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Marketing activates and Investors awareness of
Commodity Market with reference Derivative Investors
A training report submitted in partial fulfillment of the requirement for the degree of
Submitted By:
Jaspreet Kaur
UID: 24040
Class: BBA
BATHINDA
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CERTIFICATE
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EXECUTIVE SUMMARY
The prerequisites of internet trading are a computer, a modem and a telephone connection,
registration with broker, a bank account and depository account. The introduction of
depository service is considered as the beginning of the trading of stocks @click. This means
that you can arrange delivery of scripts sold anytime, anywhere to anyone by click of a
mouse. Dematerialization facilities to keep the securities in electronic form instead of paper
form. It offers more advantageous than the physical certificate form. Despite the advantages
of Dematerialization, the awareness levels among the investors relating to demat account is
not adequate because of numerous reasons. The investors are not sufficiently responsive of
the concept of Demat account and the various financial institutions providing such services.
This study involves understanding the various concepts of Demat and analyzing the
investment pattern of individuals in India and a study on Analysis of awareness among
investors regarding online trading and Dematerialization.
Table of contents
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Sr. no. Contents Page no. REMARK
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1. Acknowledgement
3. Objective of Study
4. Commodities Market
5. Types of Trading
6. Research Methodology
7. Scope of Study
9. Suggestions
10. Conclusion
11. Appendices
12. Bibliography
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ACKNOWLEDGEMENTS
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COMPANY PROFILE
KARVY is a premier integrated financial services provider, and ranked among the top five in
the country in all its business segments, services over 20 million individual investors in
various capacities and provides investor services to over 300 corporate, comprising the whos
who of corporate India. KARVY covers the entire spectrum of financial services such as
Stock broking, Depository participants, Distribution of financial products like mutual funds,
bonds, fixed deposit, merchant banking & Corporate Finance, insurance broking,
commodities broking, realty services, personal Finance advisory services, placement of
equity, IPOs, among others. KARVY has a professional management team and ranks among
the best in technology, operations, and more importantly, in research of various industrial
segments.
The birth of KARVY was on a modest scale in 1981. It began with the vision and enterprise
of a small group of practicing charted Accountants who founded the flagship company
KARVY Consultants limited. We started with consulting and financial accounting
automation, and carved
Inroads into the field of registry and share accounting by 1985. Since then, we have utilized
our services, to provide new ones, to innovate, diversify and in the process, evolved KARVY
as one of Indias premier integrated financial service enterprise. Thus over the last 20 years
KARVY has traveled the success route, towards building a reputation as an integrated
financial services provider, offering a wide spectrum of services. And we have made this
journey by taking the route of quality service, path breaking innovations in service, versatility
in service and finallytotality in service.
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servicing behind us and years of complete expertise in the industry to look forward to, we
have now emerged as a premier integrated financial services provider.
And today, we can look with pride at the fruits of our mastery and experience comprehensive
financial services that are completely segregated to service and manage a diverse range of
customer requirements.
Member- National Stock Exchange (NSE), The Bombay Stock Exchange (BSE) and The
Hyderabad Stock Exchange (HSE).
KARVY Stock Broking limited, one of the cornerstones of the KARVY edifice, flows freely
towards attaining diverse goals of the customer through varied services. Creating a plethora
of opportunities for the customer by opening up investment vistas backed by research based
advisory services. Here, growth knows no limits and success recognizes no boundaries.
Helping the customer create waves in his portfolio and empowering the investor completely
is the ultimate goal.
It is undisputed fact that the stock market is unpredictable and yet enjoys a high success rate
as a wealth accumulated option. The difference between unpredictability and a safety anchor
in the market is provided by in-depth knowledge of market functioning and changing trends,
planning with foresight and choosing one& risqu; s with care. This is what we provide in
our stock broking services.
We offer services that are beyond just a medium for buying and selling stocks and shares.
Instead we provide services which are multi dimensional and multi focused in their scope.
There are several advantages in utilizing our stock broking services which are the reasons
why it is one the best in the country.
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We offer trading on a vast platform: national stock exchange, Bombay stock exchange and
Hyderabad stock exchange. More importantly, we make trading safe to the maximum
possible extent by accounting for several risk factors and planning accordingly. We are
assisted in this task by our in depth research, constant feedback and sound advisory facilities.
Our highly skilled research team, comprising of technical analyst as well as fundamental
specialists, secure result-oriented information on market trends, market analysis and market
predictions.
This crucial information is given as a constant feedback to our customers, through daily
reports delivered thrice daily; the Pre-session report, where market scenario for the day is
predicted, the mid-session Report, timed to arrive during lunch break, where the market
forecast for the rest of the day is given and The post-session report, the final report for the
day, where the market and the report itself is reviewed.
To add to this repository of information, we publish a monthly magazine “ karvy; The
Finapolis&rdquo, which analyze the latest stock market trends and take a close look at the
various investment options, and product available in the market. While a weekly report called
&idquo, karvy Bazaar Baatein&rdquo, keeps you more informed on the immediate trends in
the stock market. In addition our specific industry reports give comprehensive information on
the various industries. Besides this we also offer special portfolio analysis packages that
provide daily technical advice on scrip for successful portfolio management and provide
customized advisory services to help you make the right financial moves that are
specification suites to your portfolio.
Our Stock broking services are widely networked across India, with the number of our
trading terminals providing retail stock broking facilities. Our services have increasingly
offered customer oriented convenience, which we provide to a spectrum of investors, high-
net worth or otherwise with equal dedication and competence. But true to our spirit. This
success is not our final destination. But just a platform to launch further enhanced quality
services to provide you the latest in convenient, customer-friendly stock management.
Over the year we have ensured that the trust of our customers is our biggest returns. Factors
such as our success in electronic custody business has helped build on our tradition of trust
even more. Consequently our retail client through various delivery channels like email, chat,
SMS, phone calls etc. Our foray into commodities broking has been path breaking and we are
in the process of converting existing traders in commodities into the more organized
mainstream of trading in commodity futures, both as a trading and risk hedging mechanism.
9
In the future, our focus will be on the emerging businesses and to meet this objective, we
have enhanced our manpower and revitalized our knowledge base with enhances focus on
futures and Option as well as the commodities business.
MERCHANT BANKING
Recognized as a leading merchant banker in the country. We are registered with SEBI as a
category 1 merchant banker. This reputation was build by capitalizing on opportunities in
corporate consolidations, mergers and acquisitions and corporate restructuring which have
earned us the reputation of a merchant banker. Raising resources for corporate or government
undertaking successfully over the past two decades have given us the confidence to renew our
focus in this sector.
