A STUDY ON COMMODITIES MARKET

WITH SPECIAL REFERENCE TO GOLD

K.SAMBA SIVA RAO

H.T.NO:08B81E0019

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

MASTER OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT STUDIES

CVR COLLEGE OF ENGINEERING
(Affiliated to JNTU, HYDERABAD)
2008-2010
 CERTIFICATE

This is to certify that a project report “A STUDY ON COMMODITIES MARKET WITH

SPECIAL REFERENCE TO GOLD” is a bonafied work submitted by Mr. K.SAMBA SIVA RAO
(08B81E0023) in partial fulfillment of the requirement for the award of degree Master of Business
Administration (MBA) from CVR College of Engineering (affliated to Jawaharlal Nehru
Technological University, Hyderabad).

Certified further that, to the best of our knowledge the work presented in this report has not
been submitted to any other university or institution for the award of any degree or diploma.

P.V.S.H.Sastry Prof.M.S.Bhat
Asst. Professor in Management Studies Professor & Head
Internal guide Department of Management Studies
C.V.R.College of Engineering,
Mangalpally, R.R.Dist.,
Companycertificate
 DECLARATION

I here by declare that this Project Report titled “A study on commodities market

with special reference to Gold” submitted by me to the Department of Business Management, JNTU,

Hyderabad is a bonafied work undertaken by me and it is not submitted to any other University or

Institution for the award of any degree /diploma / certificate or published any time before.

Signature of the Student

 ACKNOWLEDGEMENTS

Ideas are nobody’s property. They belong to those who express them the best. Any research
involves intellectual contributions from many personalities. I would like to express my heart-felt
gratitude to all those who helped and encouraged me in successful completion of this dissertation.

First and foremost I thank P.V.S.H. Sastry, Asst. Professor in Management Studies, my
internal guide who encouraged me in every way to get this project into a solid form. I express my
sincere appreciation for his advice and encouragement during the preparation and progress of this
project.

It is of great opportunity to render our sincere and honest thanks to Prof.M.S.Bhat, Professor
& Head, Department of Management Studies for his timely guidance and highly interactive attitude
which helped me a lot in successful completion of this project.

I thank our principal Dr.A.D. Raj kumar, who stood as a silent inspiration behind this project.
My heart full thanks for his endorsement and valuable suggestions.

I thank to my Parents and Friends for their extreme cooperation. I also thank everyone who
directly and indirectly helped me in the completion of my project.
 TABLE OF CONTENTS

Page No
INDEX

CHAPTER – I
02-07
1.1 Introduction
1.2 Need of the study
1.3 Objectives
1.4 Methodology
1.5 Scope
1.6 Limitations of the study

CHAPTER – II

2.1 Commodities Market A Theoretical Review 09-71

CHAPTER – III

3. Inter Connected Stock Exchange of India Limited - A Profile 73-77

CHAPTER –IV

4. Data Analysis and Interpretation 79-103

CHAPTER –V

5.1 Findings 104-107

5.2 Suggestions
5.3 Conclusions

6. BIBLIOGRAPHY 109
 CHAPTER-I

INTRODUCTION
 INTRODUCTION

Indian markets have recently thrown open a new avenue for retail investors and traders to participate
commodity derivatives. For those who want to diversify their portfolios beyond shares,
commodities bonds and real estate are the best options. The retail investors could have done very
little to actually invest in commodities such as gold and silver or oilseeds in the futures market.
This was nearly impossible in commodities except for gold and silver as there was practically
no retail avenue for pumping in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors
can now trade in commodity futures without having physical stock.

Commodities actually offer immense potential to become a separate asset class for market survey
investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets,
may find commodities an unfathomable market. But commodities are easy to understand as far as
fundamentals of demand and supply are concerned. Retail investors should understand the risks and
advantages of trading in commodities futures before taking a leap. Historically, pricing in
commodities futures has been less volatile compared with equity and bonds, thus providing an efficient
portfolio diversification option.
 2

NEED AND IMPORTANCE OF THE STUDY

The era of liberalization has revolutionized the commodity market. In such a scenario it is necessary to
make an assessment of commodity market .as more and more investors are seeking commodity market
as of the important investment avenues, it is necessary to make a detailed analysis. Such an analysis
will help any person who is to invest in commodity market.
 3

OBJECTIVES OF THE STUDY

• To understand the commodities market in general.

• To study the commodities trading process and its clearing & settlement methods.

• To study the profile of the Interconnected Stock Exchange of India Limited

• To study the methods for trading in “gold” as a commodity.

• To draw suitable findings and offer the necessary suggestions based on the study..
 4

METHODOLOGY

SOURCES OF DATA COLLECTION:

The methodology adopted or employed in this study was Mostly on secondary data

collection i.e,

 Companies Annual Reports.

 Information from Internet.

 Publications.

 Information provided by Inter Connected Stock Exchange.

 Period of study:

Financial data has been collected from the year 2005-2010.

 5

SCOPE OF THE STUDY

 The analysis is based on commodity trading specifically in gold

futures market.

 The analysis is based on six (6) month prices on daily basis to

show the friend of the bullion market.

 The analysis is based on opening and closing price of gold in

commodity market.

 The study is conducted based on four types of gold products i.e.

 Gold

 Gold HNI

 Gold guinea and

 Gold mini only

 6

LIMITATIONS OF THE STUDY

 The analysis is based on moving average tool.

 A technical analysis is done using 3day moving averages.

 The present study takes in to consideration of 6 months data of gold prices.

 This analysis will be holding good for a limited time period i.e. based on present

scenario and study conducted, future movement of price may or may not be similar.
 7

CHAPTER - II
COMMODITIES MARKET – A THEORETICAL
REVIEW
COMMODITIES MARKET – A THEORETICAL REVIEW

INTRODUCTION

Commodities Futures’ trading in India has a long history. The first commodity futures market
appeared in 1875. But the new standardized form of trading in the Indian capital market is an
attractive package for all the people who earn money through speculation by trading into
FUTURES. It is a well-known fact and should be remembered that the trading in commodities
through futures’ exchanges is merely, “old wine in a new bottle”.

The trading in commodities was started with the first transaction that took place between two
individuals. We can relate this to the ancient method of trading i.e., BARTER SYSTEM. This
method faced the initial hiccups due to the problems like: store of value, medium of exchange,
deferred payment, measure of wealth etc. This led to the invention of MONEY. As the market
started to expand, the problem of scarcity piled up.

The farmers / traders then felt the need to protect themselves against the fluctuations in the price
for their produce. In the ancient times, the commodities traded were – the Agricultural Produce,
which was exposed to higher risk i.e., the natural calamities and had to face the price uncertainty.
It was certain that during the scarcity, the farmer realized higher prices and during the oversupply
he had to loose his profitability. On the other hand, the trader had to pay higher price during the
scarcity and vice versa. It was at this time that both joined hands and entered into a contract for the
trade i.e., delivery of the produce after the harvest, for a price decided earlier. By this both had
reduced the future uncertainty.

One stone still remained unturned- ‘surety of honoring the contract on part from either of the
parties’. This problem was settled in the year 1848, when a group of traders in CHICAGO came
forward to standardize the trading. They initiated the concept of “to-arrive” contract and permitted
the farmers to lock in the price upfront and deliver the grain at a contracted date later. This trading
was carried on a platform called CHICAGO BOARD OF TRADE, one of the most popular
9
commodities trading exchanges’ today. It was this time that the trading in commodity futures’
picked up and never looked back.

Although in the 19th century only agricultural produce was traded as a futures contract, but now,
the commodities of global or at least domestic importance are being traded over the commodity
futures’ exchanges. This form of trading has proved useful as a device for HEDGING and
SPECULATION. The commodities that are traded today are:

Agro-Based Commodities…… Wheat, Corn, Cotton, Oils, Oil seeds etc..

Soft Commodities…………….. Coffee, Cocoa, Sugar etc

Livestock………………………. Live Cattle, Pork Bellies etc

Energy………………………….. Crude Oil, Natural Gas, Gasoline etc

Precious Metals……………….. Gold, Silver, Platinum etc

Other Metals…………………… Nickel, Aluminum, Copper etc

 10

STRUCTURE OF THE COMMODITY MARKET

 11
DEFINITION OF COMMODITIES

Any product that can be used for commerce or an article of commerce which is traded on an
authorized commodity exchange is known as commodity. The article should be movable of value,
something which is bought or sold and which is produced or used as the subject or barter or sale. In
short commodity includes all kinds of goods. Forward Contracts (Regulation) Act (FCRA), 1952
defines “goods” as “every kind of movable property other than actionable claims, money and
securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and
fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity
exchanges, recognized by the Central Government, permits commodities which include precious (gold
and silver) and non-ferrous metals: cereals and pulses; ginned and un-ginned cotton; oil seeds, oils and
oil cakes; raw jute and jute goods; sugar and potatoes and onions.

NEED OF COMMODITY MARKET IN INDIA

Achieving hedging efficiency is the main reason to opt for futures contracts. For instance, in
February, 2007, India had to pay $ 52 per barrel more for importing oil than what they had to pay a
week ago. The utility of a futures contract for hedging or risk management purpose parallel or near-
parallel relationship between the spot and futures prices over time. In other words, the efficiency of a
futures contract for hedging essentially envisages that the prices in the physical and futures markets
move in close union not only in the same direction, but also by almost the same magnitude, so that
losses in one market are offset by gains in the other.

Theoretically ( and ideally), in a perfectly competitive market with surplus supplies and
abundant stocks round the year, the futures price will exceed the spot price by the cost of storage till
the maturity of the futures contract. But such storage cost declines as the contract approaches maturity,
thereby reducing the premium or con tango commanded by the futures contract over the spot delivery
over its life and eventually becomes zero during the delivery month when the spot and futures prices
 12
virtually converge. The efficiency of a futures contract for hedging depends on the prevalence of such
an ideal price relationship between the spot and futures markets.

COMMODITY EXCHANGE

A brief description of commodity exchanges are those which trade in particular commodities,
neglecting the trade of securities, stock index futures and options etc.,

In the middle of 19th century in the United States, businessmen began organizing market forums to
make the buying and selling of commodities easier. These central market places provided a place for
buyers and sellers to meet, set quality and quantity standards, and establish rules of business.

The major commodity markets are in the United Kingdom and in the USA. In India there are 25
recognized future exchanges, of which there are three national level multi-commodity exchanges.
After a gap of almost three decades, Government of India has allowed forward transactions in
commodities through Online Commodity Exchanges, a modification of traditional business known as
Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities.

THE THREE EXCHANGES ARE

 National Commodity & Derivatives Exchange Limited ( NCDEX)

 Multi Commodity Exchange of India Limited ( MCX)
 National Multi-Commodity Exchange of India Limited ( NMCEIL)

All the exchanges have been set up under overall control of Forward Market Commission (FMC) of
Government of India.
 13
National Commodity & Derivatives Exchange Limited (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is

a public limited company incorporated on April 23, 2003 under the Companies Act, 1956
and had commenced its operations on December 15, 2003.This is the only commodity
exchange in the country promoted by national level institutions. It is promoted by ICICI Bank
Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a
professionally managed online multi commodity exchange. NCDEX is regulated by Forward
Market Commission and is subjected to various laws of the land like the Companies Act, Stamp
Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.

Multi Commodity Exchange of India Limited (MCX)

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an

independent and de-mutualized exchange with a permanent recognition from Government of
India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates
online trading, clearing and settlement operations for commodity futures markets across the
country. MCX started offering trade in November 2003 and has built strategic alliances with
Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of
India, Pulses Importers Association and Shetkari Sanghatana.

National Multi-Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-
mutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was
granted approval by the Government to organize trading in the edible oil complex. It has
operationalised from November 26, 2002. It is being supported by Central Warehousing
Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited.
14
It got its recognition in October 2002.Commodity exchange in India plays an important role
where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of
produce and its seller in the market judged upon the prices. Others never had a say. Today,
commodity exchanges are purely speculative in nature. Before discovering the price, they reach
to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price
transparency and risk management in the vital market.

A big difference between a typical auction, where a single auctioneer announces the bids and
the Exchange is that people are not only competing to buy but also to sell. By Exchange rules
and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone
else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their
toes to make sure no one gets the purchase or sale before they do.

DERIVATIVES

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard themselves
against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial
markets are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices. However,
by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on
the profitability and cash flow situation of risk-averse investors.

Derivatives are risk management instruments, which derive their value from an underlying
asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc. Banks,
Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make
profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

15
DEFINITION

 Derivative is a product whose value is derived from the value of an underlying asset in a
contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
 Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to secured or
unsecured, risk instrument or contract for differences or any other form of security.
 A contract which derives its value from the prices, or index of prices, of underlying securities.

EMERGENCE OF FINANCIAL DERIVATIVE PRODUCTS

Derivative products initially emerged as hedging devices against fluctuations in commodity

prices, financial derivatives came into spotlight in the post-1970 period due to growing instability in
the financial markets. However, since their emergence, these products have become very popular and
by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent
years, the market for financial derivatives has grown tremendously in terms of variety of instruments
available, their complexity and also turnover. Even small investors find these useful due to high
correlation of the popular indexes with various portfolios and ease of use.

