trading on commodites

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A STUDY ON “COMMODITY TRADING”


AT


THE ZEN COMTRADE PRIVATE LIMITED
HYDERABAD



Mr. SATYARAJESH.C


(02005-140)

IN PARTIAL FULFILLMENT FOR THE
AWARDED OF THE DEGREE OF


“Master of Business Administration”



Osmania University,Hyderabad-500007







DECLARATION

I here by declare that the project entitled A study on “COMMODITY TRADING” in The Zen Comtrade Private Limited, Hyderabad, is an original work done by me and the findings are collected during my study and submitted by me in partial fulfillment for the award of degree in “Master of Business Administration” from Nava Bharathi college of P.G. studies affiliated to Osmania University.

The findings in this report are based on information collected by me are not submitted for achievement of any other degree.




(Mr. SATYARAJESH.C)













ACKNOWLEDGEMENT


I would like to express my sincere thanks to Mr. Namashivaya Renukuntla, DIRECTOR of Zen Comtrade and Head of Compliance for permitting me to pursue this project and I am also very much thankful to MR.NAGESHWAR RAO Project guide at ZEN COMTRADE PRIVATE LIMITED, staff and Employees of ZEN for their support and advice in all stages of the project.

I express my profound gratitude to my guide Mr. MURTHY, Professor of Finance for guiding me and in preparing this project.

My sincere thanks to our Director Dr. Wg.Cdr (Retd) M.GHOSH. I express my gratitude to NASEER (Head of the Department) Nava Bharathi College of P.G. studies, Bolarum for their constant encouragement. I would like to thank my project guide of our college Mrs. Smitha Jayadev.



(Mr. SATYARAJESH.C)




















CERTIFICATE

Date: 04th March 2007.


This is to certify that Mr. M. ROHIT student of s, Bolarum, Hyd bearing hall ticket number 2005-140 have completed the project work on “COMMODITY TRADING” From 15-01-2007 to 03-03-2007, as prescribed by the Osmania University.

Thanking you,

Sincerely
For ZEN COMTRADE LTD


A.PURUSHOTHAM REDDY
(Head of the Compliance)





3rd Floor, Vamsee Estates, 6-3-788/32, Ameerpet, Hyderabad - 500 016
Phones: 040-6666 0555, 2340 0855, 3911 2222 Fax: 040-2340 5124
Email: [email protected]




CONTENTS




CHAPTER I
• OBJECTIVES AND SCOPE OF THE STUDY
• RESEARCH METHODOLOGY OF STUDY

CHAPTER II
• COMPANY PROFILE

CHAPTER III
• BRIEF DESCRIPTION OF COMMODITY MARKET:
Introduction
History
Beginners Guide to Commodity Futures Trading in India
Evolution in India
Emerging Trends in India

CHAPTER IV
• COMMODITY TRADING MECHANISM:
Trading
Clearing
Settlement

CHAPTER V
• PRICING OF THE COMMODITY FEATURES:
Pricing Future Contracts on Commodities
Pricing Future Contracts on Investment Commodities
Pricing Future Contracts on Consumption Commodities




CHAPTER VI
• PARTICIPANTS IN COMMODITY MARKET:
Hedging
Speculating
Arbitrage

CHAPTER VII
• REGULATORY FRAME WORK:
Rules governing commodity derivatives exchanges
Rules governing intermediaries
Rules governing investor grievances, Arbitration

CHAPTER VIII
• INSIGHTS OF MARKET & TRADING SPECIFICATIONS FOR
COMMODITIES:
Crude oil
Rubber
Gold
Cotton
Rice

CHAPTER IX
• CONCLUSION
• SUGGESTIONS
• REFERENCES AND SOURCE OF DATA






























CHAPTER I
• OBJECTIVES AND SCOPE OF THE STUDY
• RESEARCH METHODOLOGY OF STUDY




















OBJECTIVES OF THE STUDY

A new energy is coursing through a very old industry : the centuries old commodities
market has been bitten by the futures bug and its throbbing opportunity for
professionals in research, business development and analysis.
At this juncture one can easily exploit a very good opportunity in this market with in
a short period.
To understand the basics of commodity market and to discover the emerging
prospects in the Indian commodity market.
To empathies trading and settlement mechanism for commodities in Indian stock
exchanges
To know how exactly the commodities are traded through the trading desks and what
happens in the market.
To identify the working procedure of the commodity trading practices in India.
Study aims at understanding the governance and regulatory frame work for
commodity derivatives exchanges, traders, investors and other participants.

SCOPE OF THE STUDY
The study mainly focuses on Indian commodity market, its history and latest
developments in the country in Commodities market.
The study also keeps a birds eye view on global commodity market and its
development
The study vastly covered the aspects of commodity trading, clearing and settlement
mechanisms in Indian commodity exchanges.

The study also provides regulatory framework for commodities market in India.







RESEARCH METHODOLOGY


PRIMARY DATA :

 DATA COLLECTED FROM BROKERS AND MEMBERS OF HSE.

SECONDARY DATA :

 DATA COLLECTED FROM VARIOUS BOOKS AND SITES.
 DATA PROVIDED BY HSE AS PART OF THE CLASSES UNDERTAKEN.
 DATA COLLECTED FROM NEWS PAPER AND INTERNET.
























COMPANY PROFILE











COMPANY PROFILE
THE ZEN SECURITIES LIMITED
ORIGIN:

Zen Securities Limited boasts a rich history of nearly two decades and continues to innovate in everything it does.

ZSL is promoted by Mr. Ravindra Babu Kantheti, a prominent stockbroker and well-respected personality in the stock broking and investing communities.

ZSL commenced its membership on The Hyderabad Stock Exchange Ltd., Hyderabad as a proprietary concern of M/s K. Ravindra Babu in 1986, which was corporatised in February 1995 to Zen Securities Ltd. Since those days, we also have the distinction of being the first corporate member from Hyderabad and also the first Andhra Pradesh based broking firm to start trading on the National Stock Exchange (NSE.)

Although we are proud of our past achievements, we are a forward-looking institution and are thus geared to continue to thrive in the future, along with our valuable clients.


OBJECTIVES
Zen offers you quick, transparent, and cost effective Stock Broking services through its membership in NSE and BSE.

CommoditiesTrading through Zen offers you hedging, trading, and arbitrage opportunities to leverage the commodities market.

Zen provides access to the top Mutual Funds that offer a simple and convenient way to take exposure to equities and debt.

A depository participant with NSDL & CDSL, Zen offers you flexible, transparent, and cost effective Depository Services.

Zen has the experience, capabilities, and research facilities to efficiently manage funds your funds through its Portfolio Management Services.

Strong fundamental and technical research expertise and pragmatic investment strategies from Zen’s Equity Research department can help you succeed in the market.

Zen offers Futures & Options trading services for customers who are keen on protecting their portfolio against market movements.

Are you a NRI trying to invest in India? Zen’s NRI Services can guide you through the process and help you reach your goals.

GROWTH

Zen Securities Limited is one of the leading stock broking companies based in Andhra Pradesh, India with an extensive network of over 100 trading terminals spread over Andhra Pradesh and Tamil Nadu.

Zen Securities Limited (ZSL) is led by a highly experienced and respected team, which offers unique perspectives and excellent customer service to our clients. We offer a wide array of products and services including equities, futures & options, mutual funds, portfolio management services, public issues, commodities and depository services among others, to help our clients reach their personal financial goals

Zen prides itself on the strength of its people, who offer valuable advice based on fundamental/technical research and pragmatic investment strategies, which guide our clients in the right direction.


Memberships

We are members of the top exchanges and professional organizations of India.

Currently, ZSL is a registered member of the Capital Market and Futures & Options segments of The National Stock Exchange of India Ltd. (NSE) and a member of the Capital Market segment of The Stock Exchange, Mumbai (BSE.)

We are a Depository Participant (DP) with the National Securities Depository Ltd.

(NSDL) and the Central Depository Services Ltd. (CDSL.)


We are also a SEBI Registered Portfolio Manager and offer Portfolio Management Services to our clients.
Subsidiaries

Zen Comtrade Pvt. Limited:

A 100% subsidiary of ZSL and is a member of National Commodities & Derivatives Exchange Limited (NCDEX), an exchange co-promoted by NSE and ICICI and the Multi Commodity Exchange (MCX.)

Zen Insurance Services Pvt. Limited:

A 100% subsidiary of ZSL, it has applied for a license as an Insurance broker and the same is under consideration by Insurance Regulatory Development Authority (IRDA).













BRIEF DESCRIPTION OF COMMODITY MARKET


















INTRODUCTION


What is a "Commodity"?


Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable property other than actionable claims, money and securities". Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices, etc

"Commodity Exchange"

Commodity exchange is an association, or a company or any other body corporate organizing futures trading in commodities.