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and as a professional navigation for long term
growth of our client who include leading corporate, state government, foreign institutional
investors, public and private sector companies and banks, in Indian and global markets.
We have also emerged as a trailblazer in the area of relationships, both at the customer and
trade levels because of our unshakable integrity, seamless service and innovative solutions
that are turned to meet varied needs. Our team of committed industry specialists, having
extensive experience in capital market, further nurtures this relationship.
We have Traversed wide spaces to tie with the worlds largest transfer agent. The leading
Australian Company. Computershare Limited. The company that services more than 75
10
million shareholders across 7000 corporate clients and makes its presence felt in over 12
countries across 5 countries has entered into a 50-50 joint venture with us.
With our management team completely transferred to this new entity. We will aim to enrich
the financial services industry than before. The future holds new arenas of client servicing
and contemporary and relevant technologies as well as geared to deliver better value and
foster bigger investment in the business.
The worldwide network of Computershare will hold us in good stead as we expect to adopt
international standards in addition to leveraging the best of technologies from around the
world. Excellence has to be the order of the day when two companies with such similar
ideologies of growth, vision and competence get together.
We have attained a position of immense strength as a provider of across the board transfer
agency services to AMCs Distributors and investors.
Nearly 40% of the top-notch AMCs including prestigious clients like deutsche AMC and UTI
swear by the quality and range of services that we offer. Besides providing the entire back
office processing. We provide link between various mutual fund and the investor including
services to the distributor. The prime channel in this operation.
Carrying the limitless ideology forward. We have explored new dimension in every aspect
of mutual fund servicing right from volume management, Cost effective pricing. Delivery in
the least turnaround time. Efficient back office and front office operations to customized
service. We have been which AMCs every step of the way, helping them their investor better
by offering them a diverse and customized range of services. The first to market approach
that is our anthem has earned us the reputation of an innovative service provides which a
visionary bent of mind.
Our services enhancement such a karvy converz. A full fledged call center. A top line
website (www.karvymfs.com). The m-investor and many more. Creating a galaxy of
customer advantages.
ISSUE REGISTRY
In our voyage towards becoming the largest transaction-processing house in the Indian
corporate segment. We have mobilized funds for numerous corporate. Karvy has emerged has
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the largest transaction-processing house for the Indian corporate sector. With an experience of
handling over 700 issues. Karvy today has the able to execute voluminous transaction and
hardcore expertise in technology application has gained us the No. 1 slot in the business.
Karvy is the first Registry Company to receive ISO 9002 certification in India that stands
testimony to its stature.
Karvy has the backing of skilled human resources complemented by requisite technological
packages to ensure a faster capability. Karvy has the benefit of a good synergy between
depositories and registry that enables faster resolution to related customer queries. Apart from
it unique investor servicing preserce` in all the phases of a public issue, it is actively
coordinating with both the main depositories to develop special models to enable the
customer to access depository (NSDL,CDSL) services during an IPO.
Our trust-worthy reputation, competent manpower and high-end technology and
infrastructure are the solid foundations on which our success is built.
Karvy has been a customer centric company since its inception. Karvy offers a single
platform servicing multiple financial instruments in its bid to offer complete financial
solutions to the varying needs of both corporate and retail investors where an extensive range
of services are provided with great volume-management capability.
Today Karvy is recognized as a company that can exceed customer expectations which is the
reason for the loyalty of customers towards karvy for all his financial needs. An opinion poll
commissioned by the merchant banker Update and Conducted by the reputed market
research agency, MARG revealed that karvy was considered the Most Admired in the
registrar category among financial services companies.
We have grown from being a pure transaction processing business to one of complete
shareholder solution. The specialist business process outsourcing unit of Karvy Group. The
legacy of expertise and experience in financial services of the Karvy Group serves as well as
enter the global area with the confidence of being able to deliver and deliver well.
Here we offer several delivery models on the understanding that business needs are unique
and there fore only customized services could possibly fit the bill. Pure service matrix has
permutations and combinations the create several options to choose from. Be it in re-
engineering and managing processes or delivering new efficiencies. Our service meets up to
the most stringent of international standards. Our outstanding models are designed for the
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global customer and are backed by sound corporate and operations philosophies and domain
expertise. Providing productivity improvements, operational cost control, cost saving,
improved accountability and a whole gamut of other advantages.
We operate in the core market segments that have emerging requirement for specialized
services. Our wide vertical market coverage including banking, Financial and insurance
services (BFIS), retail and Merchandising, Leisure and entertainment, energy and utility and
healthcare.
Our horizontal offering do justice to our stance as a comprehensive BPO unit and include a
variety of services in finance and accounting outsourcing operations, human Resource
Outsourcing Operations, Research and analytics outsourcing operation and insurance back
office outsourcing operations.
Our technological and infrastructure strengths and especially our street-smart skills make us
an ideal broker. Our services matrix is holistic with a gamut of advantages. The first and
foremost being our legacy of human resources. Technology and infrastructure that comes
from being part of the Karvy group.
Our wide national network. Spanning the length and breadth of India. Further supports these
advantages. Regular trading workshops and seminars are conducted to hone trading strategies
to perfection. Every move made is a calculated one based on reliable research that is
converted into valuable information through daily, weekly and monthly newsletters, calls and
intraday alerts.
Board of Directors
Mr. C Parthasarathy
Director
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Mr. M yuganghar
Director
Mr. M S Ramakrishna
Director
Mr. Akash Mehta
Director
Mr. Peter wing Hung So
ACHIEVEMENTS
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INTRODUCTION
Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.
World-over one will find that a market exists for almost all the commodities known to us.
15
COMMODITIES AND COMMODITY MARKET IN INDIA
INTRODUCTION TO COMMODITIES
India, a commodity based economy where two-third of the one billion population depends on
agricultural commodities, surprisingly has an under developed commodity market. Unlike the
physical market, futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock.
For instance, a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets.
The article aims at know how of the commodities market and how the commodities traded on
the exchange. The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view. In fact it was one of the most vibrant markets till
early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now,
with most of these restrictions being removed, there is tremendous potential for growth of
this market in the country.
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets. It is believed that the establishment of "Bombay
Cotton Trade Association Ltd." in 1875 marks the beginning of organized futures Commodity
market in India. Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali, the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd. in
1919. Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country. Over the years futures
Trading in various other commodities like pepper, turmeric, potato, sugar and gur etc. also
begun. After independence, Forward Contracts (Regulation) Act, 1952, was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up.
However in the seventies, most of the registered associations became inactive, as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether. With the gradual withdrawal of the government from various sectors in
the post-liberalization era, the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
16
and risk management. Consequently the Government issued notifications on 1.4.2003
permitting futures trading in the commodities.
