A SUMMER INTERNSHIP PROJECT ON

“A STUDY ON INVESTORS

PREFERENCE IN COMMODITY MARKETS”

FOR THE PARTIAL FULFILLMENT OF POST-GRADUATION DEGREE IN

“MASTER OF BUSINESS ADMINSTRATION”

INTERNSHIP DONE AT

“STRATAGEM SOLUTIONS”

UNDER THE ESTEEMED GUIDENCE OF

PROF. LATHA CHAKRAVARTHI

(FACULTY, AGBS HYDERABAD)

SUBMITTED BY

UGENDHAR REDDY E

ROLL NO: A30601909014

AMITY GLOBAL BUSINESS SCHOOL

BANJARA HILLS ROAD NO: 11

ADJACENT TO LAKE VEIW APARTMENT

HYDERABAD

DECLARATION
I hereby declare to the best of my knowledge and belief that the Summer Training
Project Report entitled as “A STUDY ON INVESTORS PREFERENCE IN
COMMODITY MARKETS” for STRATAGEM SOLUTIONS,
HYDERABAD being submitted as the partial fulfillment of Master of Business
Administration, has been written and submitted under the guidance of Ms. Tanvi
Agarwal Industry guides and Prof. Latha chakravarthi my faculty guide.

I further declare that it is original work done as a part of the academic course and
has not been submitted elsewhere.

The conclusions and recommendations written in this project are based on the data
collected by me while preparing this report.

UGENDHAR REDDY E
A30601909014

CERTIFICATE
(Whom so ever it may concern)
 This is to certify that the project report entitled “A STUDY ON
INVESTORS PREFERENCE IN COMMODITY MARKETS” carried at
STRATAGEM SOLUTIONS Hyderabad is a bonafide work done by Mr.
UGENDHAR REDDY, bearing ID No. A30601909014 a student of AMITY
GLOBAL BUSINESS SCHOOL, Hyderabad and submitted the same in the
partial fulfillment for the award of the degree of “ MASTER OF BUSINESS
ADMINISTRATION” has done his Summer Internship Program under my
guidance from 7st June 2010 to 10th August 2010.

I found him to be good in the task and activities assigned to him. I wish his
success in all future endeavors.

FACULTY GUIDE

ACKNOWLEDGEMENT
I would like to express word of thanks to all those who have provided me with sincere advice

and information during the course of my training period. It was indeed a great pleasure for me to

work in a very co-operative, enthusiastic and learning atmosphere at Stratagem solutions.

I would like to take this opportunity to thank Dr. Prasad Rao (Director AGBS Hyderabad)

and D. Surekha Thakur (corporate relations), Amity Global Business School for giving me

an opportunity for doing a project in a corporate firm and all my faculty members, senior

officials and colleagues at Stratagem solutions for their help and support during the project.

I would also like to express my sincere thanks to Prof. Latha chakravarthi (Faculty Guide-

AMITY GLOBAL BUSINESS SCHOOL, Hyderabad) for her unstinting guidance and

support throughout the project. She has been a great source of motivation to me.

I would also like to extend my regards to my company guide Ms. Tanvi Agarwal, Stratagem

solutions and for helping me and providing me with right direction during the course of my

project. The interaction with him has provided me with the knowledge which will definitely help

me to enrich my career and help me to perform better in future.

With all the heartiest thanks; I hope my final project report will be a great success and a good

source of learning and information.

UGENDHAR REDDY E

TABLE OF CONTENTS

1. Objective and methodology of the study…………………………………………………………… 1

2. Introduction………………………………………………………………………………………… 4
2.1.Spot Vs Forward Transactions
2.2. Limitations
3. Company Profile……………………………………………………………………………………. 9
4. History of Commodity trading and Precious Metals……………………………………………….. 13
4.1. Commodity trading in India
4.2. Kabra committee report
4.3.Forward Market Commission
4.4.Multi-commodity exchange of India
4.5.National Commodity and Derivatives Exchange limited
4.6.History of Gold Market
4.6.1. Gold Trading
4.6.2. Production of the Gold
4.6.3. Why central Banks Hold Gold
4.7.History of silver Market
4.7.1. Production of silver
5. Pricing Commodity Futures……………………………………………………………………….. 29
5.1.Investment Vs Consumption Assets
5.2.Cost of Carry model
5.3.Pricing Futures Contract on Investment commodities
5.4.Pricing Futures Contract on Consumption commodities
6. Clearing, Settlement and Risk Management……………………………………………………….. 38
6.1. Clearing
6.2. Settlement
6.3.Risk Management
7. Fundamental and Technical Analysis………………………………………………………………. 45
7.1. Fundamental analysis
7.1.1. Demand and Consumption
7.1.2.Consumption of gold in India
7.1.3.Uses of Gold
7.2. Technical analysis
7.2.1. Dow Theory
7.2.2.Basic principles of technical analysis
7.2.3.Market indicators
8. Questionnaire…………………………………………………………………………………….. 56
9. Analysis & interpretation………………………………………………………………………… 60
10.Tests……………………………………………………………………………………................. 81
11.Recommendations………………………………………………………………………………... 85
12.Case study………………………………………………………………………………………... 87
13.Article……………………………………………………………………………………………. 93
14.Conclusion……………………………………………………………………………………….. 96
15.References……………………………………………………………………………………….. . 98

ABSTRACT
Aim: An empirical study on precious metals based on fundamental and technical analysis.

Abstract: We study the gold and silver prices based on fundamental analysis like inventories in

the entire globe, central bank reserves and currency fluctuations. We study the Inventories which

will effect due to strikes, political conditions and demand & supply mismatch. According to

central Bank policies and central agreements reserves will various. Currency trading on Dollar

verses Euro or Dollar verses sterling pound causes volatility which leads to gold/silver price

fluctuations.

We forecast the gold and silver prices with advanced technical analysis tools

by using mathematical indicators and Market indicators like Simple moving average,

Exponential moving average. Market indicators are the indicators used by technical analysts to

study t he trend of the market as a whole. Oscillators like Rate of change Indicators. We use

mathematical indicators to know the average prices of the commodity, and we use Oscillators to

identify overbought and oversold conditions.

In this study we are applying both fundamental and technical analysis for

predicting the future price actions based on historical data and previous trends.
 CHAPTER – 1

OBJECTIVE AND METHODOLOGY OF

STUDY

OBJECTIVES OF THE STUDY:

PRIMARY OBJECTIVE
• To study the investors’ preference towards commodities market.
 SECONDARY OBJECTIVE
• To identify the investment patterns of investors.

• To know whether the investor’s opinion about international commodities market

affects the national trading activity.

• To identify the source of information about commodities market.

• To profile the commodities investors.

METHODOLOGY OF THE STUDY:

The data collection methods include both primary and secondary collection methods.

1. QUESTIONNAIRE:

The study will be analyzed by using a customer survey which will be

done with the help of a pre-determined structured questionnaire used
in extracting the required data from the 150 customers who use
Commodities for their asset management.

2. DATA COLLECTION:

The data required for the study was primarily collected through two
methods:

a. Primary Data: The required primary data for the study will be
collected through a survey which will be conducted on the
customers trading in commodity market.

b. Secondary Data: The data will be collected from secondary

sources such as the company’s website, articles from the internet
and management book and journals. These data will be used to
support the primary data collected through the survey.

SCOPE OF THE STUDY

v Understanding the investor’s risk towards commodity market.
v The study helps us to know about the Investor’s preference towards commodity market.
LIMITATIONS OF THE STUDY:
1. The suggestion is based on the study on Fundamental and Technical Analysis such as price

movement, Relationship of gold with other factors, Volumes and Open Interest (OI).

2. This analysis will be holding good for a limited time period that is based on present scenario

and study conducted, future movement on gold price may or may not be similar.

RESEARCH METHODOLOGY
Research Design : Descriptive Research
Data Source : Primary and Secondary Data
Primary Data Collection : Survey Method
Primary Data Collection Instrument : Questionnaire
Sample size : 150 respondents

TIME LINE: Project started on 7st June 2010 and concluded on 10th August 2010.
 CHAPTER – 2

INTRODUCTION

Trading on derivatives first started to protect farmers from the risk of their values

against fluctuations in the price of their crop. From the time it was sown to the time it was ready

for harvest, farmers would face price uncertainty. Through the use of simple derivative products

the farmers can transfer their risk (i.e. fully or partially) by locking the price of their products.

This was developed to reduce the risk of the farmers. Let’s take an example when a farmer who

sowed his crop in June which he would receive his harvest in September may face uncertainty in

prices over the period because of the oversupply they are selling at a very low cost.
 In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and

merchants together. A group of traders got together and created the `to-arrive' contract that

permitted farmers to lock in to price upfront and deliver the grain later. Today, derivative

contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc.

Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks,

interest rate, exchange rate, etc.

Due to the high volatility in Financial Market with high risk & low rate of return

had made investors to choose alternate investments such as Bullion market in Commodity

market. In India gold has traditionally played a multi-faceted role. Apart from being used for

armament purpose, it has also served as an asset of the last resort and a hedge against inflation

and currency depreciation. But most importantly, it has most often been treated as an investment.

Many people have become very rich in commodity markets. It is one of the areas

where people can make extraordinary profits within a short span of time. For example, Richard

Dennis borrowed $1600 and turned it into a $200 million fortune in about ten years.

Definition of Derivatives: A derivative is a product whose value is derived from value of one or

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

forex, commodity or any other assets.

For example: A wheat farmers may wish to sell their harvest at a future date to eliminate

the risk of a change in prices by that date.

The Forwards Contracts (Regulation) Act, 1952, regulates the forward/ futures

contracts in commodities all over India. However when derivatives trading in securities was

introduced in 2001, the term security in the Securities Contracts Regulation Act, 1956 (SCRA),

was amended to include derivative contracts in securities.

