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Fundamental and technical analysis in Crude Oil and Natural

Gas

(NAME)

(HT NO)

Project submitted in partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Internal guide: External gu

Asst. Professor

PRINCETON P.G COLLEGE

(Affiliated to Osmania University)

Hyderabad-500007


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DECLARATION

I hereby declare that this project report titled Fundamental and

technical analysis in Crude Oil and Natural Gas submitted by me to

the Department ofPRINCETON P.G COLLEGE, is a bonafide work undertaken by me

and it is not submitted to any other University or institution for the award of any degree/

diploma/certificate of published any time before.

Name and Address of the Student Signature of the student

Date:


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CERTIFICATE

This is to certify that the Project Report titled Fundamental and

technical analysis in Crude Oil and Natural Gas submitted in partial

fulfillment for the award ofMASTER OF BUSINESSADMINISTRATION was carried

by under my guidance.This has not been submitted to any other University or

Institution for the award of any degree/diploma/certificate.

Name and Address of the Supervisor Signature of the Supervisor

Date:


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ACKNOWLEDGEMENT

I convey my heartful thanks to every one who helped me directly

and indirectly in completing my project successfully.

I convey my heartful thanks to Mrs. for guiding me in

successful completion of my project.

I would like to thank Mrs ,Head of the

Department, Business management and all the faculty members, Princeton

P.G College for their valuable guidance throughout the completion of my

project.

I

convey my heartful thanks to , FCH for giving me anopportunity to undertake the project. Ialso thank ,FCH and the entire staff

for guiding me and extending their support in completion of my project.

I am indebted to my family members and friends for their moral

support in completing my project work.

()


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ABSTRACT

India has a long history of commodity futures trading, extending over 125

years. 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.

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

contract as a contract for the delivery of goods and whish is not a ready delivery contract.

In India, the Commodity Futures Trading is gaining importance in the

market. To study how the Crude oil Natural gas are trading in MCX and NCDEX. Industry

and Economic Analysis of both the products. Technical analysis for both the products using

Moving averages, Resistance and Support, MACD (Moving Average and Converse

Diversion), RSI (Relative Strength Index). The data collected only on commodity

derivatives but not on the financial derivatives.

The share of GDP of crude oil was only 28.7 % while 71.3 %

were imports. And the total crude oil production in 2003-04 was 33 million tons, while

imports were as high as 90 million tons. The share of natural gas in Indias energy mix has

increased from 2.5 % in 1980s to more than 7 % now. The demand for natural gas in India

is 1.5 times the current levels of domestic production. Demand for gas is expected to rise at

CAGR of more than 5 % during 2000 to 2025.

Technical analysis is explained by using Moving averages,

Resistance and Support, MACD (Moving Average and Converse Diversion), RSI (Relative

Strength Index). In both the graphs crude oil and natural gas, Moving averages is plotted by


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taking 9-day (black) and 18-day (pink). If 18-day is crossing the 9-day, it is indicated that

market is falling down. If 9-day is crossing the 18-day, it is indicated that market is moving

upwards. .

Resistance is equivalent to supply line, and support is

equivalent to demand line. In the above chart we observe that, the above line shows

Resistance and below line shows Support. Here, both the 18-day and 9-day are

crossing the resistance, so resistance becomes support. In crude oil, the Resistance line is

above the point 3000 and Support line is near to the point 2750, where as in natural gas, the

Resistance line is at the point 345 and Support line is at the point 312, so we say that it

shows a good Resistance and Support lines.

MACD is done by taking the Difference between the 12-day & 26-day

EMAs. A 9-day EMAs, called the signal (or trigger) line is plotted on top of the MACD

to show buy/sell opportunities. MACD is indicated by red line and 9-day or signal line is

indicated by black line. If MACD is above its signal line, so it shows buy signal. Later, if

MACD is below its signal line, it shows a sell signal.

The RSI is a popular oscillator. It usually tells about the Overbought

and Oversold. If RSI is above 70, it is considered as Overbought. If RSI is below 30, it is

considered as Oversold.

So, I would like to conclude that, we cant expect how the prices are

fluctuating in futures market. I found that there are only futures contracts to the commodity

markets. I would like to suggest that it will be better if Options contract are included.


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TABLE OF CONTENTS

CONTENTS PAGE NO

List of Tables A

List of Charts B

1. INTRODUCTION 11

2.OBJECTIVE AND SCOPE OF THE STUDY

3.RESERACH AND METHODOLOGY

4.REVIEW OF LITERATURE 16

5. COMPANYPROFI LE

6. DATA ANALYSIS AND INTERPRETATION OF ENERGY

COMMODITIES

70

6.1 FUNDAMENTAL ANALYSIS OF Crude Oil 78

6.2 TECHNICAL ANALYSIS OF Crude Oil 97

6.3FUNDAMENTAL ANALYSIS OFNATURAL GAS 107

6.4 TECHNICAL ANALYSIS OF NATURAL GAS 125

7.FINDINGS AND SUGGESTIONS

8. CONCLUSIONS 130

9. BIBLIOGRAP HY


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(A)

LIST OF TABLE

CONTENTS PAGE NO

List of Exchanges for different products 26

Commodity Exchange registered in India 27

OilIntensity in Major Countries based on GDP 92

Impact of increase in Oil prices on growth and inflation levels in India 95

Future Contract specification of Crude oil 100

Future Contract specification of Natural Gas 128


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(B)

LIST OF CHARTS

CONTENTS PAGE NO

a) Crude OilPrices (1969 - 2009) 79b) U.S and WORLD Events and OilPrices 80c) WORLD Events and OilPrices 82d) Increase in Energy Demand 87e) World Oil Production 88f) Technical Analysis of Crude Oil 97g) Distribution of proved reserves in 1985 (NG) 112h) Distribution of proved reserves in 1995 and 2005 (NG) 113i) Share of Natural gas as primary source 114j) Demand and Supply Scenario 115k) Domestic scenario l) Share of Natural Gas 118m)Domestic Natural Gas Production 121n) Technical Analysis of Natural Gas 125


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CHAPTER-1

INTRODUCTION


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INTRODUCTION

HISTORY OF COMMODITY TRADING:

In the 1840s, Chicago had become a commercial center with railroad and telegraph lines

connecting it with the East. Around this same time, the McCormick reaper was invented

which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell

their wheat to dealers who, in turn, shipped it all over the country.

He brought his wheat to Chicago hoping to sell it at a good price. The city had few storage

facilities and no established procedures either for weighing the grain or for grading it. In

short, the farmer was often at the mercy of the dealer.

1848 saw the opening of a central place where farmers and dealers could meet to deal in

spot grain that is, to exchange cash for immediate delivery of wheat.

The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers)

began to commit to futures exchanges of grain for cash. For instance, the farmer would

agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June.

The bargain suited both parties. The farmer knew how much he would be paid for his

wheat, and the dealer knew his costs in advance. The two parties may have exchanged a

written contract to this effect and even a small amount of money representing a

guarantee.


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Such contracts became common and were even used as collateral for bank loans. They also

began to change hands before the delivery date. If the dealer decided he didnt want the

wheat, he would sell the contract to someone who did. Or, the farmer who didnt want to

deliver his wheat might pass his obligation on to another farmer. The price would go up

and down depending on what was happening in the wheat market. If bad weather had

come, the people who had contracted to sell wheat would hold more valuable contracts

because the supply would be lower; if the harvest were bigger than expected, the sellers

contract would become less valuable. It wasnt long before people who had no intention of

ever buying or selling wheat began trading the contracts. They were speculators, hoping to

buy low and sell high and buy low.

