a project report on commodity futures and awareness level of commodity market at geojit financial...

A PROJECT REPORT ON COMMODITY FUTURES AND AWARENESS

LEVEL OF COMMODITY MARKET AT GEOJIT FINANCIAL SERVICE LTD

BANGALORE

Babasabpatilfreepptmba.com

Executive Summary:-

The function of the Financial Market is to facilitate the transfer of funds from

surplus sectors to deficit sector.

A derivative is a financial instrument that derives its value from an underlying

asset. This underlying asset can be stocks, bonds, currency, commodities, metals etc.,

there are different types of derivatives like:-

Futures

Forwards

Options and Swaps

A futures contract is an agreement between two parties to buy or sell the

underlying asset at a future date at today's future price

Options are deferred delivery contracts that give the buyers the right, but not the

obligation, to buy or sell a specified underlying at a set price on or before a specified

date.

A forward contract is an agreement between two entities to buy or sell the

underlying asset at a future date, at today's pre-agreed price.

Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula.

I have taken the commodity futures, to study and analyze as it is the emerging

trend in the market, at Geojit Commodity Ltd. Geojit Commodity Ltd is the Subsidiary of

the Geojit Financial Service Ltd., it is serving in all the areas of financial market like

Share trading, Security analysis and portfolio management and commodity trading.

I conducted the survey in Bangalore City to know about the awareness of the

Commodity Market.



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Commodity as an asset class possess low correlation with equity and debt markets

which makes it attractive as a portfolio diversifer.Also,long term volatility witnessed in

commodity markets is lower than that witnessed in equity markets.

When I conducted surveys with customers and, according to their view they

prefer to invest mostly in commodities like Gold, Silver, Crude oil, etc. Because

percentage of return is more of these commodities also risk is attached to it. As well as

they prefer the Capital market because of its growth and they are having fare knowledge

about that market. Most of the customers are not aware of the commodity market .So

fare knowledge about the commodity market and its operation to the public.

Objective of the project are:

To understand the commodity market, its working and mechanism and types of

commodities traded in India.

To study the future contracts on commodities..

To study the pricing of commodity futures.



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To find the awareness level of commodity market in Bangalore city.

To find the potential customers for commodity market.

To know which commodity they prefer to invest in.

Findings:

Commodity Futures have a bright future in coming days.

Deciding on the prices depending on the formulas may go wrong. Because it is

cost plus carry, but in real sense the prices may even go down than the spot

prices.

Price of a commodity is dependent on its demand and supply of that commodity

in the market.

As the commodity future market is new and emerging, many investors and

farmers are not fully aware of this market. As this market, helps them to trade

transparently without middlemen or agents to earn the good profits.

Suggestions:

Creating the awareness among the people and farmers about commodity market

through:



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Making presentations in the villages to the farmers by video and

explaining them the uses and benefits of the commodity market

Educate them on how to trade the commodity futures, i.e. getting

in to the contract before harvesting only, to get the minimum

guarantees.

The Company should inform the benefits of Commodity trading to the present

investors who are investing in cash market.

Investor who wants to trade internationally has to understand the import and

export duty, customs, octroi, and sales tax etc.

Study the price volatility is must for the trader, i.e. study the fluctuation or

variations in the daily prices in the market. This volatility is the indicator of the

present trend in that commodity

Research Methodology:

Title:



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“Commodity Futures and Awareness level

of Commodity Market”

Scope of the Study:

The study is limited to only commodity market and it is only at Geojit

Financial Services Ltd. Bangalore. My study and analysis mainly based on the deciding

on the future price for the products using formula. I did this by selecting the three

commodities Gold, Silver and Wheat as example. and study is limited to the Bangalore

city only.

Sources of Data:

The data is collected through both the sources, they are:

Primary data:

The primary data has been collected from the employees of the Geojit Financial

Services Ltd...by applying Random Sampling Method

Secondary data:

The secondary data has been collected from

magazines,

newspaper,

books &

Internet etc.

Selection of Sample:



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Population: People of Bangalore City.

Sampling Frame: People those who are trading regular basis.

Sampling Size: 100Units.

Sampling Method: Random Sampling.

Tools for Analysis

Cost carry Method

Considering storage costs

Without considering storage costs

Graphs and charts

Limitations of the Study:.

The study is related to only the Commodity Futures Market.

There is less investor in Commodity Market, so it is not possible to

know the investors perception regarding the Commodity Market.

The study is limited to Bangalore City.



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COMPANY PROFILE

Company Profile



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OVERVIEW

Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a partnership firm in

the year 1987. In 1993, Mr. Ranajit Kanjilal retired from the firm and Geojit became a

proprietary concern of Mr. C .J. George. In 1994, it became a Public Limited Company

by the name Geojit Securities Ltd. The Kerala State Industrial Development Corporation

Ltd. (KSIDC), in 1995, became a co-promoter of Geojit by acquiring 24% stake in the

company, the only instance in India of a government entity participating in the equity of a

stock broking company. Geojit listed at The Stock Exchange, Mumbai (BSE) in the year

2000. In 2003, the Company was renamed as Geojit Financial Services Ltd. (GFSL). The

board of the company consists of professional directors; including a Kerala government

nominee with 2/3rd of the board members being Independent Directors. With effect from

July 2005, the company is also listed at The National Stock Exchange (NSE). Geojit is a

charter member of the Financial Planning Standards Board of India and is one of the

largest DP brokers in the country.

Company aims to be a niche player in the capital market through partnership

philosophy by carefully selecting business associates and other intermediaries in other

fields.

The capital market scene is facing increasing challenges with the inflow from FII

and increased competition from national as well as international players. Introduction of

new products like margin funding is threatening to alter the competitive positioning of

existing players. In order to effectively compete and continue its growth, Company has

promoted a NBFC named Geojit Credits Private Limited and the future business plans of

this Company are being worked out.



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As a result of the robust and proactive strategies adopted by the management,

Company achieved a good performance and the management is confident that the

positive trend would continue in the coming years.

Delisting

Pursuant to the special resolution passed by the members at the 9th Annual General

Meeting held on 27th September 2003 the Company has delisted its equity shares from

Delhi Stock Exchange during December 2004 in accordance with SEBI (Delisting of

Securities) Guidelines 2003.

Listing

The Equity shares of the company are listed with the Stock Exchange, Mumbai. The

Company has made an application to the National Stock Exchange of India for listing and

Shares would be listed shortly.

Increase in Share Capital

During the previous year, the Board of Directors at their Meeting held on 21st

December, 2004, allotted 15,50,000 shares against preferential issue for meeting the

capital requirements of the Company. In this regard, your Company had obtained the

approval of Shareholders at their Extra Ordinary General Meeting held on 7th October

2004 for the issue of the following shares in accordance with the SEBI (Disclosure &

Investor Protection) Guidelines, 2000.



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Shareholding Pattern for the quarter ended 31st Mar 2006

Category No. of

shares held

Percentage of

shareholding

A. Promoter's Holding

01. Promoters

a. Indian Promoters

b. Foreign Promoters

77,67,408

-

51.04

02. Persons acting in concert NIL NIL

Sub-Total 77,67,408 51.04

B. Non-Promoters Holding

03. Institutional Investors

a. Mutual Funds & UTI

b. Banking, Financial Institutions/

Insurance companies

(Central/State Gov.

Institutions/Non-Government

Institutions)

c. FIIs

-

1,80,300

NIL

6,29,824

-

1.18

NIL

4.14

Sub-Total 8,10,124 5.32

04. Others

a. Private Corporate Bodies

b Indian Public

c NRIs/OCBs

d. Any Other

(i) Directors/Relatives

/Associates (Independent

and are not in control

of the Company)

9,70,040

30,34,999

6,06,029

20,30,000

6.38

19.94

3.98

13.34

Sub-Total 66,41,068 43.64

Grand Total 1,52,18,600 100.00



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Overseas Joint Ventures

Barjeel Geojit Securities, LLC, Dubai, is a joint venture of Geojit with Al Saud

Group belonging to Sultan bin Saud Al Qassemi having diversified interests in the area of

equity markets, real estates and trading. Barjeel Geojit is a financial intermediary and the

first licensed brokerage company in UAE. It has facilities for off-line and on-line trading

in Indian capital market and also in US, European and Far-Eastern capital markets.

Doha Bank-Geojit in Qatar: Geojit has a tie up with Doha Bank in Qatar, which

offers capital market services from the India Desk.



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Milestones

The company crossed the following milestones to reach its present position as a

leading retail broking house in India.

1986

Geojit becomes a member of the Cochin Stock Exchange.

1994

The Kerala State Industrial Development Corporation (KSIDC), an arm of the

Government of Kerala, becomes a co-promoter of the company by acquiring 24%

equity stake in Geojit Financial Services Ltd., based on the evaluation report of

Ernst & Young.

