5760635 commodities
TRANSCRIPT
-
8/9/2019 5760635 Commodities
1/30
-
8/9/2019 5760635 Commodities
2/30
Commodities Exchange
A commodities exchange is an exchange where variouscommodities and derivatives products are traded.
Most commodity markets across the world trade in
agricultural products and other raw materials (like wheat,barley, sugar, maize, cotton, cocoa, coffee, milk products,pork bellies, oil, metals, etc.) and contracts based on them.
These contracts can include spot prices, forwards, futures
and options on futures. Other sophisticated products mayinclude interest rates, environmental instruments, swaps, orocean freight contracts.
-
8/9/2019 5760635 Commodities
3/30
Commodities exchanges usually trade futures contracts oncommodities, such as trading contracts to receive something, saycorn, in a certain month.
A farmer raising corn can sell a future contract on his corn,which will not be harvested for several months, and guaranteethe price he will be paid when he delivers; a breakfast cereal
producer buys the contract now and guarantees the price will notgo up when it is delivered. This protects the farmer from pricedrops and the buyer from price rises.
Speculators and investors also buy and sell the futures contractsto make a profit and provide liquidity to the system.
Continued
-
8/9/2019 5760635 Commodities
4/30
Commodity Ecosystem
-
8/9/2019 5760635 Commodities
5/30
Commodity Market Structure
Producers
(Farmers/
Co-operatives/
Institutional)
Commodities
Ecosystem
Consumers
(Retail/
Institutional)
QualityCertification
Agencies
Clearing Bank
Warehouses
Transporters/
Support
Agencies
Traders(Speculators)
Arbitrageurs/
Client)
Hedger
(Exporters/
Millers/
Industry)
Gl oba l C ommo di ti esM a r k e t
Spo t Mark et
-
8/9/2019 5760635 Commodities
6/30
COMMODITY MARKETS - OVERVIEW
Indian commodity market set for paradigmshift
Four licenses recently issued by Govt. of India to set-upNational Online Multi Commodity Exchanges to ensure atransparent price discovery and risk management mechanism
List of commodities for futures trade increased from 11 in1990 to over 100 in 2003
Reforms with regard to sale, storage and movement ofcommodities initiated
Shift from administered pricing to free market pricing WTOregime
Overseas hedging has been allowed in metals
Petro-products marketing companies have been allowed tohedge prices
Institutionalization of agriculture
-
8/9/2019 5760635 Commodities
7/30
-
8/9/2019 5760635 Commodities
8/30
Indias Place in World Market
COMMODITY INDIA WORLD SHARE RANK
RICE (PADDY) 240 2049 11.71 THIRD
WHEAT 74 599 12.35 SECOND
PULSES 13 55 23.64 FIRSTGROUNDNUT 6 35 17.14 SECOND
RAPESEED 6 40 15.00 THIRD
SUGARCANE 315 1278 24.65 SECOND
TEA 0.75 2.99 25.08 FIRSTCOFFEE(GREEN) 0.28 7.28 3.85 EIGTH
JUTE AND JUTE FIBERS 1.74 4.02 43.30 SECOND
COTTON (LINT) 2.06 18.84 10.09 THIRD
-
8/9/2019 5760635 Commodities
9/30
Participants in Commodity FuturesParticipants in Commodity Futures
Farmers/ Producers
Merchandisers/ Traders
Importers
Exporters
Consumers/ Industry
Commodity Financers
Agriculture Credit providing agencies
Corporate having price risk exposure in commodities
-
8/9/2019 5760635 Commodities
10/30
Commodity Exchange in India
The Government of India permitted establishment of National
level Multi-Commodity exchanges in the year 2002. They are
Multi Commodity Exchange (MCX) located at MumbaiNational Commodity and Derivatives Exchange Ltd
(NCDEX) located at Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located atAhmedabad.
-
8/9/2019 5760635 Commodities
11/30
Who regulates the commodity
exchanges?
Just as SEBI regulates the stock exchanges,
commodity exchanges are regulated by Forwards
Market Commission (FMC); Forwards Market
Commission is under the purview of the Ministry
of Food, Agriculture and Public Distribution.
-
8/9/2019 5760635 Commodities
12/30
Different types of commodities that are
traded
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities: Wheat, Corn, Cotton,Oils, Oilseeds, etc.
Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc
-
8/9/2019 5760635 Commodities
13/30
Nation-wide Multi Exchanges vis-a-vis
Regional ExchangesBetter Reach in all parts of the country
Wider base for speculators from other markets including securities market
Broad basing of the underlying commodity
Industry diffused in several parts of the country may alsodirectly participate
Few commodities can be projected viable for an international futures
Contract, with participation from global player
Best management practices, end of day mark to market, online marginingand surveillance, daily pay-in & pay-out are some of the features to woo the
players
-
8/9/2019 5760635 Commodities
14/30
-
8/9/2019 5760635 Commodities
15/30
How risky are these markets
compared to stock & bond markets?
Commodity prices are generally less volatile than thestocks and this has been statistically proven. Thereforeit's relatively safer to trade in commodities.
Also the regulatory authorities ensure throughcontinuous vigil that the commodity prices are market-driven and free from manipulations.
However all investments are subject to market risk anddepends on the individual decision. There is risk of losswhile trading in commodity futures like any otherfinancial instruments.
-
8/9/2019 5760635 Commodities
16/30
Are the trades/ settlement
guaranteed by the exchanges?YES, the commodity exchanges have got some of the most highprofile corporate as their promoters.