Need of a Commodity Trading Exchange

Earlier, all the sellers and buyers of a commodity used to come to a common market place for the trade. Buyer could judge the amount of produce that year while the seller could judge the amount of demand of the commodity. Thus they could dictate their terms and hence the counter party was left with no choice. Thus, in order to hedge from this unfavorable price movement, need of the commodity exchange was felt

DEFINATION OF COMMODITY:

The word commodity is a term with distinct meanings in business and in Marxian political economy. For the former, it is a largely homogeneous product, whereas for the latter, it refers generically to wares offered for exchange.


Linguistically, the word commodity came into use in English in the 15th century, being derived from the French word "commodité" meaning "benefit, profit", similar in meaning to biens (goods). The Latin root meaning is commodite, referring variously to the appropriate measure of something; a fitting state, time or condition; a good quality; efficaciousness or propriety; and advantage, or benefit. The German equivalent is die Ware, i.e. wares or goods offered for sale.

Business usage
Definition
In the world of business, a commodity is an undifferentiated product whose market value arises from the owner's right to sell rather than the right to use. Example: commodities from the financial world include oil (sold by the barrel), electricity, wheat, bulk chemicals such as sulfuric acid, base and other metals, and even pork-bellies and orange juice. More modern commodities include bandwidth, RAM chips and (experimentally) computer processor cycles, and negative commodity units like emissions credits.

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product. One can reasonably say that food commodities, for example, are defined by the fact that they substitute for each other in recipes, and that one can use the food without having to look at it too closely


Branding

Producers often attempt to 'de-commodify' their products by branding them. Branding attempts to make similar products from different producers more distinguishable. This strategy can lead to higher prices for the branded items relative to the price in a commodity market. The term product market is sometimes used to contrast with commodity market and signifies the exchange of differentiated goods.

Forms of commodity trade

The 7 basic forms of commodity trade can be summarised as follows:

M-C (an act of purchase: a sum of money purchases a commodity)
C-M (an act of sale: a commodity is sold for money)
M-M' (a sum of money is lent out at interest to obtain more money, or, one currency is traded for another)
C-C' (countertrade, in which a commodity trades directly for a different commodity, with money possibly being used as an accounting referent, for example, food for oil, or weapons for diamonds)
C-M-C' (a commodity is sold for money, which buys another, different commodity with an equal or higher value)
M-C-M' (money is used to buy a commodity which is resold to obtain a larger sum of money)
M-C...P...-C'-M' (money buys means of production and labour power used in production to create a new commodity, which is sold for more money than the original outlay).
The hyphens ("-") here refer to a transaction applying to an exchange involving goods or money; the dots in the last-mentioned circuit ("...") indicate that a value-forming process ("P") occurs in between purchase of commodities and the sales of different commodities. Thus, while at first merchants are intermediaries between producers and consumers, later capitalist production becomes the intermediary between buyers and sellers of commodities. In that case, the valuation of labour is determined by the value of its products.

The retifying effects of universalized trade in commodities, involving a process Marx calls "commodity fetishism," mean that social relations become expressed as relations between things; for example, price relations. Markets mediate a complex network of interdependencies and supply chains emerging among people who may not even know who produced the goods they buy, or where they were produced.

Since no one agency can control or regulate the myriad of transactions that occur (apart from blocking some trade here, and permitting it there), the whole of production falls under
the sway of the law of value, and economics becomes a science aiming to understand market behavior, i.e. the aggregate effects of a multitude of people interacting in markets. How quantities of use-values are allocated in a market economy depends mainly on their exchange value, and this allocation is mediated by the "cash nexus".

Cost structure of commodities

In considering the unit cost of a capitalistically produced commodity (in contrast to simple commodity production), Marx claims that the value of any such commodity is reducible to three components equal to:

variable capital used up to produce it, plus
fixed and circulating constant capital used up per unit, and
surplus value per unit.
These components reflect respectively labour costs, the cost of materials and operating expenses including depreciation, and generic profit.

In capitalism, Marx argues, commodity values are commercially expressed as the prices of production of commodities (cost-price + average profit). Prices of production are established jointly by average input costs and by the ruling profit margins applying to outputs sold. They reflect the fact that production has become totally integrated into the circuits of commodity trade, in which capital accumulation becomes the dominant motive. But what prices of production simultaneously hide is the social nature of the valorization process, i.e. how an increase in capital-value occurs through production.

Likewise, in considering the gross output of capitalist production in an economy as a whole, Marx divides its value into these three components. He argues that the total new value added in production, which he calls the value product, consists of the equivalent of variable capital, plus surplus value. Thus, the workers produce by their labor both a new value equal to their own wages, plus an additional new value which is claimed by capitalists by virtue of their ownership and supply of productive capital.

By producing new capital in the form of new commodities, Marx argues the working class continuously reproduces the capitalist relations of production; by their work, workers create a new value distributed as both labour-income and property-income. If, as free workers, they choose to stop working, the system begins to break down; hence, capitalist civilization strongly emphasizes the work ethic, regardless of religious belief. People must work, because work is the source of new value.

HISTORY OF COMMODITY TRADING

In the 1840s, Chicago had become a commercial center with railroad and telegraph lines connecting it with the East. Around this same time, the McCormick reaper was invented which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell their wheat to dealers who, in turn, shipped it all over the country.

He brought his wheat to Chicago hoping to sell it at a good price. The city had few storage facilities and no established procedures either for weighing the grain or for grading it. In short, the farmer was often at the mercy of the dealer.

1848 saw the opening of a central place where farmers and dealers could meet to deal in "spot" grain - that is, to exchange cash for immediate delivery of wheat.

The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who did. Or, the farmer who didn't want to deliver his wheat might pass his obligation on to another farmer. The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the seller's contract would become less valuable. It wasn't long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low.

Beginners Guide to Commodities Futures Trading in India:

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, bonds and real estate, a commodity is the best option.
Till some months ago, this wouldn't have made sense. For 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 punting 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 stocks!

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

In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover of Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grow many folds here on.

Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid.


1. Here's how a retail investor can get started:
Where do I need to go to trade in commodity futures?

You have three options - the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence.

2. How do I choose my broker?

Several already-established equity brokers have sought membership with NCDEX and MCX. The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect), ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures services. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.

3. What is the minimum investment needed?

You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other brokers have different packages for clients.

For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one kg).

The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000.

4. Do I have to give delivery or settle in cash?

You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item.

If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.





5. What do I need to start trading in commodity futures?

As of now you will need only one bank account. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.

6. What are the other requirements at broker level?

You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc.


7. What are the brokerage and transaction charges?

The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.

8. Where do I look for information on commodities?

Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support.

But the information easiest to access is from websites. Though many websites are subscription-based, a few also offer information for free. You can surf the web and narrow down you search.


9. Who is the regulator?

The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.

The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.



10. Who are the players in commodity derivatives?

The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators.

Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market.

Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite.

For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.


11. In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading.

12. Do I have to pay sales tax on all trades? Is registration mandatory?

No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax.

The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number.

13. What happens if there is any default?

Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges.

14. Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods?

Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery.



15. Is stamp duty levied in commodity contracts? What are the stamp duty rates?

As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.
16. How much margin is applicable in the commodities market?

As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value.
The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility.


17. Are there circuit filters?

Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.

Physical delivery a ‘must’ in commodity trade

It is boom time for commodity trading in India with more and more items traded and the market estimated to touch a growth of 252 percent in the year ahead. Volumes also are expected to sky-rocket to touch an estimated Rs.12 lakh crore annually against the current volumes of Rs.3.4 lakh crore.

While such momentum is good, for long-term sustenance of the same, some good fundamentals have to built. In this context, it is relevant to analyze the need to choose physical delivery as the mechanism over cash settlement.
Cash settlement is a process for settling a futures contract by payment of the money difference rather than by delivering the physical commodity or an instrument representing such physical commodity such as warehouse receipt. The main drawback in cash settlement is that the commodities spot wholesale market is not an organized one (globally).

Commodity prices vary from location to location and also in accordance with their quality characteristics, variety and preferred end-uses in different locations. There is no single unique cash price quotation for a commodity valid throughout the country at any given time. For example, wheat will have different price in Gujarat, Madhya Pradesh, Uttar Pradesh and Punjab. In most cases the price that is fixed is subject to manipulation and hence discourages investors/farmers/traders from investing in the commodity market.

Coming to physical delivery, it is a method in which the bylaws of the exchange provide both the buyer and the seller the right to demand/supply physical delivery of the asset at the final settlement of any future contract. Delivery is at the option of the sellers. The physical delivery model is ideal for a country like India where every commodity sold is of varying quantities in different parts of the country. The seller can thus deliver goods of a prefixed quality determined by the exchange to the warehouse identified by the exchange.