PARTICIPANTS

The following three broad categories of participants in the derivatives market.

HEDGERS:

Hedgers face risk associated with the price of an asset. They use futures or options markets to
reduce or eliminate this risk.

16
SPECULATORS:

Speculators wish to bet on future movements in the price of an asset. Futures and options
contracts can give them an extra leverage; that is, they can increase both the potential gains and
potential losses in a speculative venture.

ARBITRAGERS:

Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if
for,example, they see the futures price of an asset getting out of line with the cash price, they will take
offsetting position in the two markets to lock in a profit.

FUNCTION OF DERIVATIVES MARKETS

The following are the various functions that are performed by the derivatives markets. They are:

 Prices in an organized derivatives market reflect the perception of market participants about the
future and lead the price of underlying to the perceived future level.
 Derivatives market helps to transfer risks from those who have them but may not like them to
those who have an appetite for them.
 Derivatives trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase saving and investment in long run.

17
TYPES OF DERIVATIVES

The following are the various types of derivatives. They are

FORWARDS

A forward contract is a customized contract between two entities, where settlement takes place on a
specific date in the future at today’s pre-agreed price.

FUTURES

A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a
certain price; they are standardized and traded on exchange.

OPTIONS

Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a
given quantity of the underlying asset, at a given price on or before a given future date. Puts give the
buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on
or before a given date.

WARRANTS

Options generally have lives of up to one year; the majority of options traded on options exchanges
having a maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded over-the counter.

LEAPS

The acronym LEAPS means long-term Equity Anticipation securities. These are options having a
maturity of up to three years.

18
BASKETS

Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving
average of a basket of assets. Equity index options are a form of basket options.

SWAPS

Swaps are private agreements between two parties to exchange cash flows in the future according to a
prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used
Swaps are

INTEREST RATE SWAPS

These entail swapping only the related cash flows between the parties in the same currency.

CURRENCY SWAPS

These entail swapping both principal and interest between the parties, with the cash flows in on
direction being in a different currency than those in the opposite direction.

SWAPTION

Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.
Thus a swaption is an option on a forward swap.

INTRODUCTION TO FUTURES AND OPTIONS

In recent years, derivatives have become increasingly important in the field of finance. While futures
and options are now actively traded on many exchanges, forward contracts are popular on the OTC
market. In this chapter we shall study in detail these three derivative contracts.
19
FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One
of the parties to the contract assumes a long position and agrees to buy the underlying asset on a
certain specified future date for a certain specified price. The other party assumes a short position and
agrees to sell the asset on the same date for the same price. Other contract details like delivery date,
price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are
normally traded outside the exchanges.

THE SALIENT FEATURES OF FORWARD CONTRACTS ARE:

 They are bilateral contracts and hence exposed to counter–party risk.

 Each contract is custom designed, and hence is unique in terms of contract size, expiration date
and the asset type and quality.
 The contract price is generally not available in public domain.
 On the expiration date, the contract has to be settled by delivery of the asset.
 If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty,
which often results in high prices being charged.

However forward contracts in certain markets have become very standardized. This process of
standardization reaches its limit in the organized futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging application would
be that of an exporter who expects to receive payment in dollars three months later. He is exposed to
the risk of exchange rate fluctuations. By using the currency forward market to sell dollars forward, he
can lock on to a rate today and reduce his uncertainty. Similarly an importer who is required to make a
payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying
dollars forward
Limitations of forward markets
 20
FORWARD MARKETS WORLD-WIDE ARE AFFLICTED BY SEVERAL PROBLEMS:

• Lack of centralization of trading,

• Liquidity, and
• Counter party risk

INTRODUCTION TO FUTURES

Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a
certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded.
To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the
contract. A futures contract may be offset prior to maturity by entering into an equal and opposite
transaction. More than 99% of futures transactions are offset this way.

DEFINITION

A Futures contract is an agreement between two parties to buy or sell an asset a certain time in
the future at a certain price. To facilitate liquidity in the futures contract, the exchange specifies
certain standard features of the contract.

Quantity and Quality of the underlying of the underlying.

 The date and the month of delivery

 The units of price quotations and minimum price change
 Location of settlement
 21

FEATURES OF FUTURES

1.Futures are highly standardized.

2. The contracting parties need not pay any down payments.
3.Hedging of price risks.
4. They have secondary markets to.

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types:

 Stock futures
 Index futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a future contract, the buyer and the seller. The buyer of the futures contract is
one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on
the futures contract.
 22

The pay off for the buyer and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

Profit

FP
F
0 S2 S1
FL
Loss

CASE 1 the buyer bought the futures contract at (F); if the future price goes to S1 then the buyer gets
the profit of (FP).
CASE 2 the buyer gets loss when the future price goes less then (F), if the future price goes to S2 then
the buyer gets the loss of (FL).
 23

PAY-OFF FOR A SELLER OF FUTURES

Profit FL
S2 F S1

FP
Loss

F – FUTURES PRICE S1, S2 – SETTLEMENT PRICE

CASE 1 the seller sold the future contract at (F); if the future goes to S1 then the seller gets the
profit of (FP).
CASE 2 the seller gets loss when the future price goes greater than (F), if the future price goes to S2
then the seller gets the loss of (FL).
 24
DISTINCTION BETWEEN FUTURES AND FORWARDS:

Futures Forwards
Trade on an organized exchange OTC in nature
Standardized contract terms customized contract terms
Hence more liquid hence less liquid
Requires margin payments no margin payments
Follows daily settlement settlement happens at end of
period

Forward contracts are often confused with futures contracts. The confusion is primarily because both
serve essentially the same economic functions of allocating risk in the presence of future price
uncertainty. However futures are a significant improvement over the forward contracts as they
eliminate counter party risk and offer more liquidity.

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES

Holding portfolios of securities is associated with the risk of the possibility that the investor may
realize his returns, which would be much lesser than what he expected to get. There are various factors,
which affect the returns.

1. Price or dividend (interest)

2. Some are internal to the firm like-

 Industrial policy
 Management capabilities
 Consumer’s preference
 Labor strike, etc.

25
These forces are to a large extent controllable and are termed as non systematic risks. An investor can
easily manage such non-systematic by having a well-diversified portfolio spread across the companies.
There are other of influence which are external to the firm which cannot be controlled and affect large
number of securities. They are termed as systematic risk. They are:

1. Economic
2. Political
3. Sociological changes are sources of systematic risk.

For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual
stocks to move together in the same manner. We therefore quite often find stock prices falling from
time to time in spite of company’s earning rising and vice versa.

In debt market, a large position of the total risk of securities is systematic. Debt instruments
are also finite life securities with limited marketability due to their small size relative to many common
stocks. Those factors favor for the purpose of both portfolio hedging and speculation, the introduction
of a derivatives securities that is on some broader market rather than an individual security.

EVOLUTION OF COMMODITY FUTURES EXCHANGES

Commodity markets have existed for centuries around the world because producers and buyers
of foodstuffs and other items have always needed a common place to trade. Cash transactions were
most common, but sometimes “forward” agreements were also made deals to deliver and pay for
something in the future at a price agreed upon in the present. There are records, for example, of
“forward” agreements related to the rice markets in Seventeenth century Japan: most scholars agree
that forward arrangements actually date back much farther in time.

The first organized grain futures trading in the U.S began in places such as New York City and
Buffalo, but the development of “modern” futures, which are a unique type of forward agreement,
began in Chicago in the 1840s. With the construction of the railroads, Chicago began to emerge as a
center for transportation between Midwestern producers and west coast population centers. The city
26
was a natural hub for trade, but the trading that took place there was inefficient and unorganized until a
group of Chicago-based business men formed the Board of Trade of the City of Chicago in 1848. The
Board was a member-owned organization that offered a centralized location for cash trading of a
variety of goods as well as trading of forward contracts. Members served as brokers who facilitated
trading in return for commissions.

As trading of forward contracts increased, the Board decided that standardizing those contracts
would streamline the trading and delivery processes. Instead of individualized contracts, which took a
great deal of time to negotiate and fulfill, people interested in the forward trading of corn at the Board,
for example, were asked to trade contracts that were identical in terms of quantity, quality, delivery
month and terms, all as established by the exchange. The only thing left for traders to negotiate was
price and the number of contracts.

These standardized forwards were essentially the first modern futures contracts.

They were unlike other forwards in that they could only be traded at the exchange that created
them, and only at certain designated times. They were also different from other forwards in that the
bids, offers and negotiated prices of the trades were made public by the exchange. This practice
established futures exchanges as venues for “price discovery” in U.S markets.

In contrast to customized contracts, standardized futures contracts were easy to trade, since all
traders were simply re-negotiations of price, and they usually changed hands many times before
expiration. People who wanted to make a profit based on a fortuitous price change, or alternatively,
who wished to cut mounting losses as quickly as possible, could “offset” a futures contract before
expiration by engaging in an opposite trade: buying a contract which they had previously sold (or
“gone short”), or selling a contract which they had previously bought (or “gone long”).

CASH COMMODITY

A cash commodity must meet three basic conditions to be successfully traded in the futures market:

27
 1. It has to be standardized and, for agricultural and industrial commodities, must be in a basic, raw,
unprocessed state. There are futures contracts on wheat, but not on flour. Wheat is wheat (although
different types of wheat have different futures contracts). The miller who needs wheat futures to help
him avoid losing money on his flour transactions with customers wouldn’t need flour futures. A given
amount of wheat yields a given amount of flour and the cost of converting wheat to flour is fairly fixed
hence predictable.

2.Perishable commodities must have an adequate shelf life, because delivery on a futures contract is
deferred.

3.The cash commodity’s price must fluctuate enough to create uncertainty, which means both rise and
potential profit.

Unlike a stock, which represents equity in a company and can be held for along time, if not
indefinitely, futures contracts have finite lives. They are primarily used for hedging commodity price-
fluctuation risks or for taking advantage of price movements, rather than for the buying or selling of
the actual cash commodity. The word “contract” is used because a futures contract requires delivery of
the commodity in a stated month in the future unless the contract is liquidated before it expires.

The buyer of the futures contract (the party with a long position) agrees on a fixed purchase price to
buy the underlying commodity (wheat, gold or T-bills, for example) form the seller at the expiration of
the contract. The seller of the futures contract (the party with a short position) agrees to sell the
underlying commodity to the buyer at expiration at the fixed sales price. As time passes, the contract’s
price changes relative to the fixed price at which the trade was initiated. This creates profits or losses
for the trader.

In most cases, delivery never takes place. Instead, both the buyer and the seller, acting independently
of each other, usually liquidate their long and short positions before the contract expire: the buyer sells
futures and the seller buys futures.

28
THE ERA OF FINANCIAL FUTURES

In the 19th and early 20th centuries gold played a key role in international monetary transactions.
The gold standard was used to back currencies; the international value of currency was determined by
its fixed relationship to gold; gold was used to settle international accounts. The gold standard
maintained fixed exchange rates that were seen as desirable because they reduced the risk of trading
with other countries.

Imbalances in international trade were theoretically rectified automatically by the gold

standard. A country with a deficit would have depleted gold reserves and would thus have to reduce
its money supply. The resulting fall in demand would reduce imports and the lowering of prices would
boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold
and therefore would have a decrease in the amount of money available to spend. This decrease in the
amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this
period was the British pound. Based on the dominant British economy, the pound became a reserve,
transaction, and intervention currency. But the pound was not up to the challenge of serving as the
primary world currency, given the weakness of the British economy after the Second World War.

Preparing to rebuild the international economic system as World War II was still raging 730
delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Breton Woods, New
Hampshire for the United Nations Monetary and Financial Conference. The delegates deliberated
upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary
system, the planners at Bretton Woods established the International Bank for Reconstruction and
Development (IBRD) (now one of five institutions in the World Bank Group) and the International
Monetary Fund (IMF). These organizations became operational in 1946 after a sufficient number of
countries had ratified the agreement.

29
THE BRETTON WOODS SYSTEM OF FIXED EXCHANGE RATES

The chief features of the Bretton Woods system were an obligation for each country to adopt a
monetary policy that maintained the exchange rate of its currency within a fixed value-plus or minus
one percent – in terms of gold; and the ability of the IMF to bridge temporary imbalances of payments.

THE “PEGGED RATE” OR “PAR VALUE” CURRENCY REGIME

What emerged was the “pegged rate” currency regime. Members were required to establish a parity of
their national currencies in terms of gold (a “peg”) and to maintain exchange rates within plus or minus
1% of parity (a “band”) by intervening in their foreign exchange markets (that is, buying or selling
foreign money)

THE “RESERVE CURRENCY”

In practice, however, since the principal “ Reserve currency” would be the U.S dollar, this
meant that other countries would pet their currencies to the U.S dollar, and – once convertibility was
restored – would buy and sell U.S dollars to keep market exchange rates within plus or minus 1% of
parity. Thus, the U.S dollar took over the role that gold had played under the gold standard in the
international financial system.