Products and participants:

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

and swaps. Participants who trade in the derivatives market can be classified under the following

three broad categories - Hedgers, Speculators, and Arbitragers.

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

options markets to reduce or eliminate this risk.

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

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

small amounts of money upfront, they can take large positions on the market. As a result of this

leveraged speculative position, they increase the potential for large gains as well as large losses.

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

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

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

two markets to lock in the profit.

Spot versus forward transaction:

Let us try to understand the difference between spot and derivatives contract.

Every transaction has three components like trading, clearing and settlement. A buyer and seller

come together, negotiate and arrive at a price this is trading. Clearing involves finding out the net

outstanding, that is exactly how much of goods and money the two should exchange.

For example ‘A’ buys goods worth Rs.1000 from ‘B’ and sells goods worth Rs.400 to ‘B’.

On a net basis ‘A’ has to pay Rs.600 to ‘B’. Settlement is the actual process of exchanging

money and goods.

In a spot transaction, the trading, clearing and settlement happens immediately, i.e.

on the spot. For example on 1March 2009, Suman wants to buy some gold. The goldsmith quotes
Rs.15000 per 10 grams. They agree upon this price and Suman buys 20grams of gold. He pays

Rs.30000 to the goldsmith and collects his gold. This is a spot transaction.

Now suppose Suman does not want to buy the gold on the 1 March, but wants to

buy it a month later. Then the goldsmith quotes Rs.15050 per 10 grams. They agree upon the

forward price for 20 grams of gold that Suman wants to buy and Suman leaves. A month later, he

pays the goldsmith Rs.30100 and collects his gold. This is a forward contract, a contract by

which two parties permanently agree to settle a trade at a future date, for a stated price and

quantity. No money changes hands when the contract is signed. The exchange of money and the

underlying goods only happens at the future date as specified in the contract. In a forward

contract the process of trading, clearing and settlement does not happen immediately. The

trading happens today, but the clearing and settlement happens at the end of the specified period.

A forward is the most basic derivative contract. We call it a derivative because it

derives value from the price of the asset underlying the contract, in this case gold. If on the

1st of April, gold trades for Rs.15100 in the spot market, the contract becomes more valuable to

Suman because it now enables him to buy gold at Rs.15050. If however, the price of gold drops

down to Rs.15000, he is worse off because as per the terms of the contract, he is bound to pay

Rs.15050 for the same gold. The contract has now lost value from Suman’s point of view. “Note

that the value of the forward contract to the goldsmith varies exactly in an opposite manner to its

value for Suman”.

 CHAPTER – 3
STRATAGEM SOLUTIONS LTD

STRATAGEM SOLUTIONS.

-BUSINESS PERFORMANCE THROUGH SERVICES.

Stratagem Solutions is a wealth trading start-up platform which provides financial services in the
fields of brokerage and human resources. We liaise with high net worth clients in providing them
advisory services for greatest levels of consumer satisfaction.

About Stratagem
Stratagem Solutions is a wealth trading start-up platform which provides financial services in the
fields of brokerage and human resources. We liaise with high net worth clients in providing them
advisory services for greatest levels of consumer satisfaction.
The Company also offers training modules for students who are looking at a career in the
financial services industry by certifying them to high industry standards. We also undertake the
placement of qualified financial professionals.

Mission Statement :
 • To set the standard for excellence in service
• To continually monitor our portfolio of products to meet the ever-changing needs of our
customers as they plan for the future
• To assist our independent force in an atmosphere of team spirit to professionally serve the
customers and communities
• To maintain profitable growth and provide challenging opportunities for our employees
while continually stressing unquestioned business ethics and integrity

Why Stratagem
Stratagem Solutions is a wealth trading start-up platform which provides financial services in the
fields of brokerage and human resources. We liaise with high net worth clients in providing them
advisory services for greatest levels of consumer satisfaction. The Company also offers training
modules for students who are looking at a career in the financial services industry by certifying
them to high industry standards. We also undertake the placement of qualified financial
professionals.
Vision Charter
• Stratagem Solutions will embark on a quest to become a pioneer company and a leader in
the defined fields

• We will always demonstrate dedication, professionalism, integrity and strength in service

to our Customers
Financial Services
• Brokerage Services
• Portfolio management services
• Gold and silver bullion trading
• Margin funding
• Mutual Funds
• Life Insurance
• General Insurance
• Housing and Infrastructure Finance
• Project Funding with CC,OD and Term Loan Limits

Stepping Stone Training

Cooperative education is a structured method of combining classroom-based education with
practical work experience. A cooperative education experience, commonly known as a "co-op",
provides academic credit for structured job experience. Cooperative education is taking on new
importance in helping young people to make the school-to-work transition, service learning, and
experiential learning initiatives.
A highly competitive marketplace has made it imperative for the companies to effectively utilize
their resources to increase productivity and succeed. This has increased the need for complex
systems and shorter product life cycle. The work force should be trained on these complexities to
meet the goal of the organization. This has necessitated the corporate training model where the
companies utilize the expertise of experienced trainers for their project specific customized
training needs. These training programs are also organized for skill development and retention of
the existing workforce. So for meeting the customer demands in the right time at a right way
Stratagem has Profound Training facility as its core value in achieving organization goal.
Higher productivity – The Straragem has higher levels of productivity, owing to the training
program which will give them all the knowledge they require to be adept at handling their work
routines.

Edge over competition – Since the employees are better skilled at handling network
infrastructure through the training program, one can achieve the business objectives in a better
way than before, giving a definitive edge over the competitors as the time to deliver results is
shorter and faster.

Higher return on investment – The training program will make employees adept at handling their
responsibility, which can result in higher productivity and quicker achievement of business
objectives.

Recruitment Services
We offer placement services to IT and non-IT Professionals in the following industries across the
globes:
• Finance and Banking
• Insurance
• Telecom
• Pharma
• FMCG
• Consumer Durable
• Projects and Infrastructure
• Engineering
• Information Technology (IT)
• Process & Chemicals
• Power

Careers
At Stratagem solutions, we maintain a competent and demanding ambience that helps you to
realize your utmost potential, and which often spurs you to even go beyond the confines of your
potential. It’s an environment that transfigures you into a seasoned and a clued-in professional.
The environment, which is taxing, and which, at the same time, is equally invigorating and
rewarding. So if you are on the lookout for not just a job but a real launch pad for your career in
Stratagem.
 CHAPTER – 4

HISTORY OF COMMODITY TRADING &

PRECIOUS METALS
Commodity trading in India:

The history of organized commodity derivatives in India goes back to the

nineteenth century when the Cotton Trade Association started futures trading in 1875, barely

about a decade after the commodity derivatives started in Chicago. Over time the derivatives

market developed in several other commodities in India. Following cotton, derivatives trading

started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur

(1913) and in Bullion in Bombay (1920). However, many feared that derivatives lead to

unnecessary speculation in essential commodities, and were harmful to the healthy functioning

of the markets for the underlying commodities, and also to the farmers.

With a view to restricting speculative activity in cotton market, the Government of Bombay

prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited in

oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar And

cloth. After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952

which Regulated forward contracts in commodities all over India. The Act applies to goods,

which are defined as any movable property other than security, currency and actionable claims.

The Act prohibited Options trading in goods.

The Act envisages (imagine) three-tier regulation:

1) The Exchange which organizes forward trading in commodities can regulate

trading on a day-to-day basis,

 2) The Forward Markets Commission provides regulatory oversight under the

powers delegated to it by the central Government,

3) The Central Government - Department of Consumer Affairs, Ministry of

Consumer Affairs, Food and Public Distribution - is the ultimate regulatory

authority.

In 1970s and 1980s the Government relaxed forward trading rules for some commodities.

The Kabra committee report

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

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

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

chairmanship of Prof. K.N. Kabra.

The committee was setup with the following objectives:

1. To assess

• The working of the commodity exchanges and their trading practices in India

• To make suitable recommendations with a view to making them compatible

with those of other countries

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

during the last 10 years.

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

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

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

reasonable limits.

The committee submitted its report in September 1994. The recommendations of the Committee

were as follows:

➢ The Forward Markets Commission (FMC) and the Forward Contracts (Regulation) Act,

1952, would need to be strengthened.

➢ Due to the inadequate infrastructural facilities such as space and telecommunication

facilities the commodities exchanges were not able to function effectively. Enlisting more

members, ensuring capital adequacy norms and encouraging computerisation would

enable these exchanges to place themselves on a better footing.

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

of surveyors and arbitrators are strengthened further.

➢ The FMC which regulates forward/ futures trading in the country should continue to act

a watch.dog and continue to monitor the activities and operations of the commodity

exchanges. Amendments to the rules, regulations and bye-laws of the commodity

exchanges should require the approval of the FMC only.

All the exchanges have been set up under overall control of Forward Market

Commission (FMC) of Government of India.

FORWARD MARKET COMMISSION:-Forward Markets Commission (FMC) headquartered

at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and

Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward

Contracts (Regulation) Act, 1952.

The functions of the Forward Markets Commission are as follows:

1. To advise the Central Government in respect of the recognition or the

withdrawal of recognition from any association or in respect of any other

matter arising out of the administration of the Forward Contracts

(Regulation) Act 1952.

2. To keep forward markets under observation and to take such action in

relation to them, as it may consider necessary, in exercise of the powers

assigned to it by or under the Act.

3. To collect and whenever the Commission thinks it necessary, to publish

information regarding the trading conditions in respect of goods to which

any of the provisions of the act is made applicable, including information

regarding supply, demand and prices, and to submit to the Central

Government, periodical reports on the working of forward markets relating

to such goods;

4. To make recommendations generally with a view to improving the

organization and working of forward markets;

 5. To undertake the inspection of the accounts and other documents of any

recognized association or registered association or any member of such

association whenever it considerers it necessary.

Commodity Exchanges in India: The two important commodity exchanges in India are Multi-

Commodity Exchange of India Limited (MCX), and National Multi-Commodity & Derivatives

Exchange of India Limited (NCDEX).