This is the only venture in India where a state owned development institution is

participating in the equity of a stock broking company. Geojit becomes a

corporate broking house.

1995

Geojit comes out with a small Initial Public Offer (IPO) of Rs.9.5 million, which

was oversubscribed by 15 times. Geojit's issued and subsribed equity capital

increased to Rs.30 million and KSIDC's equity stake comes down to 17%.

Geojit becomes a member of the National Stock Exchange (NSE) and installs its

first trading terminal in Cochin, Kerala.



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1996

The company launches Portfolio Management Services after obtaining required

registration (Portfolio Management) from Securities Exchange Board of India

(SEBI).

1997

Geojit becomes a Depository Participant under National Securities Depository

Limited (NSDL) and begins providing Depository Services through its branches.

1999

Geojit becomes a member of The Stock Exchange, Mumbai (BSE) and activates

Bombay Online Terminals (BOLT) in different branches. The customer base of

Geojit crosses the 50,000 mark.

2000

Geojit becomes the first broking firm in the country to offer online trading

facility. The then SEBI Chairman, Mr. D.R.Mehta inaugurates the facility on 1st

February 2000.

Commences Derivative Trading after obtaining registration as a Clearing and

Trading Member in NSE.

Establishes the first Bank Gateway in the country for Internet Trading.

2001

Geojit's customer base crosses 100,000.

Becomes India's first DP to launch depository transactions through Internet.

Establishes Joint Ventures in the UAE for serving NRI clients.

The company issues bonus shares in the ratio of 1:1.

2002

Geojit ties up with MetLife for the marketing and distribution of insurance

products across the country.

The company becomes the first online brokerage house to launch integrated

internet trading system for both cash and derivatives segments.



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Sheikh Sultan Bin Saud Al Oassemi, a member of the ruling family of Sharjah,

UAE, joins the Board of Directors of Geojit.

2003

Geojit Commodities Limited, a wholly owned subsidiary of Geojit, becomes

member of National Multi-Commodity Exchange of India Ltd., National

Commodity & Derivatives Exchange Ltd., Multi Commodity Exchange and

launches Commodity Futures Trading in rubber, pepper, gold, wheat and rice.

Geojit Commodities Limited launches Online Futures Trading in multiple

commodities namely, agri-commodities, precious metals like gold and silver,

other metals like steel, aluminum, etc. and energy futures namely, crude oil and

furnace oil.

Geojit raises more than Rs.100 million through issue of preferential shares.

2005

Barjeel Geojit Securities LLC becomes a member of Dubai Gold Commodity

Exchange.

Customer base of Geojit crosses 250,000.

Geojit's reach spreads through a network of more than 300 branches.

The company issues bonus shares in the ratio of 1:1.

Geojit Credits, a subsidiary of Geojit Financial Services Ltd. registers with

Reserve Bank of India as a Non-Banking Financial Company (NBFC).

The company gets listed on National Stock Exchange of India Limited.

The company implements Employees Stock Option Scheme.

The company opens a first of its kind - all women's branch in Cochin.

2006

Geojit relaunches Internet trading on Reuters TIB Mercury Platform.



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Board of directors

Mr. A. P. Kurian Non - Executive & Independent Chairman

Mr. C. J. George Managing Director & Chief Promoter

Mr. Jiji Thomson Non - Executive & Independent Director

Sheikh Sultan Bin Saud Al Qassemi Non - Executive & Independent Director

Mr. P. C. Cyriac Non - Executive & Independent Director

Mr. Mahesh Vyas Non - Executive & Independent Director

Management

Mr. C. J. George Managing Director

Mr. Punnose George Director

Mr. Satish Menon Chief Operating Officer

Mr. Binoy .V.Samuel Chief Financial Officer

Mr. A. Balakrishnan Chief Technology Officer

Mrs. Jaya Jacob Alexander Chief, Human Resources

Mr. K. Venkitesh Head - Channel Sales and Distribution

Ms. Farzana Khan Head-Online Products, Services and Operations



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Mr. Rakesh Jhunjhunwala Non - Executive Director

Mr. Ramanathan Bupathy Non - Executive & Independent Director

Mr. Punnoose George Non - Executive Director

Vision

“We will continually strive to raise our products and service standards by intelligent

application of technology and processes.”

Values and Beliefs

We understand and respect customer needs to consistently deliver total quality

solutions through constant skills up gradation.

We believe that our company culture helps to attract and retain best talent.

We uphold uncompromising ethical standards and strive to maintain a distinctive

identity in public mind shore through innovation and quality

We are committed to achieve profitable progress consistently.

We freely share our investment experience across all ages and strata of society to

encourage wise investment for a better future.



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PRODUCTS AND SERVICES:

1. Equity

2. Depository

3. Portfolio management services

4. Distribution

5. Futures and Options

6. Commodity

7. Services and distribution

8. Research



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THEORETICAL FRAME

WORK



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An Overview of the Capital Market

INTRODUCTION

The deregulation and liberalization of the industry in India has been accompanied

by change in financial sector. It is widely acknowledged that economic development of a

country is directly related to the level of its industrial growth. The process of industrial

growth essentially requires the development of capital market, which provides long-term

finance to entrepreneurs. The capital market aims at mobilization & efficient allocation of

resources to the desired investment outlets & thus, plays a vital role in the development

of the national economy. The Indian capital market has been experiencing a process of

structural transformation since the early eighties signifying the widening & deepening of

the market by showing notable increases both in the number of participants as well as

instruments.

DEFINITION & MEANING OF CAPITAL MARKET

The dictionary of commerce defines capital market as a market for medium and

long-term finance.

Capital market is one of the sources for raising long-term finance by the

corporate. Capital market is the medium through which the companies and investors

interact. The companies will enter the capital market with shares and/or debenture issues,

which are subscribed by the investors. The investors will evaluate the company‟s



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offerings and based on the credentials of the offer take decisions regarding investment.

The primary purpose of capital market is to direct the flow of savings into long term

investments.

FEATURES OF CAPITAL MARKET

The following are the main features of the capital market:

1 It is a market for long-term funds exceeding a period of one year.

2 Capital market supplies funds for financing the fixed capital requirements

of trade, commerce as well as Govt.

3 The transaction in capital market involves various types of instruments

like shares, debentures etc.

4 It is open for both institutions and individuals.

5 Capital market instruments generally have Secondary market.

TYPES OF CAPITAL MARKET

On the basis of the status of the market, the capital markets in India is classified

as



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a) Organized capital market and

b) Unorganized capital market

ORGANIZED CAPITAL MARKET

The constituents of the organized capital market are the Reserve Bank of India

financial institutions like IFCI, LIC, IDBI, UTI commercial banks, stock markets etc.

In the organized capital market the demand for capital comes from corporate

enterprises and government and semi-government institutions and supply comes from

household savings, institutions investors like banks investments trusts, insurance

companies, finance corporations, governments and international financing agencies.

UNORGANIZED CAPITAL MARKET

Unorganized capital market consists of indigenous bankers, money lenders, chit

funds, traders etc.

A large part of the demand for funds in the unorganized capital market is for

consumption purposes. In fact many purposes, for which funds are very difficult to get

from the organized market, are financed by the unorganized sector. Unorganized capital

market in India is characterized by the existence of multiplicity of interest rates,

exorbitant rates of interest and lack of uniformity in their business dealings.



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On the basis of stage of development, capital market is classified into two types,

viz.,

i) Primary capital market

ii) Secondary capital market

PRIMARY CAPITAL MARKET OR NEW ISSUE MARKET

Primary capital market is market for new issues, where long term funds are raised

by industrial, commercial enterprises, state government & central government from

investors through the issue of shares, debentures & bonds.

SECONDARY CAPITAL MARKET OR STOCK EXCHANGE MARKET

Secondary market is markets for secondary sale of securities which have already

passed through the new issue market are traded in this market. An active secondary

market actually promotes the growth of the primary market & capital formation because

investors in the primary market are assured of a continuous market & they can liquidate

their investments.



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Derivatives

Derivatives defined

A derivative is a product whose value is derived from the value of one or more

underlying variables or assets in a contractual manner. The underlying asset can be

equity, forex, commodity or any other asset.

Products, participants and functions

Derivative contracts are of different types. The most common ones are forwards,

futures, options and swaps. Participants who trade in the derivatives market can be

classified under the following three broad categories hedgers, speculators, and

arbitragers.

1. Hedgers: Hedgers face risk associated with the price of an asset. They use the

futures or options markets to reduce or eliminate this risk.

2. Speculators: Speculators are participants who wish to bet on future movements in

the price of an asset. Futures and options contracts can give them leverage; that is, by



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putting in small amounts of money upfront, they can take large positions on the market.

As a result of this leveraged speculative position, they increase the potential for large

gains as well as large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy

between prices of the same product across different markets. If, for example, they see the

futures price of an asset getting out of line with the cash price, they would take offsetting

positions in the two markets to lock in the profit.

