 0.69 (5.98)* 0.10 (0.92)
Wald
D-W
Adj.
R2
110.19 (0.00) 172.23 (0.00) 16.7 (0.00) 189.93 (0.00) 76.93 (0.00) 137.05 (0.00) 498.21 (0.00) 11.89 (0.003) 75.56 (0.00) 22.86 (0.00) 118.26 (0.00) 14.27 (0.00) 169.37 (0.00) 7.64 (0.02) 73.04 (0.00) 1.99 0.93
1
1.23 (13.75) 1.51 (13.01) 1.45 (11.71) 1.02 (68.97) 1.29 (16.21) 1.33 (16.10) 1.38 (12.11) 1.47 (18.36) 1.23 (13.70) 1.12 (9.83) 1.14 (10.28) 0.99 (45.12) 1.39 (14.35) 1.16 (9.47) 1.29 (8.04)
2
-0.27 (-2.98) -0.68 (-3.48) -0.47 (-3.77) -
3
-
Pepper
1.91
0.98
0.17 (1.42) -
1.85
0.96
1.47
0.99
1.51
0.99
-0.30 (-3.76) -0.38 (-4.59) -0.47 (-2.52) -0.49 (-6.14) -0.27 (-3.04) -0.23 (-1.97) -0.17 (-1.48) -
2.00
0.94
1.95
0.96
0.10 (1.84) -
Cotto
1.72
0.97
1.72
0.97
1.92
0.96
Castor Seed
1.40
0.96
1.68
0.88
1.41
0.99
-0.42 (-4.26) -0.19 (-1.54) -0.35 (-2.17)
1.98
0.97
1.96
0.91
32
Item
Contract (NOBS) Apr. 2001 (70) Apr 2000 (68) Oct.2000 (52) Oct. 2000 (63) July 2000 (43) Dec. 1998 (136) Mar. 1999 (76) Dec. 1997 (132) Mar. 1998 (73) July 1997 (63)

-0.03 (-1.94)** 0.13 (8.78)* -0.06 (-1.64)*** -0.11 (-9.19)* -0.01 (-0.14) -0.03 (-3.32)* 0.03 (5.54)* 0.45 (16.26)* -0.03 (-1.97)** 0.19 (39.18)*