NEED FOR THE STUDY

1. The Commodity Futures Trading is gaining immense importance in Secondary

market Investments.

2. while Crude Oil and Natural Gas are backbone of any economy in the world and

their trading and price fluctuations show retro- spective effect .

3. As such, commodity trading on these products has been gaining importance in the

market.


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CHAPTER-2

OBJECTIVES AND

SCOPE


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OBJECTIVES OF THE STUDY

1. Commodity trading at MCX and NCDEX in crude oil and Natural gas

2. To study the industry and economic analysis of both the products

3. Technical analysis of the products in commodity Future study of crude oil and

Natural Gas using five statistical methods with special reference to moving

averages method , RSI (Relative Strength Index), MACD (moving average

convergence divergence),Resistance and Support.

4. To study the fluctuations in commodity Futures markets using 4 technical methods.

SCOPE AND LIMITATIONS OF THE STUDY

1. Commodity trading at MCX on crude oil and natural gas

2. Commodity trading only for a period.

3. Technical analysis using to moving averages method, RSI (Relative Strength

Index), MACD (moving average convergence divergence), Resistance and Support.

4. The data collected only on commodity derivatives but not on the financial

derivatives.

5. The commodities covered under this project are limited to two; they are crude oil

and Natural gas.

6. In analysis we can say that, in coming 3 days we cant expect how the prices are

fluctuating in the Futures market.


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CHAPTER-3

RESEARCH AND

METHODOLOGY


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METHODOLOGY OF THE STUDY

RESEARCH OF THE STUDY

TYPE OF RESEARCHThe research is basically a descriptive research. In this project Descriptive researchmethodologies is u sed . The research methodology will be used fo r gatheringdetails of different aspects of CRUDEOIL AND NATURAL GAS ANALYSIS

SOURCE OF DATA COLLECTION

Secondary data will be collected from articles in journals and magazines. The databaseof MCX, NCDEX,OPEC and NYMEX will be taken. As this topic is very new, article fromother we b s i t e l i n k s i s r e q u i r e d . Report submitted b y MCX/FMC committee isused.

METHODOLOGY OF THE STUDY

Data collection instrument:

SecondaryData:

The data that is used in this project is also in the form of secondarynature. The data is collected from secondary sources such as various websites, journals, newspapers, books, etc. the analysis used in this project has been doneusing selective technical tools. In Equity market, risk is analyzed and tradingdecisions are taken on basis of technical analysis. It is collecting share prices ofselected companies for a period of five years.

TOOLS USED:

1. Win quote is using for charts building

2. Ms excel is using for demand and supply graphs.


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CHAPTER-4

REVIEW

OFLITERATURE


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LITERATURE REVIEW

COMMODITY FUTURESMARKET:

India has a long history of commodity futures trading, extending over 125 years. Still, such

trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an

elusive socialistic pattern of society. As the country embarked on economic liberalization

policies and signed the GATT agreement in the early nineties, the government realized the

need for future trading to strengthen the competitiveness of Indian agriculture and the

commodity trade and industry. Futures trading began to be permitted in several

commodities, and the ushering in of the 21-century saw the emergence of new National

Commodity Exchange with country wide reach for trading in almost all primary

commodities and their products.

A commodity futures contract is essentially a financial instrument. Following the absence

of futures trading in commodities for nearly four decades, the new generation of

commodity producers, processors, market functionaries, financial organizations, broking

agencies and investors at large are, unfortunately, unaware at present of the economic

utility, the operational techniques and the financial advantage of such trading.

The futures markets are described as continuous auction markets and exchanges providing

the latest information about supply and demand with respect to individual commodities,


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financial instruments, and currencies. Futures exchanges are where buyers and sellers of an

expanding list of commodities, financial instruments, and currencies, come together to

trade. Trading has also been initiated in options on futures contracts. Thus, option buyers

participate in futures markets with different risk. The exact risk is known to the option

buyer. It is unknown to the futures trader.

STATURORY FRAME WORK 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 their under. The nodal

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

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

and Public Distribution of the Central Government..

WHAT IS 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


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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.

WHAT IS COMMODITY EXCHANGE?

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

organizing futures trading in commodities.

The National commodity & Derivatives Exchange of India Limited (NCDEX) and Multi

Commodity Exchange of India (MCX0 the premier exchanges of India have become

operational from December 15th of2003 in national level.

HOW FUTURESMARKETS CAME ABOUT:

Many people see pictures of the large crowd of traders standing in a crowd yelling and

signaling with their hands, holding pieces of paper, and writing frantically. To the outsider,

it looks like chaos. But do you really think that there is in fact chaos going on in the

worlds futures pits? Not a chance. Actually, everyone in the crowd knows exactly whats

going on.


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How does this differ from the way thinks operated in the old days? Before there were

organized grain and commodity markets, farmers would bring their harvested crops to

major population centers. There they would search for buyers. There were no storage

facilities; and many times the harvest would rot before buyers were found. Also, because

many farmers would bring their crops to market at the same time, the price of the crops or

commodities would be driven down. There was tremendous supply in relation to demand.

The reverse was true in the spring. Many times there would be a shortage of crops and

commodities and the price would rise sharply.

Initially, the first organized and central market places were created to provided spot prices

for immediate delivery. Shortly thereafter, forward contracts were also established. These

forwards were forerunners to the present day futures contract.

Futures prices and the bid and asked price are continuously transmitted throughout the

world electronically. Regardless of what geographic location the speculator or hedger is

located in, he has the same access to price information as everyone else. Farmers, bankers

manufactures, corporations, all have equal access. All they have to do is call their broker

and arrange for the purchase or sale of a futures contract. The person who takes the

opposite side of your trade may be a competitor who has a different outlook on the future

price, it may be a floor broker, or it could be a speculator.


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MEANING OF FUTURES CONTRACT:

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

contract for the delivery of goods and whish is not a ready delivery contract. Under the

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

payments of price therefore, 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 talking the physical delivery of goods. In market parlance, the ready delivery contracts

are commonly known as spot or cash contracts.

All contracts in commodities providing for delivery of goods and/or payment of price after

11 days from the date of the contract are forward contracts. Forward contracts are of two

types specific delivery contracts and futures contracts. Specific delivery contracts

provide future period, and in which the names of both the buyers and the sellers are

mentioned.

The term futures contract is nowhere defined in the FCRA. But the Act implies that is a

forward contract, it is necessarily a contract for the delivery of goods. A futures contract

in which delivery is not intended is void (i.e., not enforceable by law), and is, therefore, not

permitted for trading at any commodity exchange.


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SALIENT FEATURES OF A COMMODITY FUTURES CONTRACT:

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 contracts is for

a specified variety of a commodity, known as the basis, though quite a few other similar

varieties, both inferior and superior, are allowed to be deliverable or tenderable for delivery

against the specified futures contract.

The quality parameters of the basis and the permissible tenderable varieties; the delivery

months and schedules; the places of delivery; the on and of allowances for the quality

differences and the transport costs; the tradable lots; the modes of price quotes; the

procedures for regular periodical (mostly daily) clearings; the payments of prescribed

clearing and margin monies; the transaction, clearing and other fees; the arbitration, survey

and other dispute redressing methods; the manner of settlement of outstanding transactions

after the last trading day, the penalties for nonissuance or non-acceptance of deliveries,

etc., are all predetermined by the rules and regulation of the commodity exchange.

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

bought and sold the price. Everything else is prescribed by the Exchange. Because of the

standardized nature of the futures contract, it can traded with ease at a moments notice.