Some commonly used derivatives

Some of the more popularly used derivative contracts.

Forwards:

A forward contract is an agreement between two entities to buy or sell the

underlying asset at a future date, at today's pre-agreed price.

Futures:

A futures contract is an agreement between two parties to buy or sell the

underlying asset at a future date at today's future price. Futures contracts differ from

forward contracts in the sense that they are standardized and exchange traded.

Options:

There are two types of options - calls and puts.

Calls give the buyer the right but not the obligation to buy a given quantity of

the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of

the underlying asset at a given price on or before a given date.



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Warrants:

Options generally have lives of up to one year, the majority of options traded

on options exchanges having a maximum maturity of nine months. Longer dated

options are called warrants and are generally traded over-the-counter.

Baskets:

Basket options are options on portfolios of underlying assets. The underlying

asset is usually a weighted average of a basket of assets. Equity index options are

a form of basket options.

Swaps:

Swaps are private agreements between two parties to exchange cash flows in

the future according to a prearranged formula. They can be regarded as portfolios

of forward contracts. The two commonly used swaps are:

o Interest rate swaps: These entail swapping only the interest related cash

flows between the parties in the same currency.

o Currency swaps: These entail swapping both principal and interest

between the parties, with the cash flows in one direction being in a

different currency than those in the opposite direction.

Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the

expiry of the options. Thus a swaption is an option on a forward swap.



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Futures vs. Forwards

A futures contract is very similar to a forward contract, which is also a contract to

trade on a future date. The main differences are, that:

futures are always traded on an exchange, whereas forwards always trade over-

the-counter

futures are highly standardized, whereas each forward is unique

the price at which the contract is finally settled is different:

o futures are settled at the settlement price fixed on the last trading date of

the contract (i.e. at the end)

o forwards are settled at the forward price agreed on the trade date (i.e. at

the start)

the credit risk of futures is much lower than that of forwards:

o The profit or loss on a futures position is exchanged in cash every day.

After this the credit exposure is again zero.



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o the profit or loss on a forward contract is only realized at the time of

settlement, so the credit exposure can keep increasing

In case of physical delivery, the forward contract specifies whom to make the

delivery to. The counter party on a futures contract is chosen randomly by the

exchange.

Evolution of the commodity market in India

Bombay Cotton Trade Association Ltd., set up in 1875, was the first organised

futures market. Bombay Cotton Exchange Ltd. was established in 1893 following the

widespread discontent amongst leading cotton mill owners and merchants over

functioning of Bombay Cotton Trade Association. The Futures trading in oilseeds started

in 1900 with the establishment of the Gujarati Vyapari Mandali, which carried on futures

trading in groundnut, castor seed and cotton. Futures trading in wheat were existent at

several places in Punjab and Uttar Pradesh. But the most notable futures exchange for

wheat was Chamber Of Commerce at Hapur set up in 1913. Futures trading in bullion

began in Mumbai in 1920. Calcutta Hessian Exchange Ltd. was established in 1919 for

futures trading in rawjute and jute goods. But organised futures trading in raw jute began

only in 1927 with the establishment of East Indian Jute Association Ltd. These two

associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct

organised trading in both Raw Jute and Jute goods. Forward Contracts (Regulation) Act

was enacted in 1952 and the Forwards Markets Commission (FMC) was established in



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1953 under the Ministry of Consumer Affairs and Public Distribution. In due course,

several other exchanges were created in the country to trade in diverse commodities.

The Kabra committee report

After the introduction of economic reforms since June 1991 and the consequent

gradual trade and industry liberalization in both the domestic and external sectors, the

Government of India appointed in June 1993 a committee on Forward Markets under

chairmanship of Prof. K.N.Kabra. The committee was setup with the following

objectives:

1. To assess

(a) The working of the commodity exchanges and their trading practices in India and to

make suitable recommendations with a view to making them compatible with those of

other countries

(b) The role of the Forward Markets Commission and to make suitable recommendations

with a view to making it compatible with similar regulatory agencies in other countries so

as to see how effectively these agencies can cope up with the reality of the fast changing

economic scenario.



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2. To review the role that forward trading has played in the Indian commodity markets

during the last 10 years.

3. To examine the extent to which forward trading has special role to play in promoting

exports.

4. To suggest amendments to the Forward Contracts (Regulation) Act, in the light of the

recommendations, particularly with a view to effective enforcement of the Act to check

illegal forward trading when such trading is prohibited under the Act.

5. To suggest measures to ensure that forward trading in the commodities in which it is

allowed to be operative remains constructive and helps in maintaining prices within

reasonable limits.

6. To assess the role that forward trading can play in marketing/ distribution system in the

commodities in which forward trading is possible, particularly in commodities in which

resumption of forward trading is generally demanded.

The committee submitted its report in Sept 1994. The recommendations of

the committee were as follows:

The Forward Markets Commission (FMC) and the Forward Contracts

(Regulation) Act, 1952, would need to be strengthened.

Due to the inadequate infrastructural facilities such as space and

telecommunication facilities the commodities exchanges were not able to function

effectively. Enlisting more members, ensuring capital adequacy norms and

encouraging computerization would enable these exchanges to place themselves

on a better footing.

In-built devices in commodity exchanges such as the vigilance committee and the

panels of surveyors and arbitrators be strengthened further.

The FMC, which regulates forward/ futures trading in the country, should

continue to act a watchdog and continue to monitor the activities and operations

of the commodity exchanges. Amendments to the rules, regulations and bylaws of

the commodity exchanges should require the approval of the FMC only.



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In the context of globalization, commodity markets in India could not function

effectively in an isolated manner. Therefore, some of the commodity exchanges,

particularly the ones dealing in pepper and castor seed, are upgraded to the level

of international futures markets.

The majority of the committee recommended that futures trading be introduced in

the following commodities:

1. Basmati rice

2. Cotton

3. Raw jute and jute goods

4. Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower

seed, safflower seed, copra and soybean, and oils and oilcakes of all of

them.

5. Rice bran oil

6. Castor oil and its oilcake

7. Linseed

8. Silver

9. Onions



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The liberalized policy being followed by the government of India and the gradual

withdrawal of the procurement and distribution channel necessitated setting in place a

market mechanism to perform the economic functions of price discovery and risk

management. The national agriculture policy announced in July 2000 and the

announcements in the budget speech for 2002ñ2003 were indicative of the governments

resolve to put in place a mechanism of futures trade/market. As a follow up, the

government issued notifications on 1.4.2003 permitting futures trading in the

commodities, with the issue of these notifications futures trading is not prohibited in any

commodity. Options trading in commodity are, however presently prohibited.

Commodities Traded In India

Commodities

Bullion Gold, Gold HNI, Gold M, I-Gold, Silver, Silver HNI, Silver M

Oil and Oil Seeds

Castor Oil, Castor Seeds,

Cottonseed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli

(Cottonseed Oilcake), Mustard /Rapeseed Oil,

Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Sesame

Seed, Soymeal, Soy Seeds

Spices Cardamom, Jeera, Pepper, Red Chilli

Metals

Aluminium,

Copper, Nickel, Sponge Iron, Steel Flat, Steel Long (Bhavnagar),

Steel Long (Gobindgarh), Tin, Zinc

http://www.mcxindia.com/silver.aspx

http://www.mcxindia.com/castor_seed_disa.aspx

http://www.mcxindia.com/castor_seed_disa.aspx

http://www.mcxindia.com/rbd.aspx

http://www.mcxindia.com/groundnut_oil.aspx



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Fibre Cotton Long Staple ,Cotton Medium Staple,Cotton Short Staple,

Kapas

Pulses Chana, Masur, Tur, Urad, Yellow Peas,

Cereal Basmati Rice, Maize, Rice, Sarbati Rice, Wheat

Energy Brent Crude Oil, Crude Oil,Furnace Oil

Plantation Cashew Kernel, Rubber

Petro-Chemical High Density Polyethylene (HDPE), Polypropylene (PP), PVC

Others Guar Seed, Guargum, Gurchaku, Mentha Oil, Potato, Sugar M-30,

Sugar S-30,

COMMODITY FUTURES

Commodity futures are the part of the derivatives. India has a long history of

commodity futures trading, extending over 125 years. As the country embarked on

economic liberalization policies and signed the GATT agreement in the early nineties, the

government realized the need for futures trading to strengthen the competitiveness of

Indian agriculture and the commodity trade and industry.

Statutory framework for regulating commodity futures exists in India

Commodity futures contracts and the commodity exchanges organizing trading in

such contracts are regulated by the Government of India under the Forward Contracts

(Regulation) Act, 1952 (FCRA or the Act), and the Rules framed there under. The nodal



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agency for such regulation is the Forward Markets Commission (FMC), situated at

Mumbai, which functions under the aegis of the Ministry of Consumer Affairs, Food &

Public Distribution of the Central Government.