0.61 (9.73)* 0.76 (13.25)* 0.35 (3.15)* 0.62 (7.68)* 0.80 (7.69)* 0.93 (46.86)* 0.92 (26.06)* 0.92 (38.77)* 0.98 (38.87)* 0.99 (37.03)*
Wald
D-W
Adj.
R2
45.11 (0.00) 86.06 (0.00) 37.46 (0.00) 471.44 (0.00) 3.76 (0.15) 13.39 (0.00) 31.86 (0.00) 349.98 (0.00) 4.31 (0.12) 1784.4 (0.00) 2.20 0.95
1
1.30 (11.54) 1.03 (35.73) 1.38 (10.89) 0.73 (5.30) 1.31 (9.22) 1.06 (12.62) 0.86 (15.06) 1.02 (54.39) 0.94 (23.17) 1.41 (13.22)
2
-0.33 (-2.92) -
3
-
Castor Oil
1.71
0.99
1.45
0.98
-0.40 (-3.15) 0.36 (1.86) -0.35 (-2.48) -0.15 (-1.80) -
Mustard Seed
1.48
0.92
-0.09 (-1.59) -
1.89
0.96
Gur
1.93
0.99
1.83
0.98
2.37
0.99
1.72
0.99
1.73
0.99
-0.52 (-4.88)
The contract indicates the month and year in which the particular contract matures. The values in parenthesis are t-statistics and one, two and three asterisks indicate level of confidence at one, five and ten percent respectively. Wald is the Wald Chi-square test statistic with the corresponding p-values in parenthesis. D-W is the Durbin-Watson statistic. NOBS stands for number of data points under each contract. The notations 1, 2, and 3 are first, second and third order autoregression parameter estimates respectively with their t-statistic in parenthesis.
33
Table-4.2: Relationship between Volume, Return and Volatility
Commodity & Name of the Commodity Exchange Gur; The Chamber Commerce, Hapur
1
0.003 (0.018) 0.42 (1.09) 0.691 (2.48)* -0.176 (-0.68) 3.15 (1.28) 0.175 (0.13) -0.767 (-0.67)
2
-0.115 (-0.453) -0.09 (-0.24) -0.762 (-1.54) -0.562 (-2.1)** -4.25 (-1.8)*** 0.32 (0.22) 0.401 (0.33)
D-W
Adj. R2 0.24
1
0.53 (3.51) 0.52 (3.37) 0.20 (1.15) 0.43 (2.53) 0.38 (2.26) 0.36 (2.18) 0.39 (2.39)
2
-
of 5.37 (85.44)*
2.05
Gur; Vijay Beopar Chamber, 5.82 Muzaffarnagar (50.16)* Gur; Bhatinda Om and Oil Exchange. 5.20 (118.9)*
1.74
0.22
1.84
0.23
Gur; The Meerut Agro 3.49 Commodities Exchange. (80.07)* Castorseed; The Bombay -0.42 Commodity Exchange. (-2.94)* Castorseed; Ahmedabad Commodity Exchange. 5.46 (46.78)*
1.92
0.17
-0.30 (-1.75) -
1.81
0.23
2.10
0.11
Castorseed; The Rajkot Seeds 4.96 Oil and Bullion Merchants (60.89)* Association. Potato; The Chamber Commerce, Hapur of -0.28 (-0.35)
2.00
0.12
1.20 (1.06) -0.068 (-0.05) 3.05 (1.8)*** 0.32 (0.27) -1.55 (-1.12)
-0.74 (-1.18) 1.35 (0.82) -2.78 (-1.7)*** -
2.11
0.60
1.09 (6.45) 0.90 (11.27) -
-0.44 (-2.57) -
Cotton;The East India 1.66 CottonAssociation, Mumbai (2.34)** Pepper; India Pepper & Spice 2.40 Trade Association, Cochin. (38.02)* Coffee Plan ationn A; Coffee -0.12 Futures Exchange, Bangalore. (-0.23) Coffee Rob. Cherry AB; Coffee -0.58 Futures Exchange, Bangalore. (-1.89)
1.96
0.75
2.07
0.04
2.15
0.54
0.86 (9.46) 0.67 (5.03)
2.05
0.41
The values in parenthesis indicate t-statistics and o ne, two and three asterisks indicate level of confiden ce at one, five and ten percent respectively. D-W is the Durbin-Watson statistic. The notations 1, and 2 are first and second order autoregression parameter estimates respectively with thei tstatistic in parenthesis.
34
Table-4.3: Market Depth and Return Volatilities
Commodity & Name of the Exchange Gur; The Chamber of Commerce Hapur Gur; Vijay Beopar Chamber, Muzaffarnagar Gur; Bhatinda Exchange. Om and

