Commodity Market Questionnaire

Awareness of commodity market with reference Derivative investors

A PROJECT REPORT ON

“Awareness of commodity market with reference Derivative investors”

BABASAB PATIL MBA FINANCE PROJECT REPORT

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CONTENTS SL.NO

PARTICULARS

1.

Executive Summary

2.

Research Methodology

3.

Company profile

4.

Introduction to the topic

5.

Analysis and interpretation

6.

Findings

7.

Suggestions

8.

Conclusion

9.

Bibliography


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CONTENTS SL.NO

PARTICULARS

1.

Executive Summary

2.

Research Methodology

3.

Company profile

4.


5.

Analysis and interpretation

6.

Findings

7.

Suggestions

8.

Conclusion

9.

Bibliography


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Awareness of commodity market with reference Derivative investors EXECUTIVE SUMMARY

A proj projec ectt repor reportt cont contai aini ning ng the the ““Awarene “Awareness ss of commodi commodity ty market market with reference to Derivative investors ” a case study of Belgaum city At KARVY Finapolis

Belga Belgaum um for for fulf fulfil illm lment ent of requ requir irem emen entt of MBA MBA IVth IVth seme semest ster er in Inst Instit itut utee of Management Education and research. It was an opportunity to learn the practical aspects of the firm

Objectives of the study

1. To know the the perception perception of derivati derivative ve investors investors towards towards commodit commodity y future market market 2. To find find the awareness awareness level level of commodity commodity market market in in Belgaum Belgaum city city 3. To understa understand nd the commod commodity ity market market and and its working working mechanism mechanism.. 4. To know know which which commod commodity ity they they prefe preferr to inves invest. t. 5. To find find the the potential potential customer customer for for commodit commodity y market market The project was undertaken at KARVY Finapolis Belgaum the first part of the study is done by collected information through net, journals, textbooks. And second part of the study is conducted through survey of the derivative investors.

Scope of the study

This study is limited to only Belgaum City the study is carried out to know the awareness awareness level of derivative derivative investors towards Commodity Commodity Futures Futures market. market. This study also helps to know about trading mechanism of Commodity Market & the future trading level.


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RESEARCH METHODOLOGY

Title of the Project “Awareness of commodity market with reference to Derivative investors” Sample Size

The sample size is consist of traders in derivative market of Belgaum city.100 random sample was taken to identify the awareness level of the derivative investors towards Commodity Future Market Sample Type

:

Simple random sampling was adopted to select respondents.

Sample Area

:

Belgaum city

Duration of Project:

Ist Phase - December IInd Phase - January to April (weekly two days)

TOOLS USED FOR ANALYSIS:

1. Graphical Graphical Representat Representation ion of of Analys Analysis is through through SPSS. : a. Pie charts

DATA COLLECTION APPROACH:

Primary data has been used to carry out the research successfully. The secondary data has been collected from NDEX and MCX. For the purpose of gathering primary data a structure and questionnaire was designed to collect data from the derivative investors.


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Awareness of commodity market with reference Derivative investors Method of Communication :

In order to minimize the bias in data collection, the method of personal interview was adopted. THE SOURCES OF THE DATA COLLECTION ARE AS FOLLOWS

The study relies to a great extent on primary data and to some extent on secondary data:

Primary Data: •

Questionnaire

•

Observation and interview technique

Secondary Data: •

Information is collected through internet

•

From various text books Journals and magazines

LIMITATION OF THE STUDY: 

Since the study is based on the convenient sampling it may not depict the accurate outcome



Level of accuracy of results of research is restricted to the accuracy level with which the customers have given answers and the accuracy level of the answer cannot be predicted



The findings are based solely on the information provided by the respondents and there is a possibility of biased results



The study of project is limited to only Belgaum


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FINDINGS •

More than 50% of the Traders in are aware about the commodity future Market

•

Hardly 30% traders are invested in the commodity future market

•

Most of the investors are not ready to invest in commodity future market they feel it involve high risk.

•

Returns and the Risk of the commodity are the most critical factors, which Traders will consider while investing in any commodity

•

Most of the investors are ready to invest in commodity future market if proper information is provided

•

As commodity future market is new and emerging ,many investors and farmers are not fully aware of this market .as the market helps to trade transparently without middlemen and agents

•

While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unanawareness & mythical perception about commodity market.


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SUGGESTION •

There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc

•

From survey it is found that most of the potential customers are concerned about the Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage it will help to attract more and more customers.

•

More agents and marketing executives should be appointed to educate the customers because the customers having many myths in there mind

•

And also create the awareness of electronic commodity trading

•

Firm should approach people who are already into the business of commodities .special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation ,market trends etc . They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.