Meanwhile, in order to bolster faith in the dollar, the U.S agreed separately to link the dollar to
gold at the rate of $ 35 per ounce of gold. Member countries could only change their par value with
IMF approval, which was contingent on IMF determination that its balances of payments was in a
“fundamental disequilibrium”.

THE U.S BALANCES OF PAYMENTS CRISIS (1958-68)

After the end of World War H. the U.S held $26 billion in gold reserves, of an estimated total
of $40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the gold
30
base increased by only a few percent. In 1958, the U.S balance of payments swung negative. The first
U.S response to the crisis was in the late 1950s when the Eisenhower administration placed import
quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not
acted on. However, with a mounting recession that began in 1959, this response alone was not
sustainable.

By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the
Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. By the early
1970s as the Vietnam War accelerated inflation, the United States as a whole began running a trade
deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S
gold coverage deteriorate from 55% to 22%.
The Smithsonian Agreement

On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in
Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with 2.25%
trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized
at the time, and was by design a “temporary” agreement. It failed to impose discipline on the U.S
government, and with no other credibility mechanism in place, the pressure against the dollar in gold
continued.

This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $
70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against
the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the
Bretton Woods currency exchange markets closed after a last-gasp devaluation of the dollar to
$44/ounce, and reopened in March in a floating currency regime.
Throughout the first seven decades of the twentieth century, the futures industry remained essentially
as it has been – focused on the trading of futures on agricultural products. But a remarkable change
occurred in the industry in 1971, with the introduction of futures based on financial products

31
EMERGING TRENDS IN COMMODITY MARKET IN INDIA

Commodity markets have existed in India for a long time, below Table gives the list of
registered commodities exchanges in India. Above Table gives the total annualized volumes on
various exchanges.

While the implementations of the Kara committee recommendations were rather slow, today,
the commodity derivative market in India seems poised for a transformation. National level
commodity derivatives exchanges seem to be the new phenomenon. The Forward Markets
Commission accorded in principle approval for the following national level multi commodity
exchanges. The increasing volumes on these exchanges suggest that commodity markets in India seem
to be a promising game.

NATIONAL BOARD OF TRADE

Multi Commodity Exchange of India

National Commodity & Derivatives Exchanges of India Ltd.,

Commodity Exchange Products

National board of trade, Indore Soya, mustard
National multi commodity exchange, Ahmedabad Multiple
Ahmedabad commodity exchange Castor, cotton
Rajadhani Oil & Oil seeds Mustard
Vijai Beopar Chamber Ltd., Muzzaffarnagar Gur
Rajkot seeds, Oil & bullion exchange Castor, groundnut
IPSTA, Cochin Pepper
Chamber of commerce, Hapur Gur, mustard
Bhatinda Om and Oil Exchange Gur
Other ( mostly inactive)

32
COMMODITY TRADING

COMMODITY MARKET TRADING MECHANISM

Every market transaction consists of three components – trading, clearing and settlement.

TRADING

The trading system on the Commodities exchange provides a fully automated screen-based trading for
futures on commodities on a nationwide basis as well as an online monitoring and surveillance
mechanism. It supports an order driven market and provides complete transparency of trading
operations. After hours trading has also been proposed for implementation at a later stage.

The NCDEX system supports an order driven market, where orders match automatically. Order
matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are
in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures
contracts on various commodities. The exchange notifies the regular lot size and tick size for each of
the contracts traded from time to time. When any order enters the trading system, it is an active order.
It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does
not find a match, the order becomes passive and gets queued in the respective outstanding order book
in the system; Time stamping is done for each trade and provides the possibility for a complete audit
trail if required.

33
COMMODITY FUTURES TRADING CYCLE

NCDEX trades commodity futures contracts having one-month, two-month and three-month expiry
cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would
expire on the 20th of January and a February expiry contract would cease trading on the 20th February.
If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading
day. New contracts will be introduced on the trading day following the expiry of the near month
contract. Following Figure shows the contract cycle for futures contracts on NCDEX.

Jan Feb Mar Apr

Time
Jan 20 contract
Feb 20 contract
March 20 contract

April 20 contract
May 20 contract
June 20 contract

ORDER TYPES AND TRADING PARAMETERS

An electronic trading system allows the trading members to enter orders with various conditions
attached to them as per their requirement. These conditions are broadly divided into the following
categories:

 Time conditions
 Price conditions
 Other conditions
 34
Several combinations of the above are possible thereby providing enormous flexibility to users. The
order types and conditions are summarized below. Of these, the order types available on the NCDEX

system are regular lot order, stop loss order, immediate or cancel order, good till day order, good till
cancelled order, good till order and spread order.

TIME CONDITIONS

1. GOOD TILL DAY ORDER

A day order, as the name suggests is an order which is valid for the day on which it is entered. If the
order is not executed during the day, the system cancels the order automatically at the end of the day
Example: A trader wants to go long on March 1, 2004 in refined palm oil on the commodity exchange.
A day order is placed at Rs.340/- 10 kg. If the market does not reach this price the order does not get
filled even if the market touches Rs.341 and closes. In other words day order is for a specific price and
if the order does not get filled that day, one has to place the order gain the next day.

2. GOOD TILL CANCELLED (GTC)

A GTC order remains in the system until the user cancels it. Consequently, it spans trading days, if not
traded on the day the order is entered. The maximum number of days an order can remain in the
system is notified by the exchange from time to time after which the order is automatically cancelled
by the system. Each day counted is a calendar day inclusive of holidays. The days counted are
inclusive of the day on which the order is placed and the order is cancelled from the system at the end
of the day of the expiry period. Example: A trader wants to go long on refined palm oil when the
market touches Rs.400/- 10 kg. Theoretically, the order exists until it is filled up, even if it takes
months for it to happen. The GTC order on the NCDEX is cancelled at the end of a period of seven
calendar days from the date of entering an order or when the contract expires, whichever is earlier.
 35
3. GOOD TILL DATE (GTD)

A GTD order allows the user to specify the date till which the order should remain in the system if not
executed. The maximum days allowed by the system are the same as in GTC order. At the end this
day / date, the order is cancelled from the system. Each day / date counted is inclusive of the day / date
on which the order is placed and the order is cancelled from the system at the end of the day / date of
the expiry period.

4. IMMEDIATE OR CANCEL (IOC)

An IOC order allows the user to buy or sell a contract as soon as the order is released into the system,
failing which the order is cancelled from the system. Partial match is possible for the order, and the
unmatched portions of the order are cancelled immediately.

5. ALL OR NONE ORDER

All or none order ( AON) is a limit order, which is to be executed in its entirety, or not at all. Unlike a
fill-or-kill order, an all-or-none order is not cancelled if it is not executed as soon as it is represented in
the exchange. An all-or-none order position can be closed out with another AON order.

6. FILL OR KILL ORDER

This order is a limit order that is placed to be executed immediately and if the order is unable to be
filed immediately, it gets cancelled.

PRICE CONDITION

1. LIMIT ORDER

An order to buy or sell a stated amount of a commodity at a specified price, or at a better price, if
obtainable at the time of execution. The disadvantage is that the order may not get filled at all if the
 36
price of that day does not reach specified price.

2. STOP-LOSS

A stop-loss order is an order, placed with the broker, to buy or sell a particular futures contract at the
market price if and when the price reaches a specified level. Futures traders often use stop orders in an
effort to limit the amount they might lose if the futures price moves against their position Stop orders
are not executed until the price reaches the specified point. When the price reaches that point the stop
order becomes a market order. Most of the time, stop orders are used to exit a trade. But, stop orders
can be executed for buying / selling positions too. A buy stop order is initiated when one wants to buy
a contract or go long and a sell stop order when one wants to sell or go short . The order gets filled at
the suggested stop order price or at a better price. Example: A trader has purchased crude oil futures at
Rs.750 per barrel. He wishes to limit his loss to Rs.50 a barrel. A stop order would then be placed to
sell an offsetting contract if the price falls to Rs.700 per barrel. When the market touches this price,
stop order gets executed and the trader would exit the market. For the stop-loss sell order, the trigger
price has to be greater than the limit price.

OTHER CONDITIONS

MARGINS FOR TRADING IN FUTURES

Margin is the deposit money that needs to be paid to buy or sell each contract. The margin required for
a futures contract. The margin required for a futures contract is better described as performance bond
or good faith money. The margin levels are set by the exchanges based on volatility (market
conditions) and can be changed at any time. The margin requirements for most futures contracts range
from 2% to 15% of the value of the contract.

In the futures market, there are different types of margins that a trader has to maintain. We will
discuss them in more details when we talk about risk management in the next chapter. At this stage we
look at the types of margins as they apply on most futures exchanges.
 37
• Initial margin: The amount that must be deposited by a customer at the time of entering into a
contract is called initial margin. This margin is meant to cover the largest potential loss in one
day. The margin is a mandatory requirement of parties who are entering into the contract.

• Maintenance margin: A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin. To ensure that the balance in the margin account never becomes
negative, a maintenance margin, which is somewhat lower than the initial margin, is set. If the
balance in the margin account falls below the maintenance margin, the trader receives a margin

• call and is requested to deposit extra funds to bring it to the initial margin level within a very
short period of time. The extra funds deposited are known as a variation margin. If the trader
does not provide the variation margin, the broker closes out the position by offsetting the
contract.

• Additional margin: In case of sudden higher than expected volatility, the exchange calls for an
additional margin, this is a preemptive move to prevent breakdown. This is imposed when the
exchange fears that the markets have become too volatile and may result in some payments
crisis, etc.

• Mark-to-Market margin (MTM): At the end of each trading day, the margin account is adjusted
to reflect the trader’s gain or loss. This is known as marking to market the account of each
trader. All futures contracts are settled daily reducing the credit exposure to one day’s
movement. Based on the settlement price, the value of all positions is marked-to-market each
day after the official close, i.e., the accounts are either debited or credited based on how well
the positions fared in that day’s trading session. If the account falls below the maintenance
margin level the trader needs to replenish the account by giving additional funds. On the other
hand, if the position generates a gain, the funds can be withdrawn (those funds above the
required initial margin) or can be used to fund additional trades.
 38
Just as a trader is required to maintain a margin account with a breaker, a clearing house member is
required to maintain a margin account with the clearing house. This is known as clearing margin. In
the case of clearing house member, there is only an original margin and no maintenance margin.
Clearing house and clearing house margins have been discussed further in detail under the chapter on
clearing and settlement.

CHARGES

Members are liable to pay transaction charges for the trade done through the exchange during the
previous month. The important provisions are listed below; the billing for the all trades done during
the previous month will be raised in the succeeding month.

1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs. One Lakh trade
done. This rate is subject to change from time to time.

2. Due date: The transaction charges are payable on the 7th day from the date of the bill every
month in respect of the trade done in the previous month.

3. Collection process: NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System.

4. Registration with BJPL and their services: Members have to fill up the mandate form and
submit the same to NCDEX. NCDEX then forwards the mandate form the BJPL. BJPL sends
the login ID and password to the mailing address a s mentioned in the registration form. The
members can then log on through the website of BJPL, and view the billing amount and the due
date. Advance email intimation is also sent to the members. Besides, the billing details can be
viewed on the website up to a maximum period of 12 months.

5. Adjustment against advances transaction charges: In terms of the regulations, members are
required to remit Rs.50, 000/- as advance transaction charges on registration. The transaction
 39

charges due first will be adjusted against the advance transaction charges already paid as
advance and members need to pay transaction charges only after exhausting the balance lying
in advance transaction.

6. Penalty for delayed payments: If the transaction charges are not paid on or before the due date,
a penal interest is levied as specified by the exchange. Finally, the futures market is a zero sum
game i.e. the total number of long in any contract always equals the total number of short in
any in time is called the “Open interest”. This Open interest figure is a good indicator of the
liquidity in every contract. Based on studies carried out in international exchanges, it is found
that open interest is maximum in near month expiry contracts.

BENEFITS OF COMMODITIES FUTURES:

TO PRODUCER: A producer of a commodity can sell the futures of the commodity, thereby ensuring
that he can sell a particular quantity of his commodity at a particular price at a particular date.

TO INVESTORS: An investor has alternative investment instruments where he can take a position as
to future price and the spot price at a particular date in future and buys and sells options. He is not

interested in taking deliveries of the commodities.

TO COMMODITY TRADER: A commodity trader can use these to ensure that he is protected
against any adverse changes in the prices. He can enter into a futures contract for purchase of a certain
quantity of the underlying at a particular price on a particular date, or he can enter into a futures
contract for sale of a particular quantity on a particular date at a particular price and be assured of the
margins because both his purchase price as well as the sale price are fixed. Traders do a good arbitrage
in Gold and Silver. Whenever they find Gold moving up, they short silver and similarly whenever they
find silver moving up and gold likely to move down, they hedge.
 40
TO EXPORTERS: Future trading is very useful to the exporters as it provides an advance indication
of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby
secure export contract in a competitive market. Having entered into an export contract, it enables him
to hedge his risk by operating in futures market.