The warehouse undertakes quality verification to ensure that goods conform to the standards set by the exchange. Once the quality is confirmed, the goods are delivered to the buyer in the form of a warehouse receipt.

While there is thus a strong case for physical delivery vis-à-vis cash settlement, it is necessary to address the challenges as well to make this work well.

At present, physical settlement of commodities in India is a complex process because of inadequate storage facilities in different states, restrictions on movement, state level duty levied, stamp duty, sales tax, warehousing charges and insurance. There needs to be also wider acceptance and awareness of warehouse receipts as legitimate instruments for various financial transactions.

With the central warehousing corporation working on putting such a system in place in many centres in addition to the many where it already has quality storage facilities, it is just a question of time before this problem is addressed. As regards acceptance of such receipts, the trend is clearly changing for the better. With the forward markets commission also being proactive and watchful, it can be expected that the emphasis on physical delivery will aid sustained growth of commodity trading in India with adequate safeguards for all stakeholders.

EVOLUTION OF COMMODITY MARKET IN INDIA
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures market. Bombay Cotton Exchange Ltd. Was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade Association. The Futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapuri Mandali, which carried on futures trading in groundnut, castor seed and cotton. A future trading in wheat was existent at several places in Punjab and Uttar Pradesh. But the most notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920. Calcutta Hessian Exchange Ltd. Was established in 1919 for futures trading in raw jute and jute goods. But organized futures trading in raw jute began only in 1927 with the establishment of east India jute Association Ltd. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to conduct organized trading in both raw jute and jute goods. Forward Contracts (Regulation) Act was enacted in 1952 and the Forward Markets Commission (FMC) was established in 1953 under the ministry of Consumer Affairs and Public Distribution. In due course several other exchanges were created in the country to trade in diverse commodities.





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. The table gives the total annualized volumes on various exchanges.

While the implementation of the Kabra committee recommendations were rather show, 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 Exchange of India Ltd


Commodity Exchange
Products Approx.
Annual vol
(Rs. Crore)
National Board of Trade, Indore Soya, Mustard 80000
National Multi-Commodity Exchange, Ahmedabad Multiple 40000
Rajdhani Oil & Oil Seeds Mustard 3500
Vijai Beopar Chamber Ltd, Muzzaffarnagar Gur 2500
Ahmedabad Commodity Exchange Castor, Cotton 3500
Rajkot Seeds Oil & Bullion Exchange Castor, Groundnut 2500
IPSTA, Cochin Pepper 2500
Chamber of Commerce, Hapur Gur, Mustard 2500
Bhatinda Om and Oil Exchange Gur 1500
Other (mostly inactive) 1500
Total 140000



Commodity Exchange Registered in India
Commodity Exchange Products Traded
Bhatinda Om & Oil Exchange Ltd. Gur




The Bombay Commodity Exchange Ltd. Sunflower oil
Cotton (Seed and Oil)
Groundnut (Nut and Oil)
Castor Oil, Catoreseed
Sesamum (Oil and Oilcake)
Rice bran, Rice bran oil and oil cake
Crude Palm Oil
The Rajkot Seeds Oil & Bullion Merchants Groundnut Oil
Association Ltd., Castor Seed
The Kanpur Commodity Exchange Ltd. Rapeseed / Mustard seed oil and
Cake
The Meerut Argo Commodities Exchange Co. Ltd. Gur
The Spieces and Oilseeds Exchange Ltd, Sangli Turmeric
Ahmedabad Commodities Exchange Ltd. Cotton seed, Castor seed
Vijay Beopar Chamber Ltd., Muzaffarnagar Gur
India Pepper & Spice Trade Association, Kochi Pepper
Rajdhani Oils and Oilseeds Exchange Ltd., Delhi Gur, Rapeseed/Mustard seed Sugar Grade-M
National Board of Trade, Indore Rapeseed/Mustard seed/ Oil Cake/ Soybean/Meal/Oil, Crude Plam Oil
The Chamber of Commerce, Hapur Gur, Rapeseed/Mustard seed
The East India Cotton Association, Mumbai Cotton
The Central India Commercial Exchange Ltd., Gwaliar Gur
The East India Jute & Hessian Exchange Ltd., Kolkata Hessian, Sacking
First Commodity Exchange of India Ltd., Kochi Copra, Coconut Oil & Copra Cake
The Coffee Futures Exchange India Ltd., Coffee




























COMMODITY TRADING MECHANISM

 TRADING

 CLEARING

 SETTLEMENT
























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 operation. 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.

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 of 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 contracts

Feb 20 Contracts

March 20 Contracts

April 20 Contracts

May 20 Contracts

June 20 Contracts


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 requirements. These conditions are broadly divided into the following categories.

• Time Conditions

• Price Conditions

• Other Conditions

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 conceal order, good till day order, good till cancelled order, good till date order and spread order.

TIME CONDITIONS

1. Good till day order:

A day order, as the name suggest 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 March1, 2004 in refined palm oil on the commodity exchange. A day order is placed at Rs. 340/10Kg. 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 again 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 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 March1, 2004 in refined palm oil on the commodity exchange. When a market touches Rs. 400/ 10Kg. theoretically, the order exits 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.

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 of this day / date, the order is cancelled from the system. Each day / date counted are 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 there order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

5. All or None Order (AON):

All or none order (AON) is a limit order, which is to be executed in it’s entirely, 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 filled 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 price for 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 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 or 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 or go short. The order gets filled at the suggested stoop 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 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 on 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.

Initial margin: The amount that must be deposited by a customer at the time of entering into a contract is called initial margin. This margin is meant to cover the largest potential loss in one day. The margin is a mandatory requirement for parties who are entering into the contract.

Maintenance margin: A trader is entitled to withdraw any balance in the margin account in excess of the initial margin. To ensure that the balance in the margin account never becomes negative, a maintenance margin, which is somewhat lower than the initial margin, is set. If the balance in the margin account falls below the maintenance margin, the trader receives a margin call and is requested to deposit extra funds to bring it to the initial margin level within a very short period of time. The extra funds deposited are known as a variation margin. If the trader does not provide the variation margin, the broker closes out the position by offsetting the contract.

Additional margin: In case of sudden higher than expected volatility, the exchange calls for an additional margin this is preemptive move to prevent breakdown. This is imposed when the exchange fears that the markets have become too volatile and may result in some payment 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 trade. 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 market-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 the day’s trading session. I 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.

Just as a trader is required to maintain a margin account with a broker, 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 raise din the succeeding month.

1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs.1, 00,000 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 pf 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. NCDX then forwards the mandate form to BJPL. BJPL sends the login ID and password to the mailing address as mentioned in the registration form. The members can then log on through the website of BJPL and view the billing amount and the due date. Advance email intimation is also sent to the members. Besides, billing details can be view 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 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, 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 tin any contract. The total numbers of outstanding contracts (long/short) at any point in time is called the” Open interest”. This Open interest figure is a good indicator of the liquidity in every contract. Based on studies carried out in international exchange, it is found that open interest is maximum of near month expiry contracts.
CLEARING AND SETTLEMENT

Most futures contracts do not lead to the actual physical delivery of the underlying asset. The settlement is done by closing out open positions, physical delivery or cash settlement. All these settlement functions are taken care of by an entity called clearing house or clearing corporation. Nation al 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 happens through the exchange clearing house. A clearing house is a system by which exchange 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 calculate. 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 particiapants.

The clearing house has as number of members, who are mostly financial institutions responsible for the clearing and settlement of commodities traded on the exchange. The margin account 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 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 member s including professional clearing members (PCM’s) are entitled to clear and settle contracts through the clearing house.

The clearing mechanism essentially involves working out open positions and obligations of clearing members. This position is considered for exposure 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 meter 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 or loss as determined on the basis of final settlement price.
Clearing Banks:

NCDEX has designated clearing banks through whom funds to be paid and or to be received must be settled. Every clearing member is required to maintain and operate a clearing account with any one of the designated clearing bank branches. The clearing account is to be used exclusively for clearing operations i.e. for settling funds and other obligations to NCDEX including payments of margins and penal charges. A clearing member can deposit funds into this account, but can withdraw funds from this account only in his self-name. A clearing member having funds obligations to pay is required to have clear balance in his clearing account on or before the stipulated pay-in day and the stipulated time. Clearing members must authorize their clearing bank to access their clearing account for debiting and crediting their accounts as per the instructions of NCDEX, reporting of balances and other operations as may be required by NCDEX from time to time. The clearing bank with debit or 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 Limited undertakes clearing of trades executed on the NCDEX.




SETTLEMENT

Futures contracts have two types of settlement, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting or 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 session, daily settlement price is computed as per the methods prescribed by the exchange from time to time.