COMMODITY
A commodity may be defined as an article, a product or material that is bought and sold. It
can be classified as every kind of movable property, except Actionable Claims, Money &
Securities.
Commodities actually offer immense potential to become a separate asset class for market-
savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the
equity markets, may find commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned. Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap. Historically, pricing in commodities futures has been less volatile compared with equity
and bonds, thus providing an efficient portfolio diversification option.
In fact, the size of the commodities markets in India is also quite significant. Of the country's
GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent)
industries constitute about 58 per cent.
Currently, the various commodities across the country clock an annual turnover of Rs 1,
40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the
commodities market grows many folds here on.
17
COMMODITY MARKET
Commodity market is an important constituent of the financial markets of any country. It is
the market where a wide range of products, viz., precious metals, base metals, crude oil,
energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a
vibrant, active and liquid commodity market. This would help investors hedge their
commodity risk, take speculative positions in commodities and exploit arbitrage opportunities
in the market.
Table
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S Market segments 2009-10 2010-11 2011-12 (E)
No.
1 Government Securities Market 1,544,376 (63) 2,518,322 (91.2) 2,827,872 (91)
2 Forex Market 658,035 (27) 2,318,531 (84) 3,867,936 (124.4)
3 Total Stock Market Turnover (I+ II) 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)
I National Stock Exchange (a+b) 1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)
a)Cash 617,989 1,099,534 1,147,027
b)Derivatives 439,865 2,130,468 2,494,645
II Bombay Stock Exchange (a+b) 316,551 (13) 515,505 (18.7) 519,030 (16.7)
a)Cash 314,073 503,053 499,503
b)Derivatives 2,478 12,452 19,527
4 Commodities Market NA 130,215 (4.7) 500,000 (16.1)
Note: Fig. in bracket represents percentage to GDP at market prices
Source: SEBI Bulletin
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Structure of Commodity Market
World-over one will find that a market exits for almost all the commodities known to us.
These commodities can be broadly classified into the following:
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds.
Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc
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Leading commodity markets of world
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX),
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT).
Consequently four commodity exchanges have been approved to commence business in this
regard. They are:
Multi Commodity Exchange (MCX) located at Mumbai.
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai.
National Board of Trade (NBOT) located at Indore.
National Multi Commodity Exchange (NMCE) located at Ahmedabad.
Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT, 1952 by the FORWARDS MARKET COMMISSION (FMC). Which
is an apex regulatory body for the commodities and futures market on the lines of securities
20
and exchange board of India (SEBI), for the securities market operations? The commodity
exchanges are granted approval by FMC under the overall aegis of the Ministry Of Consumer
Affairs, Food and Public Distribution, Government of India. All commodities and future
contracts traded on the exchange are required to be approved by the FMC along with their
contract specification which describes the quantity quality and place of the commodities
traded.
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors. And the reasons for the same are not difficult to understand.
21
OVERVIEW OF COMMODITIES EXCHANGES IN INDIA
"The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof. Currently Commission comprises three
members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma
Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the
Commission."
The list of exchanges that has been allowed to trade in commodities are
22
14. The Central India Commercial Exchange Ltd, Gwaliar
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NCDEX AND MCX
The two main exchanges in India facilitating commodity trading are NCDEX and MCX.
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies
Act, 1956. It has commenced its operations on December 15, 2003. 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, Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange. Started with an authorized capital of Rs.50crores, ICICI
BANK, LIC, NABARD and NSE hold the maximum share in the share capital (15%
each).NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India. The reach will gradually be expanded to more centers. NCDEX
is the only commodity exchange in the country promoted by national level institutions.
NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed,
Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil,
Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry
Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy
Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black
Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent
phases trading in more commodities would be facilitated.
24
Currently NCDEX has 700 members at 470 locations across the country. The exchange saw
400% growth in the first year of its operations and expects 200% in the second year also.
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel,
tin and mentha oil.
MCX offers futures trading in the following commodity categories: Agri Commodities,
Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices
and other soft commodities.
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers / Processors, Traders, Corporate, Regional
Trading Centers, Importers, Exporters, Cooperatives, and Industry Associations.
In a significant development, National Stock Exchange of India Ltd. (NSE), countrys largest
exchange and National Bank for Agriculture and Rural Development (NABARD), countrys
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15, 2005. This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country.
MCX is an ISO 9001:2000 online nationwide multi commodity exchange. It has over 900+
members spread across 500+ centers across the country, with more than 750+VSATs and
leased line connections and 5,000+ trading terminals that provide a transparent robust and
25
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals, energy and agriculture commodities. Exchange
has pioneered major innovations in Indian commodities market, which has become the
industry benchmarks subsequently.
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM), the 250 year old Baltic Freight Exchange, London, Dubai
Metals & Commodity Centre (DMCC) & Dubai Gold & Commodity Exchange (DGCX), the
strategic initiative of Government of Dubai. MCX has to its credit, setting up of the National
spot exchange (NSEAP), which connects all India APMC markets thereby contributing in the
implementation of Government of Indias vision to create a common Indian market
The trading system of MCX is state- of-the -art, new generation trading platform that permits
extremely cost effective operations at much greater efficiency. The Exchange Central System
is located in Mumbai, which maintains the Central Order Book. Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time. The controls in the
system are system driven requiring minimum human intervention. The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange, which matches on the Central System and sends a confirmation back to the
Member
Settlement: Exchange maintains electronic interface with its Clearing Bank. All Members of
the Exchange are having their Exchange operations account with the Clearing Bank.
All debits and credits are affected electronically through such accounts only. All contracts on
maturity are for delivery. MCX specifies tender and delivery periods. A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity. Exchange would
select from the long open position holder for the tendered quantity. Once the buyer is
identified, seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange Players involve d in
commodities trading like commodity exchanges, financial institutions, and banks have a
feeling that the markets are not being fully exploited . Education and regulation are the main
26
impediments to the growth of commodity trading. Producers, farmers and Agri- based
companies should enter into formal contracts to hedge against losses. The use of commodity
exchanges will create more trading opportunities; result in an integrated market and better
price discoveries
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a person/corporate who is admitted by the Exchange
as the member, conferring upon them a right to trade and clear through the clearing house of
the Exchange, as a Clearing Member.
Moreover, the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only.
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements.
Trading limit could be obtained by the Exchange Members on payment of a deposit,
which is called as a Margin Deposit.
They would be provided the software for trading on the exchange.
27
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT.
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the Members
and the Exchange through which the daily receipts and payments of margin and mark-to-
margins would be accomplished.
