SUMMER INTERNSHIP PROJECT COMMODITY FUTURES: AN INVESTORS PERSPECTIVE

Presented byAditya Singh MBA Finance (3rd Sem)

Under Guidance of Chandan Kumar IIFL, Varanasi

Company Profile
IndiaInfoline founded in 1995 Independent business research and information provider Listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). offer a wide range of services and products comprising broking (retail and institutional equities and commodities), wealth management, credit and finance, insurance, asset management and investment banking It is registered as a Category I merchant banker and are a SEBI registered portfolio manager

Objectives
To study the various aspects of commodity market To understand the stages through which a commodity deal is done To anticipate the market based on the market research reports To study the whole process- from application of d-mat account opening, enclosures required, brokerage charged, allotment of login id and final trading commencement

Introduction
Any product or an article of commerce which is traded on an authorized commodity exchange All goods and products of agricultural (including plantation), mineral and fossil origin allowed for commodity trading recognized by FCRA The national commodity exchanges, recognized by the Central Government, permits commodities include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and jaggery, potatoes and onions, coffee and tea, rubber and spices Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion)

Futures Market
An agreement between two parties to buy or sell an asset at a certain time in the future at a certain price The main standardized items in a futures contract are:
Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Delivery center
FUTURES Trade on an organized exchange FORWARD OTC in nature

Standardized contract terms hence more liquid Requires margin payments Follows daily settlement

Customized contract terms hence less liquid No margin payment

Settlement happens at end of period

Continued..
A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner Underlying asset can be equity, forex, commodity or any other asset A Commodity Derivative derives its value from an underlying asset, which is necessarily a commodity

Estimation Technique for Future Price

Financial Instruments Futures: There is no cost of carry, but the holding cost is cost of financing (less) Dividend Returns. Therefore the fair value of Future contract can be defined as under: F = Se (rt) Where, F = Future Price S = Spot Price r = Cost of Financing (using continuous compounded interest rate) t = Time till expiration e = 2.71828 Commodities Futures: In commodities you have to carry till it is sold as there is physical delivery. Here the seller so insures holding cost which is equal to cost of finance + Storage cost+ Insurance. Fair value of Future contract here is defined as under: F = (S + U)e(rt) Where, F = Future Price S = Spot Price U = Present Value of Storage r = Cost of Financing (using continuous compounded interest rate) t = Time till expiration, e = 2.71828

Commodity Trading Cycle

TRADING [both of the parties agrees to buy or sell the underlying asset]

SETTLEMENT

[The seller intending to make delivery takes the commodities to the designated warehouse]

CLEARING [members are informed of the deliverable/receiva ble positions]

Risks
OPERATIONAL

Risk Management

AVERAGING SWITCHING

MARKET

LIQUIDITY

LOCKING

Research Methodology
Research Type : Exploratory

Universe
Sampling Technique Sample Unit Sample Size

:
: : :

Varanasi (confined to Jewelers Market)

Convenience Sampling Jewelers & Prospects 30 Primary Data Questionnaire Secondary Data Internal Sources, Brochures, Websites, Leaflet, Pampslet.

Methods of Data Collection:

Analysis
Column Chart Showing The Percentage of Respondents who have Invested In Comodity Future
Yes No

Column Chart Showing The Percentage of Respondents who have Invested Other Securities Yes No

62% 38%

70%

30%

Yes

No

Yes

No

Pie chart showing the amount invested in commodity futures

3% Percentage 80% 60% 40% 20% 0%

Column chart showing the percentage of investors who use fundamental/technical analysis when giving an order

20%

27%

Rs. 2 lakh Rs. 2-3 lakh Rs. 3-5 lakh Above Rs.5lakh

50%

Yes

Particular Yes No

No

Column chart showing the means through which the investors got to know about commodity futures
60% 50% 40% 30% 70% 60% 50%

Column chart showing the extent of returns derived by the investors from commodity futures

40% 30%
20% 10% 0% Friends Friends Media Media Self-Research Self-Research Others Others Good Good Reasonable Reasonable Bad Bad

20%
10% 0%

Column chart showing opinion of the investor of whether commodity futures is a good investmentopportunity
80%
60% 40% 20% 0% Yes No

Yes

No

PERCENTAGE
60% 50% 40% 30% 20% 10% 0% MARKET LIQUIDITY LOT SIZE 0% PERCENTAGE 20% 60% 40%

Column chart showing the investors perception towards the facility fee charged by their company

Very High Very High

High High

Reasonable Reasonable Low

Low

Findings
There is a little less awareness of commodity market to investors. Person between ages of 20-40 years are more active player in the commodity trading and 10-30 % of their income are invested in market There has been seen that most of private sector employees and business person invests in commodity market It has been seen that Gold, Silver and Copper are more dealing commodity

Recommendations
Since commodity futures are a new concept, more awareness must be created by marketing this investment instrument appropriately. If the minimum investment is reduced, this might induce more people to invest in commodity future. As commodity market are growing so one should trade in exchange traded market rather than the OTC market As commodity market growing so all groups of people must be asked to invest in commodity futures. One should take better position with the help of fundamental and technical analysis It is not a necessity that one must be very educated to invest in commodity futures. So, it is recommended that those who are not soundly educated also can invest in commodity futures

Conclusion
Investor becomes more careful in investment with considering the factor like global economy, availability of commodity etc In the trading system people consider above factor for investment so we can conclude that investor are more moving towards the exchange traded market The trading system also includes trading and intermediary participants, who ensure the correct price discovery. Thus, the trading system is one of the factors, which reduce the risk in commodity futures It can be concluded that one can use commodity futures for the hedging purposes rather than for the speculative This can be emphasized by the fact that there has been an increasing trend in the volume traded in most of the commodities. Thus, commodity futures are a growing market

References
www.crnindia.com www.indiamart.com www.ncdex.com www.fmc.gov.in COMMODITY EXCHANGE WEBSITES
http://www.mcxindia.com http://www.icexindia.com http://www.ncdex.com/ http://www.sebi.gov.in/ http://www.fmc.gov.in/ http://www.nseindia.com/ http://www.bseindia.com/

BOOKS Kolb, Robert W, Futures, options and swaps, by LPE Publications Thomas, Derivative markets in India 2003, 3rd Edition

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