-0.295 (-5.19)* 0.001 (0.009) Oil -1.01 (-9.04)* Agro -1.89 (-9.52)*
1
0.526 (1.01) -0.184 (-0.26) -1.66 (-1.8)*** 0.95 (0.74) 6.02 (1.21) 0.48 (0.35)
2
0.059 (0.094) -0.766 (-1.08) 4.54 (3.02)* -1.12 (-0.83) -9.72 (-2.06)* -1.39 (-0.93) 2.03 (0.88)
D-W
Adj. R2 0.04
1
-0.313 (-1.84) -
1.89
2.19
0.05
1.95
0.24
Gur; The Meerut Commodities Exchange. Castorseed; The Commodity Exchange. Castorseed; Ah Commodity Exchange.
1.43
0.07
0.14 (1.79) -0.19 (-1.04) 0.45 (2.80) -0.18 (-1.02)
Bombay -3.27 (-22.6)* medabad 2.01 (14.2)*
1.91
0.12
2.02
0.15
Castorseed; The Rajkot Seeds Oil 0.566 -3.16 * and Bullion Merchants (10.64) (-1.45) Association. Potato; The Chamber Commerce, Hapur of -1.54 (-4.32)* -0.559 (-0.43)
1.86
0.06
0.474 (0.67) -0.328 (-0.123) 0.628 (0.790) -
2.09
0.08
0.35 (2.00) 0.83 (8.21) 0.746 (6.13) 0.79 (7.21) 0.72 (5.81)
Cotton; The East India Cotton Association, Mumbai
-0.005 -0.002 (-0.007) (0.001) -0.609 (-0.706) 0.27 (0.36) 0.514 (0.679)
2.04
0.60
Pepper; India Pepper and Spice -0.17 Trade Association, Cochin. (-1.36) Coffee Plan ation A; Coffee -0.69 Futures Exchange, Bangalore. (-3.12)* Coffee Rob. Cherry AB; Coffee -1.11 Futures Exchange, Bangalore. (-5.56)*
2.14
0.50
1.77
0.63
1.59
0.51
The values in parenthesis indicate t-statistics and one, two and three asterisks indicate level of confiden ce at one, five and ten percent respectively. D-W is the Durbin-Watson statistic . The notaion 1 is the first order autoregression parameter estimate with its t-statistic in parenthesis.
35
Table-4.4: Bartletts Homogeneity of Variance Test
Commodity & Name of the Exchange
Variance of Futures Ready Return Return 0.019 0.018 0.013 0.017
Bartletts Statistic
Gur; The Chamber of Commerce, Hapur Gur; Vijay Beopar Chamber, Muzaffarnagar Gur; Bhatinda Om and Oil Exchange. Gur; The Meerut Agro Commodities Exchange. Castorseed; The Bombay C mmodity Exchange. Castorseed; Ahmedabad Commodity Exchange.
1.391 0.014
0.016 0.018 0.005 0.006
0.006 0.016 0.006 0.005 0.005
7.37 0.103 0.059 0.041 0.108
Castorseed; The Rajkot Seeds Oil and Bullion 0.006 Merchants Association. Potato; The Chamber of Commerce, Hapur Cotton; The East India Cotton Association, Mumbai 0.035 0.004
0.121 0.003 0.014
9.45 1.952 0.048
Pepper; India Pepper and Spice Trade Association, 0.013 Cochin.
36
Table-4.5: Correlation Matrix
Commodity & Name of the Exchange
Correlation Coefficient FV FM SR FR SR FR SR FR SR FR SR FR SR FR SR -0.21 -0.13 0.14 0.04 0.44 -0.21 -0.04 -0.26 -0.21 -0.37 0.25 0.21 0.10 0.04 -0.03 0.05 0.12 0.08 0.10 0.02 -0.009 0.11 -0.02 -0.08 -0.21 -0.25 0.45 0.15 -0.18 -0.27 -0.38 -0.05 -0.13 -0.25 -0.14 -0.09 0.15 0.12 0.07 -0.20 -0.18 -0.06 0.07 0.16 0.10 0.009 0.88 0.79 0.89 0.33 0.66 0.97 -
Gur; The Chamber of Commerce, Hapur
Gur; Vijay Beopar Chamber, Muzaffarnagar
Gur; Bhatinda Om and Oil Exchange.
Gur; The Meerut Agro Commodities Exchange.
Castorseed; The Bombay Commodity Exchange.
Castorseed; Ahmedabad Commodity Exchange.
Castorseed; The Rajko Merchants Association.
Seeds Oil and Bullion FR SR FR SR FR SR FR SR FR
Potato; The Chamber of Commerce, Hapur
Cotton; The East India Cotton Association, Mumbai
Pepper; India Pepper and Spice Trade Association, Cochin. Coffee Plantation A; Coffee Futures Exchange, Bangalore.
FR Coffee Robusta Cherry AB; Coffee Futures -0.19 -0.04 Exchange, Bangalore. SR represents ready price return. All other variables are as defined in equations (4) and (5).
37
CHAPTER 5 CONSTRAINTS AND POLICY OPTIONS Commodity exchanges in India are in their nascent stage of development. There are numerous bottlenecks in the growth of this particular segment in India. These institutional and policy level issues have to be addressed by the government and the FMC for taking appropriate solutions towards rejuvenation of the paralyzed agricultural futures markets. Some of the major problems that handicap the commodity exchanges are discussed below. a. Constitution of exchanges: All commodity exchanges in India are mutual organizations. They are promoted by traders who carryout trading as well as manage the exchanges. The exchange staff including the chief executive officer/secretary is the staff of promoters. This structure poses a serious threat to the integrity of exchanges. The structure needs to be altered so as to ensure an arms length relationship between those who promote and anage the exchange on the one hand and those who have trading interest in exchanges on the other. Many leading exchanges in the world like Chicago Mercantile Exchange, International Petroleum Exchange, and New York Mercantile Exchange etc. are demutualized organizations