28
select from the long open position for the tendered quantity. Once the buyer is identified,
seller has to initiate the process of giving delivery & buyer has to take delivery according to
the delivery schedule prescribed by the exchange
In the first two of these, the basic problem is that of too much edibility and generality. The
forward market is like a real estate market in that any two consenting adults can form
contracts against each other. This often makes them design terms of the deal which are very
convenient in that specific situation, but makes the contracts non-tradable.
Counterparty risk arises from the possibility of default by any one party to the transaction.
When one of the two sides to the transaction declares bankruptcy, the other suffers. Even
when forward markets trade standardized contracts, and hence avoid the problem of
illiquidity, still the counterparty risk remains a very serious issue.
29
COMMODITY DERIVATIVES
Introduction
Derivatives as a tool for managing risk first originated in the commodities markets. They
were then found useful as a hedging tool in financial markets as well. In India, trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875. Over a period of
time, other commodities were permitted to be traded in futures exchanges. Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is
only in the last decade that commodity future exchanges have been actively encouraged.
However, the markets have been thin with poor liquidity and have not grown to any
significant level. In this chapter we look at how commodity derivatives differ from financial
derivatives. We also have a brief look at the global commodity markets and the commodity
markets that exist in India.
futures
Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price. But unlike forward contracts, the futures contracts are standardized
and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies
certain standard features of the contract. It is a standardized contract with standard underlying
instrument, a standard quantity and quality of the underlying instrument that can be delivered,
(or which can be used for reference purposes in settlement) and a standard timing of such
30
Settlement. A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction. More than 99% of futures transactions are offset this way.
Futures terminology
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The commodity futures contracts on
the NCDEX have one-month, two-months and three-month expiry cycles which expire on the
20th day of the delivery month. Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February. On the
next trading day following the 20th, a new contract having a three-month expiry is introduced
for trading.
Expiry date: It is the date specified in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist.
Delivery unit: The amount of asset that has to be delivered less than one contract. For
instance, the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales. The
delivery unit for the Gold futures contract is 1 kg.
Basis: Basis can be defined as the futures price minus the spot price. There will be a different
basis for each delivery month for each contract. In a normal market, basis will be positive.
This reflects that futures prices normally exceed spot prices.
31
Cost of carry: The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry. This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset.
Initial margin: The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.
Marking-to-market (MTM): In the futures market, at the end of each trading day, the
margin account is adjusted to re ect the investors gain or loss depending upon the futures
closing price. This is called markingtomarket.
Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that
the balance in the margin account never becomes negative. If the balance in the margin
account falls below the maintenance margin, the investor receives a margin call and is
expected to top up the margin account to the initial margin level before trading commences
on the next day.
Introduction to options
In this section, we look at another interesting derivative contract, namely options. Options are
fundamentally different from forward and futures contracts. An option gives the holder of the
option the right to do something. The holder does not have to exercise this right. In contrast,
in a forward or futures contract, the two parties have committed themselves to doing
something. Whereas it costs nothing (except margin requirements) to enter into a futures
contract, the purchase of an option requires an upfront payment.
Option terminology
Commodity options: Commodity options are options with a commodity as the underlying.
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract.
Stock options: Stock options are options on individual stocks. Options currently trade on
over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares
at the specified price.
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Buyer of an option: The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller/ writer.
Writer of an option: The writer of a call/ put option is the one who receives the option
premium and is thereby obliged to sell/ buy the asset if the buyer exercises on him.
There are two basic types of options, call options and put options.
Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain\ date for a certain price.
Option price: Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the expiration date,
the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price or the
exercise price.
American options: American options are options that can be exercised at any time upto the
expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the expiration
date itself. European options are easier to analyze than American options, and properties of an
American option are frequently deduced from those of its European counterpart.
In-the-money option: An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately. A call option on the index is said to
be in-the-money when the current index stands at a level higher than the strike price (i.e. spot
price strike price). If the index is much higher than the strike price, the call is said to be deep
ITM. In the case of a put, the put is ITM if the index is below the strike price.
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(At-the-money option: An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately. An option on the index is at-the-money when the
current index equals the strike price (i.e. spot price = strike price).
Intrinsic value of an option: The option premium can be broken down into two components
intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM,
if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic
value of a call is I. Similarly, Q which means the intrinsic value of a call is the greater of 0 or
9 I. K is the strike price Q, i.e. the greater of 0 or 9 C is the spot price. the intrinsic value of a
put is 0
Time value of an option: The time value of an option is the difference between its premium
and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM
has only time value...
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WORKING OF COMMODITY MARKET
Physical settlement
Physical settlement involves the physical delivery of the underlying commodity, typically at
an accredited warehouse. The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity. This may sound simple,
but the physical settlement of commodities is a complex process. The issues faced in physical
settlement are enormous. There are limits on storage facilities in different states. There are
restrictions on interstate movement of commodities. Besides state level octroi and duties have
an impact on the cost of movement of goods across locations. The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets.
35
In the case of BMF-Brazil a seller typically has to submit the following documents:
A declaration verifying that the asset is free of any and all charges, including fiscal debts
related to the stored goods. A provisional delivery order of the good to BM&F (Brazil),
issued by the warehouse. A warehouse certificate showing that storage and regular insurance
have been paid.
Assignment
Whenever delivery notices are given by the seller, the clearing house of the exchange
identifies the buyer to whom this notice may be assigned. Exchanges follow different
practices for the assignment process. One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery. Among the international
exchanges, BMF, CBOT and CME display delivery notices. Alternatively, the clearing houses
may assign deliveries to buyers on some basis. Exchanges such as COMMEX and the Indian
commodities exchanges have adopted this method
Any seller/ buyer who has given intention to deliver/ been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice. After the close of
trading, exchanges assign the delivery intentions to open long positions. Assignment is done
typically either on random basis or firstinfirst out basis. In some exchanges (CME), the
buyer has the option to give his preference for delivery location.
The clearing house decides on the daily delivery order rate at which delivery will be settled.
Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for
quality and freight costs. The discount/ premium for quality and freight costs are published
by the clearing house before introduction of the contract. The most active spot market is
normally taken as the benchmark for deciding spot prices. Alternatively, the delivery rate is
determined based on the previous day closing rate for the contract or the closing rate for the
day.
Delivery
After the assignment process, clearing house/ exchange issues a delivery order to the buyer.
The exchange also informs the respective warehouse about the identity of the buyer. The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt.
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The period available for the buyer to take physical delivery is stipulated by the exchange.