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BASICS OF FUTURES TRADING:

Trading commodity futures and options is not for everyone. It is a volatile, complex, and

risky business. Before you invest any money in futures or options contracts, you should:

yConsider your financial experience, goals, and financial resources and know

how much you can afford to lose above and beyond your initial payment.

yUnderstand commodity futures and option contracts and your obligations in

entering into those contracts.

WHO USES FUTURESMARKET:

The futures market participants comprise of farmers, traders, producers, processors,

exporters, importers and industry associated with commodities. The futures market is used

for hedging the price risk and for trading or arbitrage. Brokers of exchange, who are

located all across the country, serve the futures market users directly through their own

branch offices network or through the network of their franchisees or sub-brokers.


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COMMODITY FUTURES TRADING

EVOLUTION OF COMMODITY MARKET IN INDIA:

Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized 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 Vyapuri Mandali, which carried on futures trading in

groundnut, castor seed and cotton. A future trading in wheat was 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 raw jute

goods. But organized futures trading in raw jute began only in 1927 with the establishment

of east India Jute Association Ltd. to conduct organized trading in both raw jute and jute

goods. A forward contract (Regulation) Act was enacted in 1952 and the Forward Market

Commission (FMC) was established in 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.


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EMERGING TRENDS IN COMMODITY MARKET IN INDIA:

Commodity markets have existed in India for a long time, below Table gives the list of

registered commodities exchanges in India. The table gives the total annualized volumes on

various exchanges.

While the implementation of the Kabra Committee recommendations were rather show,

today, the commodity derivative market in India seems poised for a transformation.

national level commodity derivatives exchanges seem to be the phenomenon. The Forward

Markets Commission accorded in principle approval for the following National Level Multi

Commodity Exchanges. The increasing markets in India seem to be a promising game.


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NATIONAL BOARD OF TRADE .

MULTI COMMODITY EXCHANGE OF TRADE.

NATIONAL COMMODITY &DERIVATIVES EXCHANGE OF INDIA LTD.

COMMOTITY EXCHANGE PRODUCTS APPROX. ANNUAL VOL

(RS. CRORE)

National Board ofTrade, Indore Soya, Mustard 80000

National Multi-Commodity

exchange, Ahmedabad

Multiple 40000

Rajdhani Oil & Oil Seeds Mustard 3500

Vijai Beopar Chamber Ltd,

muzzaffarnagar

Gur 2500

Rajkot seeds Oil & bullion

Exchange

Castor, Groundnut 2500

IPSTA,Cochin Pepper 2500

Chamber of commerce, hampur Gur, Mustard 2500

Bhatinda Om and Oil exchange Gur 1500

Ahmedabad Commodity Exchange Castor, cotton 3500

Other (mostly inactive) 1500

Total 140000


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COMMODITY EXCHANGE REGISTERED IN INDIA

Commodity Exchange Products traded

Bhatinda Om & Oil Exchange Ltd. Gur

The Bombay Commodity Exchange Ltd. Sunflower Oil, Cotton (Seed and Oil),Groundnut (Nut and Oil), Castor Oil,Catoreseed, Sesamum (Oil and Oilcake),Rice bran, Rice bran Oil and Oil Cake,Crude Palm Oil

The Rajkot Seeds Oil & BullionMerchants

Groundnut Oil

Association Ltd. Castor Seed

The Kanpur Commodity Exchange Ltd. Rapeseed/Mustard Seed Oil and CakeThe Meerut Agro Commodities

Exchange Co. Ltd.Gur

The Spieces and Oilseeds Exchange Ltd.Sangli

Turmeric

Ahmedabad Commodities Exchange ltd. Cotton Seed, Castor Seed

Vijay Beopar Chamber Ltd.,Muzaffarnagar

Gur

India Pepper & Spice Trade Association,Kochi

Pepper

Rajdhani Oils and Oilseeds ExchangeLtd., Delhi

Gur, Rapeseed/Mustard Seed SugarGrade-M

National Board ofTrade, Indore Rapeseed/Mustard Seed/ oilCake/Soyabean/Meal/Oil,Crude PalmOil

The Chamber of Commerce, Hapur Gur. Rapeseed/Mustard Seed

The East India Cotton Association,Mumbai

Cotton

The East India jute & Hessian ExchangeLtd., Kolkata

Hessian, Sacking

First Commodity Exchange of IndiaLtd., Kochi

Copra, Coconut Oil & Copra Cake

The Coffee Futures Exchange of IndiaLtd.,Bangalore

Coffee

The Central India Commercial ExchangeLtd., Gwaliar

Gur


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FUNDAMENTAL ANALYSIS

DEFINITION:

A method of security valuation which involves examining the companys financials and

operations, especially sales, earnings growth potential, assets, debt, management, products,

and competition. Fundamental analysis is taken in to consideration only those variables that

are directly related to the company itself, rather than the overall state of the market or

technical analysis data.

Fundamental analysis is a method used to determine the value of a stock by analyzing the

financial data that is fundamental to the company. That means the fundamental analysis

takes in to consideration only those variables that are directly related to the company itself,

such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the

overall state of the market nor does it include behavioral variables in its methodology. It

focuses exclusively on the companys business in order to determine whether or not the

stock should be bought or sold.

Critics of fundamental analysis often charge that the practice is either irrelevant or that it is

inherently flawed. The first group, made up largely of proponents of the efficient market

hypothesis, say that fundamental analysis is a useless practice since a stocks price will

always already take in to account the companys financial data. In other words, they argue

that it is impossible to learn any thing new about a company by analyzing its fundamentals

that the market as a whole does not already known, since everyone has access to the same


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financial information. The other major argument against fundamental analysis is more

practical than theoretical. These critics charge that fundamental analysis is too unscientific

a process, and that its difficult to get a clear picture of a companys value when there are

so many qualitative factors such as a companys management and its competitive

landscape.

However, such critics are in the minority. Most individual investors and investment

professionals believe that fundamental analysis is useful, either alone or in combination

with other techniques. If you decide that fundamental analysis is the method for you, youll

find that a companys financial statements (its income statement, its balance sheet, and its

cash flow statement) will be indispensable resources for your analysis. And even if youre

not totally sold on the idea of fundamental analysis, its probably a good idea for you to

familiarize yourself with some of the valuation measures it uses since they are often talked

about in other types of stock valuation techniques as well.

FUNDAMENTAL ANALYSIS TOOLS

These are the most popular tools of fundamental analysis. Which focus on earnings per

share, price to earnings ratio, price to sales ratio, price to book ratio, dividend yield.

y EARNINGS PERSHARE:

The over all earnings of a company is not in itself a useful indicator of a stocks worth.

Low earnings coupled with low outstanding shares can be more valuable than high earnings


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with a high number of outstanding shares. Earnings per share is much more useful

information than earnings by itself. Earnings per share (EPS) is calculated by dividing the

net earnings by the number of outstanding shares. For example:ABC company had net

earnings of $1 million and 100,000 outstanding shares for an EPS of 10

(1,000,000/100,00=10). This information is useful for comparing two companies in a

certain industry but should not be the deciding factor when choosing stocks.

y PRICE TO EARNING RATIO:

The price to earning ratio (P/E) shows the relationship between stock price and company

earnings. It is calculated by dividing the share price by the earnings per share. in our

example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E

is (50/10=5). The P/E tells you how much investors are willing to pay for that particular

companys earnings. P/E's can be read in a variety of ways. A high P/E could mean that the

company is overpriced or it could mean that investors expect the company to continue to

grow and generate profits. A low P/E could mean that investors are wary of the company or

it could indicate a company that most investors have overlooked.


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y PRICE TO SALES RATIO:

When a company has no earnings, there are other tools available to help investors judge its

worth. New companies in particular often have no earnings, but that does not mean they are

bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies.