Final Settlement Price: Final Settlement price is the closing price of the underlying commodity on the last trading day of the futures contract. All open positions in a futures contract cease to exist after its expirations 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 make s the process a little more complicated.











Types of Settlement




Daily Settlement
Final Settlement



Daily Settlement Price
Handles daily price fluctuation for all trades (mark to market)
Daily process at end of day
Final Settlement Price
Handles Final Settlement of all open positions

On contract expiry date


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 the profit or loss is determined as below:

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

MTM on a long position in cotton futures

A clearing member buys one December expiration long staple cotton futures contract at Rs.6435 per Quintal on December 15. The unit of trading is 11 bales and enact contract is for delivery of 55 bales of cotton. The member closes the position on December 19. The MTM profits or losses get added or deducted from his initial margin on a daily basis.


Date
Settlement Price
MTM

Dec15,2003
Dec16,2003
Dec17,2003
Dec18,2003
Dec19,2003

6320
6250
6312
6310
6315

-115
-70
+62
-2
+5



Above Table explains the MTM margins to pay by a member who buys one unit of December expiration long staple cotton contract at Rs.6435 per Quintal (18.7 Quintals = 11 bales) on December 15. The unit of trading is 11 bales and each contract is for delivery of 55 bales of cotton. The member closes the position on December 19. The MTM profit or loss per unit of trading shows at he makes a total loss of Rs.120 per Quintal of trading. Sp upon closing his position, he makes a total loss of Rs.2244, (18.7*120) on the long position taken by him. The profit or loss made by him however gets added or deducted form his initial margin on a daily basis.

A clearing member sell one December Expiration long staple cotton futures contract at Rs.6435 on December 15. The unit of trading is 11 bales and each contract is for delivery of 55 bales of cotton. The member closes the position of December 19. The MTM profits or losses get added or deducted from his initial margin on a daily basis.

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 or 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 fro 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.

Non-fulfillment of either the whole or part of the settlement obligations is traded as a violation of the rules, bye-laws and regulations of NCDEX and attracts penal charges as stipulated by NCDEX 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 time 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 provided alternatives like delivery place, month and quality specifications. Trading period, delivery date etc are all defined as per the settlement calendar. A member is bound to provide delivery information. If he fails to give information, it is closed out with penalty as decided by the exchange. A member can choose an alternative mode of settlement by providing counter party clearing member and constituent. The exchange is however not responsible for not 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 of 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 no the available information, the matching for deliveries is done, firstly, on the basis of location 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 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 tools a long position in two gold futures contracts of 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.

CASH SETTLEMENT

Contracts held till the last day of trading can be cash settled. When a contract is settled in cash, it is marked to the market at the end of the last trading day and all positions are declared closed. The settlement price on the last trading day is set equal to the closing spot price of the underlying asset ensuring the convergence of futures prices and the spot prices. For example an investor tool as short position in five long staple cotton futures contracts on December 15 at Rs.6950. On 20th February, the last trading day of the contract, the spot price of long staple cotton is Rs.6725. This is the settlement price for his contract. As a holder of a short position on cotton, he does not have to actually deliver the underlying cotton, but simply takes away the profit of Rs.225 per trading unit of cotton in the form of cash entities involved in physical settlement.

ENTITLESINVOLVED 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 specifies accredited warehouses through which delivery of a specific commodity can be affected and which will facilitate for storage of commodities. For the service 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.

FOLLOWING ARE THE FUNCTIONS OF AN ACCREDITED WAREHOUSE

1. Earmark separate storage area as specified by the exchange 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 ware house 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.


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. Established 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.
4. Ensures that the credit of commodities-oes only to the demat account of Rs.5 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 ao0n 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-coordinating 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 Participants


NSDL



Ware House

R & T Agent

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 of the commodity futures:


 Pricing futures contracts on commodities

 Pricing futures contracts on investment commodities

 Pricing futures contracts on consumption commodities















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 untill its close. The prices are freely and competitively derived. Future price are therefore considered to be superior to the 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.


THE COST OF CARRY MODEL:

Use arbitrage arguments to arrive at the fair value of futures. For pricing Purposes, we treat the forward and the futures market as one and the same. A futures Contract is nothing but a forward contract that is exchange traded and that is settled at the end of each day. The buyer who needs an asset in the future has the choice between buying the underlying asset today in the spot market and holding it, or buying it in the forward market. If he buys it in the spot market today, it involves opportunity costs. He incurs the cash outlay for buying the asset and he also incur costs for storing it. If instead he buys the asset in the forward market, he does not incur an initial outlay. However the costs of holding the asset are now incurred by the seller of the forward contract who charges the buyer a price that is higher that the price of the asset in the spot market.

Let us take an example of a futures contract on a commodity and work out the price of the contract. The spot price of silver is Rs 7000/kg. if the cost of financing is 15% annually, what should be the futures price of 100 gms of silver one month down the line ? Let us assume that we’re on 1st January 2005. How would we compute the price of a silver futures contract expiring on 30th January? From the discussion above we know that the futures price is nothing but the spot price plus the cost-of-carry. Let us first try to work out the components of the cost-of-carry model.

1. what is the spot price of silver? the spot price of silver, S = Rs.7000/10gms.
2. what is the cost of financing for a month? eo-15*30/365.
3. what are the holding costs? Let us assume that the storage cost = 0.
4. In this case the fair value of the futures price, works out to be = Rs.7174.

F = SerT = 7000e0.15*30/365 = Rs.7086.80

If the contract was for a three month period i.e. expiring on 30th march, the cost of financing would increase the futures price. Therefore, the futures price would be F= SerT =7000e15*30/365 = 7263.75. pricing futures contracts on investment commodities.

In the example above we saw how a futures contract on gold could be priced using .Arbitrage arguments and the cost-of-carry model. In the example we considered, the gold contract was for 10 grams of gold. Hence we ignored the storage costs. However, if the one-month contract was for a 100 kgs of gold instead of 10 gms, then it would involve non-zero holding costs which would include storage and insurance costs. The price of the futures contract would then be Rs.7086.80 plus the holding cost. The indicative warehouse charges for accredited warehouse/vaults that will function as delivery centers for contracts that trade on the NCDEX. Warehouse charges include a fixed charge per deposit of commodity into the warehouse, and a per unit per week charge. The per unit charges include storage costs and insurance charges.


We saw that in the absence of storage costs, the futures price of a commodity that is an investment asset is given by F = SerT . Storage costs add to the cost of carry. If U is the present value of all the storage costs that will be incurred during the life of a futures contract, it follows that the futures price will be equal to

F = (S+U) erT

Where:
r = Cost of Financing (Annualizes)
T = Time till expiration
U = Present value of all storage costs.

Pricing futures contracts on consumption commodities

We used the arbitrage argument to price futures on investment commodities. For commodities that are consumption commodities rather than investment assets, the arbitrages arguments used to determine futures prices need to be reviewed carefully. Suppose we have

F > (S+U)erT

To take advantage of this opportunity, an arbitrager can implement the
following strategy :
1. Borrow an amount S + U at the risk free interest rate and use it to purchase one
unit of the commodity and pay storage costs.
2. Short a forward contract on one unit of the commodity.

If we regard the futures contract as a forward contract, this strategy leads to a profit of F = (S+U)erT at the expiration of the futures contract. As arbitragers exploit this opportunity, the spot price will increase and the futures price will decrease until equation F > (S+U)erT does not hold good. Suppose next that F < (S+U)erT


In case of investment assets such as gold and silver, many investors hold the
commodity purely for investment. When they observe the inequality, they will find it profitable to trade in the following manner:
1. Sell the commodity, save the storage costs, and invest the proceeds at the
risk-free interest rate.
2. Take a long position in a forward contract.

This would result in a profit at maturity of (S+U)erT relative to the position that
the investors would have been in had they held the underlying commodity. As arbitragers exploit this opportunity, the spot price will decrease and the futures price will increase until it does not hold good. This means that for investment assets, the equation holds good. However, for commodities like cotton or wheat that are held for consumption purpose, this argument cannot be used. Individuals and companies, who keep such a commodity in inventory, do so, because of its consumption value not because of its value as an investment. They are reluctant to sell these commodities and buy forward or futures contracts because these contracts cannot be consumed. Therefore there is unlikely to be arbitrage when the equation holds good. In short, for a consumption commodity therefore

F <= (S+U)erT

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

THE FUTURES BASIS

The cost-of-carry model explicitly defines the relationship between the futures price and the related spot price. The difference between the spot price and the futures price is called the basis. We see that as a futures contract nears expiration, the basis reduces to zero. This means that there is a convergence of the futures price to the price of prices will fall leading to the convergence of the future price with the spot price. If the futures price is below the spot price during the delivery period all parties interested in buying the asset will take a long position. The trader would buy the contract and sell the asset in the spot market making a profit equal to the difference between the future price and spot price. As more traders take a long position the demand for the particular asset would increase and the futures price would rise nullifying the arbitrage opportunity.