where arms-length relationship between management and trading is maintained. The pepper exchange in Cochin is seriously considering change in its set up from a non -profit making organization to a profit making equity based organization. b. Trading parameters: The terms and conditions of contracts play a crucial role in the growth and development of trading in any exchange. They should be market friendly in the sense that the terms are affordable to small and large traders alike and shou d be attracting all prospective beneficiaries of futures trading including growers, processors, merchandisers, consumers, etc. However, the contract specifications (as given in table 2.2) in many exchanges are prohibitive to many segments. For example, the lot size of cotton contract in cotton exchange, Bombay, is 55 bales which amounts to 10 tonnes. Similarly, the costlier commodity like pepper for which the lot size fixed by the peppe exchange, Cochin is 2.5 tonnes with 15 tonnes as deliverable quanti y. Many such finer t aspects of contracts can be pointed out which apparently seem to go against the wider interests of prospective beneficiaries of futures trading. One needs to really go into the micro details of these specifications before making any judgements as to how market friendly these contracts are. c. Infrastructur : Lack of efficient and modern infrastructural facilities are a majo bottleneck in the growth of futures markets in India. Though some of the exchanges notably Bombay Commodity Exchange and Cotton Exchange, Mumbai own huge office premises, they lack necessary institutional infrastructure including warehousing facilities independent clearing house in addition to modern trading ring. The Kanpur Commodity Exchange for example, lacks basic facilities to disseminate the trading information. The exchange has only a couple of small office rooms and a poorly maintained trading ring which seems to have never been utilized.
38
d. The trading system: Most of the exchanges till date have open outcry system. Of the sample of six exchanges visited, only Coffee Futures Exchange, Bangalore has introduced electronic trading system. The Forward Markets Commission has been emphasizing the need for automation and on -line trading system for ensuring better transparency and fairness in trading practices. It has been observed that less than 10 pe cent of members are only actively trading in these exchanges. Volume of trade has been consistently declining. In some exchanges e.g., Kanpur Commodity Ex change the market is non-existent. An active and vibrant market is necessary for introducing electronic trading system. Steps have to be initiated for creating market and making the exchange financially sound for investing in automation and on-line trading. The Coffee Futures Exchange, Bangalore where automation was introduced which did not encourage the traders consequent to which volume dropped leaving a large financial burden. Moreover, majority of trading members in some of the exchanges are not edu cate enough to handle English and to operate computer. For example, most of the members of the commodity exchange in Hapur said to have no working knowledge in Engl ish without which computerised trading is almost impractical. e. Broking community: Although a large number of members exist in the records of exchanges, most of them shy away from trading due to the fact that the business is not very profitable. It is essential to attract large scale broking firms who have diversified into stock broking and other related businesses. Regulation including setting standards for brokers, imposing capital adequacy norms, qualification criterion, etc would become more meaningful when more and more active traders are attracted to the business. f. Existence of uno fficial market: The grey/black market which existed outside the exchange premises during the ban on futures trading for over 30 years still continues to exist even inside the exchanges. It has been widely accepted and admitted by some of the CEOs/Secretaries of exchanges that at least 25 30 per cent trade in the exchanges go unreported. The unofficial market operating outside the official exchange is much larger. These unofficial traders find the margin, stamp duty and income tax requirements least encouraging to come to the official contract channels. g. Multiplicity of exchanges: Currently twenty exchanges are operational of which three are specifically for conducting NTSD contracts and the remaining are in the trade of nearly 30 commodity items. Recently, five new exchanges have been approved and