It is calculated by dividing the market cap (stock price times number of outstanding shares)

by total revenues. An alternate method is to divide current share price by sales per share.

P/S indicates the value the market places on sales. The lower the P/S the better the value.

y PRICE TO BOOK RATIO:

Book value is determined by subtracting liabilities from assets. The value of a growing

company will always be more than book value because of the potential for future revenue.

The price to book ratio (P/B) is the value the market places on the book value of the

company. It is calculated by dividing the current price per share by the book value per

share (book value / number of outstanding shares). Companies with a low P/B are good

value and are often sought after by long term investors who see the potential of such

companies.


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y DIVIDENDS YIELD:

Some investors are looking for stocks that can maximize dividend income. Dividend yield

is useful for determining the percentage return a company pays in the form of dividends. It

is calculated by dividing the annual dividend per share by the stock's price per share.

Usually it is the older, well-established companies that pay a higher percentage, and these

companies also usually have a more consistent dividend history than younger companies.

IndustryAnalysis:

Webster defines an Industry as a department or branch of a craft, art, business, or

manufacture. And more specifically:

a) Group of productive or profit-making enterprises or organizations that have a

similar technological structure of production or supply technically substitutable

goods, services, or sources of income.

Industryanalysis is a type of business research that focuses on the status of an industry or

an industrial sector (a broad industry classification, like "manufacturing"). A complete

industrial analysis usually includes a review of an industry's recent performance, its current

status, and the outlook for the future. Many analyses include a combination of text and

statistical data. There are many sources of industry analysis: investment firms, business and


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trade periodicals, trade associations, and government agencies. To conduct a thorough

industry analysis, include a variety of sources.

For an analyst, industry analysis demands into :

y The key sector or sub-division of overall economic activity that influence particular

industries, and

y The relative strength or weakness of particular industry or other groupings under

specific sets of assumptions about economic activity.

Economic Analysis:

Economics studies the allocation of scarce resources among people examining what

goods and services wind up in the hands of which people. Why scarce resources? Absent

scarcity, there is no significant allocation issue. All practical, and many impractical, means

of allocating scarce resources are studied by economists. Markets are an important means

of allocating resources, so economists study markets. Markets include stock markets like

the New York Stock Exchange, commodities markets like the Chicago Mercantile, but also

farmers markets, auction markets like Christies or Sothebys , eBay, or more ephemeral

markets,. In addition, goods and services (which are scarce resources) are allocated by

governments, using taxation as a means of acquiring the items. Governments may be

controlled by a political process, and the study of allocation by the politics, which is known

as political economy, is a significant branch of economics. Goods are allocated by certain

means, like theft, deemed illegal by the government, and such allocation methods

nevertheless fall within the domain of economic analysis. Other allocation methods include


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gifts and charity, lotteries and gambling, and cooperative societies and clubs, all of which

are studied by economists. Some markets involve a physical marketplace. Traders on the

New York Stock Exchange get together in a trading pit.

.

Economic analysis is used in many situations. When British Petroleum sets the price for its

Alaskan crude oil, it uses an estimated demand model, both for gasoline consumers and

also for the refineries to which BP sells. The demand for oil by refineries is governed by a

complex economic model used by the refineries and BP estimates the demand by refineries

by estimating the economic model used by refineries. Economic analysis was used by

experts in the antitrust suit brought by the U.S. Department of Justice both to understand

Microsofts incentive to foreclose rival Netscape and consumer behavior in the face of

alleged foreclosure. Stock market analysts use economic models to forecast the profits of

companies in order to predict the price of their stocks. When the government forecasts the

budget deficit or considers a change in environmental regulations, it uses a variety of

economic models.


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TECHNICAL ANALYSIS:

Definition:

A method of evaluating securities by relying on the assumption that market data, such as

charts of price, volume, and open interest, can help predict future (usually short-term)

market trends. Unlike fundamental analysis, the intrinsic value of the security is not

considered. Technical analysts believe that they can accurately predict the future price of a

stock by looking at its historical prices and other trading variables. Technical analysis

assumes that market psychology influences trading in a way that enables predicting when a

stock will rise or fall. For that reason, many technical analysts are also market timers, who

believe that technical analysis can be applied just as easily to the market as a whole as to an

individual stock.

Technical analysis uses a variety of charts and calculations to spot trends in the market and

individual stocks and to try to predict what will happen next. Technical analysts don't

bother looking at any of the qualitative data about a company (for example, its management

team or the industry that it is in); instead, they believe that they can accurately predict the

future price of a stock by looking at its historical prices and other trading variables.

Technical analysis assumes that market psychology influences trading in a way that lets

them predict when a stock will rise or fall. For that reason, many technical analysts are also

market timers, who believe that technical analysis can be applied just as easily to the

market as a whole as to an individual stock


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. Critics of technical analysis, and there are many, say that the whole endeavor is a

waste of time and effort. They point to academic studies like Burton Malkiel's "A Random

Walk Down Wall Street" as evidence that there is no possible way to predict future prices

using historical prices . Others contend that if any such systems were found to be

successful, those who practiced them would be wealthy beyond their wildest dreams.

Technical analysts use dozens of different quantitative metrics in order to predict stock

prices. In this section, we'll introduce you to some of the most popular ones and explain to

you what they're all about, but first here are a few key terms you should know about:

y Support Level: The level that the technical analyst believes a stock price will not

fall below (also sometimes called a "floor")

y Resistance Level: The opposite of a support level, the level that the technical

analyst believes a stock price will not exceed.

y Breakout: If a stock surpasses the resistance level or falls below the support level, it

is said to be a "breakout."

y Advance-Decline Line: The total number of advancing issues minus the total

number of declining issues, added to a cumulative total.


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MOVING AVERAGES:

Introduction:

Moving averages are one of the most popular and easy to use tools available to the

technical analyst. They smooth a data series and make it easier to spot trends, something

that is especially helpful in volatile markets. They also form the building blocks for many

other technical indicators and overlays.

Perhaps the most commonly used variable in technical analysis, the moving average for a

stock is the average selling price for the stock over a set period of time (the most common

being 20, 30, 50, 100 and 200 days). Moving average data is used to create charts that show

whether or not a stock's price is trending up or down. They can be used to track daily,

weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to

the average and the oldest numbers are dropped; thus, the average "moves" over time. In

general, the shorter the time frame used, the more volatile the prices will appear, so, for

example, 20 day moving average lines tend to move up and down more than 200 days

moving average lines.

RELATIVE STRENGTH:

Technical analysts use what is called relative strength in order to compare the price

performance of one stock to the entire market. The relative strength of a stock is calculated

by taking the percentage price change of a stock over a set period of time and ranking it on

a scale of 1 to 100 against all other stocks on the market. For example, a stock with a

relative strength of 90 has experienced a greater increase in its price over the last year than


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the price increases experienced by 90% of all other stocks on the market. Some technical

analysts like stocks with high relative strength rankings, believing that stocks which have

recently gone up are more likely to continue going up. Other technical analysts believe that

a very high relative strength can be an indication that the stock is overbought and is ready

to fall. Relative strength is really a "rear view window" metric, measuring only how the

stock has done in the past, not how it will do in the future.

