praladarai dalmia lions college of commerce and

8/14/2019 Praladarai Dalmia Lions College of Commerce And

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PRALADARAI DALMIA LIONS

COLLEGE OF COMMERCEAND

ECONOMICS

SYBMS - 4

th

Sem


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COMMODITY

MARKET


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Introduction to Commodity Market

1)What is Commodity? Any product that can be used for commerce or an

article of commerce which is traded on anauthorized commodity exchange is known ascommodity. The article should be movable of

value, something which is bought or sold andwhich is produced or used as the subject orbarter or sale. In short commodity includes allkinds of goods. Indian Forward Contracts(Regulation) Act (FCRA), 1952 defines goods asevery kind of movable property other than

actionable claims, money and securities. In current situation, all goods and productsofagricultural (including plantation), mineral andfossil origin are allowed for commodity tradingrecognized under the FCRA.


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2)What is a commodity exchange?

3)What is Commodity Futures?

4)Consumer Preferences:


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The objectives of Commodity futures: -

Hedging with the objective of transferring risk related to the possession of physicalassets through any adverse moments in price. Liquidity and Price discovery to ensurebase minimum volume in trading of a commodity through market information anddemand supply factors that facilitates a regular and authentic price discoverymechanism.Maintaining buffer stock and better allocation of resources as it augments reduction ininventory requirement and thus the exposure to risks related with price fluctuation

declines. Resources can thus be diversified for investments.Price stabilization along with balancing demand and supply position. Futures tradingleads to predictability in assessing the domestic prices, which maintains stability, thussafeguarding against any short term adverse price movements. Liquidity in Contractsof the commodities traded also ensures in maintaining the equilibrium betweendemand and supply.

Flexibility, certainty and transparency in purchasing commodities facilitate bankfinancing. Predictability in prices of commodity would lead to stability, which in turnwould eliminate the risks associated with running the business of trading commodities.This would make funding easier and less stringent for banks to commodity market

players.


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Benefits of Comodity

Futures Markets:- 1)Price Discovery:-

2)Price Risk Management: 3) Import- Export competitiveness:

4)Predictable Pricing 5)Benefits for farmers/Agriculturalists

6)Credit accessibility:


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History of Evolution of commodity

markets

Commodities future trading was evolved from need of assured continuous supplyof seasonal agricultural crops. The concept of organized trading incommodities evolved in Chicago, in 1848. .In 19th century Chicago in UnitedStates had emerged as a major commercial hub. So that wheat producersfrom Mid-west attracted here to sell their produce to dealers & distributors.Due to lack of organized storage facilities, absence of uniform weighing &grading mechanisms producers often confined to the mercy of dealersdiscretion. These situations lead to need of establishing a common meetingplace for farmers and dealers to transact in spot grain to deliver wheat andreceive cash in return.

Gradually sellers & buyers started making commitments to exchange theproduce for cash in future and thus contract for futures trading evolved. Inthis way producer was aware of what price he would fetch for his produce and

dealer would know about his cost involved, in advance. This kind ofagreement proved beneficial to both of them. As if dealer is not interested intaking delivery of the produce, he could sell his contract to someone whoneeds the same. Similarly producer who not intended to deliver his produceto dealer could pass on the same responsibility to someone else. The largestcommodity exchange in USA is Chicago Board of Trade, The ChicagoMercantile Exchange, the New York Mercantile Exchange, the New York

Commodity Exchange and New York Coffee, sugar and cocoa Exchange.Worldwide there are major futures trading exchanges in over twenty countries


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India and the commodity market The history of organized commodity derivatives in India

goes back to the nineteenth century when Cotton Trade Associationstarted futures trading in 1875, about a decade after they started inChicago. Over the time datives market developed in severalcommodities in India. Following Cotton, derivatives trading started inoilseed in Bombay (1900), raw jute and jute goods in Calcutta(1912), Wheat in Haipur (1913) and Bullion in Bombay (1920).