Multi Commodity exchange of India, promoted by FinancialTechnologies Ltd has got on board institutions such as SBI, HDFCBank, Canara Bank, Corporation Bank, Bank of India, Union Bankof India, Bank of Baroda.
The National Commodity and Derivatives Exchange (NCDEX) hasgot NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as themajor share-holders.
Such a high profile share-holding provides these exchanges valuableexperience, knowledge and also high standards of operations .
Also the exchange guarantees the settlement of trades and soeliminates the counter-party risk in the transactions.
-
8/9/2019 5760635 Commodities
17/30
Different segments in the
commodities marketThe commodities market exits in two distinct formsnamely the Over the Counter (OTC) market and theExchange based market.
Also, as in equities, there exists the spot and thederivatives segment. The spot markets are essentiallyover the counter markets and the participation isrestricted to people who are involved with thatcommodity say the farmer, processor, wholesaler etc.
Majority of the derivative trading takes place throughexchange-based markets with standardized contracts,settlements etc.
-
8/9/2019 5760635 Commodities
18/30
What are Commodity Futures?
Commodity Futures are contracts to buy specific quantity of a particularcommodity at a future date.
It is similar to the Index futures and Stock futures but the underlyinghappens to be commodities instead of Stocks and indices.
Commodity futures market has been in existence in India for centuries.The Government of India banned futures trading in certain commoditiesin 70s.
However trading in commodity futures has been permitted again by thegovernment in order to help the Commodity producers, traders and
investors.World-wide, commodity exchanges originated before the other financialexchanges. In fact, most of the derivatives instruments had their birth incommodity exchanges.
-
8/9/2019 5760635 Commodities
19/30
Who benefits from dealing in
commodity futures and how?If you are an investor, commodities futures represent a good form ofinvestment because of the following reasons:
Diversification The returns from commodities market are free from
the direct influence of the equity and debt market, which means thatthey are capable of being used as effective hedging instrumentsproviding better diversification.
Less Manipulations - Commodities markets, as they are governed byinternational price movements are less prone to rigging or pricemanipulations by individuals.
High Leverage The margins in the commodity futures market areless than the F&O section of the equity market.
-
8/9/2019 5760635 Commodities
20/30
Continued.
If you are an importer or an exporter, commodities futures can helpyou in
the following ways:
Hedge against price fluctuations Wide fluctuations in the
prices of import or export products can directly affect yourbottom-line as the price at which you import/export is fixed
before-hand.
Commodity futures help you to procure or sell the commodities
at a price decided months before the actual transaction, thereby
ironing out any fluctuation in prices that happen subsequently
-
8/9/2019 5760635 Commodities
21/30
Continued
If you are a producer of a commodity, futures can help you asfollows:
Lock-in the price for your produce If you are a farmer, there isevery chance that the price of your produce may come downdrastically at the time of harvest. By taking positions in commodity
futures you can effectively lock-in the price at which you wish tosell your produce.
Assured demand Any glut in the market can make you waitunendingly for a buyer. Selling commodity futures contract can giveyou assured demand at the time of harvest.
Increase in holding power You can store the underlyingcommodity in exchange approved warehouse and sell in the futuresto realize the future value of the commodity.
-
8/9/2019 5760635 Commodities
22/30
Continued.
If you are a large scale consumer of a product, here is how this
market can help you:
Control your cost If you are an industrialist, the raw materialcost dictates the final price of your output. Any sudden rise in the
price of raw materials can compel you to pass on the hike to yourcustomers and make your products unattractive in the market. By
buying commodity futures, you can fix the price of your rawmaterial.
Ensure continuous supply Any shortfall in the supply of raw
materials can stall your production and make you default on yoursale obligations. You can avoid this risk by buying a commodityfutures contract by which you are assured of supply of a fixedquantity of materials at a pre-decided price at the appointed time.
-
8/9/2019 5760635 Commodities
23/30
Are there physical deliveries in
commodity futures exchanges?
YES, the exchanges, in order to maintain the futures prices
in line with the spot market, have made available
provisions of settlement of contracts by physical delivery.
They also make sure that the price of futures and spot
prices coincide during the settlement so that the arbitrage
opportunities do not exist.
-
8/9/2019 5760635 Commodities
24/30
How the deliveries are made
possible?
The exchange has enlisted certain cities for specific commodities asthe delivery centers.
The seller of commodity futures, upon expiry of the contract may
choose to deliver physical stock instead of settling the positions bycash, in which case he would be required to deliver the stocks to thespecified warehouses.
The buyer of the commodity futures, if he is interested in physicaldelivery would be matched with a seller and would be required to
take delivery of the specified quantity of stock from the designatedwarehouse.
In case of NCDEX it is mandatory to open a Demat account with anapproved DP by the buyer and seller if they wish to take/ givedelivery of goods.
-
8/9/2019 5760635 Commodities
25/30
Opportunities
Speculation
HedgingArbitrage
-
8/9/2019 5760635 Commodities
26/30
Working of Commodity Exchange
-
8/9/2019 5760635 Commodities
27/30
Settlement Of Future Contracts
How would contracts settle?
What would be the settlement period?
Are deliveries compulsory?How would the settlement take place in
commodity futures market?
-
8/9/2019 5760635 Commodities
28/30
Neat Trading terminal
-
8/9/2019 5760635 Commodities
29/30
Delivery Information
-
8/9/2019 5760635 Commodities
30/30
Thank You