three of them are exclusively for futures contract in sugar. Many of these exchanges are set up as specialized ones for trading in one or a few commodities. The international experience shows that exchanges are only to provide a platform for trade in many commodities and different forms of contracts. The Chicago Mercantile Exchange started as an agricultural exchange, and now largely relies on trade in financial futures; while the New York Mercantile Exchange, now the worlds largest energy exchange, once traded butter and potatoes. If an exchange provides a well-organised trading system for certain commodities, with well-developed procedures, a good intermediary structure, and a sound clearing house, it can build on these strengths to introduce new products.
39
h. Controlled market: Price variability is an essential pre-condition for futures markets. Any distortion in the market mechanism where free play of supply and demand forces for commodities determines prices will dilute the variability of prices and potential risk. It is imperative that for a vibrant futures market commodity pricing must be left to market forces, without monopolistic or undue government control. However, in India many of the c mmodities in which futures trading is allowed have been still protected under ECA, 1955. There are also commodity based specialized government agencies like Cotton Corporation of India, NAFED, Jute Corporation of India, etc. which seek to control supplies of some farm products. i. Regulation and self -regulation: Government has two important role to play: an oversight role by which the government disciplining those who try to manipulate the markets for their own benefit, and ensuring the sanctity of contra cts; and secondly, an enabling role by which the government providing the necessary legal and regulatory framework for the smooth functioning of the system. The regulatory intervention shoul be most active at the time of the establishment of the exchange and of contracts. If the contracts are well formulated, and delivery modalities provide effective line of defence against attempts at manipulation, government has to only act as a watchdog intervening only when necessary. The goal of regulatory agency i s not only regulate but also to inculcate the culture of sel -regulation among the participants. This in turn, over a period of time, will give way for more self-regulation supported by the advisory role of state regulation. j. Wider use of Commodity der ivatives: With the increasing technological sophistication of trading methods, better transparency and guarantee of trade in futures, more institutional players like mutual funds, foreign institutional investors should be allowed to trade in recognized commodity exchanges. The exchanges under the guidance of the Forward Markets Commission must undertake publicity and mass awareness programmes for the promotion of this segment. For this purpose it would be beneficial for them to have a policy level alliance with the counterparts in stock markets. k. Modification of income tax provisions and rationalization of stamp duty : In the past, speculative and non-speculative businesses were treated equally for taxation so far as right to set off or carry forward of loss was concerned. As a result, it was possible t set off speculative losses against speculative profits. Current tax rule however does not allow for setting off or carrying forward of speculative losses against regular business income. It does not treat losses on futures transaction as a normal business expense. The futures trading industry has been demanding amendments in the tax law for the better development of futures trading. Similarly, the stamp duty provisions on futures trading make the transaction cost higher and moreover the rates vary from one state to the other. While states like Gujarat, Madhya Pradesh, Kerala, etc do not impose stamp duty on futures trading, some other states like Maharashtra imposes stamp duty on futures trading of certain commodity items.
40