41
CLEARING & 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.

CLEARING

Clearing of trades that take place on an exchange happened through the exchange-clearing house. A
clearinghouse 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:

1. Effecting timely settlement.

2. Trade registration and follow up.
3. Control of the evolution of open interest.
4. Financial clearing of the payment flow.
5. Physical settlement (by delivery) or financial settlement ( by price difference) of contracts.
6. Administration of financial guarantees demanded by the participants.

The clearing house has a number of members, who re 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). Everyday the
42
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.

CLEARING MECHANISM

Only clearing members including professional clearing members (PCMs) are entitled to clear and settle
contracts through the clearinghouse.

The clearing mechanism essentially involves working out open positions and obligations of clearing
members. This position is considered for exposures and daily margin purposes. The open positions of
PCMs are arrived at by aggregating the open positions of all the TCMs clearing through him, in
contracts in which they have traded. A TCM’s open position is arrived at by the summation of his
clients’ open positions, in the contracts in which they have traded. Client positions are netted at the
level of individual client and grossed across all clients, at the member level without any set-offs
between clients. Proprietary positions are netted at member level without any set-offs between client
and proprietary positions.

At NCDEX, after the trading hours on the expiry date, based on the available information, the
matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view
the factors such as available capacity of the vault / warehouse, commodities already deposited and
dematerialized and offered for delivery etc., Matching done by this process is binding on the clearing
members. After completion of the matching process, clearing members are informed of the deliverable
/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash.
The cash settlement is only for the incremental gain / loss as determined on the basis of final settlement
price.

43
CLEARING BANKS

NCDEX has designed clearing bank through who 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 NCDE 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 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,
Canara Bank, UTI Bank Limited and HDFC Bank Limited, National Securities Clearing Corporation
(NSCCL) undertakes clearing of trades executed on the NCDEX.

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 deal in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs
with the respective clearing bank. All positions of a CM, 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 sessions, daily settlement price is computed as per the methods
prescribed by the exchange from time to time.

44
• Final settlement price: Final settlement price is the closest 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.

SETTLEMENT MECHANISM

Settlement of commodity futures contracts is a little different from settlement of financial futures,
which are mostly cash settled. The possibility of physical settlement makes the process a little more
complicated.

Types of
` Settlement

Daily Settlement Final Settlement

Daily Settlement Price Final Settlement Price

Handles daily price fluctuation Handles final settlement of all

For all trades (mark to market) Open oppositions

Daily process at end of day On contract expiry date

45

DAILY MARK TO MARKET SETTLEMENT:

Daily mark to market settlement is done till the date of the contract expiry. This is done to take care of
daily price fluctuations for all trades. All the open positions of the members are marked to market at
the end of the day and profit/loss is determined as below:

• On the day of entering into the contract, it is the difference between the entry value and daily
settlement price for that day.
• On any intervening days, when the member holds an open position, it is the different between the
daily settlement price for that day and the previous day’s settlement price.

FINAL SETTLEMENT

On the date of expiry, the final settlement price is the spot price on the expiry day. The spot prices are
collected from members across the country through polling. The polled bid/ask prices are
bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price. The
responsibility of settlement is on a trading cum clearing member for all trades done on his own account
and his client’s trades. A professional clearing member is responsible for settling all the participants’
trades, which he has confirmed to the exchange.

On the expiry date of a futures contract, members are required to submit delivery information through
delivery request window on the trader workstations provided by NCDEX for all open positions for a
commodity for all constituents individually. NCDEX on receipt of such information matches the
information and arrives at a delivery position for a member for a commodity. A detailed report
containing all matched and unmatched requests is provided to members through the extranet.
Pursuant to regulations relating to submission of delivery information, failure to submit delivery
information for open positions attracts penal charges as stipulated by NCDEX from time to time.
NCDEX also adds all such open positions for a member, for which no delivery information is
submitted with final settlement obligations of the member concerned and settled in cash.

46
Non-fulfillment of either the whole or part of the settlement obligations is treated as a violation of the
rules, bye-laws and regulations of NCDEX, and attracts penal charges as stipulated by NCDE from
time to time. In addition NCDEX can withdraw any or all of the membership rights of clearing
member including the withdrawal of trading facilities of all trading members clearing through such
clearing members, without any notice. Further, the outstanding positions of such clearing member
and/or trading members and/or constituents, clearing and settling through such clearing member, may
be closed out forthwith or any thereafter by the exchange to the extent possible, by placing at the
exchange, counter orders in respect of the outstanding position of clearing member without any notice
to the clearing member and / or trading member and / or constituent. NCDEX can also initiate such
other risk containment measures, as it deems appropriate with respect to the open positions of the
clearing members. It can also take additional measures like imposing penalties, collecting appropriate
deposits, invoking bank guarantees or fixed deposit receipts, realizing money by disposing off the
securities and exercising such other risk containment measures as it deems fit or take further
disciplinary action.

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 materializing into deliveries are settled in a period 2-7 days after
expiry. The exact settlement day for each commodity is specified by the exchange.

PHYSICAL DELIVERY OF THE UNDERLYING ASSET

For open positions on the expiry day of the contract, the buyer and the seller can announce intentions
for delivery. Deliveries take place in the electronic form. All other positions are settled in cash.
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.

47
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 precise period (date and time) during which the delivery can be made.
For many commodities, the delivery period may be an entire month. The party in the short position
(seller) gets the opportunity to make choices from these alternatives. The exchange collects delivery
information. The price paid is normally the most recent settlement price (with a possible adjustment for
the quality of the asset and – the delivery location). Then the exchange selects a party with an
outstanding long position to accept delivery.

As mentioned above, after the trading hours on the expiry date, based on the available information, the
matching for deliveries is done, firstly, on the basis of locations and then randomly keeping in view
factors such as available capacity of the vault/warehouse, commodities already deposited and
dematerialized and offered for delivery and any other factor as may be specified by the exchange from
time to time. After completion of the matching process, clearing members are informed of the
deliverable/receivable positions and the unmatched positions. Unmatched positions have to be settled
in cash. The cash settlement is done only for the incremental gain/loss as determined on the basis of
the final settlement price.

Any buyer intending to take physicals has to put a request to his depository participant. The DP
uploads such requests to the specified depository who in turn forwards the same to the registrar and
transfer agent (R&T agent) concerned. After due verification of the authenticity, the R&T agent
forwards delivery details to the warehouse which in turn arranges to release the commodities after due
verification of the identity of recipient. On a specified day, the buyer would go to the warehouse and
pick up the physicals.

The seller intending to make delivery has to take the commodities to the designated warehouse. These
commodities have to be assayed by the exchange specified assayer. The commodities have to meet the
contract specifications with allowed variances. If the commodities meet the specifications, the

48
warehouse accepts them. Warehouses then ensure that the receipts get updated in the depository
system giving a credit in the depositor’s electronic account. The seller then gives the invoice to his
clearing member, who would courier the same to the buyer’s clearing member.
NCDEX contracts provide a standardized description for each commodity. The description is provided
in terms of quality parameters specific to the commodities. At the same time, it is realized that with
commodities, there could be some amount of variances in quality/weight etc., due to natural causes,
which are beyond the control of any person. Hence/ NCDEX contracts also provide tolerance limits
for variances. A delivery is treated as good delivery and accepted if the delivery lies within the
tolerance limits. However, to allow for the difference, the concept of premium and discount has been
introduced. Goods that come to the authorized warehouse for delivery are tested and graded as per the
prescribed parameters. The premium and discount rates apply depending on the level of variation. The
price payable by the party taking delivery is then adjusted as per the premium/discount rates fixed by
the exchange. This ensures that some amount of leeway is provided for delivery, but at the same time,
the buyer taking delivery does not face windfall loss/gain due to the quantity/quality variation at the
time of taking delivery. This, to some extent, mitigates the difficulty in delivering and receiving exact
quality/quantity of commodity.

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, 2004 at 6090, can close his position by selling two gold futures contracts
on February 27, 2004 at Rs.5928. In this case, over the period of holding the position he has suffered a
loss of Rs.162 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. 5928 in this case.

49

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 prince 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 20 th 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 actual deliver the
underlying cotton but simply takes away the profit of Rs. 225 per trading unit of cotton in the form of
cash entities involved in physical settlement.

ENTITLES INVOLVED IN PHYSICAL SETTLEMENT

Physical settlement of commodities involves the following three entities an accredited warehouse,
registrar & transfer agent and an assayer. We will briefly look at the functions of each accredited
warehouse.

ACCREDITED WAREHOUSE

NCDEX specified accredited warehouses through which delivery of a specific commodity can be
affected and which will facilitate for storage of commodities. For the services provided by them,
warehouses charge a fee that constitutes storage and other charges such as insurance, assaying and
handling charges or any other incidental charges following are the functions of an accredited
warehouse.

50

FOLLOWING ARE THE FUNCTIONS OF AN ACCREDITED WAREHOUSE

 1. Earmark separate storage area as specified for the purpose of storing commodities to be
delivered against deals made on the exchange. The warehouses are required to meet the
specifications prescribed by the exchange for storage of commodities.

2. Ensure and coordinate the grading of the commodities received at the warehouse before they
are stored.

3. Store commodities in line with their grade specifications and validity period and facilitate
maintenance of identity. On expiry of such validity period of the grade for such commodities,
the warehouse has to segregate such commodities and store them in a separate area so that the
same are not mixed with commodities which are within the validity period as per the grade
certificate issued by the approved assayers.

4. Approved registrar and transfer agents (R&T agents) The exchange specifies approved R&T
agents through whom commodities can be dematerialized and who facilitate for
dematerialization/re-materialization of commodities in the manner prescribed by the exchange
from time to time.

The R&T agent performs the following functions.

1. Establishes connectivity with approved warehouses and supports them with physical
infrastructure.
2. Verifies the information regarding the commodities accepted by the accredited
warehouse and assigns the identification number (ISIN) allotted by the depository in
line with the grade/validity period.
3. Further processes the information, and ensures the credit of commodity holding to the
Demat account of the constituent.

51
4. Ensures that the credit of commodities - £oes only to the demat account of c5 the
constituents held with the exchange empanelled DPs.
 5. On receiving a request for re-materialization (physical delivery) through the depository,
arranges for issuance of authorization to the relevant warehouse for the delivery of
commodities.

R&T agents also maintain proper records of beneficiary position of constituents holding dematerialized
commodities in warehouses and in the depository for a period and also as on a particular date. They are
required to furnish the same to the exchange as and when demanded by the exchange, R&T agents also
do the job of co-ordinating with DPs and warehouses for billing of charges for services rendered on
periodic intervals. They also reconcile dematerialized commodities in the depository and physical
commodities at the warehouses on periodic basis and co-ordinate with all parties concerned for the
same settlement – entity interaction approved assayer.

Client Broker Exchange

BANK Clearing Corporation

Depository NSDL
Participant

Ware R&T
House Agent

52
APPROVED ASSAYER
The exchange specifies approved assayers through whom grading of commodities (received at
approved warehouses for delivery against deals made on the exchange), can, be availed by the
constituents of clearing members. Assayers perform the following functions.

Inspect the warehouses identified by the exchange on periodic basis to verify the compliance of
technical/safety parameters detailed in the warehousing accreditation norms of the exchange.

Make available grading facilities to the constituents in respect of the specific commodities traded on
the exchange at specified warehouse. The assayer ensures that the grading to be done (in a certificate
format prescribed by the exchange) in respect of specific commodity is as per the norms specified by
the exchange in the respective contract specifications.

Grading certificate so issued by the assayer specifies the grade as well as the validity period up to
which the commodities would retain the original grade, and the time up to which the commodities are
fit for trading subject to environment changes at the warehouses.

PRICING COMMODITY FUTURES

The process of arriving at a figure at which a person buys and another sells a futures contract for a
specific expiration date is called price discovery. In an active futures market, the process of price
discovery continues from the market’s opening until its close. The prices are freely and competitively
derived. Future prices are therefore considered to be superior to be administered prices or the prices
that are determined privately. Further, the low transaction costs and frequent trading encourages wide
participation in futures markets lessening the opportunity for control by a few buyers and sellers.

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 the cost of carry model.

53

REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA

At present there are three tiers of regulations of forward/futures trading system in India, namely,
government of India, Forward Markets Commission (FMC) and commodity exchanges. The need for
regulation arises on account of the fact that the benefits of futures markets accrue in competitive
conditions.

Proper regulation is needed to create competitive conditions. In the absence of regulation,

unscrupulous participants could use these leveraged contracts for manipulating prices. This could have
undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is
also needed to ensure that the market has appropriate risk management system. In the absence of such
a system, a major default could create a chain reaction.

The resultant financial crisis in a futures market could create systematic risk. Regulation is also
needed to ensure fairness and transparency in trading, clearing, settlement and management of the
exchange so as to protect and promote the interest of various stakeholders, particularly non-member
users of the market.

RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets Commission
(FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified
under section 15 of the Act can be conducted only on the exchanges, which are granted recognition by
the central government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and
Public Distribution). All the exchanges, which deal with forward contracts, are required to obtain
certificate of registration from the FMC Besides, they are 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 their working.