"Commodity"

Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of

movable property other than actionable claims, money and securities". Futures' trading is

organized in such goods or commodities as are permitted by the Central Government. At

present, all goods and products of agricultural (including plantation), mineral and fossil

origin are allowed for futures trading under the auspices of the commodity exchanges

recognized under the FCRA. The national commodity exchanges have been recognized

by the Central Government for organizing trading in all permissible commodities which

include precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and

unginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur;

potatoes and onions; coffee and tea; rubber and spices, etc.

"Commodity Exchange"

A commodity exchange is an association, or a company or any other body

corporate organizing futures trading in commodities.

Meaning of "Futures Contract"

A futures contract is an agreement between two parties to buy or sell a specified

quantity and quality of asset at a certain time in future at a certain price agreed at the time

of entering into the contract on the futures exchange.

A futures contract is a type of "forward contract". FCRA defines forward contract

as "a contract for the delivery of goods and which not a ready delivery contract is". Under



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the Act, a ready delivery contract is one, which provides for the delivery of goods and the

payment of price there for, either immediately or within such period not exceeding 11

days after the date of the contract, subject to such conditions as may be prescribed by the

Central Government. A ready delivery contract is required by law to be fulfilled by

giving and taking the physical delivery of goods. In market parlance, the ready delivery

contracts are commonly known as "spot" or "cash" contracts.

Salient features of a "Commodity Futures Contract”

A commodity futures contract is a tradable standardized contract, the terms of

which are set in advance by the commodity exchange organizing trading in it. The

futures contract is for a specified variety of a commodity, known as the "basis".

The quality parameters of the "basis" and the permissible tender able varieties; the

delivery months and schedules; the places of delivery; the "on" and "off"

allowances for the quality differences and the transport costs; the tradable lots.



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The penalties for no issuance or non-acceptance of deliveries, etc., are all

predetermined by the rules and regulations of the commodity exchange.

Consequently, the parties to the contract are required to negotiate only the

quantity to be bought and sold, and the price.

The two major economic functions of a commodity futures market are price risk

management and price discovery.

Objectives of commodity futures are as follows.

Hedging - price risk management by risk mitigation

Speculation - take advantage of favorable price movements

Leverage - pay low margin to enjoy large exposure

Liquidity - ease of entry and exit of market



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Price discovery - for making farming and business decisions

Price stabilization along with balancing demand and supply position

Facilitates integrated price structure

Flexibility, certainty and transparency in purchasing commodities facilitate bank

Financing.

Facilitates 'informed' lending to the banks.

Benefits of Commodity Future Market

It benefits to

Farmers

Efficient Price Discovery/Forecast made by the exchange will enable farmers

decide cropping pattern and investment on inputs.

Price Stability resulting from equilibrium in supply and demand for a commodity

would be possible through exchanges.

Get an extensive market opened for them.



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Get opportunity to trade, knowing the national and international trends and

standards.

Can sell the commodity to the customer without any agents.

Can decide the market even before harvest.

Get an opportunity to gain profit by spending only a small percentage of the

actual commodity price.

There is an opportunity to keep the commodity in the warehouse and use the

warehouse receipt to deal with financial needs, as it is an endorsable document.

Can avoid deliberate decrease in price in the name of quality.

Farmers can trade by asking the help of the experts in trading organizations even

if they are computer illiterate.

Traders

Can trade by spending only the margin amount.

Can sell the commodities that he buys from the ready market and can rescue

himself from the loss happening from price fall.

For those who have kept their commodity in the Central Warehouse, loans are

available on the basis of the stock. The benefit is that you can keep the

commodity somewhere without blocking the working capital in the stock.

Consumer, Industrialist & Exporters

Can be sure that the commodity is available when they require it.

Can calculate the price since it is predetermined and can arrange everything

according to that.

Can buy goods without agents.

Can buy them even while sitting in their office.

Can be assured the quality of the good.



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Commodities can be purchased with only margin amount instead of giving the

whole price.

Commodity futures trading cycle

NCDEX trades commodity futures contracts having one-month, two-month and

three-month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a

January expiration contract would expire on the 20th of January and a February expiry

contract would cease trading on the 20th of February. If the 20th of the expiry month is a

trading holiday, the contracts shall expire on the previous trading day. New contracts will

be introduced on the trading day following the expiry of the near month contract. Figure

shows the contract cycle for futures contracts on NCDEX.

Benefits of trading in commodity futures

Futures‟ trading in commodities results in transparent and fair price discovery on

account of large-scale participation and reflects views and expectations of wider

section of people related to those commodities. Producers, traders and processors,

exporters/importers get an online platform through different exchanges for price risk

management. It provides a platform for producers to hedge their positions according



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to their view of the prices. The brokerage is expected to be 0.25% of the transaction

value.

Indian Commodity Futures Market

Introduction:

Global commodity market volumes far exceed that of markets. In India too, this

market is expected to generate volumes exceeding today‟s equity and derivative volumes.

It is being estimated that international trading in commodity futures market is expected to

be around five to ten times of physical commodity markets in the next few years. In

India, one can expect commodity futures market to be at least five times (at around Rs.

55.000 billion) that of the physical commodity markets (at around Rs 11,000 billion), at

least over the next five years. Retail, corporate or institutional investors can now manage

their commodity price-risk through participation in this market.

Regulatory Frame work:

Commodity Futures Trading functions under three tier regulatory framework.

1. Commodity Exchanges:

2. Forward Markets Commission (FMC)

3. Department of Consumer Affairs, Government of India

Commodity Exchanges:

The commodity Exchange is responsible for the orderly conducting of trade as per

the rules and bylaws of FMC.

Forward Markets Commission (FMC):



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The market regulator is responsible for recommending approvals of exchanges,

approves bylaws of exchanges and engages in surveillance for orderly conduction of

Future Trading.

Department of Consumer Affairs, Government of India:

The Ministry of Consumer Affairs, Food and Public Distribution approves the

Exchanges, approves a Commodity for Futures Trading and formulates policies and rules.

The National level multi-commodity exchanges are:

1. National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

The First De-Merged Electronic multi commodity exchange of India Granted the

National status on a permanent basis by the government of India and operational

since 26th

November 2002.This is presently working on-line and trading in many

active commodities like castor seed/oil, rapeseed and mustard seed/oil, aluminum,

soybean/oil, pepper, gold, silver etc. www.nmce.com.

2. National Board of Trade, Indore (N-BOT)--www.nbotind.org. This is also

presently working but not completely on-line, screen-based. In this exchange

maximum trades are carried out in soy oil. It is incorporated on July 30, 1999 to

offer integrated, state-of-the-art commodity futures exchange

3. National Commodity and Derivative Exchange, Mumbai (NCDEX)-- The

exchange is being promoted by ICICI Bank, National Stock Exchange (NSE), Life

Insurance Corporation and NABARD. It is more or less on the lines of the NSE of

the capital market. NCDEX is a public limited company incorporated on April 23,

http://www.nmce.com/

http://www.nbotind.org/



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2003 under the Companies Act, 1956. It obtained its Certificate for Commencement

of Business on May 9, 2003. It has commenced its operations on December 15,

2003. www.ncdex.com.

4. Multi Commodity Exchange of India Ltd, Mumbai(MCX) www.mcxindia.com

The exchange is promoted mainly by professionals and supported by Financial

Technology (FT). The exchange has started operations from November 10 2003 and

has offered gold, silver and castor seed in the first phase of trading facility. The key

share holders are State Bank of India (India‟s largest commercial bank) & associates,

Fidelity International, National Stock Exchange of India Ltd. (NSE), National Bank

for Agriculture and Rural Development (NABARD), HDFC Bank, SBI Life

Insurance Co. Ltd., Union Bank of India, Canara Bank, Bank of India, Bank of

Baroda and Corporation Bank.

The general risks associated with commodity futures

The different types of risks associated with commodity futures are as follows:

1. Credit risks

http://www.ncdex.com/

http://www.mcxindia.com/



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These are the usual risks associated with counter party default and which

must be assessed as part of any financial transaction.

2. Market risks

These are associated with all market variables that may affect the value of

the contract, for e.g., a change in the price of the underlying instrument

3. Operational risks

These are the risks associated with the general course of business

operations and include:

a. Settlements risks,

b. Legal risks, and

c. Deficiencies in information, monitoring and control systems, which result in

fraud, human error, system failures, management failures etc. Settlement risk

arises as a result of the timing differences between when an institution either pays

out funds or deliverable assets before receiving a assets or payments from a

counter party. Legal risk arises when a contract is not legally enforceable, reason

being

Inadequate documentation

The counter party lacks the required authority to enter into the

transaction

The underlying transaction is not permissible

Bankruptcy or insolvency of the counter party changes the contract

conditions

4. Strategic risks

These risks arise from activities such as:

1. Entrepreneurial behavior of traders in financial institutions

2. Misreading client requests



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3. Costs getting out of control

4. Trading with inappropriate counter parties.

5. Environmental Risk

This risk mainly on the agricultural commodities, which are dependent on

the climatic conditions, Unfavorable climatic conditions like flood etc., leads to

loss of the production.