Buyer or his authorized representative in the presence of seller or his representative takes the
physical stocks against the delivery order. Proof of physical delivery having been affected is
forwarded by the seller to the clearing house and the invoice amount is credited to the sellers
account.
In India if a seller does not give notice of delivery then at the expiry of the contract the
positions are cash settled by price difference exactly as in cash settled equity futures
contracts.
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing. In case of most exchangetraded financial derivatives, all the positions are cash
settled. Cash settlement involves paying up the difference in prices between the time the
contract was entered into and the time the contract was closed. For instance, if a trader buys
futures on a stock at Rs.100 and on the day of expiration, the futures on that stock close
Rs.120, he does not really have to buy the underlying stock. All he does is take the difference
of Rs.20 in cash. Similarly the person, who sold this futures contract at Rs.100, does not have
to deliver the underlying stock. All he has to do is pay up the loss of Rs.20 in cash.
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity. The advantage
of this system is that a warehouse receipt becomes good collateral, not just for settlement of
exchange trades but also for other purposes too. In India, the warehousing system is not as
efficient as it is in some of the other developed markets. Central and state government
37
controlled warehouses are the major providers of Agriproduce storage facilities. Apart from
these, there are a few private warehousing being maintained. However there is no clear
regulatory oversight of warehousing services.
Unlike the physical market, a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract.
As a result, futures market attracts hedgers for risk management, and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities. While hedgers have long-term perspective of the market, the
traders or arbitragers, prefer an immediate view of the market. However, all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price, demand and supply, climatic and market related information.
These factors, together, result in efficient price discovery, allowing large number of buyers
and sellers to trade on the exchange. MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function.
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Price Risk Management: Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market. This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs.
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies. They also submit the
documents to the Exchange with the details of the warehouse within the city, chosen as a
delivery center. Sellers are free to use any warehouse, as they are responsible for the goods
until the buyer picks up the delivery, which is a practice followed in the commodities market
globally.
Seller would receive the money from the exchange against the goods delivered, which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time.
MCX has tied up with State Level Warehousing Corporations of Karalla, Gujarat, Tamil Nadu
and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and other
State level Warehousing Corporations
A contract has a life cycle of one month or longer. At MCX, two weeks before the expiry of a
contract, the contract enters into a tender period. At the start of the tender period, both the
parties must state their intentions to give or receive delivery, based on which the parties are
supposed to act or bear the penal charges for any failure in doing so.
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract. In case
they do not, their positions are closed out at 'due date rate'. The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices.
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Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month. The important provisions are listed below: The billing for the all trades
done during the previous month will be raised in the succeeding month.
1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs. one Lakh
trade done. This rate is subject to change from time to time.
2. Due date: The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month.
3. Collection process: NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System.
4. Registration with BJPL and their services: Members have to fill up the mandate form
and submit the same to NCDEX. NCDEX then forwards the mandate form to BJPL. BJPL
sends the login ID and password to the mailing address as mentioned in the registration
form. The members can then log on through the website of BJPL and view the billing amount
and the due date. Advance email intimation is also sent to the members. Besides, the billing
details can be viewed on the website upto a maximum period of 12 months.
5. Adjustment against advances transaction charges: In terms of the regulations, members
are required to remit Rs.50, 000 as advance transaction charges on registration. The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction .
6. Penalty for delayed payments: If the transaction charges are not paid on or before the due
date, a penal interest is levied as specified by the exchange.
Finally, the futures market is a zero sum game i.e. the total number of long in any contract
always equals the total number of short in any contract. The total number of outstanding
contracts (long/ short) at any point in time is called the Open interest. This Open interest
figure is a good indicator of the liquidity in every contract.
Regulatory framework
At present, there are three tiers of regulations of forward/futures trading system in India,
namely, government of India, Forward Markets Commission (FMC) and commodity
exchanges. The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions. Proper regulation is needed to create competitive
40
conditions. In the absence of regulation, unscrupulous participants could use these leveraged
contracts for manipulating prices. This could have undesirable in hence on the spot prices,
thereby affecting interests of society at large... Regulation is also needed to ensure that the
market has appropriate risk management system. In the absence of such a system, a major
default could create a chain reaction. The resultant financial crisis in a futures market could
create systematic risk. Regulation is also needed to ensure fairness and transparency in
trading, clearing, settlement and management of the exchange so as to protect and promote
the interest of various stakeholders, particularly nonmember users of the market.
1. Limit on net open position as on the close of the trading hours. Some times limit is also
imposed on intraday net open position. The limit is imposed operatorwise, and in some
cases, also member wise.
2. Circuitfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price. By making further
purchases/sales relatively costly, the price rise or fall is sobered down. This measure is
imposed only on the request of the exchange.
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4. Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors. This measure is also imposed on the request of the exchanges.
5. Skipping trading in certain derivatives of the contract, closing the market for a specified
period and even closing out the contract: These extreme measures are taken only in
emergency situations.
Besides these regulatory measures, the F.C(R) Act provides that a clients position cannot be
appropriated by the member of the exchange, except when a written consent is taken within
three days time. The FMC is persuading increasing number of exchanges to switch over to
electronic trading, clearing and settlement, which is more customerfriendly. The FMC has
also prescribed simultaneous reporting system for the exchanges following open outcry
system.
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients, etc. The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises, the
name, address, telephone number of the officer of the commission who can be contacted for
any grievance. The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC. Officers of the FMC have been
instructed to meet the members and clients on a random basis, whenever they visit exchanges,
to ascertain the situation on the ground, instead of merely attending meetings of the board of
directors and holding discussions with the officebearers.
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Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market. Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange. If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange.
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system. A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member. He does not have any title rights or
interest whatsoever with respect to trading system, its facilities, software and the information
provided by the trading system.
For the purpose of accessing the trading system, the member will install and use equipment
and software as specified by the exchange at his own cost. The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any
time. The cost of the equipment and software supplied by the exchange, installation and
maintenance of the equipment is borne by the trading member.
Trading members have to pass a certification program, which has been prescribed by the
exchange. In case of trading members, other than individuals or sole proprietorships, such
certification program has to be passed by at least one of their directors/ employees/ partners /
members of governing body. Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange. The appointment of
approved users is subject to the terms and conditions prescribed by the exchange. Each
approved user is given a unique identification number through which he will have access to
43
the trading system. An approved user can access the trading system through a password and
can change the password from time to time. The trading member or its approved users are
required to maintain complete secrecy of its password. Any trade or transaction done by use
of password of any approved user of the trading member, will be binding on such trading
member. Approved user shall be required to change his password at the end of the password
expiry period.