Nuances

 As the date of expiration comes near, the basis reduces- there is a convergence of the futures price towards the spot price. On the date of expiration, the basis is zero. If it is not, then there is an arbitrage opportunity. Arbitrage opportunities can also arise when the basis (difference between spot and future price) or the spreads difference between prices of two futures contracts) during the life of a contract are incorrect. At a later stage we shall look at how these arbitrage opportunities can be exploited.

 There is nothing but cost of carry related arbitrage that drives the behavior of the
futures price in the case of investment assets. In the case of consumption assets,
we need to factor in the benefit provided by holding the physical commodity.

 Transactions costs are very important in the business of arbitrage.








PARTICIPANTS IN COMMODITY MARKET


• Hedging


• Speculation


• Arbitrage













PARTICIPANTS IN COMMODITY MARKET:

For a market to succeed it must have all three kinds of participant’s – hedgers,
speculators and arbitragers. The confluence of these participants ensures liquidity and
efficient price discovery on the market. Commodity market give opportunity for all three kinds of participants.

HEDGING

Many participants in the commodity futures market are hedgers. They use the futures market to reduce a particular risk that they face. This risk might relate to the price of wheat or oil or any other commodity that the person deals in. The classic hedging example is that of wheat farmer who wants to hedge the risk of fluctuation in the price of wheat around the time that his crop is ready for harvesting. By selling his crop forward, he obtain a hedge by locking into a predetermined price. Hedging does not necessarily improve the financial outcome; indeed, it could make the outcome worse. What it does however is, that it makes the outcome more certain. Hedgers could be government institution, private corporation like financial institution, trading companies and even other participants in the value chain, for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices.

BASIC PRINCIPLES OF HEDGING

When an individual or a company decides to use the futures markets to hedge a risk, the objective is to take a position that neutralizes the risk as much as possible. Take the case of a company that knows that it will gain Rs.1,00,000 for each 1 rupee increase in the price of a commodity over the next three months and will lose Rs.1,00,000 for each 1 rupee decrease in the price of a commodity over the same period. To hedge, the company should take a short futures position that is designed to offset this risk. The futures position should lead to a loss of Rs.1,00,000 for each 1 rupee increase in the price of the commodity over the next three months and a gain of Rs,1,00,000 for each 1 rupee decrease in the price during this period. If the price of the commodity goes down, the gain on the futures position offsets the loss on the
commodity.


Payoff for buyer of a short hedge


The figure shows the payoff for a soy oil producer who takes a short hedge.
Irrespective of what the spot price of soy oil is three months later, by going in for a short hedge he locks on to a price of Rs.450 per MT.

Profit

Long position in Soya oil





46.5



Price of Soya oil







Short position Soya oil futures
Loss


The price of the commodity goes up, the loss on the futures position is offset by the gain on the commodity. There are basically two kinds of hedges that can be taken. A company that wants to sell an asset at a particular time in the future can hedge by taking short futures position. This is called a short hedge. Similarly, a company that knows that it is due to buy an asset in the future can hedge by taking long future position. This is known as long hedge.
A short hedge is a hedge that requires a short position in futures contracts. As we said, a short hedge is appropriate when the hedger already owns the asset, or is likely
to own the asset and expects to sell it at some time in the future. For example, a short hedge could be used by a cotton farmer who expects the cotton crop to be ready for sale in the next two months. A short hedge can also be used when the asset is not owned at the moment but is likely to be owned in the future.

Hedge Ratio


Hedge ratio is the ratio of the size of position taken in the futures contracts to the size of the exposure in the underlying asset. So far in the example we used, we assumed that the hedger would take exactly the same amount of exposure in the futures contract as in the underlying asset. For example, if the hedger exposure in the underlying was to the extent of 11 bales of cotton, the futures contracts entered into were exactly for this amount of cotton. We were assuming here that the optimal hedge ratio is one. In situation where the underlying asset in which the hedger has an exposure is exactly the same as the asset underlying the futures contract he uses and the spot and futures market are perfectly correlated, a hedge ratio of one could be assumed. In all other cases, a hedge ratio of one may not be optimal. Below equation gives the optimal hedge ratio, one that minimizes the variance of the hedger’s position.


h =  sf

Where :
S : Change in spot price, S , during a period of time equal to the life of the hedge.
F : Change in futures price, F, during a period of time equal to the life of the hedge.
s : Standard deviation of S.
f : Standard deviation of F.
 : Coefficient of correlation of S and F.
h : Hedge ratio.

Advantages of Hedging

Besides the basic advantage of risk management / hedging also has other advantages:

1. Hedging stretches the marketing period. For example, a livestock feeder does not have to wait until his cattle are ready to market before he can sell them. The futures market permits him to sell futures contracts to establish the approximate sale price at any time between the time he buys his calves for feeding and the time the fed cattle are ready to market, some four to six months later. He can take advantage of good prices even though the cattle are not ready for market.

2. Hedging protects inventory values. For example, a merchandiser with a large, unsold inventory can sell futures contracts that will protect the value of the inventory, even if the price of the commodity drops.

3. Hedging permits forward pricing of product. For example, a jewelry manufacturer can determine the cost for gold, silver or platinum by buying a futures contracts, translate that to a price for the finished products, and make forward sales to stores at firm prices. Having made the forward sales, the manufacturer can use his capital to acquire only as much gold, silver, or platinum as may be needed to make the products that will fill its orders.


SPECULATION

An entity having an opinion on the price movements of a given commodity can speculate using the commodity market. While the basics of speculation apply to any market, speculation in commodity is not as simple as speculation on stocks in the financial market. For a speculator who thinks the shares of a given company will raise, it is easy to buy the shares and hold them for whatever duration he wants to.

However, commodities are bulky products and come with all costs and procedures of handling these products. The commodities futures markets provide speculators with an easy mechanism to speculate on the price of underlying commodities.

To trade commodity futures on the NCDEX, a customer must open a futures trading account with a commodity derivatives broker. Buying futures simply involves putting in the margin money. This enables futures traders to take a position in the underlying commodity without having to actually hold that commodity. With the purchase of futures contract on a commodity, the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future ( the expiration date of the contract ). We look here at how the commodity futures markets can be used for speculation.

Today a speculator can take exactly the same position on gold by using gold futures contracts. Let us see how this work. Gold trades at Rs.6000 per 10 gms and three months gold futures trades at Rs.6150. The unit of trading is 100 gms and the deliver unity for the gold futures contract on the NCDEX is 1 kg. He buys one kg of gold futures which have a value of Rs.6,15,000. Buying an asset in the futures markets only require making margin payments. To take this position, he pays a margin of Rs.1,20,000. Three months later gold trades at Rs.6400 per 10 gms. As we know, on the day of expiration, the futures price converges to the spot price ( else there would be a risk-free arbitrage opportunity ). He closes his long futures position at Rs.6400 in the process making a profit of Rs.25,000 on an intial margin investment of Rs.1,20,000. This works out to an annual return of 83 percent. Because of the leverage they provide, commodity futures form an attractive tool for speculators.

Speculation : Bearish Commodity, Sell Futures:

Commodity futures can also be used by a speculator who believes that there is likely to be excess supply of a particular commodity in the near future and hence the prices are likely to see a fall. How can he trade based on this opinion? In the absence of a defeqqal product, there wasn’t much he could do to profit from his opinion. Today all he needs to do is sell commodity futures.

Let us understand how this works. Simple arbitrage ensures that the price of a futures contract on commodity moves correspondingly with the price of the underlying commodity. If the commodity price rises, so will the futures price. If the commodity price falls, so will the futures price. Now take the case of the trader who expects to see a fall in the price of cotton. He sells ten two month cotton futures contract which is for deliver of 550 bales of cotton. The value of the contract is Rs. 4,00,000. He pays a small margin on the same. Three months later, if his hunch were correct the price of cotton falls. So does the price of cotton futures. He close out his short futures position at Rs.3,50,000, making a profit of Rs. 50,000.


ARBITRAGE

A central idea in modern economics is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of the same asset is different in two market, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize price and restore market efficiency.