6. Political Risk:

Due to the combination of government actions, ineffective legal systems,

war and revolution affect the prices of the commodities.

Pricing commodity futures



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Commodity futures began trading on the NCDEX from the 14th December 2003.

The market is still in its nascent phase; however the volumes and open interest on the

various contracts trading in this market have been steadily growing.

The process of arriving at a figure at which a person buys and another person sells

a futures contract for a specific expiration date is called price discovery. In an active

futures market, the process of price discovery continues from the market's opening until

its close. The prices are freely and competitively derived. Future prices are therefore

considered to be superior to the administered prices or the prices that are determined

privately. Further, the low transaction costs and frequent trading encourages wide

participation in futures markets lessening the opportunity for control by a few buyers and

sellers.

In an active futures markets the free flow of information is vital. Futures

exchanges act as a focal point for the collection and dissemination of statistics on

supplies, transportation, storage, purchases, exports, imports, currency values, interest

rates and other pertinent information. Any significant change in this data is immediately

reflected in the trading pits as traders digest the new information and adjust their bids and

offers accordingly. As a result of this free flow of information, the market determines the

best estimate of today and tomorrow's prices and it is considered to be the accurate

reflection of the supply and demand for the underlying commodity. Price discovery

facilitates this free flow of information, which is vital to the effective functioning of

futures market.

In this chapter we try to understand the pricing of commodity futures contracts

and look at how the futures price is related to the spot price of the underlying asset. We



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study the cost-of-carry model to understand the dynamics of pricing that constitute the

estimation of fair value of futures.

Investment assets versus consumption assets

When studying futures contracts, it is essential to distinguish between investment

assets and consumption assets. An investment asset is an asset that is held for investment

purposes by most investors. Stocks and bonds are examples of investment assets. Gold

and silver are also examples of investment assets. Note however that investment assets do

not always have to be held exclusively for investment. Silver, for example, has a number

of industrial uses. However, to classify as investment assets, these assets do have to

satisfy the requirement that they are held by a large number of investors solely for

investment. A consumption asset is an asset that is held primarily for consumption. It is

not usually held for investment. Examples of consumption assets are commodities such

as copper, oil, and pork bellies.

As we will learn, we can use arbitrage arguments to determine the futures prices

of an investment asset from its spot price and other observable market variables. For

pricing consumption assets, we need to review the arbitrage arguments a little differently.

To begin with, we look at the cost-of-carry model and try to understand the pricing of

futures contracts on investment assets.

The cost of carry model



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We use arbitrage arguments to arrive at the fair value of futures. For pricing

purposes, we treat the forward and the futures market as one and the same. A futures

contract is nothing but a forward contract that is exchange traded and that is settled at the

end of each day. The buyer who needs an asset in the future has the choice between

buying the underlying asset today in the spot market and holding it, or buying it in the

forward market. If he buys it in the spot market today, it involves opportunity costs. He

incurs the cash outlay for buying the asset and he also incurs costs for storing it. If instead

he buys the asset in the forward market, he does not incur an initial outlay. However the

costs of holding the asset are now incurred by the seller of the forward contract who

charges the buyer a price that is higher than the price of the asset in the spot market. This

forms the basis for the cost-of-carry model where the price of the futures contract is

defined as:

Where:

F Futures price

S Spot price

C Holding costs or carry-costs

The fair value of a futures contract can also be expressed as:

Where:

r Percent cost of Financing

T Time till expiration

F = S + C



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Whenever the futures price moves away from the fair value, there would be

opportunities for arbitrage. If F< Or F> , arbitrage would exist.

We know what are the spot and futures prices, but what are the components of holding

costs? The components of holding cost vary with contracts on different assets. At times

the holding cost may even be negative. In the case of commodity futures, the holding cost

is the cost of financing plus cost of storage and insurance purchased. In the case of equity

futures, the holding cost is the cost of financing minus the dividends returns.

Equation cost of carry uses the concept of discrete compounding, where interest

rates are compounded at discrete intervals, for example, annually or semiannually.

Pricing of options and other complex derivative securities requires the use of

continuously compounded interest rates. Most books on derivatives use continuous

compounding for pricing futures too.

When we use continuous compounding, equation cost of carry is expressed as:

Where:

r Cost of financing (using continuously compounded interest rate)


e 2.71828

So far we were talking about pricing futures in general. To understand the pricing

of commodity futures, let us start with the simplest derivative contract of a forward

contract. We use examples of forward contracts to explain pricing concepts because

forward contracts are easier to understand. However, the logic for pricing a futures

contract is exactly the same as the logic for pricing a forward contract. We begin with a

forward contract on an asset that provides the holder with no income and has no storage

or other costs. Then we introduce real world factors as they apply to investment

commodities and later to consumption commodities.



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HEDGING:

Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives

are widely used hedging. A hedge can help lock in existing profits. Its purpose is to

reduce the volatility of a portfolio, by reducing the risk.

Hedging does not mean maximization of return. It only means reduction in variation

of return. It is quite possible that the return is higher in the absence of the hedge, but so

also is the possibility of much lower return.

Basic principle of hedging:

When an individual or a company decides to use the futures markets to hedge a risk, the

objective is to take a position that neutralizes the risk as much as possible.

Kinds of Hedging

There are basically two kinds of hedges that can be taken.

Short Hedge

Long Hedge



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Short Hedge

A short hedge is a hedge that requires a short position in futures contracts. A short

hedge is appropriate when the hedger already owns the asset, or is likely to own the asset

and expects to sell it at some time in the future.

For example:

A short hedge could be used by a cotton farmer who expects the cotton crop to be

ready for sale in the next two months.

Long Hedge

Hedges that involve taking a long position in a futures contract are known as long

hedges. A long hedge is appropriate when a company knows it will have to purchase a

certain asset in the future and wants to lock in a price now.

For Example:

Suppose that it is now January 15. A firm involved in industrial fabrication knows

that it will require 300 kgs of silver on April 15 to meet a certain contract. The spot price

of silver is Rs.1680.



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Advantages of hedging

Besides the basic advantage of risk management, hedging also has other

advantages:

Hedging stretches the marketing period. For example, a livestock feeder does not have to

wait until his cattle are ready to market before he can sell them. The futures market

permits him to sell futures contracts to establish the approximate sale price at any time

between the time he buys his calves for feeding and the time the fed cattle are ready to

market, some four to six months later. He can take advantage of good prices even though

the cattle are not ready for market.

Hedging protects inventory values. For example, a merchandiser with a large, unsold

inventory can sell futures contracts that will protect the value of the inventory, even if the

price of the commodity drops

Hedging permits forward pricing of products. For example, a jewelry manufacturer can

determine the cost for gold, silver or platinum by buying a futures contract, translate that

to a price for the finished products, and make forward sales to stores at firm prices.

Having made the forward sales, the manufacturer can use his capital to acquire only as

much gold, silver, or platinum as may be needed to make the products that will fill its

orders



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Limitations of Hedging

The asset whose price is to be hedged may not be exactly the same as the asset

underlying the futures contract.

The hedger may be uncertain as to the exact date when the asset will be bought or sold.

Often the hedge may require the futures contract to be closed out well before its

expiration date. This could result in an imperfect hedge.

The expiration date of the hedge may be later than the delivery date of the futures

contract. When this happens, the hedger would be required to close out the futures

contracts entered into and take the same position in futures contracts with a later delivery

date. This is called a rollover. Hedges can be rolled forward many times. However,

multiple rollovers could lead to short term cash flow problems.



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Speculation:

Speculators accept the risk that hedgers seek to avoid, giving the market the

liquidity required to service commercial hedge participants effectively by providing the

market with the necessary bids and offers to implement a continuous flow of transactions.

Speculation is the opposite of hedging. A speculator holds no offsetting cash

market position and deliberately incurs price risk in order to reap its potential reward.

General strategies for speculating:

In general, the speculator takes a view on the market and plays accordingly. If one

is bullish on the market, one can buy futures, and vice versa for bearish outlook.

There is another strategy of playing the spreads, in which case the speculators

trades the “basis”. When a basis risk is taken, the speculator primarily bets on either the

cost of carry (interest rate in case of index futures) going up ( in which case he would pay

the basis) or going down (receive the basis).



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ANALYSIS

AND

INTERPRETATION



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I have taken 3 products to study and to analyze.

1. Gold

2. Silver

3. Wheat

A futures contract on a commodity Gold

A futures contract on a commodity Gold and work out the price of the contract.

The spot price of gold is Rs.9428/ 10gms. If the cost of financing is 12% annually, what

should be the futures price of 10gms of gold two months down the line? Let us assume

that we're on 15st may 2006. How would we compute the price of a gold futures contract

expiring on 20th

July? From the discussion above we know that the futures price is

nothing but the spot price plus the cost-of-carry. Let us first try to work out the

components of the cost-of-carry model.