CONCLUSIONS Commodity derivatives have a crucial role to play in the price risk management process especially in any agriculture dominated economy. Derivatives like forwards, futures, options, swaps etc are extensively used in many developed as well as developing countries in the world. However, they have been utilized in a very limited scale in India The production, supply and distribution of many agricultural commodities are controlled by the government and only forwards and futures trading are permitted in certain commodity items. The present study is an investigation into the derivative markets in agricultural commodities in India. The study has surveyed the recognized exchanges and their organizational, trading and the regulatory set up for futures trading in commodities. The study has outlined the status of futures markets in agricultural commodities in the Indian context In the light of spot visit to seven exchanges the study identifies the problems and prospects of the futures market in agricultural commodities in India. A statistical analysis has also been carried out to evaluate the efficiency of a sample set of markets in price discovery and to understand the interrelationship between prices, volume of transaction, open positions and volatility of the markets. The results of the study revea that many of the commodity futures exchanges fail to provide an efficient hedge agains the risk emerging from volatile prices of many farm products in which they carry out futures trading. The results obtained from a statistical analysis of the data on price discovery in a sample of six commodities traded in four exchanges showed that the futures market in those commodities are not efficient in the sense that the futures price s are not an unbiased predictor of the future ready rates. The difference between the futures prices and the future ready prices is an indication of inefficiency arising from the underdeveloped nature of the market. Many bottlenecks faced by this segmen are common across exchanges. A quantitative analysis of the relationship between price return, volume, market depth and volatility on a sample of twelve markets in six commodity items shows that the market volume and depth are not significantly influen ced by the return and volatility of futures as well as ready markets. The results indicate that the futures and ready markets are not integrated. The price volatility in the ready markets does not have any impacts on the market conditions in futures mark ets. The exchange specific problems like low volume and market depth, lack of participation of trading members and irregular trading activities along with state intervention in many commodity markets are major ills retarding the growth of futures market. In the presence of these ills no quantitative analysis of market conditions and interrelations would provide meaningful results. A review of the nature of institutional and policy level constraints facing this segment calls for more focused and pragmatic approach from government, the regulator and the exchanges for making the agricultural futures markets a vibrant segment for risk management which can play an important role especially in an agriculture dominated economy of India.
41
BIBLIOGRAPHY Bessembinder, H., & Seguin, P.J., Price volatility, trading volume, and market depth: Evidence from futures markets, Journal of Quantitative and Financial Analysis, Vol. 28, 1993, pp.21-39. Commodity Futures Trading Commission ; Economic purposes of futures tradin g, Washington, 1997. Forward Markets Commission, Ministry of Food and Consumer Affairs, Government of India; Forward Contracts (Regulation) Act, 1952. Forward Markets Commission, Ministry of Food and Consumer Affairs, Government of India; Forward trading and Forward Markets Commission, 2000. Gallant, A.R., Rossi, P.E., & Tauchen, G., Stock prices and volume, Review o Financial Studies, Vol. 5, 1992, pp.199-242. Jones, C.M., Kaul, G., & Lipson, M.L., Transactions, volume and volatility, Review o Financial Studies, Vol. 7, 1994, pp. 631-651. Ministry of Food and Consumer Affairs, Government of India; Futures trading, commodity exchanges and Forward Markets Commission, New Delhi, 1999. Sahadevan, K.G., Risk management in agricultural commodity markets: A study of some selected commodity futures, Working Paper Series: 2002-07, Indian Institute of Management Lucknow, April 2002. Tomek, W G and Peterson, H H; Risk management in agricultural markets: A review, The Journal of Futures Markets, Vol. 21 (10), 2001, pp.953-985. United Nations Conference on Trade and Development, Feasibility study on a worldwide pepper futures contract, (UNCTAD/COM/64), October 1995. United Nations Conference on Trade and Development, Emerging commodity exchanges: From potential to success, (UNCTAD/ITCD/COM/4), February 1997. United Nations Conference on Trade and Development, A survey of commodity risk management instruments, (UNCTAD/COM/15/Rev.2), April 1998. Youssef, Frida; Integrated report on commodity exchanges and Forward Markets Commission, Report of the World Bank Project for the improvement of the commodities futures markets in India, 2000.