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time. Other than the regular trading hours, trading members are
provided a facility to place orders off-line i.e. outside trading hours. These are stored by the
system but get traded only once the market opens for trading on the following working day.
The types of order books, trade books, price a limit, matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time. Members can place orders on the trading system
during these sessions, within the regulations prescribed by the exchange as per these bye
laws, rules and regulations, from time to time.
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading. This is notified by the exchange in advance. The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time.
Trading parameters.
The exchange from time to time specifies various trading parameters relating to the trading
system. Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts. The exchange also prescribes different order
44
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books.
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity/ derivatives contract. It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system. It specifies parameters like lot size in
which orders can be placed, price steps in which orders shall be entered on the trading
system, position limits in respect of each commodity etc.
In the event of failure of trading members workstation and/ or the loss of access to the
trading system, the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for. Only
requests made in writing in a clear and precise manner by the trading member would be
considered. The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange.
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system. They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip/ modification slip must be made available to the constituents.
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
45
as open or close orders. Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents.
Trades generated on the system are irrevocable and `locked in'. The exchange specifies from
time to time the market types and the manner if any, in which trade cancellation can be
effected. Where a trade cancellation is permitted and trading member wishes to cancel a
trade, it can be done only with the approval of the exchange.
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force, every clearing member, in respect of the trades in which he is party to, has to
deposit a margin with exchange authorities.
The exchange prescribes from time to time the commodities/ derivative contracts, the
settlement periods and trade types for which margin would be attracted. The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time. The margin is charged so as to cover
one. day loss that can be encountered on the position on 99% of the days. Additional margins
may be levied for deliverable positions, on the basis of VaR from the expiry of the contract
till the actual settlement date plus a mark. Up for default. The margin has to be deposited with
the exchange within the time notified by the exchange. The exchange also prescribes
categories of securities that would be eligible for a margin deposit, as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount.
The procedure for refund/ adjustment of margins is also specified by the exchange from time
to time. The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement. On failure to deposit margin/s as required
under this clause, the exchange/clearing house can withdraw the trading facility of the trading
member. After the pay-out, the clearing house releases all margins.
46
changed at any time. The margin requirements for most futures contracts range from 2% to
15% of the value of the contract.
In the futures market, there are different types of margins that a trader has to maintain... At
this stage we look at the types of margins as they apply on most futures exchanges.
Initial margin: The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin. This margin is meant to cover the largest potential loss in
one day.
The margin is a mandatory requirement for parties who are entering into the contract.
Maintenance margin: A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin. To ensure that the balance in the margin account never becomes
negative, a maintenance margin, which is somewhat lower than the initial margin, is set. If
the balance in the margin account falls below the maintenance margin, the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time. The extra funds deposited are known as a variation margin. If the
trader does not provide the variation margin, the broker closes out the position by offsetting
the contract.
Additional margin: In case of sudden higher than expected volatility, the exchange calls for
an additional margin, which is a preemptive move to prevent breakdown? This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis, etc.
Mark-to-Market margin (MTM): At the end of each trading day, the margin account is
adjusted to re direct the traders gain or loss. This is known as marking to market the account
of each trader. All futures contracts are settled daily reducing the credit exposure to one days
movement. Based on the settlement price, the value of all positions is markedtomarket
each day after the official close. i.e. the accounts are either debited or credited based on how
well the positions fared in that days trading session. If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds. On the other hand, if the position generates a gain, the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades.
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Unfair trading practices
No trading member should buy, sell, deal in derivatives contracts in a fraudulent manner, or
indulge in any unfair trade practices including market manipulation. This includes the
following:
Effect, take part either directly or indirectly in transactions, which are likely to have effect
of artificially, raising or depressing the prices of spot/ derivatives contracts.
Buy, sell commodities/ contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract.
Indulge in falsification of his books, accounts and records for the purpose of market
manipulation.
When acting as an agent, execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange.
Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange.
Clearing
As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX. All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations, bye laws and rules of the exchange.
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Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract. If the last trading day as specified in the respective
commodity contract is a holiday, the last trading day is taken to be the previous working day
of exchange.
On the expiry date of contracts, the trading members/ clearing members have to give delivery
information as prescribed by the exchange from time to time. If a trading member/ clearing
member fail to submit such information during the trading hours on the expiry date for the
contract, the deals have to be settled as per the settlement calendar applicable for such deals,
in cash together with penalty as stipulated by the exchange.
Delivery
Delivery can be done either through the clearing house or outside the clearing house. On the
expiry date, during the trading hours, the exchange provides a window on the trading system
to submit delivery information for all open positions. After the trading hours on the expiry
date, based on the available information, the matching for deliveries takes place. firstly, on
the basis of locations and then randomly keeping in view the factors such as available
capacity of the vault/ warehouse, commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time. Matching done is binding on the clearing members. After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system. The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery, notwithstanding
that the commodities are located in the warehouse along with the commodities of other
constituents.
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The relevant authority from time to time fixes the various clearing days, the pay-in and pay.-
out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities/ futures contracts.
1. Settlement obligations statements for TCMs: The exchange generates and provides to each
trading clearing member, settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery/ deliveries is/ are to be given and/ or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle. The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and/ or taken and funds to be debited
and/ or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks/ institutions for the same.
2. Settlement obligations statements for PCMs: The exchange/ clearing house generates and
provides to each professional clearing member, settlement obligations statements showing the
quantities of the different kinds of commodities for which delivery/ deliveries is/ are to be
given and/ or taken and the funds payable or receivable by him. The settlement obligation
statement is deemed to have been confirmed by the said clearing member in respect of all
obligations enlisted therein.
Delivery of commodities
Based on the settlement obligations statements, the exchange generates delivery statement
and receipt statement for each clearing member. The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members, the
details of the corresponding buying/ selling constituent and such other details. The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent, commodities as specified in the delivery and receipt
statements. On respective pay-in day, clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals. Delivery
has to be made in terms of the delivery units notified by the exchange. Commodities, which
are to be received by a clearing member, are delivered to him in the depository clearing
50
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange/ clearing house.
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange. Electronic delivery is available for trading before expiry of the
validity date. The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications.
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories. Clearing Members operate the clearing account only for the purpose
of settlement of depository deals entered through the exchange, for the collection of margins
by way of commodities for deals entered into through the exchange. The clearing member
cannot operate the clearing account for any other purpose.
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange.
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RISK MANAGEMENT OF COMMODITY MARKET
IN LIGHT OF MCX AND NCDEX
Introduction
The two major economic functions of a commodity futures market are price risk
management and price discovery of the commodity. Among these the price risk
management is by far the most important, and is raison d etre of a commodity futures
market.