I. Multi-Commodity Exchange of India Limited (MCX)

MCX an independent multi-commodity exchange has permanent recognition from

Government of India for facilitating online trading, clearing and settlement operations for

commodity futures markets across the country. Key shareholders of MCX are Financial

Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of

Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union

Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank. Headquartered

in Mumbai, MCX is led by an expert management team with deep domain knowledge of the

commodity futures markets. Through the integration of dedicated resources, robust technology

and scalable infrastructure, since inception MCX has recorded many first to its credit.

Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing

Director, Reliance Industries Ltd, 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. MCX has built strategic alliances with

some of the largest players in commodities eco-system, namely, Bombay Bullion Association,

Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers

Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and

Spice Trade Association.

 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, Industry Associations, amongst others

MCX being nation-wide commodity exchange, offering multiple commodities for trading with

wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

Active Contracts Traded in MCX

S.NO COMMODITIY Price/Unit Trading Lot Delivery Center Multiplier Initial
NAME Margin %

1 GOLD Rs / 1 KG MUMBAI 100 7

10Gms

2 GOLDM Rs / 100Gms MUMBAI 10 5

10Gms

3 GOLD GUINEA Rs/ 8Gms 8Gms MUMBAI 1 14.5

/AHMEDABAD

4 SILVER RS/ KG 30 KG AHMEDABAD 30 8

5 SIVERM Rs / 1 KG 5 KGS AHMEDABAD 5 8

6 MENTHA OIL Rs/KG 360 KG CHANDAUSI 360 11

7 KAPASIA KHALLI Rs/50 KG 10 MT AKOLA 200 6.5

8 ALUMINIUM Rs/KG 5 MT MUMBAI 5000 7

9 COPPER Rs/KG 1 MT MUMBAI 1000 12

10 NICKEL RS/KG 250 KG MUMBAI 250 15.5

11 ZINC RS/KG 5000 KG MUMBAI 5000 11

12 LIGHT SWEET Rs/Barrel 100/Barrel JNPT-MUMBAI 100 12

CRUDE OIL

13 NATURAL GAS Rs/mmBtu 1250/mmBtu 1250 10.5

 II. National Commodity & Derivatives Exchange Limited (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) is a

professionally managed online multi commodity exchange promoted by ICICI Bank Limited

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

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

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

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

subscribing to the equity shares have joined the initial promoters as shareholders of the

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

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

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

players in their respective fields and bring with them institutional building experience, trust,

nationwide reach, technology and risk management skills.

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act,

1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has

commenced its operations on December 15, 2003.

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

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

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

participants to trade in a wide spectrum of commodity derivatives driven by best global

practices, professionalism and transparency.

NCDEX is regulated by Forward Market Commission in respect of futures trading

in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies

Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other
legislations, which impinge on its working. NCDEX is located in Mumbai and offers facilities to

its members in more than 390 centres throughout India. The reach will gradually be expanded to

more centres. 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.

Since 2002 when the first national level commodity derivatives exchange started,

the exchanges have conducted brisk business in commodities futures trading. In the last three

years, there has been a great revival of the commodities futures trading in India, both in terms of

the number of commodities allowed for futures trading as well as the value of trading. While in

year 2000, futures trading were allowed in only 8 commodities, the number jumped to 80

commodities in June 2004. The value of trading in local currency saw a quantum jump from

about INR 350 billion in 2001-02 to INR 1.3 Trillion in 2003-04. The data in the below Table

indicates that the value of commodity derivatives in India could cross the US$ 1 Trillion mark in

2006. The market regulator Forward Markets Commission (FMC) disseminates fortnightly

trading data for each of the 3 national & 21 regional exchanges that have been set up in recent

years to carry on the futures trading in commodities in the country. Exhibit presents comparative

trading data for three fortnightly periods in March, June and September 2005 and brings up some

interesting facts.

The market regulator Forward Markets Commission (FMC) disseminates

fortnightly trading data for each of the 3 national & 21 regional exchanges that have been set up

in recent years to carry on the futures trading in commodities in the country. Below Table
represents comparative trading data for three fortnightly periods in March, June and September

2005 and brings up some interesting facts.

Active Contracts Traded in NCDEX

S.NO COMMODITIY Price/Unit Trading Delivery Multiplier Initial Margin

NAME Lot Center %

1 PURE KILO GOLD Rs / 10Gms 1 KG MUMBAI 100 8

2 PURE SILVER Rs / 1 KG 30 KGS DELHI 30 18

3 SILVER 5 (mini Lot) Rs / 1 KG 5 KG DELHI 5 9

4 GOLD 100 (mini Lot) Rs / 10 100 Gms MUMBAI 10 8

Gms

5 JEERA Rs / Quintal 3 MT UNJHA 30 8

6 PEPPER Rs / Quintal 1 MT KOCHI 10 15

7 TURMERIC FINGERS Rs / Quintal 10 MT NIZAMABAD 100 12

8 CHILLI LCA 334 Rs / Quintal 5 MT GUNTUR 50 33

9 MAIZE Rs / Quintal 50 MT NIZAMABAD 500 21

10 GUAR SEED Rs / Quintal 10 MT JODHPUR 100 15

11 GUARGUM Rs / Quintal 5 MT JODHPUR 50 15

History of Gold:

In India Gold is having a history of more than 7000 years which can find in

religious book of Hindu, where it is considered as a metal of immense value. But

looking at the history of world, gold is found at the Egypt at 2000B.C, which
is the first metal used by the humans value for ornament and rituals. Gold

has long been considered one of the most precious metals, and its value has

been used as the standard for many currencies in history. Gold has been

used as a symbol for purity, value, royalty, and particularly roles that

combine these properties.

As a tangible investment gold is held as part of a portfolio by the countries as a

reserves because over the long period gold has an extensive history of maintaining its value.

However, gold does become particularly desirable in times of extremely weak confidence and

during hyperinflation because gold maintains its value even as fiat money becomes worthless

when the value of currency depreciates.

It has a special role in India and in certain countries, gold Jewelry is worn for

ornamental value on all social functions, festivals and celebrations. It is the popular form of

investment in rural areas between the farmers after having bumper crop or after harvesting, this

all factor makes India as largest consumer (18.7% of world total demand in 2004) and importer

of gold due to its low production, which is negligible, and untapped gold reserves. This is due to

lack of new technology in finding gold reserves and low interest shown by government in

financing, encouraging for exploration programs in gold mines.

HISTORY OF GOLD TRADING

Gold future trading debuted first at Winnipeg Commodity Exchange (know is Comex) in Canada

in 1972. The gold contract gain popularity among traders, led to many countries had too started

gold future trading. Which include London gold future, Sydney future exchange, Singapore
International Monetary Exchange (Simex), Tokyo Commodity Exchange (Tocom), Chicago

Mercantile Exchange, Chicago Board of Trade (CBOT), Shanghai Gold Exchange, Dubai Gold

and Commodity Exchange are some of the world Top recognized exchange, and in India,

National Commodity and Derivative Exchange (NCDEX) and Multi-Commodity Exchange

(MCX), and National Board of Trade (NBOT) are some Indian exchanges where Gold are

traded. History of gold trading in India is dates back to 1948 with Bombay Bullion Association,

which is formed by the group of Merchants.

PRODUCTION OF GOLD

Till now the total gold is extracted from the mines is about $1 trillion dollar, which is

accumulated in physical form is enough to built Eiffel tower.

Annual gold production worldwide is about US$35 billion and by far the one of

the largest-trading world commodity. Worldwide, gold mines produce about 2,464 tonnes in the

year 2004 from total supply of 3328 tonnes but unable to meet identifiable demand of 3497

tonnes. Gold is mined in more than 118 countries around the world, with the large number of

development projects in these countries expected to keep production growing well into the next

century. Currently, South Africa is the largest gold producing country, followed by the United

States, Australia, Canada, Indonesia, Russia and others, some of these countries also account for

highest gold reserves from potential 50,000 tonnes of world-wide reserves.

Why central banks hold gold

Monetary authorities have long held gold in their reserves. Today their stocks amount to some

30,000 tonnes - similar to their holdings 60 years ago. It is sometimes suggested that maintaining

such holdings is inefficient in comparison to foreign exchange. However, there are good reasons
for countries continuing to hold gold as part of their reserves. These are recognized by central

banks themselves although different central banks would emphasize different factors.

Diversification: In any asset portfolio, it rarely makes sense to have all your eggs in one

basket. Obviously the price of gold can fluctuate - but so too do the exchange and interest rates

of currencies held in reserves. A strategy of reserve diversification will normally provide a less

volatile return than one based on a single asset.

Gold has good diversification properties in a currency portfolio. These stem from the fact that its

value is determined by supply and demand in the world gold markets, whereas currencies and

government securities depend on government promises and the variations in central banks’

monetary policies. The price of gold therefore behaves in a completely different way from the

prices of currencies or the exchange rates between currencies.

Physical Security: Countries have in the past imposed exchange controls or, at the worst,

total asset freezes. Reserves held in the form of foreign securities are vulnerable to such

measures. Where appropriately located, gold is much less vulnerable. Reserves are for using

when you need to. Total and incontrovertible liquidity is therefore essential. Gold provides this.

Unexpected needs: If there is one thing of which we can be certain, it is that today’s status quo

will not last forever. Economic developments both at home and in the rest of the world can upset

countries’ plans, while global shocks can affect the whole international monetary system.

Owning gold is thus an option against an unknown future. It provides a form of

insurance against some improbable but, if it occurs, highly damaging event. Such events might

include war, an unexpected surge in inflation, a generalised crisis leading to repudiation of

foreign debts by major sovereign borrowers, a regression to a world of currency or trading blocs

or the international isolation of a country.

In emergencies countries may need liquid resources. Gold is liquid and is

universally acceptable as a means of payment. It can also serve as collateral for borrowing.