CHARTS:

Charts are the main tool that technical analysts use in order to plot their data and predict

prices. Technical analysts may use several different types of charts in order to conduct their

tests, including line charts, bar charts, and candlestick charts. Most of the time, analysts use

these charts in order to look for patterns in the data. Some of the more commonly used

patterns include:

y Cup and Handle: A pattern on a bar chart that is in the shape of the letter "U" over a

period of between 7 and 65 weeks. Once the stock price reaches the second peak of

the "U", technical analysts believe that the price will fall as investors who bought at

the previous peak start to unload their shares.

y Head and Shoulders: A chart formation in which a price exhibits three successive

rallies, the second one being the highest. The name derives from the fact that on a

chart the first and third rallies look like shoulders and the second looks like a head.

Some technical analysts consider it a sign that the stock will fall further.


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y Double Bottom: A chart formation that looks like a "W". Technical analysts aim to

buy at one of the troughs and ride the stock higher.

VOLUMES:

Not all technical analysts focus exclusively on price. Many of them think that volume is

often times a better indication of where a stock is heading. Volume is simply the number of

shares of a stock that are traded over a particular period of time (e.g. 1 day or 30 days).

Some technical analysts calculate moving averages for volume, the same way others do for

price. Volume is important because it tells how active the stock was during a particular

time, which can in turn affect a stock's price. For example, if a stock falls precipitously but

volume was exceptionally light that day, this is not necessarily an indication that the stock

has fallen out of favor with the market, since the move was caused by a relatively small

number of sellers.

The ability to make commodity price forecasts is only the first step in the price decision

making process. The second, and often more difficult step, is market timing. Since

commodity futures markets are so highly leveraged ( initial margin requirements are

generally less than 10% of a contracts value), minor price moves can have a dramatic

impact on trading performance. Therefore, the precise timing of entry and exit points is an

indispensable aspect of any market commitment. Timing is everything when dealing in the

commodities markets, and timing is almost purely technical in nature. This is where a

practical application of charting principles becomes absolutely essential in the price

forecasting and risk management process.


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TREND LINES

Technical analysis is built on the assumption that prices trend. Trend Lines are an

important tool in technical analysis for both trend identification and confirmation. A trend

line is a straight line that connects two or more price points and then extends into the future

to act as a line of support or resistance. Many of the principles applicable to support and

resistance levels can be applied to trend lines as well.

y UPTREND LINE

An uptrend line has a positive slope and is formed by connecting two or more low points.

The second low must be higher than the first for the line to have a positive slope. Uptrend

lines act as support and indicate that net-demand (demand less supply) is increasing even as

the price rises. A rising price combined with increasing demand is very bullish, and shows

a strong determination on the part of the buyers. As long as prices remain above the trend

line, the uptrend is considered solid and intact. A break below the uptrend line indicates

that net-demand has weakened and a change in trend could be imminent.

y DOWNTREND LINE

A downtrend line has a negative slope and is formed by connecting two or more high

points. The second high must be lower than the first for the line to have a negative slope.

Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is

increasing even as the price declines. A declining price combined with increasing supply is

very bearish, and shows the strong resolve of the sellers. As long as prices remain below


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below support briefly. Sometimes it does not seem logical to consider a support level

broken if the price closes 1/8 below the established support level. For this reason, some

traders and investors establish support zones.

Whatis resistance?

Resistance is the price level at which selling is thought to be strong enough to prevent the

price from rising further. The logic dictates that as the price advances towards resistance,

sellers become more inclined to sell and buyers become less inclined to buy. By the time

the price reaches the resistance level, it is believed that supply will overcome demand and

prevent the price from rising above resistance

Where is resistance established?

Resistance levels are usually above the current price, but it is not uncommon for a security

to trade at or near resistance. In addition, price movements can be volatile and rise above

resistance briefly. Sometimes it does not seem logical to consider a resistance level broken

if the price closes 1/8 above the established resistance level. For this reason, some traders

and investors establish resistance zones.

There are three basic assumptions on which technical analysis is based:

1. The futures market discounts everything.

The technician believes that the price posted on the board of a commodity exchange

at any given time is the intrinsic value of the commodity based upon the

fundamental factors affecting the supply and demand of the product. Therefore, if


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the fundamentals are already reflected in the price, market action (charts- price,

volume, open interest) is all that is needed to be studied to forecast future price

direction. Although not knowing the specifics of the fundamental news, the

technician indirectly studies the fundamentals by studying the charts which reflect

the fundamentals of the marketplace.

2. Prices move in trends

Prices can move in one of three directions, up, down or sideways. Once a trend in

any of these directions is in effect it usually will persist. The market trend is simply

the direction of market prices, a concept which is absolutely essential to the success

of technical analysis. Identifying trends is quite simple; a price chart will usually

indicate the prevailing trend as characterized by a series of waves with obvious

peaks and troughs. It is the direction of these peaks and troughs that constitutes the

market trend.

3. Historyrepeats itself

Technical analysis includes the psychology of the market place. Patterns of human

behavior have been identified and categorized for several hundred years and are

repetitive in nature. The repetitive nature of the marketplace is illustrated by

specific chart patterns which will indicate a continuation of or change in trend.


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List of categories ofthe technical analysis theory:

y Indicators (Oscillators, eg: Relative Strength Index RSI)

y

Numbertheory (Fibonacci numbers, Gann numbers)

y Waves (Elliott wave theory)

y Gaps (High-Low, Open-Closing)

y Trends (Following Moving Average)

y Chart formations (Triangles, Head & Shoulders, Channels)


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CHAPTER-5

COMPANYPROFILE


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Future Capital Holdings was conceptualized as a new age capital managementand investing business that could play a vital role in the development of theconsumption-led economy in India. As a company with an investing mindset, weview India as an attractive long-term investment opportunity across asset classes.

Future Capital Holdings combines the entrepreneurial skills of world-classprofessionals from reputed international and domestic companies with the nationalscale and reach of the Future Group.

Future Group has pioneered and established a nation-wide chain of over 12 million

of retail space in 71 cities and 65 rural locations across the country.

We will respect the fact that our investors have entrusted us with theircapital, our partners with their faith, our customers with their confidence and ouremployees with their aspirations. We will measure our success by the success ofour stakeholders and will work diligently to ensure that we fulfill our fiduciary

responsibility. We firmly believe that the difference between a goodbusiness and a great organisation is the integrity of its people. We will conductourselves ethically and transparently in all our dealings, both internal and external.

We will maintain an environment which fosters creativity and encouragesinnovation. We believe that this will enable us to attract, retain and nurture the best

talent and develop the business and thought leaders of tomorrow. Wewill build an organization which has a positive mindset. By conducting everyinteraction with respect and consideration, we will create a self-reinforcing culture

of success. We believe that it is our responsibility to contribute to theenvironment in which we operate. By investing in our community, we will not onlyimprove our surroundings today, but also provide better opportunities for futuregenerations.


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Kishore Biyani

Chairman

Dhanpal A. Jhaveri

Executive Director

N Shridhar

Chief Financial Officer

Rakesh Makkar

Jt MD Future Capital Financial ServicesLtd.

Shailesh Shirali

MD Wholesale Credit

Rajesh Doshi

Sr. VP Legal, Compliance & CompanySecretary

Business, Future Capital Holdings isthe third leg in the Indian financial services space beyond the traditional bankingand brokerage businesses.

Our vision is to be the premier, most trusted and innovative investingbusiness.


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We launched our retail financial services offering inJune 2007, pursuant to an agreement with PRIL, under which we have theexclusive right to provide financial products and services at present and futuremalls, stores and retail outlets in India which are owned, controlled or managed byPRIL and its subsidiaries. The retail financial services business, housed under a100% subsidiary of FCH; Future Capital Financial Services Ltd ("FCFS") is

operated through 2 verticals; Retail Credit & Distribution. The Retail Creditbusiness is operated under the Future Money brand. The products offered by ourRetail Credit business are Personal loans, Consumption loans, Home equity loansand Credit cards; under the name Future Card, through an agreement with ICICIBank, Life and NonLife Insurance products (as a corporate agent of FutureGenerali), third party mutual fund products and fixed deposit programs.