The need for price risk management, through what is commonly called hedging arises from
price risks in most commodities. The larger, the more frequent and the more unforeseen is the
rice variability inn a commodity, the greater is the price risk in it. Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire,
pilferage, transport mishaps etc. they do not cover the risks of value losses resulting from
adverse price variations. The reason for this is obvious. The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps.
Commodity producers, merchants, stockists and importers face the risk of large value losses
on their production, purchases, stock and imports from the fall in prices. Likewise the
processors, manufacturers, exporters and market functionaries, entering into forward sale
commitments in either the domestic or export markets, are exposed to heavy risks from
adverse price changes.
True, price variability may also lead to windfalls, when losses move favorably. In the long
run, such gains may even offset the losses from adverse price movements. But the losses,
when incurred, are at times so huge these may often cause insolvencies. The greater the
exposure to commodity price risks, the greater is the share of the commodity in the total
earnings or production costs. Hence the needs for price risk management by hedging through
the use of futures contracts.
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unison and display a parallel relationship, losses in the physical market are off set, either fully
or substantially, by the gains in the future market. Hedging thus performs the economic
function of helping to reduce significantly, if not eliminate altogether, the losses emanating
from the price risks in commodities.
In India agriculture has traditionally been an area with heavy government intervention.
Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they
have import-export restrictions and a host of other interventions. Many economists think that
we could have major benefits from liberalization of the agricultural sector.
In this case, the question arises about who will maintain the buffer stock, how will we
smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out, how will farmers get signals that in the future there will
be a great need for wheat or rice. In all these aspects the futures market has a very big role to
play.
If you think there will be a shortage of wheat tomorrow, the futures prices will go up today,
and it will carry signals back to the farmer making sowing decisions today. In this fashion, a
system of futures markets will improve cropping patterns.
Next, if I am growing wheat and am worried that by the time the harvest comes out prices
will go down, then I can sell my wheat on the futures market. I can sell my wheat at a price,
which is fixed today, which eliminates my risk from price fluctuations. These days,
agriculture requires investments -- farmers spend money on fertilizers, high yielding
varieties, etc. They are worried when making these investments that by the time the crop
comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices.
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The third is the role about storage. Today we have the Food Corporation of India, which is
doing a huge job of storage, and it is a system, which -- in my opinion -- does not work.
Futures market will produce their own kind of smoothing between the present and the future.
If the future price is high and the present price is low, an arbitrager will buy today and sell in
the future. The converse is also true, thus if the future price is low the arbitrageur will buy in
the futures market. These activities produce their own "optimal" buffer stocks, smooth prices.
They also work very effectively when there is trade in agricultural commodities; arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets.
.
Benefits to Industry from Futures trading.
* Hedging the price risk associated with futures contractual commitments.
* Spaced out purchases possible rather than large cash purchases and its storage.
* Efficient price discovery prevents seasonal price volatility.
* Greater flexibility, certainty and transparency in procuring commodities would aid bank
lending.
* Facilitate informed lending.
* Hedged positions of producers and processors would reduce the risk of default faced by
banks.
* Lending for agricultural sector would go up with greater transparency in pricing and
storage.
* Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households.
* Provide trading limit finance to Traders in commodities Exchanges
.
Benefits to Exchange Member
* Access to a huge potential market much greater than the securities and cash market in
commodities.
* Robust, scalable, state-of-art technology deployment.
* Member can trade in multiple commodities from a single point, on real time basis.
* Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met, like bank credit, information dissemination, etc.
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Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity. At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country, it ensures price stabilization-in times of violent price
fluctuations and facilitates lengthy and complex production and manufacturing
activities. At micro level also they provide several economic benefits to several different
sections of the society. For example, it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities. The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market. Further after entering into an export contract, it enables
him to hedge his risk by operating in futures market. Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time. Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts.
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RESEARCH METHODOLOGY
Meaning of Research
Research in common parlance refers to a search for knowledge.
According to Redman and Moray, research is a systematized effort to gain new
knowledge
Research methodology
Research Methodology describes the research procedure. This includes the overall research
design, the sampling procedure, the data-collection methods.
1. Research Design
A research using survey method with the help of structured questionnaire will be used as it
best conforms to the objectives of the study.
2. Data Collection
Through both the primary and secondary methods.
Primary data collection
1) Survey through a questionnaire.
Secondary sources
1) Financial newspapers, magazines, journals, reports and books.
2) Interaction with experts and qualified professionals.
3) Internet
3. Sampling plan
a) Universe
Bathinda.
b) Sample size
The sample size is 60.
c) Sampling technique
The simple random sample method is used.
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Objectives of study
If you know where you are going, any road will take you there
Whenever a study is conducted, it is done on the basis of certain objective(s) in mind. A
successful completion of a project is based on the objective(s) of the study that could be
stated as under:
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DATA ANALYSIS & INTERPRETATION
Q 1. You are a/an
Diagrammatically Presentation
20%
30%
50%
From the above data collected it is found that majority of the brokers having knowledge. Out
of 200 brokers approximately 60 brokers are dealing in commodity market in LSE. There are
a number of private investment companies, which are investing in commodities through
MCX and NCDEX
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Q 2. You are investing in __________________
Diagrammatically Presentation
18%
42%
29%
11%
Majority of investors are investing in Share market but growth of commodity market can be
seen as in such a small time the number of investors is 16 i.e. share of 26.66% and some who
are investing in all option of Capital Market.
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Q 3. Degree of knowledge in commodities market
Diagrammatically Presentation
Very High (8-10) High (6-8) Moderate (4-6) Low Very Low
13%
20%
17%
20%
30%
Being a new concept the knowledge of people is moderate or less only 13.33% people have
high knowledge
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Q 4. Are you trading in commodity market?
Diagrammatically Presentation
Yes No
10%
90%
Commodity market is certainly a very gilt market to invest because 90% of people investing
in it
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Q 5. Why you have not ever invested in Commodity Market?
Diagrammatically Presentation
34%
50%
0%
16%
Lack of awareness is the major factors among the investors to not to trade in the
commodities.
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Q 6. In future in which commodities you want to invest in Future?
Diagrammatically Presentation
15%
15%
17% 53%
Most of the people like to invest to in the Bullions as compared to other commodities
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Q 7. You are trading through ______________________--
Diagrammatically Presentation
13%
12%
17%
58%
LSE is hot favorite among the investors to invest as 58.33% investors are investing through
LSE
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Q 8. From how much time you are trading?
Diagrammatically Presentation
10% 13%
7%
70%
The survey show that most of person thinks that commodities market is fast growing in India
due to its stability of transactions.