The parliament passed the Forward Contracts (Regulation) Act, 1952,which regulated contracts in Commodities all over the India. The actprohibited options trading in Goods along with cash settlement offorward trades, rendering a crushing blow to the commodityderivatives market. Under the act only thoseassociations/exchanges, which are granted reorganization from theGovernment, are allowed to organize forward trading in regulatedcommodities.In India there are 25 recognized future exchanges, ofwhich there are three national level multi-commodity exchanges.After a gap of almost three decades, Government of India hasallowed forward transactions in commodities through OnlineCommodity Exchanges, a modification of traditional business knownas Adhat and Vayda Vyapar to facilitate better risk coverage anddelivery of commodities. The three exchanges are: NationalCommodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi

Commodity Exchange of India Limited (MCX) Mumbai and NationalMulti-Commodity Exchange of India Limited (NMCEIL)


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Legal framework for regulating commodity futures in

India:- The commodity futures traded in commodity exchanges are regulated

by the Government under the Forward Contracts Regulations Act, 1952and the Rules framed there under. The regulator for the commoditiestrading is the Forward Markets Commission, situated at Mumbai, whichcomes under the Ministry of Consumer Affairs Food and PublicDistribution.

Forward Markets Commission (FMC):- It is statutory institution set up in 1953 under Forward Contracts

(Regulation) Act, 1952. Commission consists of minimum two andmaximum four members appointed by Central Govt. Out of thesemembers there is one nominated chairman. All the exchanges havebeen set up under overall control of Forward Market Commission (FMC)of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited

(NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life InsuranceCorporation of India (LIC), National Bank of Agriculture and RuralDevelopment (NABARD) and National Stock Exchange of India Limited(NSC). Punjab National Bank (PNB).


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NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is anational level technology driven on line Commodity Exchange with anindependent Board of Directors and professionals not having any vestedinterest in Commodity Markets.

It is committed to provide a world class commodity exchange platform formarket participants to trade in a wide spectrum of commodity derivativesdriven by best global practices, professionalism and transparency

Commodities Traded at NCDEX:-

Bullion

Minerals

Oil and Oil seeds

Pulses

Grain

SpicesPlantation

Fibers and other

Energy


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Multi Commodity Exchange of IndiaLimited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and dmutulized exchange with permanent reorganization from Government of India, havinHead Quarter in Mumbai. Key share holders of MCX are Financial Technologies (IndiLimited, State Bank of India, Union Bank of India, Corporation Bank of India, BankIndia and Cnnara Bank. MCX facilitates online trading, clearing and settlemeoperations for commodity futures market across the country.

MCX started of trade in Nov 2003 and has built strategic alliance with BombBullion Association, Bombay Metal Exchange, Solvent Extractors Association of Indipulses Importers Association and Shetkari Sanghatana. MCX deals wit about 100 commodities.Commodities Traded at MCX:- Bullion Minerals

Oil and Oil seeds Pulses Grains Spices Plantation Fiber and others Petrochemicals


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National Multi Commodity Exchange of India

Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is thefirst de-mutualised Electronic Multi Commodity Exchange in India. On25th July 2001 it was granted approval by Government to organize

trading in edible oil complex. It is being supported by Centralwarehousing Corporation Limited, Gujarat State Agricultural MarketingBoard and Neptune Overseas Limited. It got reorganization in Oct 2002.

NMCEIL Head Quarter is at Ahmedabad.

INTERNATIONAL COMMODITY EXCHANGES Futures trading is a result of solution to a problem related

to the maintenance of a year round supply of commodities/ products

that are seasonal as is the case of agricultural produce. The UnitedStates, Japan, United Kingdom, Brazil, Australia, Singapore are homesto leading commodity futures exchanges in the world.


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The New York Mercantile Exchange (NYMEX):-Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil,Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,

Aluminum, Platinum, Palladium, etc.

London Metal Exchange:-Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc,Aluminum Alloy, North American Special Aluminum Alloy (NASAAC),Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade:-Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats,

Ethanol, Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):-Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,Platinum, Aluminum, Rubber, etc


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.

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade,

in which one pays cash and carries away the goods. The second is futurestrade. The underpinning for futures is the warehouse receipt. A persondeposits certain amount of say, good X in a ware house and gets awarehouse receipt. Which allows him to ask for physical delivery of thegood from the warehouse. But some one trading in commodity futuresneed not necessarily posses such a receipt to strike a deal. A person can

buy or sale a commodity future on an exchange based on his expectationof where the price will go. Futures have something called an expiry date,

by when the buyer or seller either closes (square off) his account orgive/take delivery of the commodity. The broker maintains an account ofall dealing parties in which the daily profit or loss due to changes in thefutures price is recorded. Squiring off is done by taking an oppositecontract so that the net outstanding is nil.