Confidence: The public takes confidence from knowing that it’s Government holds gold - an

indestructible asset and one not prone to the inflationary worries overhanging paper money.

Some countries give explicit recognition to its support for the domestic currency. And rating

agencies will take comfort from the presence of gold in a country's reserves.

The IMF's Executive Board, representing the world's governments, has recognized that

the Fund's own holdings of gold give a "fundamental strength" to its balance sheet. The same

applies to gold held on the balance sheet of a central bank.

Income: Gold is sometimes described as a non income-earning asset. This is untrue. There is a

gold lending market and gold can also be traded to generate profits. There may be an

"opportunity cost" of holding gold but, in a world of low interest rates, this is less than is often

thought. The other advantages of gold may well offset any such costs.

Insurance: The opportunity cost of holding gold may be viewed as comparable to an insurance

premium. It is the price deliberately paid to provide protection against a highly improbable but

highly damaging event. Such an event might be war, an unexpected surge of inflation, a

generalized debt crisis involving the repudiation of foreign debts by major sovereign borrowers,

a regression to a world of currency and trading blocs, or the international isolation of a country.

From July 2010 to August 2010 the gold trading

Traded
Contracts
Month Year CommodityHead (in Lots) SegmentName
Jun 2010 GOLD 3411163 PRECIOUS METAL PRODUCTS
Jul 2010 GOLD 2920976 PRECIOUS METAL PRODUCTS
Aug 2010 GOLD 2347499 PRECIOUS METAL PRODUCTS

History of Silver Market

Major markets like the London market (London Bullion Market Association), which started

trading in the 17th century provide a vehicle for trade in silver on a spot basis, or on a forward

basis. The London market has a fix which offers the chance to buy or sell silver at a single price.

The fix begins at 12:15 p.m. and is a balancing exercise; the price is fixed at the point at which

all the members of the fixing can balance their own, plus clients, buying and selling orders.

Trading in silver futures resumed at the Comex in New York in 1963, after a

gap of 30 years. The London Metal Exchange and the Chicago Board of Trade introduced futures

trading in silver in 1968 and 1969, respectively. In the United States, the silver futures market

functions under the surveillance of an official body, the Commodity Futures Trading

Commission (CFTC). Although London remains the true center of the physical silver trade for

most of the world, the most significant paper contracts trading market for silver in the United

States is the COMEX division of the New York Mercantile Exchange. Spot prices for silver are

determined by levels prevailing at the COMEX. Although there is no American equivalent to the

London fix, Handy & Harman, a precious metals company, publishes a price for 99.9% pure

silver at noon each working day.

Production of Silver

Silver ore is most often found in combination with other elements, and silver has

been mined and treasured longer than any of the other precious metals. Mexico is the world’s

leading producer of silver, followed by Peru, Canada, the United States, and Australia. The main

consumer countries for silver are the United States, which is the world’s largest consumer of
silver, followed by Canada, Mexico, the United Kingdom, France, Germany, Italy, Japan and

India. The main factors affecting these countries demand for silver are macro economic factors

such as GDP growth, industrial production, income levels, and a whole host of other financial

macroeconomic indicators.

From July 2010 to August 2010 the silver trading

Traded
Contract
CommodityHea s (in
Month Year d Lots) SegmentName
Jun 2010 SILVER 2940814 PRECIOUS METAL PRODUCTS
Jul 2010 SILVER 2697838 PRECIOUS METAL PRODUCTS
Aug 2010 SILVER 2956440 PRECIOUS METAL PRODUCTS

CHAPTER – 5
 PRICING COMMODITY FUTURES

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

contract for a specific expiration date is called price discovery. The process of price discovery

continues from the market's opening until its close and also free flow of information is also very

important in an active future market. Futures exchanges act as a focal point for the collection and

distribution of statistics on supplies, transportation, storage, purchases, exports, imports,

currency values, interest rates and other relevant formation. As a result of this free flow of

information, the market determines the best estimate of today and tomorrow's prices and it is

considered to be the accurate reflection of the supply and demand for the underlying commodity.

Price discovery facilitates this free flow of information, which is essential to the effective

functioning of futures market.

 We try to understand the pricing of commodity futures contracts and look at how

the futures price is related to the spot price of the underlying asset. We study the cost - of - carry

model to understand the dynamics of pricing that constitute the estimation of fair value of

futures.

Investment assets versus consumption assets

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

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

most investors. Stocks, bonds, Gold and silver are examples of investment assets. However

investment assets do not always have to be held entirely for investment. As we saw earlier silver

for example, have a number of industrial uses. However to classify as investment assets, these

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

investment. A consumption asset is an asset that is held primarily for consumption. It is not

usually held for investment. Examples of consumption assets are commodities such as copper,

oil, and pork bellies.

We can use arbitrage arguments to determine the futures prices of an investment

asset from its spot price and other observable market variables. For pricing consumption assets,

we need to review the arbitrage arguments a little differently. We look at the cost – of – carry

model and try to understand the pricing of futures contracts on investment assets.

The cost of carry model:-

For pricing purposes we treat the forward and the futures market as one and the

same. A futures contract is nothing but a forward contract that is exchange traded and that is

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

buying the underlying asset today in the spot market and holding it, or buying it in the forward
market. If he buys it in the spot market today it involves opportunity costs. He incurs the cash

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

the forward market, he does not incur an initial outlay. The basis for the cost – of – carry model

where the price of the futures contract is defined as:

F=S+C
……………………………… Eq (1)

Where

F = Future price C = Holding cost or carrying cost S = Spot price

The fair value of future contracts can also be expressed as:

F = S (1+r) t .…………………………… Eq (2)

Where:

R = percentage cost of financing

T = time till expiration

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

opportunities for arbitrage. If F > S (1+r) t or F < S (1+r) t arbitrage would exit. We know that

what is Spot price and what are future price. We should know that what are the components of

the holding cost? The components of holding cost vary with contracts on different assets.

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

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

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

Equation – (2) uses the concept of discrete compounding, i.e. where interest rates

are compounded at discrete intervals like annually or semiannually. Pricing of options and other
complex derivative securities requires the use of continuously compounded interest rates. Most

books on derivatives use continuous compounding for pricing futures too. When we use

continuous compounding, equation – (2) is expressed as:

F = S erT ……………………………….. Eq (3)

Where:

r = Cost of financing (Using continuously compounding interest rate)

T = Time till expiration

e = 2.71828

Let us take an example of a future contract on commodity and we work out the

price of the contract. Let the spot price of gold is RS. 13763÷10gms. If the cost of financing is

15% annually, then what should be the future price of 10gms of gold one month later? Let us

assume that we are on 1 Jan 2009. How would we compute the price of gold future contract

expiring on 30 January? Let us first try to work out the components of cost – of – carry model.

1. What is the spot price of gold?

The spot price of gold, S = 13763/ 10gms.

2. What is the cost of financing for month?

e0.15 ×30/365
3. What are the holding costs?

Let us assume that the storage cost = 0

F = S erT = 13763 e0.15 ×30/365 = 13933.73

 If the contract was for a three months period i.e. expiring on 30th March, the cost of
financing would increase the futures price. Therefore, the futures price would be
F = 13763 e
0.15 ×90/365
= Rs 14281.58

Pricing futures contracts on investment commodities

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

using cost – of – carry model. In the example we considered, the gold contract was for 10 grams

of gold, hence we ignored the storage costs. However, if the one month contract was for a

100kgs of gold instead of 10gms, then it would involve non-zero holding costs which would

include storage and insurance costs. The price of the futures contract would then be Rs.14281.58

plus the holding costs.

NCDEX – indicative warehouse charges

Commodity Fixed charges Warehouse charges per unit per week

(Rs.) (Rs.)
Gold 310 55 per kg
Silver 610 1 per kg
Soy Bean 110 13 per MT
Soya oil 110 30 per MT
Mustard seed 110 18 per MT
Mustard oil 110 42 per MT
RBD palmolein 110 26 per MT
CPO 110 25 per MT
Cotton - Long 110 6 per Bale
Cotton - Medium 110 6 per Bale

The above table gives the indicative warehouse charges for qualified warehouses that will

function as delivery centers for contracts that trade on the NCDEX. Warehouse charges include a

fixed charge per deposit of commodity into the warehouse, and as per unit per week charge. Per

unit charges include storage costs and insurance charges. We saw that in the absence of storage

costs, the futures price of a commodity that is an investment asset is given by F = S erT Storage
Costs add to the cost of carry. If U is the present value of all the storage costs that will be

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

F = (S+U) erT
………………………………Eq (4)

Where:

r = Cost of financing (annualized)

T = Time till expiration

U = Present value of all storage costs

For understanding the above formula let us consider a one – year future contract of

gold. Suppose the fixed charge is Rs.310 per deposit up to 500kgs and the variable storage costs

are Rs.55 per week, it costs Rs.3170 to store one kg of gold for a year (52 weeks). Assume that

the payment is made at the beginning of the year. Assume further that the spot gold price is

Rs.13763 per 10 grams and the risk – free rate is 7% per annum. What would the price of one

year gold futures be if the delivery unit is one kg?

F = (S+U) erT

= (1376300 + 310 + 2860) e0.07 × 1

= 1379470 × e0.07 × 1

= 1379470 × 1.072508

= 1479493

We see that the one year futures price of a kg of gold would be Rs.1479493. The one year futures

price for 10 grams of gold would be about Rs.14794.93.

 Now let us consider a three – month futures contract on gold. We make the same

assumptions that the fixed charge is Rs.310 per deposit up to 500kgs, and the variable storage

costs are Rs.55 per week. It costs Rs.1025 to store one kg of gold for three months (13 weeks).

Assume that the storage costs are paid at the time of deposit. Assume further that the spot gold

price is Rs 13763per 10 grams and the risk free rate is 7% per annum. What would the price of

three month gold futures if the delivery unit is one kg?