Our Wholesale Credit business taps a large and relativelyunaddressed market of mezzanine, promoter, project and acquisition financing,and other special situations related financing. Our strong due diligence capabilitiesacross asset classesprivate equity, real estate and special situationsallow usto appropriately analyze risk. This capability coupled with our risk managementand credit systems and our access to entrepreneurs and developers through theFCH-Future Group eco-system of partners and suppliers favorably positions us togrow this business.


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Recent news articles on FCH

'India's domestic consumption story intact": Sameer Sain- Reuters , 18th Feb 2009

BackTo Basics- Business Today , 10th Feb 2009

Future Bright- Business India, 7th Sept 2008

Urban Muscle- Business Standard , 12th Aug 2008

Highest average income recorded in Chandigarh-The Economic Times , 8th Aug 2008

Changing Perceptions- Business India , 16th June 2008

The Gold Rush- India Today, 18th Feb 2008

Talent sets a company apart-Times of India, 6th Nov 2007

Future gets RBI nod for credit card-Times Business, 5th Nov 2007

Reforms gains racing down country roads, finds study-Times Business, 26th July 2007

Finance services firms' salaries head northward- Economics Times, 18th July 2007


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INDUSTRY PROFILE

Commodities Derivatives Exchange: Indian Scenario

In India, commodity markets have been in existence for decades. However, in 1975 the

Government banned forward contracts on commodities. Later in 2003, the Government of

India again allowed forward contracts in commodities. There have been over20 exchanges

existing for commodities all over the country. However, these exchanges are commodity

specific and have a strong regional focus. The Government, in order to make the

commodities market more transparent and efficient, accorded approval for setting up of

national level multi commodity exchanges. Accordingly, three exchanges are there which

deal in a wide variety of commodities and which allow nation-wide trading. They are

1) National Multi Commodity Exchange (NMCE)

2) Multi Commodity Exchange (MCX)

3) National Commodities and Derivatives Exchange (NCDEX)

National Multi Commodity Exchange:

First state of the art demutualised multi-commodity Exchange, National Multi Commodity

Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions,

viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative

Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited


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(GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of

Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL).

While various integral aspects of commodity economy, viz., warehousing, cooperatives,

private and public sector marketing of agricultural commodities, research and training were

adequately addressed in structuring the Exchange, finance was still a vital missing link.

Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even

today, NMCE is the only Exchange in India to have such investment and technical support

from the commodity relevant institutions. These institutions are represented on the Board

of Directors of the Exchange and also on various committees set up by the Exchange to

ensure good corporate governance. Some of them have also lent their personnel to provide

technical support to the Exchange management. The day-to-day operations of the Exchange

are managed by the experienced and qualified professionals with impeccable integrity and

expertise. None of them have any trading interest. The structure of NMCE is impossible to

replicate in India.

NMCE is unique in many other respects. It is a zero-debt company; following widely

accepted prudent accounting and auditing practices. It has robust delivery mechanism

making it the most suitable for the participants in the physical commodity markets. The

exchange does not compromise on its delivery provisions to attract speculative volume.

Public interest rather than commercial interest guide the functioning of the Exchange. It has

also established fair and transparent rule- based procedures and demonstrated total

commitment towards eliminating any conflicts of interest.


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NMCE commenced futures trading in 24 commodities on 26 November2002 on a national

scale and the basket of commodities has grown substantially since then to include cash

crops, food grains, plantations, spices, oil seeds, metals & bullion among others. Research

Desk of NMCE is constantly in the process of identifying the hedging needs of the

commodity economy and the basket of products is likely to grow even further. NMCE has

also made immense contribution in raising awareness about and catalyzing implementation

of policy reforms in the commodity sector. NMCE was the first Exchange to take up the

issue of differential treatment of speculative loss. It was also the first Exchange to enroll

participation of high net-worth corporate securities brokers in commodity derivatives

market. It was the Exchange, which showed a way to introduce warehouse receipt system

within existing legal and regulatory framework.

NMCE, India is committed to provide world class services of on-line screen based Futures

Trading of permitted commodities and efficient Clearing and guaranteed settlement, while

complying with Statutory / Regulatory requirements. We shall strive to ensure continual

improvement of customer services and remain quality leader amongst all commodity

exchanges. It was the first Exchange to complete the contractual groundwork for

dematerialization of the warehouse receipts. Innovation is the way of life at NMCE. It is

the only Commodity Exchange in the world to have received ISO 9001:2000 certification

from British Standard Institutions (BSI).


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NMCE Mission:

y Continual Improvement in Customer Satisfaction.

y Improving efficiency of marketing through on-line trading in Dematerialization

form.

y Minimization of settlement risks.

y Improving efficiency of operations by providing best infrastructure and latest

technology.

y Rationalizing the transaction fees to optimum level.

y Implementing best quality standards of warehousing, grading and testing in tune

with trade practices.

y Improving facilities for structured finance.

y Improving quality of services rendered by suppliers.

y Promoting awareness about on-line features trading services of NMCE across the

length and breadth of the country.


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MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated

on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director,

Reliance Industries Ltd.; and has permanent recognition from the Government of India for

facilitating online trading, clearing and settlement operations for commodities futures

market across the country. Today, MCX features amongst the world's top three bullion

exchanges and top four energy exchanges.

MCX offers a wide spectrum of opportunities to a large cross section of participants

including producers/ processors, traders, corporate, regional trading centre, importers,

exporters, co-operatives and industry associations amongst others. Headquartered in the

financial capital of India, Mumbai, MCX is led by an expert management team with deep

domain knowledge of the commodities futures market.

Presently, the average daily turnover of MCX is around USD1.55 bn (Rs.7, 000 crore -

April 2006), with a record peak turnover of USD3.98 bn (Rs.17, 987 crore) on April 20,

2006. In the first calendar quarter of2006, MCX holds more than 55% market share of the

total trading volume of all the domestic commodity exchanges. The exchange has also

affected large deliveries in domestic commodities, signifying the efficiency of price

discovery.


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Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering

multiple commodities for trading with wide reach and penetration, MCX is well placed to

tap the vast potential poised by the commodities market.

Key shareholders

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for

Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.

(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,

Union Bank of India, Canara Bank, Bank of India, Bank of Baroda , HDFC Bank and SBI

Life Insurance Co. Ltd.

Vision ofMCX:

MCX will offer unparalled efficiencies, unlimited growth and infinite opportunities to

all market participants. It will be acknowledged as the Exchange of Choice, based on its

strong service availability backed by superior technology.

MCX is committed towards revolutionizing the Indian commodity markets. It aims to

empower the market participants through innovative product offerings and business rules;

so that the benefits of futures markets can be fully realized. MCX will focus its efforts

towards meeting the requirements of all the stakeholders in the commodity ecosystem

without any bias. It shall focus its efforts towards establishing globally acceptable industry

norms.


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Winning Edge ofMCX:

Neutral Image:

MCX's most important strength is that it is an independent and de-mutualized exchange

since inception.

Value Proposition:

Headquartered in the financial capital of India, Mumbai, MCX is led by an expert

management team with deep domain knowledge of the commodities futures market. It also

has strong partnerships with banks, financial institutions, warehousing companies and other

stakeholders of the marketplace.