54
Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e.
to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e.
to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and
to protect and promote interest of customers/ nonmembers. It prescribes the following regulatory
measures:

1. Limit on net open position as on close of the trading houses. Some times limit is also
imposed on intra-day net open position. The limit is imposed operator-wise/ and in
some cases, also member wise.
2. Circuit filters or limit on price fluctuations to allow cooling of market in the event of
abrupt upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when price
moves up or down sharply above or below the previous day closing price. By making
further purchases/sales relatively costly, the price rise or fall is sobered down. This
measure is imposed only on the request of the exchange.
4. Circuit breakers or minimum/maximum prices. These are prescribed to prevent futures
prices from failing below as rising above not warranted by prospective supply and
demand factors. This measure is also imposed on the request of the exchange.
5. Skipping trading in certain derivatives of the contract closing the market for a specified
period and even closing out the contract. These extreme are taken only in emergency
situations.

Besides these regulatory measures, the F.C) R) Act provides that a client’s position cannot be
appropriated by the member of the exchange, except when a written consent is taken within three days
time. The FMC is persuading increasing number of exchanges to switch over to electronic trading,
clearing and settlement which is more customer/friendly. The FMC has also prescribed simultaneous
reporting system for the exchanges following open out cry system.

These steps facilitate audit trail and make it difficult for the members to indulge in malpractice like
trading ahead of clients, etc. The FMC has also mandated all the exchanges following open outcry
system to display at a prominent place in exchange premises, the name, address, telephone number of
55
the officer of the commission who can be contacted for any grievance. The website of the commission
also has a provision for the customers to make complaint and send comments and suggestions to the
FMC. Officers of the FMC have been instructed to meet the members and clients on a random basis,
whenever they visit exchanges, to ascertain the situation on the ground, instead of merely attending
meetings of the board of directors and holding discussions with the office bearers.

RULES GOVERNING INTERMEDIARIES

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules framed there
under, exchanges are governed by its own rules and bye laws (approved by the FMC). In this section
we have brief look at the important regulations that govern NCDEX. For the sake of
convenience/these have been divided into two main divisions pertaining to trading and clearing. The
NCDEX provides an automated trading facility in all the commodities admitted for dealings on the
spot market and derivative market. Trading on the exchange is allowed only through approved
workstation(s) located at locations for the office(s) of a trading member as approved by the exchange.
If LAN or any other way to other workstations at any place connects an approved workstation of a
trading Member it shall require an approval of the exchange.

Each trading member is required to have a unique identification number which is provided by the
exchange and which will be used to log on (sign on) to the trading system. A trading member has a
non-exclusive permission to use the trading system as provided by the exchange in the ordinary course
of business as trading member. He does not have any title rights or interest whatsoever with respect to
trading system/its facilities/ software and the information provided by the trading system.

For the purpose of accessing the trading system/the member will install and use equipment and
software as specified by the exchange at his own cost. The exchange has the right to inspect
equipment and software used for the purposes of accessing the trading system at any time. The cost of
the equipment and software supplied by the exchange/installation and maintenance of the equipment is
borne by the trading member and users Trading members are entitled to appoint, (subject to such terms
and conditions/as may be specified by the relevant authority) from time to time Authorized persons
and Approved users.
56
Trading members have to pass a petrifaction program/which has been prescribed by the exchange. In
case of trading members/other than individuals or sole proprietorships/such certification program has
to be passed by at least one of their directors/employees/partners/members of governing body.
Each trading member is permitted to appoint a certain number of approved users as notified from time
to time by the exchange. The appointment of approved users is subject to the terms and conditions
prescribed by the exchange. Each approved user is given a unique identification number through
which he will have access to the trading system. An approved user can access the trading system
through a password and can change the password from time to time.
The trading member or its approved users are required to maintain complete secrecy of its password.
Any trade or transaction done by use of password of any approved user of the trading member, will be
binding on such trading member. Approved user shall be required to change his password at the end of
the password expiry period.

TRADING DAYS

The exchange operates on all days except Saturday and Sunday and on holidays that it declares from
time to time. Other than the regular trading hours, trading members are provided a facility to place
orders offline i.e. outside trading hours. These are stored by the system but get traded only once the
market opens for trading on the following working day.

The types of order books, trade books, price a limit, matching rules and other parameters pertaining to
each or all of these sessions are specified by the exchange to the members via its circulars or notices
issued from time to time. Members can place orders on the trading system during these sessions, within
the regulations prescribed by the exchange as per these bye laws, rules and regulations, from time to
time.

TRADING HOURS AND TRADING CYCLE

The exchange announces the normal trading hours/open period in advance from time to time. In case
necessary, the exchange can extend or reduce the trading hours by notifying the members. Trading

57
cycle for each commodity/derivative contract has a standard period, during which it will be available
for trading.
 CONTRACT EXPIRATION

Derivatives contracts expire on a pre-determined date and time up to which the contract is available for
trading. This is notified by the exchange in advance. The contract expiration period will not exceed
twelve months or as the exchange may specify from time to time.

TRADING PARAMETERS

The exchange from time to time specifies various trading parameters relating to the trading system.
Every trading member is required to specify the buy or sell orders as either an open order or a close
order for derivatives contracts. The exchange also prescribes different order books that shall be
maintained on the trading system and also specifies various conditions on the order that will make it
eligible to place it in those books.

The exchange specifies the minimum disclosed quantity for orders that will be allowed for each
commodity/derivatives contract. It also prescribed the number of days after which Good Till
Cancelled orders will be cancelled by the system. It specifies parameters like lot size in which orders
can be placed, price steps in which shall be entered on the trading system, position limits in respect of
each commodity etc.

FAILURE OF TRADING MEMBER TERMINAL

In the event of failure of trading member’s workstation and/ or the loss of access to the trading system,
the exchange can at its discretion undertake to carry out on behalf of the trading member the necessary
functions which the trading member is eligible for. Only requests made in writing in a clear and precise
manner by the trading member would be considered. The trading member is accountable for the
functions executed by the exchange on its behalf and has to indemnity the exchange against any losses
or costs incurred by the exchange.

58
TRADE OPERATIONS
Trading members have to ensure that appropriate confirmed order instructions are obtained from the
constituents before placement of an order on the system. They have to keep relevant records or
documents concerning the order and trading system order number and copies of the order confirmation
slip/modification slip must be made available to the constituents.

The trading member has to disclose to the exchange at the time of order entry whether the order is on
his own account or on behalf of constituents and also specify orders for buy or sell as open or close
orders. Trading members are solely responsible for the accuracy of details of orders entered into the
trading system including orders entered on behalf of their constituents. Traders generated on the
system are irrevocable and blocked in 1. The exchange specifies from time to time the market types
and the manner if any, in which trade cancellation can be effected.

Where a trade cancellation is permitted and trading member wishes to cancel a trade, it can be done
only with the approval of the exchange.

MARGIN REQUIREMENTS

Subject to the provisions as contained in the exchange bye-laws and such other regulations as may be
in force, every clearing member/in respect of the trades in which he is party to, has to deposit a margin
with exchange authorities.

The exchange prescribes from time to time the commodities/derivatives contracts, the settlement
periods and trade types for which margin would be attracted.

The exchange levies initial margin on derivatives contracts using the concept of Value at Risk (VaR)
or any other concept as the exchange may decide from time to time. The margin is charged so as to
cover one-day loss that can be countered on the position on 99% of the days. Additional margins may
be levied for deliverable positions, on the basis of VaR from the expiry of the contract till the actual
settlement date plus a mark-up for default.

59
The margin has to be deposited with the exchange within the time notified by the exchange. The
exchange also prescribes categories of securities that would be eligible for a margin deposit, as well as
the method of valuation and amount of securities that would be required to be deposited against the
margin amount.

The procedure for refund/adjustment of margins is also specified by the exchange from time to time.
The exchange can impose upon any particular trading member or category of trading member any
special or other margin requirement. On failure to deposit margin/s as required under this clause, the
exchange/clearing house can withdraw the trading facility of the trading member. After the pay-out,
the clearing house releases all margins.

CLEARING

As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes clearing
of trades executed on the NCDEX, All deals executed on the Exchange are cleared and settled by the
trading members on the settlement date by the trading members themselves as clearing members or
through other professional clearing members in accordance with these regulations/bye laws and rules
of the exchange.

LAST DAY OF TRADING

Last trading day for a derivative contract in any commodity is the date as specified in the respective
commodity contract. If the last trading day as specified in the respective commodity contract is a
holiday, the last trading day is taken to be the previous working day of exchange. On the expiry date
of contracts, the trading members/ clearing members have to give delivery information as prescribed
by the exchange from time to time. If a trading member/clearing member fails to submit such
information during the trading hours on the expiry date for the contract/the deals have to be settled as
per the settlement calendar applicable for such deals, in cash-together with penalty as stipulated by the
exchange deals entered into through the exchange. The clearing member cannot operate the clearing
account for any other purpose.

60

INTRODUCTION TO THE GOLD

A very ductile and malleable, brilliant yellow precious metal that is resistant to air and water corrosion.
It is a precious metal that is very soft when pure (24 Kt). Gold is the most malleable (hammer able)
and ductile (able to be made into wire) metal. Gold is alloyed (mixed with other metals, usually silver
and copper) to make it less expressive and harder. The purity of gold jewelry is measured in karats.
Some countries hallmark gold with a three-digit number that indicates the parts per thousand of gold.
In this system. “750” means 750/1000gold (equal to 18K); “500” means 500/1000 gold (equal to
12K). Alloyed gold comes in many colors.

WORLD GOLD MARKETS

• London as the great clearing house

• New York as the home of futures trading
• Zurich as a physical timetable
• Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions.
• Tokyo where TOCOM sets the mood of Japan
• Mumbai under India’s liberalized gold regime.

24 HOURS ROUND THE CLOCK MARKET

Hong Kong Gold Market

• Zurich Gold Market
• London Gold Market
• New York Market

INDIA GOLD MARKET

• Gold is valued in India as a savings and investment vehicle and is the second preferred
investment after bank deposits
61
• India is the world’s largest consumer of gold to jewellery as investment.
 • In July “1997 the RBI authorized the commercial banks to import gold for sale or loan to
jewelers and exporters. At present, 13 banks are active in the import of gold.
• This reduced the disparity between international and domestic prices of gold from 57 percent
during 1986 to 1991 to 8.5 percent in 2001.
• The gold hoarding tendency is well ingrained in Indian society.
• Domestic consumption is dictated by monsoon/harvest and marriage season. Indian jewelry off
take is sensitive to price increase and even more so to volatility.
• In the cities gold is facing competition from the stock market and a wide range of consumer
goods.
• Facilities for refining, assaying, making them into standard bars in India, as compared to the
rest of the world, are insignificant, both qualitatively and quantitatively.

MAJOR GOLD PRODUCTION COUNTRIES

• South Africa, United States, Australia, China, Canada, Russia, Indonesia, Peru, Uzbekistan,
Papua New Guinea, China, Brazil, Chile, Philippines, Mali, Mexico, Argentina, Zimbabwe&
Colombia.

MARKET MOVING FACTORS

• Aboveground supply from sales by central bank, reclaimed scrap and official gold loans
• Producer/miner hedging interest
• World macro-economic factors – US Dollar, interest rate
• Comparative returns on stock markets
• Domestic demand based on monsoon and agricultural output, Fine gold content.

62
THE PURITY OF GOLD ARTICLES IS GENERALLY DESCRIBED IN THREE
WAYS.

Percent % (Parts of gold per Fineness (Parts of gold per Karats (parts of gold per 24)
100) 1000)
100% 999 Fine 24 Karats
91.60% 916 Fine 22 Karats
75.00% 750 Fine 18 Karats
58.50% 583 Fine 14 Karats
41.60% 416 Fine 10 Karats

FINE GOLD CONTENT

The minimum fineness is 995 parts per 1000 fine gold and gold said to be 100 fine is marked down to
999.9 fine. The following fine gold contents of other bar weights are accepted by the London Bullion
Market Association (LBMA). These bars are available at the spot Loco-London price plus a premium
which varies dependent on prevailing market conditions in different locations

TECHNICAL VS FUNDAMENTAL ANALYSIS

Technical analysis and fundamental analysis are the two main schools of thought in the financial
market. As we’ve mentioned, technical analysis looks at the price movement of a security and uses this
data to predict its Future price movements. Fundamental analysis, on the other hand, looks at economic
factor, know as fundamentals. Let’s get into the details of how this two approaches differ, the criticism
against technical analysis and how technical and fundamental analysis can be used together to analyze
securities.

63
FUNDAMENTAL ANALYSIS
At the most basic level, by looking at the balance sheet, cash flow statement and income statement, a
fundamental analyst tries to determine a company’s value. In financial terms, an analyst attempts to
measure a company’s intrinsic value. In this approach, investment decisions are fairly easy to make –if
the price of a stock trades below its intrinsic value, it’s a good investment. Although this is an
oversimplification (fundamental analysis goes beyond just the financial statements) for the purpose of
this tutorial, this simple tenet holds true.