F = (S+U) erT

= (1376300 + 310 + 715) e0.07 × 0.25

= 1377325 × 1.017654

= 1401640.30

We see that the three – month futures price of a kg of gold would be Rs. 1401640.30. The three –

month futures price for 10 grams of gold would be about Rs. 14016.40

Pricing futures contracts on consumption commodities

We used the arbitrage argument to price futures on investment commodities. For

commodities that are consumption commodities rather than investment assets, the arbitrage

arguments used to determine futures prices need to be reviewed carefully. Suppose we have

F > (S+U) erT

……………………………… Eq (5)
 To take advantage of this opportunity, an arbitrager can implement the following strategy:

I. Borrow an amount S + U. at the risk – free interest rate and use it to

purchase one unit of the commodity.

II. Short a forward contract on one unit of the commodity.

If we regard the futures contract as a forward contract, this strategy leads to a profit of

F - (S+U) erT at the expiration of the futures contract. As arbitragers exploit this opportunity, the

spot price will increase and the futures price will decrease until Equation (5) does not hold good.

Suppose next that

F < (S+U) erT ……………………………………. Eq (6)

In case of investment assets such as gold and silver, many investors hold the commodity purely

for investment. When they observe the inequality in equation 6, they will find it profitable to

trade in the following manner:

I. Sell the commodity, save the storage costs, and invest the proceeds at the risk –free

interest rate.

II. Take a long position in a forward contract.

This would result in a profit at maturity of (S+U) erT – F relative to the position that the investors

would have been in had they held the underlying commodity. As arbitragers exploit this

opportunity, the spot price will decrease and the futures price will increase until equation 6 does

not hold well. This means that for investment assets, equation 4 holds good. However, for

commodities like cotton or wheat that are held for consumption purpose, this argument cannot be

used. Individuals and companies who keep such a commodity in inventory, do so, because of its

consumption value – not because of its value as an investment. They are reluctant to sell these
commodities and buy forward or futures contracts because these contracts cannot be consumed.

Therefore there is unlikely to be arbitrage when equation 6 holds good. In short, for a

consumption commodity therefore

F ≤ (S+U) erT
………………………………………. Eq (7)

That is the futures price is less than or equal to the spot price plus the cost of carry.

CHAPTER – 6

CLEARING, SETTLEMENT AND RISK

MANAGEMENT
Clearing and settlement
Most futures contracts do not lead to the actual physical delivery of the underlying

asset. The settlement is done by closing out open positions, physical delivery or cash settlement.

All these settlement functions are taken care of by an entity called clearing house or clearing

corporation. National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of

trades executed on the NCDEX. The settlement guarantee fund is maintained and managed by

NCDEX.

1. Clearing

Clearing of trades that take place on an exchange happens through the

exchange clearing house. A clearing house is a system by which exchanges guarantee the faithful

compliance of all trade commitments undertaken on the trading floor or electronically over the

electronic trading systems. The main task of the clearing house is to keep track of all the

transactions that take place during a day so that the net position of each of its members can be

calculated. It guarantees the performance of the parties to each transaction.

Typically it is responsible for the following:

➢ Effecting timely settlement

➢ Trade registration and follow up.

➢ Control of the evolution of open interest.

➢ Financial clearing of the payment flow.

 ➢ Physical settlement (by delivery) or financial settlement (by price

difference) of contracts.

➢ Administration of financial guarantees demanded by the participants.

The clearing house has a number of members, who are mostly financial institutions responsible

for the clearing and settlement of commodities traded on the exchange. The margin accounts for

the clearing house members are adjusted for gains and losses at the end of each day (in the same

way as the individual traders keep margin accounts with the broker). On the NCDEX, in the case

of clearing house members only the original margin is required (and not maintenance margin),

Every day the account balance for each contract must be maintained at an amount equal to the

original margin times the number of contracts outstanding. Thus depending on a day's

transactions and price movement, the members either need to add funds or can withdraw funds

from their margin accounts at the end of the day. The brokers who are not the clearing members

need to maintain a margin account with the clearing house member through whom they trade in

the clearing house.

1.1 Clearing banks: NCDEX has designated clearing banks

Through whom funds to be paid and / or to be received must be settled. Every clearing member

is required to maintain and operate a clearing account with any one of the designated clearing

bank branches. The clearing account is to be used exclusively for clearing operations i.e., for

settling funds and other obligations to NCDEX including payments of margins and penal

charges. A clearing member can deposit funds into this account, but can withdraw funds from

this account only in his self-name. A clearing member having funds obligation to pay is required

to have clear balance in his clearing account on or before the stipulated pay – in day and the

stipulated time. Clearing members must authorize their clearing bank to access their clearing

account for debiting and crediting their accounts as per the instructions of NCDEX, reporting of

balances and other operations as may be required by NCDEX from time to time. The clearing
bank will debit/ credit the clearing account of clearing members as per instructions received from

NCDEX. The following banks have been designated as clearing banks. ICICI Bank Limited,

Canarabank, UTI Bank Limited and HDFC Bank ltd

1.2 Depository participants: Every clearing member is required

To maintain and operate a CM pool account with any one of the empanelled depository

participants. The CM pool account is to be used exclusively for clearing operations i.e., for

effecting and receiving deliveries from NCDEX.

2. Settlement

Futures contracts have two types of settlements,

➢ The MTM settlement which happens on a continuous basis at the

end of each day

➢ And the final settlement which happens on the last trading day of

the futures contract.

On the NCDEX, daily MTM settlement and final MTM settlement in respect of admitted deals in

futures contracts are cash settled by debiting/ crediting the clearing accounts of CMs with the

respective clearing bank. All positions of a CM, either brought forward created during the day or

closed out during the day, are marked to market at the daily settlement price or the final

settlement price at the close of trading hours on a day.

• Daily settlement price: Daily settlement price is the consensus closing price as arrived

after closing session of the relevant futures contract for the trading day. However, in the

absence of trading for a contract during closing session, daily settlement price is

computed as per the methods prescribed by the exchange from time to time.
 • Final settlement price: Final settlement price is the closing price of the underlying

commodity on the last trading day of the futures contract. All open positions in a futures

contract cease to exist after its expiration day.

2.1 Settlement Methods: Settlement of futures contracts on the

NCDEX can be done in three ways. By physical delivery of the underlying asset, by closing out

open positions and by cash settlement. We shall look at each of these in some detail. On the

NCDEX all contracts settling in cash are settled on the following day after the contract expiry

date. All contracts materialising into deliveries are settled in a period 2.7 days after expiry. The

exact settlement day for each commodity is specified by the exchange.

When a contract comes to settlement, the exchange provides alternatives like

delivery place, month and quality specifications. Trading period, delivery date etc. are all defined

as per the settlement calendar. A member is bound to provide delivery information. If he fails to

give information, it is closed out with penalty as decided by the exchange. A member can choose

an alternative mode of settlement by providing counter party clearing member and constituent.

The exchange is however not responsible for, nor guarantees settlement of such deals. The

settlement price is calculated and notified by the exchange. The delivery place is very important

for commodities with significant transportation costs. The exchange also specifies the accurate

period (date and time) during which the delivery can be made.

Closing out by offsetting positions

Most of the contracts are settled by closing out open positions. In closing out,

the opposite transaction is effected to close out the original futures position. A buy contract is

closed out by a sale and a sale contract is closed out by a buy. For example, an investor who took

a long position in two gold futures contracts on the January 30, 2009 at 14402 can close his
position by selling two gold futures contracts on February 27, 2004 at Rs.15445. In this case,

over the period of holding the position, he has gained an amount of Rs.1043 per unit. This loss

would have been debited from his margin account over the holding period by way of MTM at the

end of each day, and finally at the price that he closes his position, that is Rs. 15445 in this case.

Cash settlement

Contracts held till the last day of trading can be cash settled. When a contract is

settled in cash, it is marked to the market at the end of the last trading day and all positions are

declared closed. The settlement price on the last trading day is set equal to the closing spot price

of the underlying asset ensuring the convergence of future prices and the spot prices. For

example an investor took a short position in five long staple cotton futures contracts on

December 15 at Rs.6950. On 20th February, the last trading day of the contract, the spot price of

long staple cotton is Rs.6725. This is the settlement price for his contract. As a holder of a short

position on cotton, he does not have to actually deliver the underlying cotton, but simply takes

away the profit of Rs.225 per trading unit of cotton in the form of cash.

Risk management

NCDEX has developed a comprehensive risk containment mechanism for its commodity

futures market. The salient features of risk containment mechanism are:

✔ The financial reliability of the members is the key to risk management.

Therefore, the requirements for membership in terms of capital

adequacy (net worth, security deposits) are quite stringent.

✔ NCDEX charges an open initial margin for all the open positions of a

member. It specifies the initial margin requirements for each futures

 contract on a daily basis. It also follows value-at-risk (VAR) based

margining through SPAN. The PCMs and TCMs in turn collect the

initial margin from the TCMs and their clients respectively.

✔ The open positions of the members are marked to market based on

contract settlement price for each contract. The difference is settled in

cash on a T+1 basis.

✔ A member is alerted of his position to enable him to adjust his exposure

or bring in additional capital. Position violations result in withdrawal of

trading facility for all TCMs of a PCM in case of a violation by the

PCM.

✔ A separate settlement guarantee fund for this segment has been created

out of the capital of members.

 CHAPTER – 7

FUNDAMENTAL AND TECHNICAL

ANALYSIS

Fundamental Analysis
DEMAND AND CONSUMPTION OF GOLD

Gold produced from different sources and demanded for consumption in form of

Jewellery, Industrial applications, Government & Central bank Investment and Private investor,

which has been worth US$ 38 billion on average over the past five years in world.

Total of world gold produced is mostly consumed by different sectors are Jewelers

80%, Industrial application 11.5% and rest of gold is used as investment purpose 8.5%.