F = (S+U)erT

Where :

F : Future Price of Commodity

r : Cost of Financing (Annualized)

T : Time Till Expiration

U : Present Value of all Storage Costs

S : Storage Price

















REGULATORY FRAME WORK

o Rules Governing Commodity Derivatives Exchange
o Rules Governing Intermediaries
o Rules Governing Investor Grievances and
Arbitration

























REGULATORY FARMEWORK FOR COMMODITY TRADING IN INDIA

At present there are three tiers of regulations of Forwards/Futures Trading System in India, namely, government of India, Forward Market Commission (FMS) 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 Market 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 legislation, which impinge on their working.
Forward Market 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 condition) and to protect and promote interest of customers/nonmembers. It prescribes the following regulatory measures:
1. Limit on net open position as on the close of the trading hours. Some times limit is also 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 falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the exchanges.
5. Skipping trading in certain derivatives of the contract closing the market for a specified period and even closing out the contract: These extreme measures are taken only in emergency situations.
Besides these regulatory measures, the F.C ® 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 malpractices like trading ahead of clients, etc. The FMC has also mandated all the exchanges following open outery system to display at a prominent place in exchange premises, the name, address, telephone number of the officer of the commission who can be contacted for any grievance. The website of the commission also has a provision for the customers to make complaint and send comments and suggestions to the FMC, Officers of the FMC have been instructed to meet the members and clients on a random basis, whenever they visit exchanges, to ascertain the situation on the ground, instead of merely attending meetings of the board of directors and holding discussions with the 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 divided into two main divisions pertaining to trading and clearing. The NCDEX provides an automated trading facility in all 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.
Trading members have to pass a certification program/ which has been prescribed by the exchange. In case of trading members/ other than individuals or sole proprietorships/ such certification program has to be passed by at least one of their directors/ employees/ partners/ members of governing body.
Each trading member is permitted to appoint a certain number of approved users as 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 excepts 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 traded only once the market opens for trading on the following working day.

The types of order books, trade books, price limits, matching rules and other parameters pertaining to each or all of these sessions is specified by the exchange to the members via its circulars or notices issued from time to time. Member 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 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 prescribes the number of days after which Good Till Cancelled orders will be cancelled by the system. It
specifies parameters like lot size in which orders can be placed, price steps in which orders shall be entered on the trading system, position limits in respect of each commodity etc.

Failure of Trading Member Terminal

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



Trade Operations

Trading members have to ensure that appropriate confirmed order instructions are obtained from the constituents before placement of an order on the system. They have to keep relevant records or documents concerning the order and trading system order number and copies of the order confirmation slip/ modification slip must be made available to the constituents.
The trading member has to disclose to the exchange at the time of order entry whether the order is on his own account or on behalf of constituents and also specify orders for buy or sell as open or close orders. Trading members are solely responsible for the accuracy of details of orders entered into the trading system including orders entered on behalf of their constituents. Trades generated on the system are irrevocable and 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 includes the following: if effect, take part either directly or indirectly in transactions, which are likely to have effect of artificially, raising or depressing the prices of spot derivatives contracts.
Indulge in any act, which is calculated to create a false or misleading appearance of trading, resulting in reflection of prices, which are not genuine.
• Buy, Sell commodities/ contracts on his own behalf or on behalf of a person associated with him pending the execution of the order of his constituent or of his company or directory for the same contract.
• Delay the transfer of commodities in the name of the transferee. Indulge in falsification of his books, accounts and records for the purpose of market manipulation.
• When acting as an agent, execute a transaction with a constituent at a price other than the price at which it was executed on the exchange.
• Either take opposite position to an order of a constituent or execute opposite orders which he is holding in respect of two constituents except in the manner laid down by the exchange.

CLEARING

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

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, 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 settles 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.

RULES GOVERNING INVESTOR GRIEVANCES, ARBITRATION

In matters where the exchange is a party to the dispute, the civil courts at Mumbai have exclusive jurisdiction and in all other matters, proper courts within the area covered under the respective regional arbitration centre have jurisdiction in respect of the arbitration proceedings falling/conducted in that regional arbitration center.
For the purpose of clarity, we define the following:
 Arbitrator means a sole arbitrator or a panel of arbitrators
 Applicant means the person who makes the application for initiating arbitral
proceedings.
 Respondent means the person against whom the applicant lodges an arbitration
application, whether or not there is a claim against such person.
If the value of claim, difference or dispute is more than Rs.25 Lakhs on the date of
Application/ then such claim, difference or dispute are to be referred to a panel of
three arbitrators .If the value of the claim ,difference or dispute is up to Rs. 25 Lakh. Then they are to be referred to a sole arbitrator. Where any claim, difference or dispute arises between or dispute, the member, to whom such agent of the member is affiliated, is impeded as a party. In case the warehouse refuses or fails to communicate to the constituent the transfer of commodities, the date of dispute is deemed to have arisen on
1. The date of receipt of communication of warehouse refusing to transfer the commodities in favor of the constituent.

2. The date of expiry of 5 days from the date of lodgment of dematerialized request by the constituent for transfer with the seller, whichever is later.

PROCEDURE FOR ARBITRATION:

The applicant has to submit to the exchange application for arbitration in the specified from (Form No.I/IA) along with the following enclosures.

1. The statement of case (containing all the relevant facts about the dispute and relief sought).
2. The statement of accounts.
3. Copies of members-constituent agreement
4. Copies of the relevant contract notes, invoice and delivery challan.
5. The applicant has to submit to the exchange








IN SIGHTS OF MARKET & TRADING SPECIFICATIONS
FOR COMMODITIES

• Crude Oil

• Rubber

• Gold

• Rice

• Cotton
















CRUDE OIL

A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in color / of variable specific gravity and viscosity; often referred to simply as crude.

VARIETIES OF CRUDE OIL

The petroleum industry often characterizes crude oils according to their geographical source, e.g., Alaska North Slope Crude Oils from different geographical areas have unique properties; they can vary in consistency from a light volatile fluid to a semi-solid. The classification scheme provided below is more useful in a response scenario.

Class A: Light / volatile Oils – These oils are highly fluid, often clear / spread rapidly on solid or water surfaces / have a strong odor / a high evaporation rate / and are usually flammable. They penetrate porous surfaces such as dirt and sand / and may be persistent in such a matrix. They do not tend to adhere to surfaces; flushing with water generally removes them. Class A oils may be highly toxic to humans / fish and other biota. Most refined products and many of the highest quality light crude can be included in this class.

Class B: Non-Sticky Oils – These oils have a waxy or oily feel. Class B oils are less toxic and adhere more firmly to surfaces than Class A oils / although they can be removed from surfaces by vigorous flushing. As temperatures rise / their tendency to penetrate porous substrates increases and they can be persistent. Evaporation of volatiles may lead to a Class C or D residue. Medium to heavy paraffin-based oils fall into this class.

Class C: Heavy / sticky Oils – Class C oils are characteristically viscous / sticky or tarry / and brown or black. Flushing with water will not readily remove this material from surfaces / but the oil does not readily penetrate porous surfaces. The density of Class C oils may be near that of water and they often sink. Weathering or evaporation of volatiles may produce solid or tarry Class D oil. Toxicity is low / but wildlife can be smothered or drowned when contaminated. This class includes residual fuel oils and medium to heavy crude’s

Class D: Non fluid Oils – Class D oils are relatively non-toxic / do not penetrate porous substrates, and are usually black or dark brown in color. When heated, Class D oils may melt and coat surfaces making cleanup very difficult. Residual oils, heavy crude oils / some high paraffin oils / and some weathered oils fall into this class.

These classifications are dynamic for spilled oils; weather conditions and water temperature greatly influence the behavior of oil and refined petroleum products in the environment. For example, as volatiles evaporate from Class B oil, it may become Class C oil. If a significant temperature drop occurs (e.g., at night), a class C oil may solidify and resemble a Class D oil. Upon warming, the Class D oil may revert back to Class C oil.

CATEGORIES OF CRUDE OIL

1. West Teas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 degrees (making it a “light” crude oil), and it contains only about 0.24 percent of sulfur (making a “sweet” crude oil). WTI is generally priced at about a $2.4 per barrel premium to OPEC Basket price and about $1.2 per barrel premium to Brent, although on a daily basis the pricing relationships between these can very greatly.
2. Brent Crude Oil stands as a benchmark for Europe.
3. India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has identified China and India as their main buyers of oil in Asia for several years to come.


India in World Crude Oil Industry

Petroleum and Natural Gas: The recent exploration and production activities in the country have lead to a dramatic increase in the output of oil. The country currently produces 35 million tones of crude oil, two-third of which is from offshore areas and imports another 27 million tones. Refinery production in terms of crude throughput of the existing refineries is about 54 million tones.
Natural gas production has also increased substantially in recent years, with the country producing over 22,000 million cubic meters. Natural gas is rapidly becoming an important source of energy and feedstock for major industries. By the end of the Eight Five Year Plan, production was likely to reach 30 billion cubic meters.

Factors Influencing Crude Oil Markets

1. Shortage of oil supplies
2. Taxation – when oil taxes are raised, end consumers often mistakenly blame the oil producers, but it is really their own governments that are responsible.
3. Balance of demand and supply in the short term
4. Rate of investment in the longer term
5. Accidents
6. Bad weather
7. Increasing demand
8. Halting transport of oil from producers
9. Labour disputes

If traders in the oil market believe there will be a arbitrage of oil supplies, they may raise prices before a shortage occurs.