Insurance ofSettlement Guarantee Fund:

MCX is the only domestic exchange which has insured its Settlement Guarantee Fund, to

the tune of Rs.100 crores by The New India Assurance Co.Ltd.'S

Strategic Equity Partnerships:

MCXs wide based strategic equity partners include - Financial Technologies (I) Ltd., State

Bank of India Ltd. and its associates, National Bank for Agriculture & Rural Development

(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an

affiliate of Fidelity International, Corporation Bank Ltd., Union Bank of India Ltd., Canara

Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd., HDFC Bank Ltd., SBI Life Insurance

Co. Ltd.


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Trade Support:

MCX has already tied up exclusively with some of the largest players in the commodities

eco-system namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent

Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United

Planters Association of India and India Pepper & Spice Trade Association. MCX has also

established the National Gold Delivery market in partnership with World Gold Council.

International Alliances:

MCX has various strategic Memorandum of Understandings/ Licensing Agreements with

global exchanges like The Tokyo Commodity Exchange (TOCOM); The Baltic Exchange,

London; Chicago Climate Exchange (CCX); New York Mercantile Exchange (NYMEX),

London Metal Exchange (LME); Dubai Multi Commodities Centre (DMCC); New York

Board ofTrade (NYBOT) and Bursa Malaysia Derivatives, Berhad (BMD)

FTIL: Technology Partner:

Financial Technologies India Ltds (FTIL) proven mettle of end-to-end exchange trading

technologies addressing trading/ surveillance/ clearing and settlement operations help

enhance the MCX Trade Life Cycle operations (Pre-Trade, Trade and Post-Trade). In

addition to its technological capabilities, FTIL also brings to MCX its associations with

technology giants such as Microsoft/ Intel and HP.


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National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally

managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI

Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural

Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab

National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of

India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO) ,Canara Bank and

Goldman Sachs by subscribing to the equity shares have joined the initial promoters as

shareholders of the Exchange.

NCDEX is the only commodity exchange in the country promoted by national level

institutions. This unique parentage enables it to offer a bouquet of benefits, which are

currently in short supply in the commodity markets. The institutional promoters of NCDEX

are prominent players in their respective fields and bring with them institutional building

experience, trust, nationwide reach, technology and risk management skills.NCDEX is a

public limited company incorporated on April 23, 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.


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NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange

with an independent Board of Directors and professionals not having any vested interest in

commodity markets. It is committed to provide a world-class commodity exchange

platform for market participants to trade in a wide spectrum of commodity derivatives

driven by best global practices, professionalism and transparency. NCDEX is regulated by

Forward Market Commission in respect of futures trading in commodities. Besides,

NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act,

Contracts Act, Forward Commission (Regulation) Act and various other legislations, which

impinge on its working.

NCDEX is located in Mumbai and offers facilities to its members in more than 550 centres

throughout India. The reach will gradually be expanded to more centres. NCDEX currently

facilitates trading of 54 commodities - Cashew, Castor Seed, Chana, Chilli LCA334,

Coffee - Arabica, Coffee - Robusta, Cotton Seed Oilcake, Crude Palm Oil, Groundnut (in

shell), Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags,

Indian 28 mm Cotton , Indian 31 mm Cotton , Lemon Tur, Masoor Grain Bold, Medium

Staple Cotton, Mentha Oil , Mulberry Green Cocoons ,Rapeseed - Mustard Seed ,Pepper

,Potato ,Raw Jute, Indian ParboiledRice(IR-36/IR-64),IndianRawRice(ParmalPR-

106),RBD Palmolein

RMSeed Oil Cake, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Sponge Iron,

Expeller Mustard Oil ,Mulberry Raw Silk,V-797 Kapas, Sugar, Turmeric, Urad,Wheat,

Yellow Peas, Yellow Red Maize, Yellow Soybean Meal,Electrolytic Copper Cathode,


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Aluminium Ingot, Nickel Cathode, Zinc Metal Ingot, Mild Steel Ingots, Gold KG, Silver,

Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would

be facilitated.

Key shareholders:

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for

Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.

(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,

Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and Life

Insurance Corporation of India.

Commodities Derivatives Exchanges-Global Scenario

Globally, commodities derivative exchanges have existed for a long period of time. The

Chicago Board of Trade is one of the oldest derivatives exchange in the world. Now

commodities exchanges exist all over the world and wide variety of commodities are traded

all over the world in these exchanges.


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The major Commodities Exchanges ofthe world are as follows:

Chicago Board of Trade [CBOT] USA

New YorkMercantile Exchange [NYME] USA

London Metal Exchange [LME] UK

Tokyo Commodity Exchange [TOCOM] JAPAN

South Africa Futures Exchange [SAFEX] SOUTH AFRICA

Shanghai Futures Exchange [SFE] CHINA

Honkong Futures Exchange [HKFE] HONKONG

Chicago Board Of Trade [CBOT]

The Chicago Board ofTrade [CBOT], established in 1848, is a leading futures exchanges

in the world. More than 3600, CBOT members trade 50 different futures and options

products at the exchange through open auction as well as electronically. Volumes at the

exchange have crossed in 600 million contracts. Earlier CBOT traded only in agricultural

commodities such as corn, wheat, oats and soybeans. Futures contracts at the exchange

evolved over the years to include non-storable agricultural commodities and non-

agricultural products such as gold and silver. The CBOTs first financial futures contract

was launched in October 1975, was based on the Government National Mortgage

Association mortgage backed certificates. Since that introduction, futures trading has been

initiated in many financial instruments, including US Treasury Bonds, and Notes, stock

indexes and swaps etc; Another innovation in the markets was the introductions of Options

on futures in 1982.


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traditional strengths and remains close to its core users by ensuring its contracts continue to

meet the expectations of industry. As a result, it is highly successful with turnover in excess

of US$ 3,000 billion per annum. It also contributes to UKs invisible earnings to the sum of

more than 250 million pounds in overseas earnings each year.

The origins of the London Metal Exchange can be traced as far back as opening of the

Royal Exchange in 1571. This is where metal traders first began to meet on regular basis.

However, it was in 1877 that the London Metal Market and Exchange Company was

formed as a direct result of Britains Industrial revolution of the 19 century. This led to

massive increase in the UKs consumption of metal, which required the import of

enormous tonnages from abroad. Merchant ventures were investing large sums of money

in this activity and were exposed to great risk, not only because the voyages were

hazardous but also because the cargoes could lose value if there was fall in price during the

time it took for the metal to reach Britain.


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CHAPTER-6

DATA ANALYSIS

AND

INTERPRETATION


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DATAANALYSISAND INTERPRETATION OF ENERGY COMMODITIES

INTRODUCTION TO CRUDE OIL

CRUDE OIL

A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in

color, of variable specific gravity and viscosity, often referred to simply as crude.

OR

A fossil fuel formed from plant and animal remains many millions of years ago. It

comprises organic compounds built up from hydrogen and carbon atoms and is ,

accordingly, often referred to as hydrocarbons. Crude oil is occasionally found in springs or

pools but is usually drilled from wells beneath the earths surface.

VARIETIES OF CRUDE OIL

The petroleum industry often characterizes crude oils according to their geographical

source, e.g., Alaska north slope crude. Oils from different geographical areas have unique

properties: they can vary in consistency from a light volatile fluid to a semi-solid.

The classification scheme provided below is more useful in a response scenario.