TECHNICAL ANALYSIS

Technical traders, on the other hand, believe there is no reason to analyze a company’s fundamental
because these are all accounted for in the stock’s price. Technicians believe that all the information
they need about a stock can be found in its chart. While a fundamental analyst starts with the financial
statements.

TYPES OF MOVING AVERAGES

There are a number of different types of moving averages that vary in the way they are calculate, but
how each average is interpreted remains the same. The calculations only differ in regards to the
weighting that they place on the price data, shifting from equal weighting of each price point to more
weight being placed on recent data .The three most common types of moving averages are

SIMPLE MOVING AVERAGE (SMA)

This is the most common method used to calculate the moving average of price. It simply takes the
sum of all of the past closing prices over the time period and divides the result by the number of price
used in the calculation. For example, in a 10-day moving average, the last 10 closing are added
together and then divided by 10.

64
LINEAR WEIGHTED AVERAGE
This moving average indicator is the least common out of the three and is used to address the problem
of the equal weighting. Taking the sum of all the closing prices over a certain time period and
multiplying them by the position of the data point and then dividing by the sum of the number of
periods calculate the linear weighted moving average. For example ,in a five –day linear weighted
average ,five multiplies today’s closing price ,yesterday’s by four and so on until the first day in the
period range is reached .These numbers are hen added together and divided by the sum of the
multipliers.

EXPONENTIAL MOVING AVERAGE (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent data point
and is regarded as much more efficient than the linear weighted average. Having an understanding of
the calculation is not generally required for most trades because most charting packages do the
calculation for you. The most important thing to remember about the exponential moving average is
that it is more responsive to new information relative to the simple moving average. This
responsiveness is one of the key factors of why this is the moving average of choice among many
technical traders.

GOLD CONTRACTS

In India we have 4 types of gold contracts available in MCX.

• Gold-1000 grams
• Gold mini- 100 grams
• Gold HNI-1000 grams
• Goldguinea-8 grams

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Gold -1000 grams

It is a 1000 grams lot available in MCX and big investor can invest in this gold lots.

Gold HNI-1000 grams

It is a1000 grams lot available in MCX so, here who has registered as a HNI in MCX he will take the
gold HNI contracts at a time .number of contracts like it called as bulk deals.

Goldmini-100 grams

The medium investor can invest in goldmine and the lot size is 100 grams.

Goldguinea-8 grams

It is especially for small investors the lot size is 8 grams.

66
 CHAPTER-III

INTER-CONNECTED STOCK EXCHANGE OF

INDIA LTD - A PROFILE

INTER-CONNECTED STOCK EXCHANGE OF INDIA LTD - A

PROFILE
 Inter-connected Stock Exchange of India Limited (ISE) is a national-level stock exchange,
providing trading, clearing, settlement, risk management and surveillance support to its Trading
Members. It has 841 Trading Members, who are located in 131 cities spread across 25 states. These
intermediaries are administratively supported through the regional offices at Delhi, Kolkata, Patna,
Ahmedabad, Coimbatore and Nagpur, besides Mumbai.

ISE has been promoted by 14 Regional stock exchanges to provide cost effective trading
linkage to all the members of the participating Exchanges. ISE aims to address the needs of small
companies and retail investors by harnessing the potential of regional markets, so as to transform them
into a liquid and vibrant market using state-of-the art technology and networking.

ISE has floated ISE Securities & Services Limited as a wholly owned subsidiary under the
policy formulated by the Securities and Exchange Board of India (SEBI) for “Revival of Small Stock
Exchanges”. The policy enunciated by SEBI permits a stock exchange to float a subsidiary, which can
take up membership of larger stock exchanges, such as the National Stock Exchange of India Limited
(NSE), and Bombay Stock Exchange Limited (BSE). ISS has been registered by SEBI as a Trading-
cum-Clearing Member in the Capital Market segment and Futures & Options segment of NSE and
Capital Market segment of BSE. Trading Members of ISE can access NSE and BSE by registering
themselves as Sub-brokers of ISS. Thus, the trading intermediaries of ISS can access other markets in
addition to the ISE market. ISS, thus provides the investors in smaller cities, a one-stop solution for
cost-effective and efficient trading and settlement services in securities.

Complementing the stock trading function, ISE’s depository participant (DP) services reach out
to intermediaries and investors at industry-leading prices. The full suite of DP services are offered
using online software, accessible through multiple connectivity modes - leased lines, VSATs and
internet. Operation of the demat account by a client requires just a few mouse clicks.

The Research Cell has been established with the objective of carrying out quality research on
various facets of the Indian financial system in general and the capital market in particular.

68

It brings out a monthly newsletter titled “NISE” and a fortnightly publication titled “V share”.
The Research Cell plans to expand its activities by publishing a host of value based research
publications, covering a number of areas, such as equities, derivatives, bonds, mutual funds, risk
management, pension funds, money markets and commodities. The ISE Training Centre conducts
class-room training programmes on different subjects related to the capital market, such as equities
trading and settlement, derivatives trading, day trading, arbitrage operations, technical analysis,
financial planning, compliance requirement, etc. Through these courses, the training centre provides
knowledge to stockbrokers, sub-brokers, professionals and investors to also appear for the certificate
courses conducted by the stock exchanges.

It also aims to make and build the professional careers of MBAs, post graduates and graduates,
with a view to enabling them to work effectively in securities trading, risk management, financial
management, corporate finance disciplines or function as intermediaries (viz. stock brokers, sub-
brokers, merchant bankers, clearing bankers, etc.

MISSION OF ISE

ISE endeavors to consolidate the small, fragmented and less liquid markets into a national-
level, liquid market by using state-of-the-art infrastructure and support systems.

69
OBJECTIVES OF ISE

• Create a single integrated national level solution with access to multiple markets for providing
high cost-effective service to millions of investors across the country.

• Create a liquid and vibrant national level market for all listed companies in general and small
capital companies in particular.

• Optimally utilize the existing infrastructure and other resources of participating Stock Exchanges,
Which are under-utilized now.

• Provide a level playing field to small Traders and Dealers by offering an opportunity to participate
in a national markets having investment-oriented business.

• Provide clearing and settlement facilities to the Traders and Dealers across the Country at their
doorstep in a decentralized mode.

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SALIENT FEATURES OF ISE

NETWORK OF INTERMEDIARIES

As at the beginning of the financial year 2003-04, 548 intermediaries (207 Traders and 341 Dealers) are
registered on ISE. A broad of members forms the bedrock for any Exchange, and in this respect, ISE has a
large pool of registered intermediaries who can be tapped for any new line of business.

ROBUST OPERATIONAL SYSTEMS

The trading, settlement and funds transfer operations of ISE and ISS are completely automated and
State-of-the-art systems have been deployed. The communication network of ISE, which has connectivity
with over 400 trading members and is spread across 46 cities, is also used for supporting the operations
of ISS. The trading software and settlement software, as well as the electronic funds transfer
Arrangement established with HDFC Bank and ICICI Bank, gives ISE and ISS the required
operational efficiency and flexibility to not only handle the secondary market functions effectively, but
also by leveraging them for new ventures.

SKILLED AND EXPERIENCED MANPOWER

ISE and ISS have experienced and professional staff, who have wide experience in Stock
Exchanges/ capital market institutions, with in some cases, the experience going up to nearly twenty
years in this industry. The staff has the skill-set required to perform a wide range of functions,
depending upon the requirements from time to time.
AGGRESSIVE PRICING POLICY

The philosophy of ISE is to have an aggressive pricing policy for the various products and
services offered by it. The aim is to penetrate the retail market and strengthen the position, so that a
wide variety of products and services having appeal for the retail market can be offered using a
common distribution channel. The aggressive pricing policy also ensures that the intermediaries
have sufficient financial incentives for offering these products and services to the end-clients.

71
TRADING, RISK MANAGEMENT AND SETTLEMENT SOFTWARE
SYSTEMS

The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS (Automated
Exchange Integrated Settlement) software developed on the Microsoft NT platform, with
consultancy assistance from Microsoft, are the most contemporary of the trading and settlement
software introduced in the country. The applications have been built on a technology platform,
which offers low cost of ownership, facilitates simple maintenance and supports easy up gradation
and enhancement. The software’s are so designed that the transaction processing capacity depends
on the hardware used; capacity can be added by just adding inexpensive hardware, without any
additional software work.

VIBRANT SUBSIDIARY OPERATIONS

ISS, the wholly owned subsidiary of ISE, is one of the biggest Exchange subsidiaries in the
country. On any given day, more than 250 registered intermediaries of ISS traded from 46 cities
across the length and breadth of the country.

72
 CHAPTER - IV
DATA ANALYSIS &INTERPRETATIONS
 GOLD-10 GRAMS

THE BELOW TABLE SHOWS 3 DAYS MOVING AVERAGES.

3days moving
Date PCP(Rs) avg
7-Dec-09 17840 0
8-Dec-09 17450 0
9-Dec-09 17540 17610
10-Dec-09 17273 17421
11-Dec-09 17289 17367.33333
12-Dec-09 17025 17195.66667
14-Dec-09 17025 17113
15-Dec-09 17189 17079.66667
16-Dec-09 17189 17134.33333
17-Dec-09 17189 17189
18-Dec-09 17134 17170.66667
19-Dec-09 16992 17105
21-Dec-09 16992 17039.33333
22-Dec-09 16877 16953.66667
23-Dec-09 16768 16879
24-Dec-09 16743 16796
26-Dec-09 16850 16787
28-Dec-09 16850 16814.33333
29-Dec-09 16884 16861.33333
30-Dec-09 16830 16854.66667
31-Dec-09 16743 16819
1-Jan-10 16797 16790
2-Jan-10 16762 16767.33333
4-Jan-10 16832 16797
5-Jan-10 16949 16847.66667
6-Jan-10 16978 16919.66667
7-Jan-10 16985 16970.66667
8-Jan-10 16939 16967.33333
9-Jan-10 16902 16942
11-Jan-10 17002 16947.66667
12-Jan-10 17152 17018.66667

74
13-Jan-10 17006 17053.33333
14-Jan-10 16843 17000.33333
15-Jan-10 16990 16946.33333
16-Jan-10 16958 16930.33333
18-Jan-10 16977 16975
19-Jan-10 16960 16965
20-Jan-10 17017 16984.66667
21-Jan-10 16814 16930.33333
22-Jan-10 16631 16820.66667
23-Jan-10 16581 16675.33333
25-Jan-10 16617 16609.66667
27-Jan-10 16573 16590.33333
28-Jan-10 16584 16591.33333
29-Jan-10 16409 16522
30-Jan-10 16363 16452
1-Feb-10 16376 16382.66667
2-Feb-10 16679 16472.66667
3-Feb-10 16809 16621.33333
4-Feb-10 16692 16726.66667
5-Feb-10 16214 16571.66667
6-Feb-10 16174 16360
8-Feb-10 16353 16247
9-Feb-10 16353 16293.33333
10-Feb-10 16400 16368.66667
11-Feb-10 16364 16372.33333
12-Feb-10 16559 16441
13-Feb-10 16528 16483.66667
15-Feb-10 16574 16553.66667
16-Feb-10 16677 16593
17-Feb-10 16808 16686.33333
18-Feb-10 16830 16771.66667
19-Feb-10 16846 16828
20-Feb-10 16929 16868.33333
22-Feb-10 16889 16888
23-Feb-10 16766 16861.33333
24-Feb-10 16667 16774
25-Feb-10 16563 16665.33333
26-Feb-10 16766 16665.33333
27-Feb-10 16852 16727
75
1-Mar-10 16866 16828
2-Mar-10 16874 16864
 3-Mar-10 17094 16944.66667
4-Mar-10 17105 17024.33333
5-Mar-10 17037 17078.66667
6-Mar-10 16978 17040
8-Mar-10 16985 17000
9-Mar-10 16818 16927
10-Mar-10 16807 16870
11-Mar-10 16583 16736
12-Mar-10 16614 16668
13-Mar-10 16542 16579.66667
15-Mar-10 16545 16567
16-Mar-10 16628 16571.66667
17-Mar-10 16799 16657.33333
18-Mar-10 16765 16730.66667
19-Mar-10 16838 16800.66667
20-Mar-10 16597 16733.33333
22-Mar-10 16594 16676.33333
23-Mar-10 16508 16566.33333
24-Mar-10 16534 16545.33333
25-Mar-10 16386 16476
26-Mar-10 16346 16422
27-Mar-10 16431 16387.66667
29-Mar-10 16467 16414.66667
30-Mar-10 16395 16431
31-Mar-10 16379 16413.66667
1-Apr-10 16436 16403.33333
3-Apr-10 16555 16456.66667
5-Apr-10 16559 16516.66667
6-Apr-10 16502 16538.66667
7-Apr-10 16556 16539
8-Apr-10 16788 16615.33333
9-Apr-10 16765 16703
10-Apr-10 16818 16790.33333
12-Apr-10 16825 16802.66667
13-Apr-10 16906 16849.66667
14-Apr-10 16801 16844
15-Apr-10 16796 16834.33333
76
16-Apr-10 16838 16811.66667
17-Apr-10 16571 16735
19-Apr-10 16609 16672.66667
20-Apr-10 16613 16597.66667
 21-Apr-10 16627 16616.33333
22-Apr-10 16728 16656
23-Apr-10 16671 16675.33333
24-Apr-10 16773 16724
26-Apr-10 16805 16749.66667
27-Apr-10 16772 16783.33333
28-Apr-10 16937 16838
29-Apr-10 17104 16937.66667
30-Apr-10 16975 17005.33333
3-May-10 17125 17068
4-May-10 17186 17095.33333
5-May-10 17188 17166.33333
6-May-10 17314 17229.33333
7-May-10 17763 17421.66667
8-May-10 17931 17669.33333
10-May-10 17933 17875.66667
11-May-10 17598 17820.66667
12-May-10 17897 17809.33333
13-May-10 18229 17908
14-May-10 18030 18052
15-May-10 18175 18144.66667
17-May-10 18164 18123
18-May-10 18260 18199.66667
19-May-10 18008 18144
20-May-10 18018 18095.33333
21-May-10 18158 18061.33333
22-May-10 17990 18055.33333
24-May-10 18002 18050
25-May-10 18165 18052.33333
26-May-10 18511 18226
27-May-10 18542 18406
28-May-10 18388 18480.33333
29-May-10 18428 18452.66667
31-May-10 18465 18427

77
1-Jun-10 18385 18426
2-Jun-10 18699 18516.33333
3-Jun-10 18620 18568
4-Jun-10 18457 18592
5-Jun-10 18762 18613
 78

GOLD 3 DAYS MOVING AVERAGES

The below graph shows daily prices like closing prices of the gold in the form of the technical tool
indicator simple moving averages.