Causes of Low Oil Prices

1.Imbalance between supply and demand.If oil production rises faster than demand.
2.If the oil industry is unprofitable and discourages investors.

Causes of High Oil Prices

1. Shortage of oil supplies
2. Balance of demand and supply in the short term
3. Rate of investment in the longer term
4. If traders in the oil market believe there will be a shortage of oil supplies, they may raise prices before a shortage occurs.
5. War, Natural disasters

Crude Oil Reserves

World crude oil reserves are estimated at more than one trillion barrels of which the 11 OPEC Member Countries hold more than 75 Percent. OPEC’s Members currently produce around 27 million to 28 million barrels per day of oil, or some 40 percent of the world total output, which stands at about 75 million barrels per day.

Is the World Running Out of Oil?

Oil is a limited resource, so it may eventually run out, although not for many years to come. OPEC’s oil reserves are sufficient to last another 80 years at the current rate of production, which non-OPEC oil producer’s reserves might last less than 20 years. The worldwide demand for oil is rising and OPEC is expected to be an increasingly important source of that oil.

Use o f Crude Oil

Gasoline, petrol liquefied, petroleum gas (LPG) naphtha, kerosene, gas oil, fuel oil, lubricants, asphalt (used in paving roads), Naphtha, gas oil, ethane, ethylene, propylene, butadiene, benzene, ammonia, methanol, plastics, synthetic fibers, synthetic rubbers, detergents, chemical fertilizers.







Exchanges Dealing in Crude Futures Apart From MCX
1. The New York Mercantile Exchange (NYMEX)
2. The International Petroleum Exchange of London (IPE)
3. The Tokyo Commodity Exchange(TOCOM)


Crude Oil Units (average gravity)
1. 1 UD barrel = 42 US gallons
2. 1 US barrel = 158.98 liters
3. 1 tonne = 7.33 barrels
4. 1 short ton = 6.65 barrels





















RUBBER

Macro molecular material which has or can be given, properties of:

1. Returning rapidly (at room temperature) to the approximate shape from which it has been substantially distorted by a weak stress, and
2. Not being easily remolded to a permanent shape by the application of heat and moderate pressure.

VARIETIES OF RUBBER

1. Natural latex – This is a white fluid obtained from the rubber tree. It contains small particles of rubber dispersed in an aqueous medium. The aqueous medium also contains plant proteins which are thought to be responsible for triggering the allergy.
2. Natural Rubber – This includes all material made from or containing latex. Natural rubber is made by two processes, the natural rubber latex process (NRL) and the dry natural rubber process (DNR).

Standard Grades

Natural rubber is produced primarily in three countries:
1. Thailand
2. Malaysia
3. Indonesia

The following are the specification scheme for each country:

1. STR : Standard Thai Rubber
2. SMR : Standard Malaysia Rubber
3. SIR : Standard Indonesia Rubber


Present Status in India

With around 6000 unit comprising 30 large scale, 300 medium scale and around 5600 SSI/tiny sector units, manufacturing 35000 rubber products, employing 400 hundred thousand people, including around 22000 technically qualified support personnel, with a turnover of Rs.200 billions and contributing Rs.40 billions to the National Exchequer through taxes, duties and other levies, the Indian Rubber.

Industry plays a core sector role in the Indian National Economy. The industry has certain distinct advantages like:
1. An extensive plantation sector
2. Indigenous availability of the basic raw materials, like natural rubber, synthetic
rubber, reclaim rubber, carbon black, rubber chemicals, fatty acids, rayon and
nylon yarn and so on.
3. A large domestic market.
4. Availability of cheap labor.
5. Training facility in various technical institutes
6. On-going economic reforms
7. Improved living standards of the masses.

India and the World

India is the third largest producer, fourth largest consumer of natural rubber and fifth largest consumer of natural rubber and synthetics rubber together in the world. Besides, India is the world’s largest manufacturer of reclaim rubber. In fact, India and China are the only two countries in the world which have the capacity to consume the entire indigenous production of natural rubber and thereby obviate the compulsion and over dependence on exports of surplus quantity of natural rubber. The plantation sector with an estimated production of over 630 hundred thousand tones of natural rubber and a projected production of more than one million tones in hear future, helps radical and rapid growth of the Indian rubber industry. The growth prospect is further enlarged by a boom in the vehicle industry, improved living standards of masses and rapid over-all industrialization.

The per capita consumption of rubber in India only 800 grams against 12 to 14 kilos in Japan, USA and Europe. This envisages tremendous growth prospects of the industry in the years to come as India is far from attaining any saturation level, so far as consumption of rubber products is concerned.

Range of products

The wide ranges of rubber products manufactured by the Indian rubber industry are
• Auto tyres, Auto tubes, automobiles parts, footwear, belting, hoses, cycle tyres and tubes, cables and wires, camelback, battery boxes, latex products, pharmaceutical goods.

The products manufactured also cover hi-tech industrial items

The important areas which the industry caters to include are – All the three wings of defence

• Civil, Aviation, Aeronautics, Railways and Agriculture transport, textile engineering industries, Pharmaceuticals, mines, steels plant.

Main Sectors

The rubber industry in India is basically divided in two sectors – tyre and non-tyre sector produces all types of auto tyres, conventional as well as radial tyres and exports to advance countries like USA.

The non-tyre sector comprises the medium scale, small scale and tiny units. It produces high technology and sophisticated industrial products. The small scale sector accounts for over 50% of production of rubber goods in the non-tyre sector, Going by share of rubber consumption, automotive tyre sector is the single largest sector accounting for about 50% consumption of all kinds of rubbers, followed by bicycles tyres and tubes 15% footwear 12%, belts and hoses 6%, camelback and latex products 7%. All other remaining rubber products put together account for 10%.

Future Scope

With the saturation in rubber consumption in Western countries and the shift in consumption of rubber to the Asia Pacific region, the focal points for this decade for development will be India. The industry is expected to grow at over 8% p.a in the coming decade. Taking into account the above prospects, the industry envisaged annual growth rate of 8% and the per capita consumption of rubber at 0.8 Kg. against 14 Kg. There exists tremendous scope for expansion and development in coming years provided basic raw materials, particularly natural and synthetic rubber, are made available in adequate quantity and at reasonable prices consumption of 1.25 million tones of rubber with per capita usage of 1.2 Kgs, and exports of rubber goods worth Rs. 30 billion seems possible by the year 2007.

Asia is now the focus of growth in the rubber industry. All the world natural rubber is grown in this region namely Thailand, Indonesia, India, Malaysia, Sri Lanka etc.

The fastest growing economies in the world are here namely China, India Korea, Malaysia etc, world powerhouse Japan is here. The largest investments in new synthetic rubber plants are coming up in Asia. Production of all auto majors is shifting to Asia / even as consumption-wise Asia’s share in the world auto market grows.

Highest growth and availability of technically trained manpower for the rubber industry is in this region. While EU and US have now become a saturated market for the rubber industry all the action is shifting to Asia.

Low demand growth for the end products, high labour costs, very strict environmental norms, non availability of NR in the backyard are all propelling the worlds major input suppliers for the rubber industry to look towards Asia.

World Rubber Production

In early Nineteen nineties, Thailand replaced Malaysia as the top producer and exporter of natural rubber products. This has been the result of a re-planting program. A majority of Thailand’s rubber plantations are located in the southern part of the country.

Thailand leads the rubber producing countries in research and development of natural rubber. This makes Thai natural rubber is the most dependable and consistent. A UI-
majority of rubber products are exported in their raw form such as Technically Specified Rubbers: STR, RSS, Skim Block, ADS, Crape and Latex.

Exports accounts for 90 percent of natural production. The remaining 10 percent is utilized by local manufactures.

Of the 10 percent of total production that is utilized domestically, 55 percent of this amount is processes as value-added goods. Major manufactured rubber product are tires and inner tubes for automotive.

Financial Evaluation of the Rubber Industry

The Rubber Industry has continuously provided a high income for Thailand. Both the value of production and export have increased.

The samples used in this Financial Evaluation study were 106 business organization which were involved with producing and selling the RSS, ADS, TSR, Crape, Skim Block and Concentrate latex.

It was found that the average financial standard ratio was 0.92 of the current Ratio, 0.52 of the Quick Ratio, 11.99 of the Receivable Turnover Ratio, 10.46 of the Inventory Turnover Ratio, 4.32 of the Debts to Equity, 0.81 of the Debts to Total Assets, 0.70 of Long-term Debts of Equity, 2.02 of Time Interests Earned, 9.78 percent of the Gross Profit Margin, 4.29 percent of the operation Profit Margin, 19.86 percent of the Return Equity, and 4.00 percent of the Return on Investment.