For commodity futures to work, the seller should be able todeposit the commodity at warehouse nearest to him and collect thewarehouse receipt. The buyer should be able to take physical delivery at alocation of his choice on presenting the warehouse receipt. But at present

in India very few warehouses provide delivery for specific commodities.


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Tod Commodit t ding tem i f ll omp te i ed T de need not i it


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Today Commodity trading system is fully computerized. Traders need not visit acommodity market to speculate. With online commodity trading they could sit in theconfines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps orstages as follows:I. Trading: - At this stage the following is the system implemented-

Order receivingExecutionMatchingReportingSurveillancePrice limitsPosition limits

II. Clearing: - This stage has following system in place-

MatchingRegistrationClearingClearing limitsNotationMargining

Price limitsPosition limitsClearing house.

III. Settlement: - This stage has following system followed as follows-Marking to marketReceipts and paymentsReporting

Delivery upon expiration or maturity.


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How to invest in a Commodity Market?1)With whom investor can transact a business?

2)What is Identity Proof?

3)What statements should be given for Bank Proof?

4)What are the particulars to be given for address proof?

5)What are the other forms to be signed by the investor?

6)What aspects should be considered while selecting a commodity broker?

7)Broker

8)How to become a Commodity Trader/Broker of Commodity Exchange?

9)How to become a Member of Commodity Exchange?


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Current Scenario in Indian CommodityMarket

Need of Commodity Derivatives for India:- India is among top 5 producers of most of the

Commodities, in addition to being a major consumer of bullionand energy products. Agriculture contributes about 22% GDP of

Indian economy. It employees around 57% of the labor force ontotal of 163 million hectors of land Agriculture sector is an

important factor in achieving a GDP growth of 8-10%. All thisindicates that India can be promoted as a major centre for

trading of commodity derivatives.


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Trends in volume contribution on thethree National Exchanges:-

Pattern on Multi Commodity Exchange (MCX)

Pattern on National Commodity & Derivatives Exchange(NCDEX)

Pattern on National Multi Commodity Exchange (NMCE)

Major volume contributors

Trade strategy Beneficiaries:

In order to understand the extent of progress the trading thetrading in Commodity Derivatives has made towards its specified

objectives (price discovery and price risk management), the currenttrends are uxta osed a ainst the s ecification.


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1. Investors preferences: -

2.

Quantitative Analysis

43%

27%

23%

7%

Other

Share Market

Bank F.D.

CommodityMarket

In v e s t m e n t P r e fr e n c e s s p e c i f ie d i

6 7

3 0

3 %

R e a l E s ta t

J w e l a r y

N o t S p e c i

Analysis of data revels that majorityof people prefer investment in Real

( . % )Estate 28 81 of total sample whichspecified in other categoryinvestment and it is greater than

share market investment preference


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2. Peoples knowledge about Commodity Market: -

13%

87%

Know

Dont Know

Very few people heard ofcommodity market. Vast majorityof people are unaware aboutCommodity Market.

3. Investors interested to invest in CommodityMarket: -

50%50%

Interested

Not Interested

Though some peopleheard of commodity

market due to lack ofcomplete knowledgeabout it half of then arenot interested in investingin Commodity Market.


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4.Commodity Market Investors

Preferences

37%

30%

20%

13%

Bullion

Metals

Agricultural

Fossils/Energy

Above data revels thatmajority of commodityinvestors like to invest

in Bullion (Gold &

Silver).

.5 Perception about CommodityMarket

2 5

2 5

5 0

L e s s R i

R i s k y

V e r y R i

Analysis of data shows thatmajority of people who are awareabout commodity market; feelthat investment in commoditymarket is very risky. So effortsshould be done to minimize the

risk in commodity investment andmake peoples about minimum risk


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Qualitative Analysis

Investment preferences: - Most of the investors prefer least riskyinvestment which gives higher returns. That is why majority (70% ofsample) of people interested in investments other than Share andcommodity market. Very less number of people (only 7%) showed theirinterest in investment in commodity market. Main reason for this is lackof awareness and complete information about commodity market.

Commodity Exchanges: - People who are interested in commodityinvestment showed more concern towards NCDEX; for its brand nameand people think there might be surety of transaction at NCDEX.

Commodities: - Bullion is most preferred commodity for investment.Because one can expect maximum returns from such investment due torapidly increasing prices of bullion in market.

Advertisements: - Commodity market Advertisements should be moreinformative And it is the failure of commodity markets advertisement

praladarai dalmia lions college of commerce and

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