GOLD

40000
35000
30000
VALUES

25000 3days moving avg

20000
15000 pcp
10000
5000
0
Date

6-Jan-10

9-Mar-10
21-Jan-10

24-Mar-10
9-Apr-10

11-May-10
26-May-10
6-Feb-10

24-Apr-10
21-Dec-09

22-Feb-10

M ONTHS

INTERPRETATION

As above data we are taken GOLD Price moving from dec 5th to june 5th , on 7st Dec it is closed on
17840 in between the period on dec 24th it is closed to 16743 , latterly on 16th Feb it came down to
16174, on 5th March it is increased to 17037, on 26th March again it is come down to 16346 ,on 13th
May it is increased to18229, end of the contract on 5th June it is closed to 18762.

If you see total data the gold is highly fluctuated because the gold leads the economy.

79

GOLDGUINEA 8 GRAMS

THE BELOW TABLE SHOWS 3 DAYS MOVING AVERAGES.

 3days moving
Date PCP(RS) average
7-Dec-09 13910 0
8-Dec-09 13855 0
9-Dec-09 13802 13855.66667
10-Dec-09 13567 13741.33333
13-Jan-10
11-Dec-09 13376
13540 13417.33333
13636.33333
14-Jan-10
12-Dec-09 13325
13464 13395.66667
13523.66667
15-Jan-10
14-Dec-09 13384
13435 13361.66667
13479.66667
16-Jan-10
15-Dec-09 13352
13461 13353.66667
13453.33333
18-Jan-10
16-Dec-09 13351
13461 13362.33333
13452.33333
19-Jan-10
17-Dec-09 13352
13569 13351.66667
13497
20-Jan-10
18-Dec-09 13414
13417 13372.33333
13482.33333
21-Jan-10
19-Dec-09 13249
13414 13338.33333
13466.66667
22-Jan-10
21-Dec-09 13133
13416 13265.33333
13415.66667
23-Jan-10
22-Dec-09 13085
13269 13155.66667
13366.33333
25-Jan-10
23-Dec-09 13088
13173 13102
13286
27-Jan-10
24-Dec-09 13041
13173 13071.33333
13205
28-Jan-10
26-Dec-09 12957
13238 13028.66667
13194.66667
29-Jan-10
28-Dec-09 12854
13267 12950.66667
13226
30-Jan-10
29-Dec-09 12775
13233 12862
13246
1-Feb-10
30-Dec-09 13070
13187 12899.66667
13229
2-Feb-10
31-Dec-09 13183
13119 13009.33333
13179.66667
3-Feb-10
1-Jan-10 13324
13299 13192.33333
13201.66667
4-Feb-10
2-Jan-10 13258
13299 13255
13239
5-Feb-10
4-Jan-10 12896
13321 13159.33333
13306.33333
6-Feb-10
5-Jan-10 12846
13337 13000
13319
8-Feb-10
6-Jan-10 12998
13351 12913.33333
13336.33333
9-Feb-10
7-Jan-10 12976
13368 12940
13352
10-Feb-10
8-Jan-10 12991
13346 12988.33333
13355
11-Feb-10
9-Jan-10 12966
13347 12977.66667
13353.66667
12-Feb-10
11-Jan-10 13081
13390 13012.66667
13361
13-Feb-10
12-Jan-10 13079
13486 13042
13407.66667
15-Feb-10 13118 13092.66667
16-Feb-10 13146 13114.33333
80
17-Feb-10 13298 13187.33333
18-Feb-10 13298 13247.33333
19-Feb-10 13296 13297.33333
20-Feb-10 13364 13319.33333
22-Feb-10 13354 13338
23-Feb-10 13286 13334.66667
24-Feb-10 13210 13283.33333
25-Feb-10 13111 13202.33333
26-Feb-10 13224 13181.66667
27-Feb-10 13288 13207.66667
 81
1-Mar-10 13294 13268.66667
2-Mar-10 13299 13293.66667
3-Mar-10 13436 13343
4-Mar-10 13439 13391.33333
5-Mar-10 13404 13426.33333
 6-Mar-10 13377 13406.66667
8-Mar-10 13383 13388
9-Mar-10 13268 13342.66667
10-Mar-10 13251 13300.66667
11-Mar-10 13128 13215.66667
12-Mar-10 13146 13175
13-Mar-10 13097 13123.66667
15-Mar-10 13091 13111.33333
16-Mar-10 13131 13106.33333
17-Mar-10 13230 13150.66667
18-Mar-10 13223 13194.66667
19-Mar-10 13260 13237.66667
20-Mar-10 13125 13202.66667
22-Mar-10 13110 13165
23-Mar-10 13042 13092.33333
24-Mar-10 13056 13069.33333
25-Mar-10 12956 13018
26-Mar-10 12924 12978.66667
27-Mar-10 12975 12951.66667
29-Mar-10 12986 12961.66667
30-Mar-10 12951 12970.66667
31-Mar-10 12931 12956
1-Apr-10 12952 12944.66667
3-Apr-10 13005 12962.66667
5-Apr-10 13019 12992
6-Apr-10 12992 13005.33333
7-Apr-10 13009 13006.66667
8-Apr-10 13161 13054
9-Apr-10 13139 13103
10-Apr-10 13190 13163.33333
12-Apr-10 13200 13176.33333
13-Apr-10 13256 13215.33333
14-Apr-10 13191 13215.66667
15-Apr-10 13191 13212.66667
82
16-Apr-10 13207 13196.33333
17-Apr-10 13024 13140.66667
19-Apr-10 13044 13091.66667
20-Apr-10 13043 13037
21-Apr-10 13054 13047
22-Apr-10 13098 13065
23-Apr-10 13068 13073.33333
 24-Apr-10 13126 13097.33333
26-Apr-10 13146 13113.33333
27-Apr-10 13121 13131
28-Apr-10 13213 13160
29-Apr-10 13357 13230.33333
30-Apr-10 13317 13295.66667
3-May-10 13549 13407.66667
4-May-10 13614 13493.33333
5-May-10 13605 13589.33333
6-May-10 13668 13629
7-May-10 14017 13763.33333
8-May-10 14154 13946.33333
10-May-10 14167 14112.66667
11-May-10 13933 14084.66667
12-May-10 14136 14078.66667
13-May-10 14357 14142
14-May-10 14243 14245.33333
15-May-10 14336 14312
17-May-10 14325 14301.33333
18-May-10 14380 14347
19-May-10 14208 14304.33333
20-May-10 14229 14272.33333
21-May-10 14312 14249.66667
22-May-10 14209 14250
24-May-10 14217 14246
25-May-10 14316 14247.33333
26-May-10 14561 14364.66667
27-May-10 14600 14492.33333
28-May-10 14524 14561.66667
29-May-10 14566 14563.33333
31-May-10 14597 14562.33333
83

1-Jun-10 14533 14565.33333

2-Jun-10 14777 14635.66667
3-Jun-10 14738 14682.66667
4-Jun-10 14636 14717
5-Jun-10 14811 14728.33333
 84

GOLD GUINEA 3 DAYS MOVING AVERAGE

The below graph shows daily prices like closing prices of the gold guinea in the form of the technical
tool indicator simple moving averages.
 GOLD GUENIA 8 grams

35000
30000
25000
VALUES 3days moving avg
20000
15000 pcp
10000
5000
0

3-Jun-10
11-Jan-10
29-Jan-10
Date

5-Mar-10
23-Dec-09

16-Feb-10

23-Mar-10
10-Apr-10
28-Apr-10
17-May-10
MONTHS

INTERPRETATION

As above data we are taken GOLD GUINEA Price moving from Dec 5th to June 5th, on 7th Dec it is at
13910. on Jan 30th it is decreased to 12775 , latterly on 26th Feb. it came up to 14017, on 7th May. it
is decreased to 13933 , on 11th may. end of the contract on 5thJune it is closed to 14811.

If you see total data the gold is highly fluctuated because the gold leads the economy.

85

GOLDMINI-100 GRAMS

THE BELOW TABLE SHOWS 3 DAYS MOVING AVERAGES OF GOLD MINI.

3 DAYS
MOVING
Date PCP(RS) AVERAGE
7-Dec-09 17602 0
8-Dec-09 17538 0
 9-Dec-09 17442 17527.33333
10-Dec-09 17088 17356
11-Dec-09 17077 17202.33333
12-Dec-09 16986 17050.33333
14-Dec-09 16960 17007.66667
15-Dec-09 17017 16987.66667
16-Dec-09 17031 17002.66667
17-Dec-09 17163 17070.33333
18-Dec-09 16935 17043
19-Dec-09 16968 17022
21-Dec-09 16957 16953.33333
22-Dec-09 16700 16875
23-Dec-09 16582 16746.33333
24-Dec-09 16586 16622.66667
26-Dec-09 16691 16619.66667
28-Dec-09 16752 16676.33333
29-Dec-09 16724 16722.33333
30-Dec-09 16634 16703.33333
31-Dec-09 16558 16638.66667
1-Jan-10 16698 16630
2-Jan-10 16701 16652.33333
4-Jan-10 16788 16729
5-Jan-10 16884 16791
6-Jan-10 16896 16856
7-Jan-10 16925 16901.66667
8-Jan-10 16889 16903.33333
9-Jan-10 16898 16904
11-Jan-10 16958 16915
12-Jan-10 17092 16982.66667

86
13-Jan-10 16937 16995.66667
14-Jan-10 16852 16960.33333
15-Jan-10 16950 16913
16-Jan-10 16895 16899
18-Jan-10 16910 16918.33333
19-Jan-10 16889 16898
20-Jan-10 16986 16928.33333
21-Jan-10 16753 16876
22-Jan-10 16584 16774.33333
23-Jan-10 16515 16617.33333
25-Jan-10 16541 16546.66667
27-Jan-10 16516 16524
28-Jan-10 16500 16519
29-Jan-10 16342 16452.66667
30-Jan-10 16286 16376
1-Feb-10 16291 16306.33333
2-Feb-10 16584 16387
3-Feb-10 16717 16530.66667
4-Feb-10 16611 16637.33333
5-Feb-10 16133 16487
6-Feb-10 16077 16273.66667
8-Feb-10 16260 16156.66667
9-Feb-10 16246 16194.33333
10-Feb-10 16288 16264.66667
11-Feb-10 16246 16260
12-Feb-10 16424 16319.33333
13-Feb-10 16400 16356.66667
15-Feb-10 16457 16427
16-Feb-10 16549 16468.66667
17-Feb-10 16695 16567
18-Feb-10 16711 16651.66667
19-Feb-10 16732 16712.66667
20-Feb-10 16816 16753
22-Feb-10 16774 16774
23-Feb-10 16656 16748.66667
24-Feb-10 16554 16661.33333
25-Feb-10 16459 16556.33333
26-Feb-10 16656 16556.33333
27-Feb-10 16741 16618.66667
87
1-Mar-10 16767 16721.33333
2-Mar-10 16724 16744
3-Mar-10 16990 16827
4-Mar-10 17017 16910.33333
5-Mar-10 16940 16982.33333
6-Mar-10 17020 16992.33333
8-Mar-10 16988 16982.66667
9-Mar-10 16837 16948.33333
10-Mar-10 16821 16882
11-Mar-10 16607 16755
12-Mar-10 16628 16685.33333
13-Mar-10 16552 16595.66667
15-Mar-10 16566 16582
16-Mar-10 16637 16585
17-Mar-10 16804 16669
18-Mar-10 16785 16742
19-Mar-10 16850 16813
20-Mar-10 16615 16750
22-Mar-10 16612 16692.33333
23-Mar-10 16527 16584.66667
24-Mar-10 16545 16561.33333
25-Mar-10 16399 16490.33333
26-Mar-10 16359 16434.33333
27-Mar-10 16444 16400.66667
29-Mar-10 16479 16427.33333
30-Mar-10 16419 16447.33333
31-Mar-10 16401 16433
1-Apr-10 16450 16423.33333
3-Apr-10 16562 16471
5-Apr-10 16568 16526.66667
6-Apr-10 16515 16548.33333
7-Apr-10 16563 16548.66667
8-Apr-10 16780 16619.33333
9-Apr-10 16760 16701
10-Apr-10 16818 16786
12-Apr-10 16826 16801.33333
13-Apr-10 16905 16849.66667
14-Apr-10 16808 16846.33333
15-Apr-10 16802 16838.33333
88
16-Apr-10 16842 16817.33333
17-Apr-10 16584 16742.66667
19-Apr-10 16620 16682
20-Apr-10 16624 16609.33333
21-Apr-10 16639 16627.66667
22-Apr-10 16730 16664.33333
23-Apr-10 16677 16682
24-Apr-10 16772 16726.33333
26-Apr-10 16802 16750.33333
27-Apr-10 16772 16782
28-Apr-10 16917 16830.33333
29-Apr-10 17087 16925.33333
30-Apr-10 16974 16992.66667
3-May-10 17109 17056.66667
4-May-10 17184 17089
 5-May-10 17181 17158
6-May-10 17303 17222.66667
7-May-10 17748 17410.66667
8-May-10 17913 17654.66667
10-May-10 17914 17858.33333
11-May-10 17587 17804.66667
12-May-10 17888 17796.33333
13-May-10 18217 17897.33333
14-May-10 18025 18043.33333
15-May-10 18175 18139
17-May-10 18168 18122.66667
18-May-10 18264 18202.33333
19-May-10 18014 18148.66667
20-May-10 18027 18101.66667
21-May-10 18163 18068
22-May-10 18008 18066
24-May-10 18019 18063.33333
25-May-10 18168 18065
26-May-10 18513 18233.33333
27-May-10 18557 18412.66667
28-May-10 18425 18498.33333
29-May-10 18466 18482.66667
31-May-10 18490 18460.33333
89