Considering the situation in India, the demand for Gold consumption is far more ahead than its

availability through production, scrap or recycled gold. Where gold production in India is only

2tonnes, where demand is 18.7% of world gold consumption, which make India a leading

consumer of gold followed by Italy, Turkey, USA, China, Japan. According to Countries wise

demand, the following graph shows the demand in each country. Large part constitute by Jewelry

consumption with 85.56% during 2009 by Indian consumers, who seem to spend a

disproportionate percentage of their disposable income on gold and gold jewelry.

Gold fabrication for domestic and international market, also formed large part of

business in India with 527 tonnes of gold fabricated in India in 2009, making world largest

fabricator which is 60% more than its closest competitor Italy, Turkey, USA. But this Jeweler
18.70%

Fabrication is unable to generate much revenue, as most of its consumed in India (479 tonnes).

In dia
Italy
42.20% 11.10% Turkey
US
China
Japan
Rest of world

8.50%

5.30% 7.30%
6.90%
Consumption of Gold
GOLD CONSUMPTION IN INDIA

India consumed around 18% of world Gold produced. Even though it only contribute 1.6% of

Global GDP.

“Traditionally, Gold has been a good safety net for Indian households. However,

the sharp rise in gold imports over the last three years when the rupee has started appreciating,

inflation is relatively low, banking facilities are improving And economic can confidence has

picked up, is surprising” say Market watchers.(Source: -Economic Times, Article, “ Forget

sensex, the Gold rush is on”, July 18 ‘05)

The demand is much that it consumed more than 1.5 times of US consumption of

gold. Increasing by nearly 60% in 2008-09, but during this fiscal Gold imports increased by

another 58%, with Import of gold and silver account around $11 billion consumption increased

by 88% during March’09quarter.

Uses of Gold

1. Jewellery fabrication: The largest source of demand is the jewelry industry. In

new years, demand from the jewelry industry alone has exceeded Western mine production. This

shortfall has been bridged by supplies from reclaimed jewelry and other industrial scrap, as well

as the release of official sector reserves. Gold's workability, unique beauty, and universal appeal

make this rare precious metal the favorite of jewelers all over the world.

India is the world's foremost gold jewellery fabricator and consumer with fabricator

and consumption annually of over 600 tons according to GFMS. Measures of consumption and

fabrication are made more difficult because Indian jewellery often involves the re-making by

goldsmiths of old family ornaments into lighter or fashionable designs and the amount of gold

thus recycled is impossible to gauge. Estimates for this recycled jewellery vary between 80 tons
and 300 tons a year. GFMS estimates are that official gold bullion imports in 2001 were 654

tons. Exports have increased dramatically since 1996, and in 2001 stood at over 60 tons. The US

accounted for about one third of total official exports. Manufacturers located in Special Export

Zones can import gold tax-free through various registered banks under an Export Replenishment

scheme.

2. Industrial applications: Besides jewelry, gold has many applications in a variety of

industries including aerospace, medicine, electronics and dentistry. The electronics industry

needs gold for the manufacture of computers, telephones, televisions, and other equipment.

Gold's unique properties provide superior electrical conducting qualities and corrosion

resistance, which are required in the manufacture of sophisticated electronic circuitry. In

dentistry, gold alloys are popular because they are highly resistant to corrosion and tarnish. For

this reason gold alloys are used for crowns, bridges, gold inlays, and partial debenture.

3. Governments and central banks: The third source of gold demand is

governments and central banks that buy gold to increase their official reserves. Central banks

holds 28,225.4 tons, the holdings of Reserve Bank of India are only a modest 397.5 tons.

4. Private investors: Finally, there are private investors. Depending upon market

circumstances, the investment component of demand can vary substantially from year to year.

TECHNICAL ANALYSIS
Prices of the commodities in the commodity market fluctuate daily because of the continuous

buying and selling of the commodities. Prices of the commodity prices move in trends and

cycles and are never stable. An investor in the commodity market is interested in buying

commodities at a low price and sells them at a high price, so that he can get good return on his

investment. He therefore tries to analyze the movement of the share prices in market. There are

two approaches that we use for analyze the price of the commodities. One of these is the

fundamental analysis wherein the analyst tries to determine the true worth or intrinsic value of

the commodity when its market price is below its intrinsic value. The second approach to analyze

the commodity is technical analysis. It is an alternative approach to study the commodity price

behavior.

Dow Theory

Whatever is generally being accepted today as technical analysis has its roots in

the Dow theory. The theory is so called because it was formulated by Charles H. Dow who was

the editor of the wall street journal in U.S.A. Charles Dow formulated a hypothesis that the

commodity market does not move on a random basis but is influenced by three distinct cyclical

trends that guides its direction. According t this theory, the market has three movements and

these movements are simultaneous in nature. These movements are primary movements,

secondary reactions and minor movements.

The primary movements are a long range cycle that carries the entire market up or

down. This is the long – term trend in the market. The secondary reactions act as a restraining

force on the primary movement. These are in the opposite direction to the primary movement

and last only for a short while. These are also known as correction. For example, when the

market is moving upwards continuously, this upward movement will be interrupted by

downward movements of short durations. These are called secondary reactions. The third
movement in the market is the minor movements which are the day – to – day fluctuations in the

market. The three movements of the market have been compared to the tides, the waves and the

ripples in the ocean.

According to Dow theory, the prices of the commodities can be identified by the

means of a line chart. In this chart, the closing prices of the commodities may be plotted against

the corresponding trading days. The below diagram shows a line chart of closing prices of the

commodity in the market, The primary trend is said to have three phases in it, each of which be

interrupted by a counter move or secondary reaction which would retrace about 33 – 66 % of the

earlier rise or fall.

Primary trend and secondary reactions

Bullish Trend

During a bull market (upward moving market), in the first phase the prices

would advance with the revival of confidence in the future of business. The future prospects of

business in general would be perceived to be promising. This would prompt the investors to buy

the commodities. During the second phase, prices would advance due to inflation and

speculation. Thus during the bull market the line chart would exhibit the formation of three

peaks. Each peak would be followed by a bottom formed by the secondary reaction. According

to Dow theory, the formation of higher bottoms and higher tops indicates a bullish trend.

Three Phases of bull market

 Bearish Trend

The bear market is also characterized by three phases. In the first phase the

prices begin to fall due to abandonment of hopes. Investors begin to sell their commodities. In

the second phase, the prices fall due to increased selling pressure. In the final phase, prices fall

still further due to distress selling.

The theory also makes certain assumptions which have been referred to as the

hypotheses of the theory. The first hypothesis states that the primary trend cannot be

manipulated. It means that no single individual or institution or group of individuals and

institutions can exert influence on major trend of the market. The second hypothesis states that

averages discount everything. The third hypothesis states that the theory is not perfect. The

theory is concerned with the trend of market and has no forecasting value as regards the duration

or the likely price targets for the peak or bottom of the bull and bear markets.

Three Phases of a bear market

BASIC PRINCIPLES OF TECHNICAL ANALYSIS

The basic principles on which analysis is based are as follows:

 1. The market value of the commodity is related to demand and supply factors operating

in the market.

2. There are both rational and irrational factors which surrounded the supply and demand

factors of a security.

3. Commodity prices behave in a manner that their movement is continuous in a

particular direction for some length of time.

4. Trends in a commodity prices have been seen to change when there is a shift in the

demand and supply factors.

5. The shift in demand and supply can be detected through charts prepared specifically to

show market action.

MARKET INDICATORS:

Technical analysis focuses its attention not only on individual commodity price behaviour, but

also on the general trend of market, Indicators used by technical analysts to study the trend of the

market as a whole are known as market indicators.

Technical Analysis Vs Fundamental Analysis: Fundamental analysis tries to estimate the

intrinsic value of a commodity by evaluating the fundamental factors affecting the economy,

industry and company. This is a tedios process and takes a rather long time to complete the

process.

Thecnical analysis studies the price and volume movements in the market and by careful

examining the pattern of these movements, the future price of the commodity is predicted. Since

the whole process involves much less timeand data analysis, compared to fundamental analysis,

it facilitates timely decision.

 Fundamental analysis helps in identifying undervalued or overvalued securities. But

technical analysis helps in identifying the best timing of an investment, i.e. the best time to buy

or sell a security identified by fundamental analysis as undervalued or overvalued. Thus,

technical analysis may be used as a supplement to fundamental analysis rather thanas a substitute

to it. The two approaches, however, differ in terms of their databases and tools of analysis.

Fudamental analysis and technical analysis are two alternative approaches to predicting stock

pricebehaviour. Neither of them is perfect nor complete by itself.

Technical analysis has several limitations. It is not an accurate method of analysis. It is

offen difficult to identify the patterns underlying commodity price movements. Moreover, it is

not easy to interpret the meaning of patterns and their likely impact on future price movements.
 CHAPTER – 8

QUESTIONNAIRE

Questionnaire on Investors Preference in Commodity Markets

Name:

Gender:

Age:
1. Do you have any investment plan?

a. Yes b. No

2. If, yes, where you would like to invest your money?

a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)

3. If no, why?

a. Not aware about invest avenues b. Insufficient income c. Other (specify)

4. Are you aware about Commodity Market?

a. Yes b. No

5. Are you willing to invest in Commodity Market?

a. Yes b. If No

6. Which Commodity Exchange will you prefer for investment?

a. MCX b. NCDEX c. NMCE d. Other

7. In which Commodities will you prefer to Invest?

a. Bullion b. Agricultural c. Metals d. Energy

8. What is your perception about Commodity Market?

a. Less Risky b. Risky c. Very Risky

9. What you think Commodity Market Advertisements (hoardings, prints etc) are

explanatory enough to give needed useful information?

a. Yes b. No
10. In agri commodities, which commodity you prefer to trade?

a. Wheat b. Maize c. Cotton d. Sugar

11. In energy commodities, which commodity you prefer to trade?

a. Crude oil b. Furnace oil c. Gas d. Electricity

12.In metal commodities, which commodity you prefer to trade?

a. Gold b. Nickel c. Silver d. Zinc

13. How many times in a month would you trade?

a. 5times b.10times c.15times d. >15times

14. Do you contact brokerages to get help?

a. Yes b. No

15. What amount have you invested in commodity trading?

a. >10000 b. >50000 c. >100000 d. >300000

16. How do you feel about the brokerage charges?

a. High b. Low c. Moderate d. Can’t say

17. How do you want to trade commodities?

a. Lots b. Units

18. How do you want to trade?

a. Intra day b. Delivery

19. Do you ever get the delivery of the commodities in specified time?

a. Yes b.No c. Can’t say

20. How do you want to trade the commodities?

a. spottransaction b. forward transaction c. futures transaction

 CHAPTER – 9

ANALYSIS & INTERPRETATION

ANALYSIS AND INTERPRETATION

1. Do you have any investment plan?

a. Yes b. No

Female

Males s
a 75 40
b 15 20

GRAPH
Interpretation:

77% of respondents are having Investment plan and 23% of people are not having Investment

plan.