APPENDIX I Commodities to which Section 15 of FCRA 1952 has been applied thereby rendering illegal all orward contracts except those entered into between members of a recognized association or through or with such a member. Sl. No 1. 3. 5. 7. 9. 11. 13 15. 17. 19. 21. 23. 25. 27. Commodity Region Sl. No 2. 4. 6. 8. 10. 12. 14. 16. 18. 20. 22. 24. 26. 28. Commodity Region
Groundnut Groundnut oilcake Cottonseed oil Sesamum (till) Sesamum oilcake Copra/Coconut oil Safflower Safflower oilcake Rapeseed/Mustard seed oil Rice bran Rice bran oilcake Sunflower oil RBD Palmolein Indian cotton (ful & half pressed or loose
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country
Groundnut oil Cottonseed Cottonseed oilcake Sesamum oil Copra/Coconut Copra/Coconut oilcake Safflower oil Rapeseed/Mustard seed Rapeseed/Mustard seed oilcake Rice bran oil Sunflower seed Sunflower oilcake Gur Raw jute
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country The states of Mizoram, WB, Bihar, Assam, Orissa,Tripura, Meghalaya, & Arunachal Pradesh. Entire Country Entire Country Entire Country
29. 31. 33.
Kapas Jute goods Pepper
35.
Castor oil
Entire Country Entire Country Kerala and within the limit of Greater Bombay Maharashtra
30. Staple fibre yarn 32. Turmeric 34. Castorseed
36. Potato
Entire Country
43
APPENDIX II Commodities in which forward contracts have been prohibited under section 17 of the FCRA 1952 Sl. No 1. 3. 5. 7. 9. 11. 13 15. 17. 19. 21. 23. 25. 27. 29. 31. 33. 35. 37. 39. 41. 43. 45. 47. 49. 51. 53. 55. 57. 59. 61. Commodity Region Sl. No 2. 4. 6. 8. 10. 12. 14. 16. 18. 20. 22. 24. 26. 28. 30. 32. 34. 36. 38. 40. 42. 44. 46. 48. 50. 52. 54. 56. Commodity Region
Wheat Jowar Maize Small millets Urad (Mash) Moth Kulthi Lakh(Khesari) Guar Arhar Chuni Tur dal Mung dal Sugar Taramiraseed Mowraseed Linseed Castor oil Neemseed Karnaja Salseed Khakan seed Kokum seed Nahor seed Undi seed Watermelon seed Tobacco seed Niger seed Taramiraseed oilcake Celeryseed Cotton Yarn Art silk yarn
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Excep Maharashra Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country
Gram Bajra Ragi Tur (Arhar) Murg Masur Peas Barley Rice or Paddy Mung Chuny Urad da Gram dal Khandasari sugar Taramiraseed oil Mowraseed oi Linseed oil Vanaspati Neemseed oi Karnaja oil Sal oil Khakan oil Kokum oil Nahor oil Undi oil Watermelon oil Tobacco seed oil Niger oil Linseed oilcake
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Except the states of Mizoram, WB, Bihar, Assam, Orissa,Tripura, Meghalaya, &
58. Cotton pods 60. Cotton cloth 62. Raw Jute
44
Arunachal Pradesh. 63. 65. Methi Aniseed Entire Country Entire Country 64. Coriander seed 66. Pepper Except Kerala and Greater Bombay Except Kerala Except Kerala Except Kerala Entire Country Entire Country Entire Country Entire Country Entire Country
67. 69. 71. 73. 75. 77. 79. 81.
Betelnuts Except Kerala Chillies Except Kerala Cloves Except Kerala Nutmegs Except Kerala Silver Entire Country Copper, zinc, lead Entire Country or Tin Seedlac Entire Country Camphor Entire Country
68. 70. 72. 74. 76. 78.
Cardamom Cinnamon Ginger Gold Silver coins Shellac
80. Chara or berseem 82. Gram Husk
45
APPENDIX III Commodities in which non -transferable specific delivery contracts are prohibited under section 18(3) of FCRA 1952. Sl. No 1. 3. 5. 7. 9. 11. 13 15. 17. 19. 21. 23. 25. 27. 29. 31. 33. 35. 37. 39. 41. 43. 45. 47. 49. 51. 53. 55. 57. 59. 61. 63. 65. 67. 69. Commodity Region Sl. No 2. 4. 6. 8. 10. 12. 14. 16. 18. 20. 22. 24. 26. 28. 30. 32. 34. 36. 38. 40. 42. 44. 46. 48. 50. 52. 54. 56. 58. 60. 62. 64. 66. Commodity Region
Wheat Jowar Maize Small millets Urad (Mash) Moth Kulthi Lakh (Khesari Guar Arhar Chuni Tur dal (Arhar dal) Mung dal Mustardseed Taramiraseed Mustardseed oil Taramiraseed oil Linseed oil Vanspati and vegitable oil Neemseed oi Karanja Kusumseed Salseed Khakan seed Kokum seed Nahor seed Undi seed Rice bran Watermelon seed Tobacco seed Sunflower seed Niger seed Castor oil Mustardseed oilcake Taramiraseed oilcake Linseed oilcake
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country
Gram Bajra Ragi Tur (Arhar) Mung Masur Peas Barley Rice or paddy Mung Chuni Urad dal (Mash dal) Gram dal Rapeseed or Toria Mowraseed Rapeseed oil Linseed Cottonseed oil Mowraseed oi Neem oil Karanja oil Kusum oil Sal oil Khakan oil Kokum oil Nahor oil Undi oil Rice bran oil Watermelonseed oil Tobacco seed oil Sunflower oil Niger oil Sesamum oilcake Rapeseed oilcake
Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country Entire Country
68. Cottonseed oilcake 70. Celeryseed
46
71. 73. 75. 77. 79.
Art Silk yarn imported in to Indi Coriander seed Gold Silver coins Gram husk
Entire Country Entire Country Entire Country Entire Country Entire Country
72. Methi 74. Aniseed 76. Silver 78. Chara or berseem
47
APPENDIX IV Commodities in which Sections 15 and 18(3) of the FCRA 1952 are applied to non transferable specific delivery contracts Sl. No 1. 3. 5. 7. 9. Commodity Region Sl. No 2. 4. 6. 8. 10. Commodity Region
Groundnut Khardiseed Sesamum (till) Copra Cottonseed
11.
Kapas
13 15.
Jute goods Castorseed
Within limits Punjab, Haryana, Rajastan, UP & the UTs of Delhi and Chandigarh In the city of 14. Gur Calcutta Entire Country
Groundnut oil Khardiseed oil Sesamum oil Cocunut oil Indian cotton (ful & half pressed or loose) the 12. Raw jute of
The states of Mizoram, WB, Bihar, Assam, Orissa,Tripura, Meghalaya, & Arunachal Pradesh. Entire Country
48