With regard to the average Return on Investment of the Rubber industry, the time in which the investment was return was 51 months and 16 days. The average Rate of Return was 16.07 percent. Net percent value was 10/917,544.48 baht. Benefit Cost Ratio was 1.21 time of total benefit. The Internal Rate of Return was 18.63 percent. When comparing the size of business organization it was found that a big business organization was the most profitable / followed by the medium and small business.

Raw Material & Machinery

The yardstick to measure the growth rate of the industry is the rubber consumption. Besides rubbers-natural, synthetic and reclaim there are other raw materials required by the industry. These include: Carbon black / rubber chemicals, tyre cords/ plasticizers, process off zinc oxide / stearic acid, titanium dioxide and other miscellaneous chemicals which are all available indigenously. This apart, almost all types of major rubber machinery being manufactured in the country.

Exports

India’s exports rubber products including tyres exceed Rs. 2000 Crores.
The range of products exported are-

 Automotive tyres and tubes

 Rubber and canvas footwear

 Cycle tyres

 Pharmaceutical goods

 Rubber hoses, cots and aprons

 Belts and beltings

These Products are exported to over 85 countries, including

 USA

 Germany

 France

 U.K

 Italy

 UAE

 Saudi Arabia

 Africa

 Afghanistan

 Bangladesh








Market Influencing Factors

 The rubber production fluctuates between months and it is normally low during the rainy season.

 Growth in industrial production: automobile industry.

 The ratio of utilization of domestic production and imported rubber by tyre manufactures.

 Government policies have a profound influence on rubber prices. These include
subsidies/ restriction on ports etc.

 International rubber price movements, have a slow influence.

 Stockiest and speculators also play a significant role in influencing prices.
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 expensive 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 750/1000 gold (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 turntable.
• 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 in World Gold Industry

Indian Gold Market

 Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits.

 India is the world’s largest consumer of gold in jewellery as investment

 In July ‘1997 the RBI authorized the commercial banks to imports gold for sale or loan to jewellers 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
jewellery off take is sensitive to price increases 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, the insignificant, both qualitatively and quantitatively.

Major Gold Producing Countries

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

Market Moving Factors

Above ground supply from sales by central banks, reclaimed scrap and official gold loans.

 Producer / miner hedging interest
 World macro-economic factor – US Dollar, Interest rate
 Comparative returns on stock markets
 Domestic demand based on monsoon and agricultural output, Fine gold content

The purity of gold articles is generally described in three way:
Percent %
(parts of gold per 100 ) Fineness
(parts of gold per 1000 ) Karats
( parts of gold per 24 )
100% 999 Fine 24 Karats
91.70% 917 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 100 fine gold and gold said to be 1000 fine is marked down to 999.9 fine, the following fine 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.

RICE:
Rice (oryza sativa) is a plant of the grass family which feeds more than half of the world’s human population. Rice cultivation is well suited to poor countries because though it is very labor- intensive to cultivate-with plenty of water for irrigation it can be grown practically anywhere, even on steep hillsides. Rice is the world’s third largest crop, behind maize and wheat.

VARIETIES OF RICE

There are about 40,000 varieties of rice. Some types of specially rice are:
• Basmati rice
• Kalijira rice
• Para rice
• Risotto
• Lousiana rice
• Red rice
• Black rice
• Carolina rice
• Jasmine rice
• Arboria rice
• Delia rice
• Texamati
• Wehani
Indian rice varieties include

• Long-grained basmati(grown in the north)
• Medium-grained patna
• Short-grained Masoori

FACTORS INFLUENCING RICE MARKETS:

• Enterprise capacities: management capacity, organization of export trade,
linkages and market presence.

• Transport and storage: transport conditions and cost are particularly sensitive
factors for ACP exports, especially for the numerous land-locked and island
countries. Organizing logistics is a core competency for most exporters from
ACP Countries.

• Government policies: Exchange Rates, Fiscal Policies, Export incentives and
export promotion.

• Rice is the second largest produced cereal in the world.

• At the beginning of the 1990’s, annual production was 350 around million tons.

• By the end of the century is has reached 410 million tons.


COTTON:

Cotton is a soft fiber that grows around the seeds of the cotton plant. The fiber is most often spun into thread and used to make a soft, breathable textile. Cotton is a valuable crop because only about 10% of the raw weight is lost in processing. Once traces of was, protein, etc. are removed, the remainder is a natural polymer of pure cellulose. This cellulose is arranged in a way that gives cotton unique properties of strength, durability, and absorbency. Each fiber is made up of twenty to thirty layers of cellulose coiled in a neat series of natural springs. When the cotton boll (seed case) is opened the fibers dry into flat, twisted, ribbon-like shapes and become kinked together and interlocked. This interlocked form is ideal for spinning into a fine yarn.

Factors Influencing Cotton Markets

There are many variables influencing the direction and growth of the global cotton industry. These include:
Cotton’s relationship with synthetic fibers World economic growth and its impact on consumer textile demand seeking new consumption markets for cotton products and Fiber innovation to enhance the spinning ability of the raw cotton, with the aim of encouraging demand.

Important World Cotton Market

East Africa, Tanzania, Uganda Zimbabwe, Uzbekistan/West Africa, Central Asia,
United States.
West Africa and Central Asia are much greater than United States and other markets in part because most West African and Central Asian Cotton is exported. Compared with only 40 percent of U.S. cotton (and 60% of Greek Cotton), prices in countries that export most of their cotton are more likely to converge that prices.








CONCLUSION














CONCLUSION

Though many investors were a bit hesitant about commodities trading but still they were positive as commodities trading will be a boom in a long run after about 5 to 10 years as it is still gaining its popularity.

Many investors thought it’s a very deep study and if one can understand then he can invest in commodities trading.

Many investors asked as to what derivatives has to do in commodities trading.

Many of the investors had a good knowledge about MCX and NCDEX and suggested that those having proper knowledge about these two can invests in commodities trading without much of a doubt.

Many investors were of the opinion that a commodity trading is full of speculation, which is to the utmost extent true.

A commodity trading is considered to give highest returns when compared to other investment options.

A commodity trading is of high risk also when compared to other investment options.

On the whole commodities trading is slowly but surely gaining popularity among investors.


















SUGGESTIONS
















SUGGESTIONS

India has a deep ingrained knowledge in commodity trading ( and particularly forward trading in commodities ), especially in the interior heartland. For last 40 years or so, such forward ( futures ) trading was banned in the country for a variety of reasons and it is being revived now. The ban has meant that two generations have lost touch with the trading skills and the related knowledge levels in the commodity space. Fortunately much of the skill sets have migrated to stock exchanges.

In these intervening years, some regional exchanges specializing in specific commodities, where the bans were lifted, have carried on the baton. Also large informal trading, primarily by the speculative segment of the universe of market participants has remained. This has led to a mindset in the common man in the country that commodity exchanges are purely speculative in nature. The hedging and price discovery functions that they perform are largely ignored today by the cross section of the population.

We need our Exchange to reach to the producers, end-users, and even the retail investors, at a grassroots level. Education and awareness has a key role to play in achieving this vision.

Though commodity futures were introduced in 1998 in India, but still the Indian commodity traders have not started their participation in full enthusiasm. They are apprehensive about the unfamiliar instrument. Lack of awareness and understanding of futures trading could be one of the reasons for the failure of the commodity futures. So there is a need to bridge this knowledge gap among the traders community.

There are about 26 commodity exchanges in India. But only a few of them are active. About 24 of them do not have modern communication facilities. This is a serious problem of concern, necessary steps is to taken to bring out commodity exchanges with the required infrastructure, employees and sophisticated technology.

There are restricted lists of commodities which either cannot be exported / imported at all or can be done only under special licensing norms. Stringency of physical restrictions can adversely affect the use of commodity derivatives in two ways. In the first place the ability of the Indian exporters and importers to access futures markets would depend on the time spread between issuance of licenses and the actual sale or purchase of the commodity. This introduces the time of issuance of license as an additional constraint for the exporters and importers while taking their purchase, sale and risk management decisions. Therefore, prevalence of quantitative restrictions in India on commodities can put the Indian foreign traders associated with such commodities in a disadvantageous position in the international futures market. Stringent measures have to be taken in this context and situations of this sort should further be analyzed to take pressure off from the traders.






















References & Sources of Data:

BOOKS:

• NCFM Module on commodity markets.
• Fundamentals of Futures & Options Market by joh. C. Hull, Pearson Education, Inc.
• NCDEX handbook for commodities.
 

praveenk

New member
Can anybody give me informtion about online commodity trading and how to trade online by sitting at home?i guess you need a platform for it.please suggest good one among indiabulls,religare and reliance money!
 
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