The spot price of gold, S= Rs.9428/ 10gms.

The cost of financing for 66 days e0.12*(66/365)

Let us assume that the storage cost = 0.

In this case the fair value of the futures, works out to be = Rs.9634.756

9428* e0.12*(66/365) =9634.756

If the contract was for a three-month period i.e. expiring on 30th June, the cost of

financing would increase the futures price. Therefore, the futures price would.



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9428* e0.12*(90/365) =9711.13

In the example above we saw how a futures contract on gold could be priced

using arbitrage arguments and the cost-of-carry model. In the example we considered, the

gold contract was for 10 grams of gold. Hence we ignored the storage costs. However, if

the one-month contract was for a 1kgs or more of gold instead of 10gms, then it would

involve non-zero holding costs which would include storage and insurance costs. The

price of the futures contract would then be Rs.9634.756 plus the holding costs.

Table gives the indicative warehouse charges for accredited warehouses/ vaults

that will function as delivery centers for contracts that trade on the NCDEX. Warehouse

charges include a fixed charge per deposit of commodity into the warehouse, and a per

unit per week charge. The per unit charges include storage costs and insurance charges.

Table 1: NCDEX – Inactive warehouse charges



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We saw that in the absence of storage costs, the futures price of a commodity that

is an investment asset is given by . . Storage costs add to the cost

of carry. If „U‟ is the present value of all the storage costs that will be incurred during the

life of a futures contract, it follows that the futures price will be equal to

Where:

r Cost of financing (annualized)


U Present value of all storage costs.

For ease of understanding let us consider a one-year futures contract on gold. Suppose the

fixed charge is Rs.310 per deposit up to 1 kg. And the variable storage costs are Rs.55 per

week per Kg, it costs Rs.518.65 to store one kg of gold for a year (9.43 weeks). Assume

that the payment is made at the beginning of the year. the spot gold price is Rs.8472 per

10 grams and the risk-free rate is 10% per annum. What would the price of one year gold

futures be if the delivery unit is one kg?

Total price per Kg is = ((9428*1000)/10) = Rs942800

F= (942800+310+518.65) e(0.12*(66/365))

F = 964322.43



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We see that the two-month futures price of a kg of gold would be Rs. 964322.43

The Two-months futures price for 10 grams of gold would be about = Rs.9643.22

2) A futures contract on a commodity Silver

The spot price of silver, S= Rs.17028 per kg.

. cost of financing for 66 days? e0.12*(66/365)



17028* e0.12*(66/365) =17401.42

If the contract was for a three-month period i.e. expiring on 30th June, the cost of

financing would increase the futures price. Therefore, the futures price would.

17028* e0.12*(90/365) =17539.35



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3) A futures contract on a commodity Wheat

Take per Example June 21st future contract of Wheat for 1 quintal. And we are in the

June 1st; spot price is Rs.871.60 per quintal.

The spot price of Wheat, S= Rs.871.60/ 100kg.

The cost of financing for 21 days or 3 weeks? e(0.12*(21/365))



871.60* e(0.12*(21/365))

= 890.71

And now we will calculate for 100 quintals considering the costs involved.

Total amount for 100 quintals are (871.60*100) = Rs.87160

The fixed charges per quintal = Rs.110

Variable charges/ premium =Rs.7 per Quintal per week, for 100 quintals (7*100) =

Rs.700 and for 3 weeks = Rs.2100

F=(87160+110+2100) e(0.12*(21/365))

= 89986.653



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We see that the 3 weeks futures price of 100 quintals of wheat considering cost would be

Rs.89986.653. The 3 weeks futures price for quintal of Wheat without considering cost

would be about = Rs890.71

GRAPHICAL REPRESENTATION



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Q.NO 1 : Which among these investment criteria you usually prefer?

Investment Criteria

010203040506070

Ban

k Dep

osit

Real

Est

ate

stock

s

life in

suar

nceGold

Mut

ual fun

ds

Bon

ds

Deriv

atives

mar

ket

Oth

ers

Criteria's

No

of

Re

sp

on

ses

Series6

Series1

Series2

Series5

Series4

Series3

Interpretation:

Bank

Deposit

Real

Estate

Stocks Life

Insurance

Gold

Mutual

Funds

Bonds Derivates

Market

Others

66 41 48 50 57 39 46 38 13



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According to the survey we came to know that 66 respondents are invested

in Bank deposits,41 are in Real eastae,48 in stocks,50 in life insurance,57 in Gold,39 in

Mutual funds,46 in Bonds,38 in Derivatives Market,and13 others. so most of the

respondents are invested in Bank deposits and Gold.

Q.No.2 : Are you aware of commodity Market?

Yes No

37% 63%

Interpretation :

0

10

20

30

40

50

60

70

No of

Responden

ts

Opinoins

Awarness of Commodity Market

Yes

No



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The awareness level of respondents towards commodity market is 37%

and 63 % of the respondents are not aware of the commodity market. So majority of he

respondents are not aware of this commodity market. So Awareness has to be made.

Q.No3 : Are you invested in Commodity market?

yes No

35% 65%

Interpretation:

0

10

20

30

40

50

60

70

NO of

responses

opnions

Investment in commodity market

Yes

NO



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By conducting this survey we found that 35% of respondents are invested

in commodity market. And 65 % of the respondents are not invested in commodities. So

here the majority is lies with the respondents who are not invested in commodities.

Q.No4 : If yes, since how long are you trading with commodities?

<1 year 1-3 years >3 years

35% 20% 5%

Interpretation:

From this we can know that 35% of the respondents are invested less then

one year., and 20% of respondents are invested in 1to 3 years and 5% of respondents



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invested in more then three years. so here majority lies with the respondents who have

invested in less then one year.

Q .No 5 : If no, would you like to have knowledge of commodities market?

Yes No

60% 40%



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Interpretation:

From this we find that 60% of the respondents they would like to

have the knowledge of commodity market and 40% respondents are not

interested to know about this commodity market. Hence we should give

them the knowledge of commodity market in best manner.

Q.No6: Which among these commodities are you interested to trade with? How

do you rate them?

Gold

48

48.5

49

49.5

50

50.5

51

No of

responses

opnions

Knowledge of Commodity Market

Yes

No



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Yes No

73% 27%

0

20

40

60

80

No of

response

s

Yes No

opinoins

Gold

Series1

Interpretation:

Among the different commodities 73% of the respondents are interested to trade in Gold,

and 27% of the respondents are not interested to trade in gold. Here the majority of the

respondents are interested to trade in gold .

Silver



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0

20

40

60

No of

responses

Yes No

opinions

Silver

Series1

Series2

Interpretation:

Here 42% of the respondents are interested to trade in Silver, and

58% of respondents are not interested to trade in this silver. Hence most of the

respondents does not interested to trade in silver.

Crude Oil

Yes No

42% 58%



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Yes No

75% 25%

01020304050607080

No of

Response

s

Yes No

opinions

Crude oil

Series1

Series2

Interpretation

From this we came to know that 75% of the respondents are interested to trade in Crude

oil ,and 25%of the respondents are not interested to trade in this commodity. Hence

majority lies with the respondents who are interested to invest in this crude oil.

Sugar



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0

10

20

30

40

50

60

70

No of

Responses

Yes No

Opinion

Sugar

Series1

Series2

Series3

Series4

Interpretation:

Here 69% of the respondents are interested to invest in sugar ,and 31% of respondents

are not interested to invest in this crude oil. So majority of the respondents are interested

to invest in this crude oil.

Yes No

69% 31%



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Wheat

010

203040

506070

No of

responses

Yes No

Opinions

Wheat

Series1

Series2

Series3

Series4

Interpretation:

Here39% of the respondents are interested to trade in this wheat but 61% of respondents

are not interested to trade in this commodity .so majority here is that most of the

respondents are not interested to trade in wheat.

Yes No

39% 61%



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Gold (Ratings)

Interpretation:

From this survey we can know that 31% of respondents have given 1 preference to

gold .32% are given 2 preference ,14%respondents have given3rd preference,11%are

given 4Th

preference 12% have given 5ht preference. so majority here is 32% of

respondents have given 2nd

preference.

Items Gold Silver Crude oil Sugar Wheat

Ratings 31% 32% 14% 11% 12%



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Silver(Ratings)


Ratings 28% 32% 14% 14% 12%

Interpretation:


Silver .32% are given 2 preference ,14%respondents have given3rd preference,14%are

given 4Th

preference 12% have given 5ht preference. So majority here is 32% of

respondents have given 2nd

preference.



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Crude oil (Ratings)

Interpretation:


Crude oil .14% are given 2 preference, 35%respondents have given3rd reference,17%are

given 4Th


respondents have given 3rd

preference to the crude oil. .