2. If, yes, where you would like to invest your money?

a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)

Female

Males s
a 15 10
b 25 30
c 35 0
d 0 0

GRAPH

Interpretation:

37% of respondents are interested in Share market, 16% interested in B.F.D and 24% are

interested in commodities.

3. If no, why?

a. Not aware about invest avenues b. Insufficient income c. Other (specify)

 female

males s
a 0 0
b 10 10
c 5 10

GRAPH

Interpretation:

23% of the respondents are not interested in investment plan.

4. Are you aware about Commodity Market?

a. Yes b. No

Female

Males s
A 85 50
B 5 10

GRAPH
Interpretation:

90% of the respondents are aware of the Commodity market.

5. Are you willing to invest in Commodity Market?

a. Yes b. If No

Female

Males s
a 60 35
b 30 25

GRAPH

Interpretation:

63% of the respondents are willing to invest in Commodity Market and 37% are not interested.

6. Which Commodity Exchange will you prefer for investment?

a. MCX b. NCDEX c. NMCE d. Other

 Female

Males s
a 45 40
b 25 0
c 0 0
d 20 20

GRAPH

Interpretation:

56 % of the respondents prefer to invest in MCX, 17% prefer to invest in NCDEX and 27%

prefer to invest in other markets.

7. In which Commodities will you prefer to Invest?

a. Bullion b. Agricultural c. Metals d. Energy

Female

Males s
Bullion 40 10
Agricultur

al 20 10
Metals 10 20
Energy 15 25

GRAPH

Interpretation:
34% are in bullion market, 20% are interested in agricultural commodities, 20% are interested in

metal commodities and 26% are interested to invest in energy commodities.

8. What is your perception about Commodity Market?

a. Less Risky b. Risky c. Very Risky

MALE FEMAL

S ES
LESS

RISK

Y 10 0
RISK

Y 45 40
VERY

RISK

Y 35 20

GRAPH

Interpretation:

7% of respondents feel that commodity markets are less risky, 57% feel that commodity markets

are risky and 36% feel that commodity markets are high risky.

9. What you think Commodity Market Advertisements (hoardings, prints etc) are

explanatory enough to give needed useful information?

a. Yes b. No

MALE FEMAL

S ES
YES 15 20
NO 65 50

GRAP

Interpretation:

23% of respondents feel that commodity market advertisements have useful information and

77% of respondents feel that they are not useful.

10. In agri commodities, which commodity you prefer to trade?

a. wheat b. maize c. cotton d.sugar

MALE FEMAL

S ES
WHEAT 20 10
MAIZE 10 5
COTTO

N 35 30
SUGAR 25 15

GRAPH
Interpretation:

20% of respondents wish to trade wheat in agri commodities, 10% in maize, 43% in cotton, 27%

in sugar.

11. In energy commodities, which commodity you prefer to trade?

a. crude oil b. furnace oil c. gas d.electricity

MAL FEMAL

ES ES
CRUDE

OIL 35 30
FURNACE

OIL 0 0
GAS 40 20
ELECTRIC

ITY 15 10

GRAPH

Interpretation:

43% of respondents prefer to trade in crude oil, 40% in gasoline and 17% in electricity.

12.In metal commodities, which commodity you prefer to trade?

a. Gold b. Nickel c. Silver d.zinc

 MAL FEMAL

ES ES
GOLD 50 35
NICK

EL 10 20
SILVE

R 30 5
ZINC 0 0

GRAPH

Interpretation:

57% respondents prefer to trade in gold, 20% in nickel, 23% in silver

13. How many times in a month would you trade?

a. 5times b.10times c.15times d. >15times

MAL FEMAL

ES ES
5

TIMES 15 30
10

TIMES 40 10
15 25 15
TIMES
>15TIM

ES 10 5

GRAPH

Interpretation:

30%respondents trade 5 times in a month, 33% trade 10 times, 27% trade15 times, 10% trade

more than 15 times

14. Do you contact brokerages to get help?

a. Yes b.No

MALE FEMAL

S ES
YES 75 45
NO 15 15

GRAPH

Interpretation:

80% respondents contact brokerages to get help and 20 % do not contact brokerages.
15. What amount have you invested in commodity trading?

a. >10000 b. >50000 c. >100000 d. >300000

MAL FEMAL

ES ES
>1000

0 15 10
>5000

0 25 30
>1000

00 30 10
>3000

00 20 10

GRAPH

Interpretation:

17% respondents invest more than 10000, 37% more than 50000, 27% more than 10000, 20%

more than 300000.

16. How do you feel about the brokerage charges?

a. High b. Low c. Moderate d. can’t say

 MAL FEMAL

ES ES
HIGH 15 0
LOW 20 5
MODERA

TE 50 55
CANT

SAY 5 0

GRAPH

Interpretation:

10% respondents feel that brokerage charges are high, 17% feel they are low, 70% feel the

charges are moderate.

17. How do you want to trade commodities?

a. Lots b. Units

MALE FEMAL

S ES
LOTS 60 35
UNIT

S 30 25

GRAPH
Interpretation:

63% respondents want to trade in lots and 27% want to trade in units.

18. How do you want to trade?

a. Intraday b. Delivery

MAL FEMA

ES LES
INTRAD

AY 50 35
DELIVE

RY 40 25

GRAPH

Interpretation:

57% respondents want to trade in intraday and 43% want to get delivery.
19. Do you ever get the delivery of the commodities in specified time?

a. yes b.No c. can’t say

MALE FEMAL

S ES
YES 50 10
NO 5 5
CANT

SAY 35 45

GRAPH

Interpretation:

40% respondents feel that they get the delivery of the commodities in specified time 6% feel that

they wont get delivery in specified time and 54% respondents selected can’t say option.

20. How do you want to trade the commodities?

a. spottransaction b. forward transaction c. futures transaction

MALE FEMALE

S S
SPOT

TRANSACTION 5 20
FORWARD 65 35
 TRANSACTION
FUTURE

TRANSACTION 20 5
GRAPH

Interpretation:

17% respondents want to trade as spot transaction,67% as forward transaction,16% as future

transaction

CHAPTER – 10

TESTS
Tests

CHISQUARE TEST

The chi-square test is an important test amongst the several tests of significance. Chi-Square,

symbolically written as (Pronounced as Ki-Square), is a statistical measure used in the context

of sampling analysis for comparing a variance to a theoretical variance.

The value of the test-statistic is

where

Χ2 = Pearson's cumulative test statistic;

Oi = an observed frequency;

Ei = an expected (theoretical) frequency, asserted by the null hypothesis;

n = the number of cells in the table.

• The statistical tool is used for the analysis part of the study is chi-square test. It is a

statistical measure used in the context of sampling analysis foe comparing a variance to a

theoretical variance.

• It can be used in calculations to test for statistical significance of estimated parameters

and to measure goodness of fit of individual equations in a model.

Cross Tabs

Chi-Square Tests

Asymp. Sig. (2-

Value df sided)

Pearson Chi-Square 55.708a 12 .000

Likelihood Ratio 64.231 12 .000

N of Valid Cases 150

a. 19 cells (95.0%) have expected count less than 5. The minimum

expected count is .40.

V15 * V17 Crosstabulation

Count

V17

a B c d Total

V15 75 0 0 0 75

a 0 25 15 5 45

b 0 15 25 10 50

c 0 25 10 5 40

d 0 5 0 10 15

Total 75 70 50 30 225

Correlation:
Between questions 13 and 15

Value=0.223047

It is a positive correlation.

Interpretation

As number of trading are more the amount invested in the market is more.
 CHAPTER – 11

RECOMMENDATIONS

CONSIDERED RECOMMENDATIONS

• The company can rise up its investments by educating the public about the benefits that

they can reap from the commodities market through awareness programs, advertisements.

• Since most of the investors are those who trade in share market and it is very easy to

make them invest in higher margin commodities.

• The findings reveal that majority of the investors are within the age group of 26-35 years,

so the company can provide their customers some additional assistance like daily trading

tips, daily positions, and general news for doing a better trading with the commodities

market.

• The investors in Hyderabad are not much aware of commodity market and the

commodities being traded in the commodity market. So, awareness about the commodity

market and the commodities being traded.

• A regular investor’s friendly seminar can be organized to suit the timings of the investing

public. Seminars can be in the form of interactive sessions, arranged at frequent intervals.

• The newsletters published by Startagem must include the suggestions provided by the

research team to help the investors to better understand the tactics of trading in

commodity market. Hence newsletter can be published for guidance.

• Workshops can be conducted in villages for the farmers to educate them about

commodity market.
 CHAPTER – 12

CASE STUDY

CASE STUDY

Every day, commodities are traded on the more than one dozen major commodity exchanges

that are situated worldwide.