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Q 9. In which commodities you are investing?
Diagrammatically Presentation
47%
29%
10%
14%
Mostly the investors are investing in Bullions (40%) and the second preference being Energy
side (Crude Oil) with 25%.
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Q 10. What is the basis of trading?
Diagrammatically Presentation
10%
3%
17%
7%
63%
Survey shows that the investors are rational and selects the type which offers maximum
return. They do not stick to a particular mode of trading.
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Q 11. Growth of commodity market in India is?
Diagrammatically Presentation
10%
25%
22%
43%
Almost 65% respondents have ticked the option of all of above all these benefits are to Govt.
in indirect way. The most important that is possibility of removal of subsidy by the Govt.
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Q 12. How Commodity Market helps in Market Development?
Diagrammatically Presentation
8%
25%
16% 51%
According to the survey Demand Forecasting (50%) is most important tool in the commodity
market.
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Q 13. Is Commodity Market is _________________ for Indian Economy
Diagrammatically Presentation
8%
25%
17% 50%
The commodity market is appropriate (50%) for the developing agro Indian economy.
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Q 14. How it will influence the Indian Economy?
Diagrammatically Presentation
20%
33%
12%
35%
This shows that commodity market will reduce the risk (20%) and increase the return (21).
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Q 15. Impact of Commodity market on Business Houses?
Diagrammatically Presentation
15%
25%
35%
25%
The impact of Commodity market on Business Houses is uniform in all forms as it will
increased the revenues, Develop the bank manage the risk effectively .
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CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed. The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market. Such a practice would bring into the account
a clear picture of the impact of commodities related operations.
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products.
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios. Big individual
investors, institutional investors, mutual funds etc generally perform all these activities.
No doubt that commodities growth towards the progress of economy is positive. But
the problems confronting the commodity market segment are giving it a low customer
base. The main problems that it confronts are unawareness and bit lot sizes etc. these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places.
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RECOMMENDATIONS
Create awareness about the commodity market there is a dire need to have more and more
awareness programs.
Government of India (GOI) is committed to strengthening the commodity markets,
commodity exchanges and the regulatory authority through training and modernization.
GOI will proceed cautiously. It wants to encourage multi-commodity exchanges.
Futures exchanges must gain the confidence of not only the users but also the
agriculturists, the manufacturers, the consumers and
The public at large, through functional transparency and viability.
Clearing, guarantee and settlement procedures are important. Commodity exchanges are
bound to succeed over time with well designed contracts, appropriate technology and
marketing of their services.
Regulations are an integral part of futures markets. Monitoring and surveillance are
extremely important functions. The regulatory authority must be strong, but not over-
intrusive. The commodity exchanges should provide first level of regulation on a day-to-
day basis.
Banks have a critical role to play in the development of commodity futures. They need to
provide not only the money but also services. With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing. For this the banks would need to acquire appropriate skills.
Information need of commodity futures markets is not fulfilled. Even though government
collects useful information, it is not timely. There are also good business prospects for the
private sector to provide timely and relevant information.
Training for all those connected with commodity futures is absolutely essential. Training
needs for every level have to be identified. The levels of training have to be different for
different groups and training may have to be imparted in stages.
The commodity exchanges outside India which have adopted "online trading" or "screen
based trading" have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts.
Considering this aspect, the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
members/clients, the Indian commodity exchanges also stress on development of online
system prevailing now-days.
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The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor.
There should be more awareness programs for the rural sector people by advertising in
regional newspapers & TV channels such as Doordarshan, Akashvani etc.
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LIMITATIONS OF STUDY
No study is complete in itself, however good it may be and every study has some limitations.
Following are the limitations of my study:
Time constraint.
Since the data collection methods involve opinion survey, the personal bias may
influence the study due to the respondents tendency to rationalize their views.
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APPENDIX
QUESTIONNAIRE
1. Age Group:
a) Below30
b) 31-40
c) 41-50
d) 51-60
e) Above 60
2. Educational Qualification:
a) Under Graduate
b) Post Graduate
c) Diploma
d) Others (Specify)
3. Occupation:
a) Student
b) Employed
c) Self Employed
d) Businessman
4. Annual Income Level:
a) Below 1 Lac
b) 1-3 Lac
c) 3-5 Lac
d) Above 5 Lac
5. What percentage of your Salary do you usually save ?
a) Less than 15%
b) 15-20 %
c) 20-25 %
d) Greater then 25%
6. Where do you make investment
a) Commodities Market
b) Property
c) Mutual Fund
d) Insurance
e) Shares
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9. If No Why you have not ever invested in Commodity Market?
a) Lack of awareness.
b) New concept..
c) Less broker initiative..
d) Risk factor..
10. Which commodities would you like to invest in Future?
a) Bullion..
b) Heavy metals.
c) Agro commodities.
d) Energy
11. What is the basis of trading?
a) Hedging.
b) Speculation
c) Arbitration.
d) Delivery.
e) All of the above..
12. Growth of commodity market in India is?
a) Very fast
b) Fast
c) Moderate
d) Low
e) Very low
13. How Commodity Market helps in Market Development?
a) Price fixation..
b) Demand forecasting
c) Social security
d) All of the above.
14. Commodity Market is _________________ for Indian Economy.
a) Perfect..
b) Appropriate..
c) Unsuitable
d) Cant say..
15. How it will influence the Indian Economy?
a) Proximity..
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b) Social security
c) High return to buyer and seller..
d) Reducing risk for buyer and seller.
16. Impact of Commodity market on Business Houses?
a) Increase in revenue
b) Development of banks..
c) Provides platform.
d) All of the above
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BIBLOGRAPHY
BOOKS, JOURNALS etc:
1. NCFM modules
2. Sidhu, H.S., Outlines of Indian Capital Market.
3. Indian commodity market review (MCX publications)
4. Capital market dealer modules (NSE publications)
5. Investor education, 2003, souvenir released by Ludhiana stock exchange
6. Empowering investors through education, souvenir released by Bangalore stock exchange
7. the Indian commodity market derivatives in operation by Dr. J.N. Dhankar
8. BCDE (BSE certificate module on derivatives, BSE publications)
9. SEBI (Disclosure & Investor Protection) guidelines, 2005
10. Manual of SEBI act, rules, regulations, guidelines, circulars etc. (Bharat publications
11. MCX Annual commodity market review
12. LSE Bulletin
13. SEBI Bulletin
14. Listing agreement on commodity exchanges
WEBSITES:
http://www.ncdexindia.com
http://www.mcxindia.com
http://www.sebi.gov.in
http://www.wikipedia.com
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