Ratings 20% 14% 35% 17% 14%



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Sugar(Ratings)

Interpretation:


Sugar.14% are given 2 preference ,15%respondents have given3rd preference,34%are

given 4Th


respondents have given 4th

preference to the sugar .


Ratings 27% 14% 15% 34% 10%



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Wheat(Ratings)

Interpretation:


Wheat.15% are given 2 preference ,24%respondents have given3rd preference,13%are

given 4Th


respondents have given 5th

preference to the wheat..


Ratings 13% 14% 24% 13% 35%



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Q.No7: Which Factors do you normally see while trading in commodity market?

Factors for Trading in commodity market

0

5

10

15

20

25

30

35

Price

Seaso

n

Mar

ket R

ate

Risk

Ret

urns

liquidity

Safte

y

Factors

No o

f R

esp

onses Series1

Series2

Series3

Series4

Series5

Interpretation:

From this survey we found that while trading in commodity market 30%of the

respondents will see this price factor while investing in this. And 5% will

Price Season Market Rate Risk Returns Liquidity Safety

30% 5% 7% 20% 27% 5% 6%



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see season ,7&% will see market rate and 20% will see risk ,27%will see the returns 5%

will see liquidity and remaining 6% will see safety while investing in this commodity

market.

Q.No8: Which facilities do you expect from service provider of a commodity trading?

Up-To Date Information

1 2 3 4 5

18% 36% 18% 17% 11%

Interpretation:

Here 18% of the respondents expect up-to date information from the service provider,

and 36% of respondents will expect market knowledge ,18% will expect less brokerege



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,17% will see the comforts, 11% will expect Good service.so majority of the respondents

will expect Market knowledge from the service provider of the commodity.

Market Knowledge

Interpretation:

1 2 3 4 5

46% 16% 13% 15% 10%



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and 16% of respondents will expect market knowledge ,13% will expect less brokerage

,15% will see the comforts, 10% will expect Good service. so majority of the

respondents will expect up-to date information from the service provider of the

commodity.

Less Brokerage

Interpretation:

1 2 3 4 5

70% 3% 6% 14% 7%



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and 3% of respondents will expect market knowledge ,6% will expect less brokerage


will expect Up-to –date information from the service provider of the commodity.

Comforts

1 2 3 4 5

15% 11% 19% 24% 31%

0

10

20

30

40

No of

Response

s

Ratings

Comforts

Series1 15 11 19 24 31

1 2 3 4 5



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Interpretation:


and11% of respondents will expect market knowledge ,19% will expect less brokerage


will expect Good Service.from the service provider of the commodity.

Good Service

1 2 3 4 5

16% 26% 13% 16% 19%



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0

10

20

30

No of

Response

s

Ratings

Good Service

Series1 16 26 13 16 29

1 2 3 4 5

Interpretation:


and 26% of respondents will expect market knowledge, 13% will expect less brokerage,

16% will see the comforts, 29% will expect Good service. So majority of the respondents

will expect Good Service from the service provider of the commodity.



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FINDING

&

SUGGESTIONS

Findings

Commodity Futures have a bright future in coming days.

Deciding on the prices depending on the formulas may go wrong. Because it is

cost plus carry, but in real sense the prices may even go down than the spot

prices.

Price of a commodity is dependent on its demand and supply of that commodity

in the market.



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As the commodity future market is new and emerging, many investors and

farmers are not fully aware of this market. As this market, helps them to trade

transparently without middlemen or agents to earn the good profits.

Consumption products are perishable in nature, so investing in these

commodities are risky, as compared to investment commodities. And also there

is a normal loss may arise which should be bared by the trader in case he wants

delivery.

Here 63% of the respondents are not aware of the commodity market.

There is no growth in commodity market, and it is in the initial stage.

65% of the respondents are not invested in commodity market.

60% of respondents are interested to invest in the commodity market.

73% of the respondents are interested to invest in the gold,42%in silver,75%in

crude oil,69%in sugar,39%in wheat.

Most important factor the respondents will see while investing is Price 30% and

27% Returns.

The investor has to invest only 5% of margin and he can hold the commodity.

The commodity market prices depend upon the demand & supply as well as on

global market.

The investor should know the market idea, within a range he has to play. In spot

market for commodity, the investors have to understand the price movement, and

in future market it is difficult to play without knowing the spot market.

Suggestions:

Creating the awareness among the people and farmers about commodity market

through:

Making presentations in the villages to the farmers by video and

explaining them the uses and benefits of the commodity market



BANGALORE


Educate them on how to trade the commodity futures, i.e. getting

in to the contract before harvesting only, to get the minimum

guarantees.

The Company should inform the benefits of Commodity trading to the present

investors who are investing in cash market.

Agents should be given information regarding changes in the price margins of

different commodities, because they are not aware of the market.

Company should approach people who are already into the business of gold,

silver , sugar ,crude oil etc.

Through personal contact we can create awareness.

Conclusion:

The commodity futures market is new and emerging market. The

awareness of the market is very less among the farmers who can use this trade to

sell their products without the middlemen or agents it also helps the actual buyers



BANGALORE


too. The study of price volatility helps the traders to trade effectively even it have

some draw-backs they can be avoided with careful study and observation of

current happenings in market, political issues, change in demand and supply,

production and consumption pattern etc,. Here trader also can transfer his risk to

some other who can handle it or can appetite the risk through hedging technique.

The cash market also influences the commodity future market.



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ANNEXURE

Questionnaire



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Name:__________________________________________________

Address:________________________________________________

Contact No:(Mobile/LL) __________________________________

E-Mail:_________________________________________________

Age

Occupation: ____________________________________________

1) Which among these investment criteria you usually prefer?

Bank Deposits

Real Estate

Stocks

Life Insurance

Gold

Mutual Funds

Bonds

Derivatives market

Others if Specify ________________

2) Are you aware of Commodity Market?

Yes No

3) Are you invested in Commodity market?

Yes No

4) If yes, since how long are you trade with Commodities?

<1 year 1-3 years > 3 years



BANGALORE


5) If no, would you like to have knowledge of Commodities market?

Yes No

6) Which among these Commodities are you interested to trade with? How

do you rate them? [Rate 1 for most preferred & 5 for least preferred].

Items Gold Silver Crude Oil Sugar Wheat

Yes/No

Ratings

7) Which factor do you normally see while trading in commodity market?

Price

Season Market Rate Risk Returns Liquidity Safety

8) Which facilities do you expect from service provider of a commodity

trading?

(Give the ratings,1-5,1for high,5for low).



BANGALORE


9) Your valuable suggestions are welcomed.

________________________________________________

________________________________________________

Thank you

Data Code Sheet:

Sl. Qno Q Qno Qn Qno.5A Qno.5 Qno.6 Qno.7

Up-To Date Information

Market Knowledge

Less Brokerage

Comforts

Good service



BANGALORE


No. 1 No

2

3 o 4 B

1 2 3 4 5 6 7 8 9 1 2 1 2 3 1 2 1 2 3 4 5 Rankings 1 2 3 4 5 6 7 1 2 3 4 5

Y N Y N Y N Y N Y N 1 2 3 4 5

1 1 1 1 1 1 1 1 1 1 1 1 1 2 5 1 3 4 1 1 1 2 1 4 3 5

2 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 2 1 4 5 3

3 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 1 4 2 5 3

4 1 1 1 1 1 1 1 1 1 1 1 1 1 5 4 1 3 2 1 1 1 2 3 4 1 5

5 1 1 1 1 1 1 1 1 1 1 1 1 1 5 2 4 3 1 1 1 1 4 2 5 3

6 1 1 1 1 1 1 1 1 1 1 1 5 2 1 3 4 1 1 1 1 2 3 4 1 5

7 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 2 1 5 4 3

8 1 1 1 1 1 1 1 1 1 1 1 1 3 5 1 2 4 1 1 1 1 1 4 5 3 2

9 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 1 5 1 1 1 3 5 4 1 2

10 1 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 1 3 4 2 5

11 1 1 1 1 1 1 1 1 1 1 1 1 4 5 2 1 3 1 1 1 1 2 1 3 4 5

12 1 1 1 1 1 1 1 1 1 1 1 1 1 3 4 1 2 5 1 1 1 3 4 1 5 2

13 1 1 1 1 1 1 1 1 1 1 1 5 1 4 2 3 1 1 1 1 3 4 5 1 2

14 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 1 1 1 1 1 5 1 4 2 3

15 1 1 1 1 1 1 1 1 1 1 1 3 2 1 4 5 1 1 1 3 4 1 5 2

16 1 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 2 4 5 3 1

17 1 1 1 1 1 1 1 1 1 1 1 3 5 2 1 4 1 1 1 5 4 1 2 3

18 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 3 1 4 5 2



BANGALORE


19 1 1 1 1 1 1 1 1 1 1 1 1 2 1 3 4 5 1 1 1 1 5 2 3 4 1

20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 1 1 1 4 5 1 3 2

21 1 1 1 1 1 1 1 1 1 1 1 1 1 2 5 3 4 1 1 1 5 1 2 4 3

22 1 1 1 1 1 1 1 1 1 1 1 1 2 5 3 4 1 1 1 4 1 3 5 2

23 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 5 4 3 1 1 1 3 2 4 5 1

24 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 4 5 3 1 1 1 4 1 5 3 2

25 1 1 1 1 1 1 1 1 1 1 1 2 5 1 4 3 1 1 1 2 3 1 5 4

26 1 1 1 1 1 1 1 1 1 1 2 3 1 4 5 1 1 1 2 1 3 4 5

27 1 1 1 1 1 1 1 1 1 1 3 4 5 2 1 1 1 1 1 3 2 1 4 5

28 1 1 1 1 1 1 1 1 1 1 1 5 4 3 1 2 1 1 1 4 3 5 1 2

29 1 1 1 1 1 1 1 1 1 1 1 2 5 1 3 4 1 1 1 4 3 2 5 1

30 1 1 1 1 1 1 1 1 1 1 1 2 5 4 1 3 1 1 1 3 2 1 4 5

31 1 1 1 1 1 1 1 1 1 1 1 1 5 4 1 3 2 1 1 1 1 2 3 4 1 5

32 1 1 1 1 1 1 1 1 1 1 1 3 4 2 1 5 1 1 1 1 2 3 1 5 4

33 1 1 1 1 1 1 1 1 1 1 1 1 2 5 1 3 4 1 1 1 4 5 1 3 2

34 1 1 1 1 1 1 1 1 1 1 3 4 5 2 1 1 1 1 1 2 1 3 4 5

35 1 1 1 1 1 1 1 1 1 1 5 4 3 2 1 1 1 1 1 5 3 4 1 2

36 1 1 1 1 1 1 1 1 1 1 1 4 5 3 2 1 1 1 1 1 2 3 4 5 1

37 1 1 1 1 1 1 1 1 1 1 1 1 4 1 5 2 3 1 1 1 4 3 1 2 5

38 1 1 1 1 1 1 1 1 1 1 1 1 1 4 5 3 1 2 1 1 1 2 1 4 3 5

39 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 1 1 1 4 5 1 2 3

40 1 1 1 1 1 1 1 1 1 1 1 2 1 5 4 3 1 1 1 1 2 3 4 1 5



BANGALORE


41 1 1 1 1 1 1 1 1 1 1 1 1 1 4 2 3 5 1 1 1 5 1 3 4 2

42 1 1 1 1 1 1 1 1 1 1 1 1 2 4 3 5 1 1 1 1 1 4 2 3 5

43 1 1 1 1 1 1 1 1 1 1 1 3 2 4 5 1 1 1 1 1 4 2 3 5 1

44 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 3 1 4 2 5

45 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 2 3 1 4 5

46 1 1 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 4 2 5 3 1

47 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 2 3 5 4 1

48 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 2 4 5 1 1 1 3 1 4 5 2

49 1 1 1 1 1 1 1 1 1 1 2 3 5 4 1 1 1 2 5 4 3

50 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 4 1 2 3 5

51 1 1 1 1 1 1 1 1 1 2 3 1 5 4 1 1 3 1 4 5 2

52 1 1 1 1 1 1 1 1 1 1 1 1 4 2 3 5 1 1 1 3 4 5 2

53 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 1 1 2 1 3 5 4

54 1 1 1 1 1 1 1 1 1 1 1 1 3 2 4 5 1 1 4 1 3 5 2

55 1 1 1 1 1 1 1 1 1 1 5 2 3 4 1 1 5 4 1 2 3

56 1 1 1 1 1 1 1 1 1 1 1 1 1 1 5 3 2 4 1 1 2 1 5 3 4

57 1 1 1 1 1 1 1 1 1 1 1 5 3 2 1 4 1 1 4 3 2 1 5

58 1 1 1 1 1 1 1 1 1 1 1 3 4 2 1 5 1 1 1 1 1 2 5 3 4

59 1 1 1 1 1 1 1 1 1 1 3 4 2 1 5 1 1 1 1 1 1 1 2 3 4 5 1

60 1 1 1 1 1 1 1 1 1 1 1 1 2 5 3 4 1 1 1 1 1 1 1 1 2 3 4 5

61 1 1 1 1 1 1 1 1 1 1 1 1 3 5 2 4 1 1 2 3 5 4 1

62 1 1 1 1 1 1 1 1 1 1 5 4 2 3 1 1 1 1 1 4 3 5 1 2



BANGALORE


63 1 1 1 1 1 1 1 1 1 1 5 3 2 1 4 1 1 1 1 2 3 5 4

64 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 2 4 1 5 1 1 1 2 1 5 4 3

65 1 1 1 1 1 1 1 1 1 1 2 3 1 5 4 1 1 1 3 1 5 4 2

66 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 2 1 4 5 3

67 1 1 1 1 1 1 1 1 1 1 1 1 2 3 5 4 1 1 1 1 1 2 5 4 3

68 1 1 1 1 1 1 1 1 1 1 2 4 5 1 3 1 1 1 1 2 1 5 4 3

69 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 4 3 2 5 1 1 1 1 2 3 1 5 4

70 1 1 1 1 1 1 1 1 1 1 1 1 2 3 1 4 5 1 1 1 1 2 3 5 1 4

71 1 1 1 1 1 1 1 1 1 1 1 3 2 1 4 5 1 1 1 1 1 1 2 4 5 3

72 1 1 1 1 1 1 1 1 1 1 2 4 5 3 1 1 1 1 2 1 4 3 5

73 1 1 1 1 1 1 1 1 1 1 1 2 1 5 4 3 1 1 1 1 2 3 4 1 5

74 1 1 1 1 1 1 1 1 1 1 1 1 4 2 3 5 1 1 1 5 1 3 4 2

75 1 1 1 1 1 1 1 1 1 1 1 1 2 4 3 5 1 1 1 1 1 4 2 3 5

76 1 1 1 1 1 1 1 1 1 1 1 3 2 4 5 1 1 1 1 1 4 2 3 5 1

77 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 3 1 4 2 5

78 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 2 3 1 4 5

79 1 1 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 4 2 5 3 1

80 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 2 3 5 4 1

81 1 1 1 1 1 1 1 1 1 1 1 1 1 3 2 4 5 1 1 1 3 1 4 5 2

82 1 1 1 1 1 1 1 1 1 1 1 2 3 5 4 1 1 1 2 5 4 3

83 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 2 1 4 5 3

84 1 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 1 4 2 5 3



BANGALORE


85 1 1 1 1 1 1 1 1 1 1 1 1 1 5 4 1 3 2 1 1 1 2 3 4 1 5

86 1 1 1 1 1 1 1 1 1 1 1 1 5 2 4 3 1 1 1 1 4 2 5 3

87 1 1 1 1 1 1 1 1 1 1 1 5 2 1 3 4 1 1 1 1 2 3 4 1 5

88 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 2 1 5 4 3

89 1 1 1 1 1 1 1 1 1 1 1 1 3 5 1 2 4 1 1 1 1 1 4 5 3 2

90 1 1 1 1 1 1 1 1 1 1 1 2 3 4 1 5 1 1 1 3 5 4 1 2

91 1 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 1 1 3 4 2 5

92 1 1 1 1 1 1 1 1 1 1 1 1 4 5 2 1 3 1 1 1 1 2 1 3 4 5

93 1 1 1 1 1 1 1 1 1 1 1 1 3 4 1 2 5 1 1 1 3 4 1 5 2

94 1 1 1 1 1 1 1 1 1 1 1 4 5 1 2 3 1 1 1 1 2 4 5 3 1

95 1 1 1 1 1 1 1 1 1 1 1 3 5 2 1 4 1 1 1 5 4 1 2 3

96 1 1 1 1 1 1 1 1 1 1 1 2 4 1 3 5 1 1 1 3 1 4 5 2

97 1 1 1 1 1 1 1 1 1 1 1 1 2 1 3 4 5 1 1 1 1 5 2 3 4 1

98 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 1 1 1 4 5 1 3 2

99 1 1 1 1 1 1 1 1 1 1 1 1 1 2 5 3 4 1 1 1 5 1 2 4 3

10

0

1 1 1 1 1 1 1 1 1 1 1 1 2 5 3 4 1 1 1 4 1 3 5 2

BIBLIOGRAPHY



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Security Analysis and Portfolio Management By: Ronald Fischer and Jordan

Reports

Brouchers

Web Sites:

www.nseindia.com

www.geojit.com

www.google.com

www.commodityindia.com

http://www.nseindia.com/

http://www.geojit.com/

http://www.google.com/

http://www.commodityindia.com/

a project report on commodity futures and awareness level of commodity market at geojit financial...

Economy & Finance