1-Jun-10 18418 18458

2-Jun-10 18713 18540.33333
3-Jun-10 18644 18591.66667
4-Jun-10 18482 18613
5-Jun-10 18746 18624
 90

GOLDMINI 3 DAYS MOVING AVERAGE

The below graph shows daily prices like closing prices of the goldmine in the form of the technical
tool indicator simple moving averages.
 GOLD MINI 100 grams

40000
35000
30000 3 DAYS MOVING

VALUES
25000 AVERAGE
20000
15000 PCP (RS)
10000
5000
0

3-Jun-10
11-Jan-10
29-Jan-10
Date

5-Mar-10
23-Dec-09

16-Feb-10

23-Mar-10
10-Apr-10
28-Apr-10
17-May-10
MONTHS

INTERPRETATION

As above data we are taken GOLD MINI Price moving from Dec 5th to June 5th, on 7th Dec it is closed
on 17602, in between the period on 23rd Dec it is closed to 16582 , latterly on 4th March it is
increased to 17017, on 25th march it is decreased to 16399 , end of the contract on 5th June it is closed
to 18746.

If you see total data the gold is highly fluctuated because the gold leads the economy.

91

GOLD HNI – (1000 ) 3 DAYS MOVING AVERAGES

THE BELOW TABLE SHOWS 3 DAYS MOVING AVERAGES OF GOLD HNI.

3 DAYS
MOVING
Date PCP(RS) AVERAGE
7-Dec-09 18050 0
8-Dec-09 17870 0
9-Dec-09 17691 17870.33333
 13-Jan-10 16834 16834
10-Dec-09
14-Jan-10 17514
16834 17691.66667
16834
11-Dec-09
15-Jan-10 17339
16834 17514.66667
16834
12-Dec-09
16-Jan-10 17166
16834 17339.66667
16834
14-Dec-09
18-Jan-10 17166
16834 17223.66667
16834
15-Dec-09
19-Jan-10 16994
16834 17108.66667
16834
16-Dec-09
20-Jan-10 16994
16834 17051.33333
16834
17-Dec-09
21-Jan-10 16994
16834 16994
16834
18-Dec-09
22-Jan-10 16994
16666 16994
16778
19-Dec-09
23-Jan-10 16994
16499 16994
16666.33333
21-Dec-09
25-Jan-10 16994
16499 16994
16554.66667
22-Dec-09
27-Jan-10 16824
16499 16937.33333
16499
23-Dec-09
28-Jan-10 16656
16499 16824.66667
16499
24-Dec-09
29-Jan-10 16656
16499 16712
16499
26-Dec-09
30-Jan-10 16656
16334 16656
16444
28-Dec-09
1-Feb-10 16656
16334 16656
16389
29-Dec-09
2-Feb-10 16656
16334 16656
16334
1-Jan-10
3-Feb-10 16748
16334 16686.66667
16334
2-Jan-10
4-Feb-10 16748
16497 16717.33333
16388.33333
4-Jan-10
5-Feb-10 16748
16497 16748
16442.66667
5-Jan-10
6-Feb-10 16667
16332 16721
16442
6-Jan-10
8-Feb-10 16667
16332 16694
16387
7-Jan-10
9-Feb-10 16667
16332 16667
16332
8-Jan-10
10-Feb-10 16834
16332 16722.66667
16332
9-Jan-10
11-Feb-10 16834
16332 16778.33333
16332
11-Jan-10
12-Feb-10 16834
16332 16834
16332
12-Jan-10
13-Feb-10 16834
16332 16834
16332
15-Feb-10 16332 16332
16-Feb-10 16332 16332
92 17-Feb-10 16332 16332
18-Feb-10 16495 16386.33333
19-Feb-10 16495 16440.66667
20-Feb-10 16495 16495
22-Feb-10 16495 16495
23-Feb-10 16495 16495
24-Feb-10 16495 16495
25-Feb-10 16495 16495
26-Feb-10 16495 16495
27-Feb-10 16660 16550
 93
1-Mar-10 16660 16605
2-Mar-10 16660 16660
3-Mar-10 16660 16660
4-Mar-10 16827 16715.66667
5-Mar-10 16827 16771.33333
6-Mar-10 16827 16827
8-Mar-10 16827 16827
9-Mar-10 16827 16827
10-Mar-10 16827 16827
11-Mar-10 16827 16827
12-Mar-10 16659 16771
13-Mar-10 16492 16659.33333
15-Mar-10 16492 16547.66667
16-Mar-10 16327 16437
17-Mar-10 16327 16382
18-Mar-10 16490 16381.33333
19-Mar-10 16490 16435.66667
20-Mar-10 16490 16490
22-Mar-10 16490 16490
23-Mar-10 16490 16490
24-Mar-10 16490 16490
25-Mar-10 16325 16435
26-Mar-10 16325 16380
27-Mar-10 16325 16325
29-Mar-10 16325 16325
30-Mar-10 16162 16270.66667
31-Mar-10 16162 16216.33333
1-Apr-10 16000 16108
3-Apr-10 16000 16054
5-Apr-10 16000 16000
6-Apr-10 16000 16000
7-Apr-10 16160 16053.33333
8-Apr-10 16160 16106.66667
9-Apr-10 16322 16214
10-Apr-10 16322 16268
12-Apr-10 16485 16376.33333
13-Apr-10 16485 16430.66667
14-Apr-10 16485 16485
15-Apr-10 16485 16485
94
16-Apr-10 16485 16485
17-Apr-10 16485 16485
19-Apr-10 16485 16485
20-Apr-10 16485 16485
21-Apr-10 16485 16485
22-Apr-10 16485 16485
23-Apr-10 16485 16485
24-Apr-10 16485 16485
26-Apr-10 16485 16485
27-Apr-10 16485 16485
28-Apr-10 16485 16485
29-Apr-10 16592 16520.66667
30-Apr-10 16758 16611.66667
3-May-10 16758 16702.66667
 4-May-10 16758 16758
5-May-10 16926 16814
6-May-10 17095 16926.33333
7-May-10 17095 17038.66667
8-May-10 17900 17363.33333
10-May-10 17900 17631.66667
11-May-10 17900 17900
12-May-10 17721 17840.33333
13-May-10 17721 17780.66667
14-May-10 17898 17780
15-May-10 17898 17839
17-May-10 17898 17898
18-May-10 17898 17898
19-May-10 17898 17898
20-May-10 17898 17898
21-May-10 17898 17898
22-May-10 17898 17898
24-May-10 17898 17898
25-May-10 17898 17898
26-May-10 17898 17898
27-May-10 18077 17957.66667
28-May-10 18077 18017.33333
29-May-10 18258 18137.33333
95

31-May-10 18258 18197.66667

1-Jun-10 18258 18258
2-Jun-10 18258 18258
3-Jun-10 18258 18258
4-Jun-10 18258 18258
5-Jun-10 18258 18258
 96

GOLDHNI 3 DAYS MOVING AVERAGES

The below graph shows daily prices like closing prices of the gold hni in the form of the technical
tool indicator simple moving averages.
 GOLD HNI 1000grams

40000
35000
30000 3 DAYS MOVING

VALUES
25000 AVG
20000
15000 PCP (RS)
10000
5000
0

5-Jun-10
13-Jan-10
Date

8-Mar-10
25-Mar-10
23-Dec-09

1-Feb-10
18-Feb-10

13-Apr-10
30-Apr-10
19-May-10
MONTHS

INTERPRETATION

As above data we are taken GOLD HNI Price moving from Dec 5st to June 5th , on 7th Dec it is closed
on 18050, on 26th Dec it is decreased to 16656. on 1st Apr again it is came down to 16000, at end of the
contract on 5th June it is closed to 18258.

If you see total data the gold is highly fluctuated because the gold leads the economy.

97

ANALYSIS AND INTERPRITATIONS OF THE GRAPH

The above graphs shows daily prices like closing prices of the precious metal commodity (gold) in the
form of the technical tour indicator “simple moving avarage”

The moving avarage is the graph shows the moving trends of the index of gold futures for the six
months period data are taken in to consideration of differant gold contracts.
Moving average is used in-order to analyse the past trends of the particular commodity (gold) and
helping interpretations for the analyst and investors whether to buy, hold or sell particular commodity
in the near future.

In this particular graphs we have taken three days moving avarages on daily basis for period of six
months. Three days moving avarage is generally consider for interpreting the short term trends are
intraday trading on a daily terms.

In commodity market most of the investors are trading in intra-day points, they generally make both
buy and sell signals in a day. The buyers and sellers mainly follow three days moving avarages.

Here volumes are not taken in to concideration for analysis porpos. Even they effect the high-low in
the market. This analysis is based only on each day trading closing prices.

ANALYSIS FOR GOLD

In this starting contract the closing prices of three days moving averages which indicate a step
increasing in the commodity future and it happens in the january as there was no fluctuation in
commodity market and from the january onwards there were high incresing of gold prices. The moving
average shows a incresing trend in the commodity market which shows a very bullish trend,because of
high incresing trend and also the closing prices of the contract period.

98
 CONCLUSSION OF GOLD ANALYSIS

In the lost six months the market was showing more of buying signals than sellings.this shows
a good trend for gold in near future for long term investors and prices might rise and mostly investor
are earning profit if analyse the market proporly.

99
 CHAPTER - V
FINDINGS & SUGGESTIONS

FINDINGS
• The investment made in this is for short period of time and most of the trading is intra- day in
nature i.e. buy and sell on same day to make profit. Here daily volumes and trends are
consider.

• The prices of gold had shown significant raise in the six months.

• Dollor prices are one of the important factor, which need to track constently.

• Future and options derivatives contract avaliable in theworld commodity market .In india
options contracts have not been permitted by the government.

• There is scope for better and huge profit especially in commodities market for investors.

Ex: openning price of contract is Rs.11400 and closing price of contract is

Rs.12650, at the end of the contract the investor can get Rs.1250 as profit.

101

SUGGESTIONS
• Innvestors should try to understand the technical part of analyzing the prices of bullion
commodities so tat they can earn huge profits,as fundamental analysis doesn’t give sharp trends
of future when compared to technical analysis.

• The investor should always try to go for long positions right from the beginning of the
contract,as it is exhibites a large scale.

• In commodity market though there is a possibility of physical delivery of the contracts,there

arise the requirement of warehouse facility that is not required in case of eqity market.

• The farmers and traders are not fully aware of the existence of the commodity exchange in
india,which has to be advertised regularly.

102
BIBLIOGRAPHY

BIBLIOGRAPHY
Journals &Articles
i. Jangaih Paladi and c.Anitha raman,commodity market_ A relook ,in
icfai reader.

Books
(1) Financial claims &derivatives -by David N King.
(2) Futures & options -by Franklin R Edward.

Websites
(1) Market data is available from the URL
http://www.mcxindia.com/market/date wise

(2) Company data available from the URL

http://www.ise.com/webform/view page

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