Chicago houses two exchanges, the Chicago Board of Trade (CBOT) and the Chicago

Mercantile Exchange (CME). The CBOT was established in 1848 to bring farmers and

merchants together. Initially its main task was to standardise the quantities and qualities of the

grains that were traded. Within a few years the first futures-type contract was developed. It was

known as the to-arrive contract. Speculators soon became interested in the contract and found

trading in the contract to be an attractive alternative to trading the underlying grain itself. In

1919, another exchange, the CME was established. Now futures exchanges exist all over the

world. On these exchanges, a wide range of commodities and financial assets form the
underlying assets in various contracts. The commodities include pork bellies, live cattle, sugar,

wool, lumber, copper, aluminium, gold and tin. Between these two exchanges, a wide array of

commodities are traded, bought and sold.

The CBOT has a very diverse collection of commodity types. These include agriculture such as

corn, soybeans, wheat and oats but the diversity extends to include metal contracts such as 100

oz gold, 5,000 oz silver and mini contracts for both of these. Mini contracts allow for a lower

initial investment as well as smaller ticks (price increments). This is because the amount that is

included in the original contract is smaller than the traditional amount.

The CBOT also has several non physical commodities futures contracts. There are government

bonds, including 30 year bonds, 10 year notes, 5 year swaps and others. A swap, whose primary

use is for hedging, is a blend of a forward and a cash trade. They are similar to futures. Other

trades on the CBOT include major indexes as the Dow AIG Index (a commodity index) and the

Big Dow (a stocks index).

The CME, also in Chicago, has been trading commodities for more than one hundred years.

Trades such as live as well as feeder cattle, hogs, pork bellies and others have been executed on

this exchange. However, lumber, milk, butter and fertilizer are also traded there. However, the

CME can also shift gears to offer an E-mini S&P 500 contracts for trading on the Standard &

Poor's 500 stock index. For those who prefer the ever popular NASDAQ, there is E-mini

NASDAQ 100 for trading futures contracts.

Some of the more unusual trades made on the CME include Eurodollar futures and the Weather

derivative which is a futures contract that predicts weather conditions during different seasons

for areas around the world.

The New York Mercantile Exchange (NYMEX) is one of the oldest in the United States. Among

the wide variety of petroleum and metal commodities and futures that are traded are Brent and

mini crude (CL, WS), Natural Gas (NG), Gasoline (HU), Heating Oil (HO, BH) and many

others. Other offerings are Gold (GC), Silver (SI), Copper (HG) and Aluminum (AL). You may

have noticed that the commodity abbreviation does not match the common chemical element

abbreviation. This is because futures contracts are listed second and have their own

abbreviations.

New York houses yet another major exchange, the New York Board of Trade (NYBOT). The

NYBOT is New York's original futures exchange. Offerings on this exchange include cocoa,

coffee, sugar, FCOJ (frozen concentrate of orange juice), cotton and many other products that are

of an agricultural nature. Non physical items are also offered for trade such as currency pairs, the

United States Dollar Index and the NYSE Composite. A unique and convenient feature of the

NYBOT is that it also offers live price info that can even be accessed by a Blackberry or other

PA.

However, the commodity and futures exchanges are not confined to the United States. In fact,

one of the most active exchanges in the world is found in London. Liffe, once known as the

London Fox (London Futures and Options Exchange), has merged with euronext. Trades such as

cocoa, sugar, coffee, wheat, barley, potatoes and a variety of other agricultural products are

conducted on Life.
The London Metal Exchange is not far from Liffe. This historic exchange is one of the

grandfathers of precious metals trading. Naturally, trades such as copper, lead and aluminum are

made here, but plastics are traded here as well.

A major exchange also resides in Japan. The Central Japan Commodity Exchange (C-COM) is

based in Nagoya, Japan. It was formed in 1996 when three major exchanges merged, allowing

such diverse commodities as eggs, gasoline, kerosene and ferrous scrap.

Africa's most active and important commodity exchange is the South African Futures Exchange

(SAFEX). It was informally launched in 1987. SAFEX only traded financial futures and gold

futures for a long time, but the creation of the Agricultural Markets Division (as of 2002, the

Agricultural Derivatives Division) led to the introduction of a range of agricultural futures

contracts for commodities, in which trade was liberalised, namely, white and yellow maize,

bread milling wheat and sunflower seeds.

China's first commodity exchange was established in 1990 and at least forty had appeared by

1993. The main commodities traded were agricultural staples such as wheat, corn and in

particularly soybeans. In late 1994, more than half of China's exchanges were closed down or

reverted to being wholesale markets, while only 15 restructured exchanges received formal

government approval. At the beginning of 1999, the China Securities Regulatory Committee

began a nationwide consolidation process which resulted in three commodity exchanges

emerging; the Dalian Commodity Exchange (DCE), the Zhengzhou Commodity Exchange and

the Shanghai futures Exchange, formed in 1999 after the merger of three exchanges: Shanghai

Metal, Commodity, Cereals & Oils Exchanges. The Taiwan Futures Exchange was launched in
1998. Malaysia and Singapore have active commodity futures exchanges. Malaysia hosts one

futures and options exchange. Singapore is home to the Singapore Exchange (SGX), which was

formed in 1999 by the merger of two well-established exchanges, the Stock Exchange of

Singapore (SES) and Singapore International Monetary Exchange (SIMEX).

Latin America's largest commodity exchange is the Bolsa de Mercadorias & Futures, (BM&F) in

Brazil. Although this exchange was only created in 1985, it was the 8th largest exchange by

2001, with 98 million contracts traded. There are also many other commodity exchanges

operating in Brazil, spread throughout the country. Argentina's futures market Mercado a

Termino de Buenos Aires, founded in 1909, ranks as the world's 51st largest exchange. Mexico

has only recently introduced a futures exchange to its markets. The Mercado Mexicano de

Derivados (Mexder) was launched in 1998.

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

Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent

amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade

Association. The Futures trading in oilseeds started in 1900 with the establishment of the

Gujarati Vyapari Mandali, which carried on futures trading in groundnut, castor seed and cotton.

Futures trading in wheat was existent at several places in Punjab and Uttar Pradesh. But the most

notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913. Futures

trading in bullion began in Mumbai in 1920. Calcutta Hessian Exchange Ltd. was established in

1919 for futures trading in rawjute and jute goods. But organised futures trading in raw jute

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

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

organised trading in both Raw Jute and Jute goods. Forward Contracts (Regulation) Act was
enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953 under

the Ministry of Consumer Affairs and Public Distribution. In due course, several other exchanges

were created in the country to trade in diverse commodities.

CHAPTER – 13

ARTICLE
ARTICLE

Gold is the most popular precious metal as an investment with investors having a variety of ways

to gain exposure to this asset class ranging from bullion, coin or jewellery ownership right the

way through to certificates, exchange traded funds, derivatives or shares.

Capital Spreads offer exposure through spread betting with their “Rolling Gold” product.

What makes it move?

Like all investments the price of Gold is ultimately driven by supply and demand but unlike

some other commodities most of the Gold that has ever been mined is still in existence and could

potentially come onto the market if the price was attractive enough. This makes the demand side

of the equation a greater factor than the supply side with sentiment being a much bigger driver of

prices than the annual production of Gold. So what makes DEMAND for gold go up?

Inflation.

In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time. The consequence of which is the loss of value of money. In

effect your hard earned money will buy you less over time. Gold is the only asset class that has

historically kept its buying power against a back drop of inflation. If Investors are concerned

about inflation then they will buy Gold and when they are less worried about inflation they will

sell gold.

Safe Haven.
Often in an economic crisis investors will sell risky asset classes (like equities) to buy safer asset

classes such as government bonds and Gold. When the world looks like a risky place for

investors we sometimes see what is known as “a flight to quality” and investors will scramble to

put their money in an area that is considered safe in a time of uncertainty.

USD

Gold is priced in USD’s and historically has an inverse relationship to the currency i.e. if the $

weakens then the gold price should rise as Investors try to protect themselves from a falling $ by

buying Gold which should keep its relative purchasing power. In times of uncertainty this

relationship can break down as both Gold and the $ are considered “safe havens” and investors

may put money in both asset classes driving prices in both higher together.

Seasonal Demand.

The Indian wedding season runs from late September to December and wealthy Indian brides can

be draped in as much as $1.5 mil of 24 carat gold. It is such an important part of the culture that

if you can’t afford any gold at your wedding then you simply don’t get married! According to

research by JP Morgan the Indian wedding season has boosted the price of Gold every year since

2002 with September showing the biggest average increase. Past performance is no guarantee of

future movements but this seasonal demand does place a natural upward bias on the commodity

during those months.

 CHAPTER – 14

CONCLUSION

CONCLUSION

Commodities market provides a platform for the investors as well as hedgers to protect their

economic interests as well as increase their investible wealth. However, there is a need to profile

the investors in this market with their preferences and pattern. This will help the commodity

trading companies to focus their offerings to suit the needs of the commodity investors. Also,

the companies should understand the expectations of their clients and their level of satisfaction.

With this in mind, a study was conducted through the Startagem solutions limited, where a

sample of 150 respondents was drawn for study. A structured questionnaire with the relevant

indicators was administered to primarily identify the investors’ preference towards commodities
market. The study also intended to identify the investment patterns of investors, to know the

investors’ opinion on the effect of international commodities market over the national trading

activity, to identify the source of information about commodities market, and to profile the

commodities investors. The investors are not fully aware of the functioning of commodity

market and they draw market information from Print media, Web media and Peer groups.
 CHAPTER – 15

REFERENCES

REFERENCES

Books:

• Security Analysis And Portfolio Management

- S.kevin

E – Books:

• Ncfm module for commodity market

• COMDEX Educational series

• Investors Educational series - Angel commodities

 • Nair C.K.G. (2004): Commodity Futures Markets in India: Ready for Take

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