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Derivatives and Price Risk Management: A Study of Agricultural Commodity Futures in India

A Seed Money Project Report Prepared by

INDIAN INSTITUTE OF MANAGEMENT LUCKNOW MAY 2002

Mechanics of Futures Trading

Commodity Futures Exchanges The profile and Regulatory Environment

Price Discovery, Return, Volatility and Market Conditions: An Econometric Analysis

Chapter 5: Conclusions Bibliography Appendi

Constraints and Policy Options

I. II. III. IV.

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

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Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

LIST OF TABLES AND FIGURES

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Figure-1.1: Typology of risk management instruments

Risk Management Marketing Organized exchanges Futures Options OTC Finance

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

CHAPTER 2 MECHANICS OF FUTURES TRADING

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

(c) (d) (e)

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Check credit risk

Check credit risk

Agricultural Commodity Futures in India

Confirmation Clearing Member

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Table-2.1: Membership requirements for Trading Members

Agricultural Commodity Futures in India

K.G. Sahadevan, IIM Lucknow

Table-2.2: Important Specifications of Futures Contracts

Cotton; East India Cotton Association, Mumbai

55 bales (93.5 quintals) LS: 55 bales.

Daily at settlement price

Dec.(7), Feb.(7), Apr.(6), June (5), Sep. (6)

Coffee; Coffee Futures Exchange, Bangalore

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