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y Class A: Light, Volatile Oils-These oils are highly fluid, often clear, spread rapidly

on solid or water surfaces, have a strong odor, a high evaporation rate, and are

usually flammable. They penetrate porous surfaces such as dirt and sand and may

be persistent in such a matrix. They do not tend to adhere to surfaces; flushing with

water generally removes them. Class A oils may be highly toxic to humans, fish and

other biota. Most refined products and many of the highest quality light crudes can

be included in this class.

y Class B: Non-Sticky Oils-These oils have a waxy or oily feel. Class B oils are less

toxic and adhere more firmly to surfaces than class A oils, although they can be

removed from surfaces by vigorous flushing. As temperatures rise, their tendency to

penetrate porous substrates increases and they can be persistent. Evaporation of

volatiles may lead to a class C or D residue. Medium to heavy paraffin-based oils

fall into this class.

y Class C: Heavy, Sticky Oils-Class C oils are characteristically viscous, sticky or

tarry, and brown or black. Flushing with water will not readily remove this material

from surfaces, but the oil does not readily penetrate porous surfaces. The density of

class c oils may be near that of water and they often sink. Weathering or

evaporation of volatiles may produce solid or tarry class d oil. Toxicity is low, but

wildlife can be smothered or drowned when contaminated. This class includes

residual fuel oils and medium to heavy crudes.

y Class D: Nonfluid Oils-class D oils are relatively non-toxic, do not penetrate porous

substrates, and are usually black r dark brown in color. When heated, class D oils


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may melt and coat surfaces making cleanup very difficult. Residual oils, heavy

crude oils, some high paraffin oils and some weathered oils fall into this class.

These classifications are dynamic for spilled oils; weather conditions and water

temperature greatly influence the behavior of oil and refined petroleum products in the

environment. For example, as volatiles evaporate from a class B oil, it may become a class

C oil. If a significant temperature drop occurs (e.g., at night), a class c oil may solidify and

resemble a class D oil. Upon warming, the class D oil may revert back to a class C oil.

Categories of crude oil

y West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is

39.6 degrees (making it a light crude oil), and it contains only about 0.24 percent

of sulfur (making a sweet crude oil). WTI is generally priced at about a $2-4 per-

barrel premium to OPEC basket price and about $1-2 per barrel premium to Brent,

although on a daily basis the pricing relationships between these can very greatly.

y Brent crude oil stands as a benchmark for Europe.

y India is very much reliant on oil from the Middle East (high sulphur). The OPEC

has identified china& India as their main buyers of oil in Asia for several years to

come.


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Indian in world crude oil industry

Petroleum and natural gas. The recent exploration and production activities in the country

have led to a dramatic increase in the output of oil. The country currently produces 35

million tones of crude oil, two-thirds of which is from offshore areas ad imports another27

million tones. Refinery production in terms of crude throughput of the existing refineries is

about 54 million tones.

Natural gas production has also increases substantially in recent years, with the country

producing over22,000 million cubic meters. Natural gas is rapidly becoming an important

source of energy and feed stock for major industries. By the end of the eight five year plan,

production was likely to reach 30 billion cubic meters.

Factors influencing crude oil markets

y Shortage of oil supplies

y Taxation-when oil taxes are raised, end consumers often mistakenly blame the oil

producers, but it is really their own governments that are responsible.

y Balance of demand and supply in the short term

y Rate of investment in the longer term

y Accidents

y Bad weather

y Increasing demand

y Halting transport of oil from producers

y Labour disputes


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Note: if traders I the oil market believe there will be a shortage of oil supplies, they may

raise prices before a shortage occurs.

Crude oil reserves

World crude oil reserves are estimated at more than one trillion barrels, of which the 11

OPEC member countries hold more than 75 percent. OPEC members currently produce

around 27 million to 28 million barrels per day of oil, or some 40 percent of the world total

output, which stands at bout 75 million barrels per day.

Is the world running out of oil?

Oil is a limited resource, so it may eventually run out, although not for many years to come.

OPECs oil reserves are sufficient to last another80 years at the current rate f production,

while non-OPEC oil producers reserves might last less than 20 years. The worldwide

demand for oil is rising and OPEC is expected to be an increasingly important source of

that oil.

If we manage our resources well, use the oil efficiently and develop new fields, then our oil

reserves should last for many more generation to come

Uses of crude oil

y Gasoline

y Petrol

y Liquefied Petroleum gas(LPG)


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y naphtha

y kerosene

y gasoil

y fuel oil

y lubricants

y asphalt(used in paving roads)

y ethane

y ethylene

y propylene

y butadiene

y benzene

y ammonia

y methanol

y plastics

y synthetic fibres

y synthetic rubbers

y detergents

y Chemical fertilizers.


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Exchanges dealing in crude futures apart formMCX

y The New York Mercantile Exchange(NYMEX)

y The International Petroleum Exchange of London(IPE)

y The Tokyo Commodity Exchange (TOCOM)

Crude oil units (average gravity)

y 1 US barrel =42 US gallons

y 1US barrel= 158.98 litres

y 1 tonne= 7.33 barrels

y 1 short ton=6.65 barrels

Note: barrels per tonne vary from origin to origin.


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4.1 FUNDAMENTAL ANALYSIS OF CRUDE OIL

INDUSTRY ANALYSIS OF CRUDE OIL

Crude oil prices behave much as any other commodity with wide price swings in times of

shortage or oversupply. The crude oil price cycle may extend over several years responding

to changes in demand as well as OPEC and non-OPEC supply.

The U.S. petroleum industry's price has been heavily regulated through production or price

controls throughout much of the twentieth century. In the post World War II era U.S. oil

prices at the wellhead have averaged $23.57 per barrel adjusted for inflation to 2006

dollars. In the absence of price controls the U.S. price would have tracked the world price

averaging $25.56. Over the same post war period the median for the domestic and the

adjusted world price of crude oil was $18.43 in 2006 prices. That means that only fifty

percent of the time from 1947 to 2008 has oil prices exceeded.

Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude,

oil prices only exceeded $23.00 per barrel in response to war or conflict in the Middle East.

With limited spare production capacity OPEC has abandoned its price band and for close to

three years was powerless to stem a surge in oil prices which was reminiscent of the late

1970s.


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Crude oil prices 1969-2009

Middle EastSupply Interruptions

Yom Kippur War - Arab Oil Embargo

In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price

of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel

by Syria and Egypt on October5, 1973. The United States and many countries in the

western world showed strong support for Israel. As a result of this support several Arab

exporting nations imposed an embargo on the countries supporting Israel. Arab nations

curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up

by increased production in other countries. The net loss of4 MMBPD extended through

March of 1974 and represented 7 percent of the free world production.


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U.S. and World Events and Oil Prices 1973-1981

If there was any doubt that the ability to control crude oil prices had passed from the United

States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of

prices to supply shortages became all too apparent when prices increased 400 percent in six

short months.

From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per

barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time

exhibited a moderate decline.

OPECS Failure to Control Oil Prices

OPEC has seldom been effective at controlling prices. While often referred to as one OPEC

does not satisfy the definition of a cartel. One of the primary requirements is a mechanism


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to enforce member quotas. During the 1979-1980 period of rapidly increasing prices,

Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that

high prices would lead to a reduction in demand. His warnings fell on deaf ears.

Surging prices caused several reactions among consumers: better insulation in new homes,

increased insulation in many older homes, more energy efficiency in industrial processes,

and automobiles with higher mileage. These factors along with a global recession caused a

reduction in demand, which led to falling crude prices. Unfortunately for OPEC only the

global recession was temporary. Nobody rushed to remove insulation from their homes or

to replace energy efficient plants and equipment -- much of the reaction to the oil

Price increase of the end of the decade was permanent and would not respond to lower

prices with increased demand for oil.


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The higher prices also resulted in increased exploration and production outside of OPEC.

From 1981 to 2007 non-OPEC production increased 10 million barrels per day. OPEC was

faced with lower demand and higher supply from outside the organization

A December 1986 OPEC price accord set to tar

cudeoil and natural gas

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