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Company Overview And Information BABASAB PATIL MBA FINANCE PROJECT REPORT

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COMPANY PROFILE The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company …Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strength…to better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of India’s premier integrated financial service enterprise.

Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally totality in services.


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Awareness of commodity market with reference Derivative investors Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world.

Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortresses of financial strength - our various companies.

With the experience of years of holistic financial servicing behind us and years of complete expertise in the industry to look forward to, we have now emerged as a premier integrated financial services provider.

And today, we can look with pride at the fruits of our mastery and experience comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements. OVERVIEW:

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Value and Vision of Karvy Stock Broking Ltd:


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Awareness of commodity market with reference Derivative investors “Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortress of financial strength – our various companies”.

The Karvy Credo: Our Clients Our Focus

Clients are the reason for our being. Personalized service, professional care; proactiveness are the values that help us nurture enduring relationships with our clients. Respect for the Individual Each and every individual is an essential building block of our organization.

We are the kiln that hones individuals to perfection. Be they our employees, shareholders or investors. We do so by upholding their dignity & pride, inculcating trust and achieving a sensitive balance of their professional and personal lives.

Teamwork

None of us is more important than all of us.Each team member is the face of Karvy. Together we offer diverse services with speed, accuracy and quality to deliver only one product: excellence. Transparency, co-operation, invaluable individual contributions for a collective goal, and respecting individual uniqueness within a corporate whole, is how we deliver again and again.

Responsible Citizenship

A social balance sheet is as rewarding as a business one. As a responsible corporate citizen, our duty is to foster a better environment in the society where we live and work. Abiding by its norms, and behaving responsibly towards the environment, is some of our growing initiatives towards realizing it.


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Integrity

Everything else is secondary Professional and personal ethics are our bedrock. We take pride in an environment that encourages honesty and the opportunity to learn from failures than camouflage them. We insist on consistency between works and action

About KARVY Group:

About KARVY Group

Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years.


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Awareness of commodity market with reference Derivative investors Karvy, a name long committed to service at its best. A fame acquired through the range of corporate and retail services including mutual funds, fixed income, equity investments, insurance ……… to name a few. Our values and vision of attaining total competence in our servicing has served as a building block for creating a great financial enterprise. The birth of Karvy was on a modest scale in the year 1982. It began with the vision and enterprise of a small group of practicing Chartered Accountants based in Hyderabad, who founded Karvy. We started with consulting and financial accounting automation, and then carved inroads into the field of Registry and Share Transfers. Since then, we have utilized our quality experience and superlative expertise to go from strength to strength to provide better and new services to the investors. And today, we can look with pride at the fruits of our experience into comprehensive financial services provider in the Country.

KARVY Group Companies are:

Karvy Consultants Limited

The first securities registry to receive ISO 9002 certification in India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being ‘Most Admired’ Registrar is one among many of the acknowledgements we received for our customer friendly and competent services.


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Karvy Stock Broking Limited

The company, Member of National Stock Exchange (NSE), offers a comprehensive range of services in the stock market through the benefits of in-depth research on crucial market dynamics, done by qualified team of experts. Apart from stock broking activities, the company also provides Depository Participant Services to its corporate and retail customers.

Karvy Investor Services Limited

Registered with SEBI as a Category I Merchant Banker and ranked among the top 10 merchant bankers in the country, the company has built a reputation as a professional advisor in structuring IPO’s take over assignments and buy back exercises.

Karvy Computershare Private Limited

Karvy Global Services Limited


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Awareness of commodity market with reference Derivative investors Karvy Global Services is the global services arm of the Karvy Group of Companies engaged in the business of offshore business process outsourcing in the areas of human resource outsourcing, finance and accounting operations outsourcing, research and analytics and back office processing operations.

Karvy Comtrade Limited

The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

The company is into distribution of Financial Products. It distributes a wide range of financial products and services from insurance to credit cards and loans. The company provides sound advisory services to suit the different investment needs of customers.

Stock Broking Services:

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by indepth knowledge of market functioning and changing trends, planning with foresight and


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Awareness of commodity market with reference Derivative investors choosing one & rescue’s options with care. This is what we provide in our Stock Broking services. We offer services that are beyond just a medium for buying and selling stocks and shares. Instead we provide services, which are multi dimensional and multi-focused in their scope. There are several advantages in utilizing our Stock Broking services, which are the reasons why it is one of the best in the country. We offer trading on a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. We are assisted in this task by our in-depth research, constant feedback and sound advisory facilities. Our highly skilled research team, comprising of technical analysts as well as fundamental specialists, secure result-oriented information on market trends, market analysis and market predictions. This crucial information is given as a constant feedback to our customers, through daily reports delivered thrice daily ; The Presession Report, where market scenario for the day is predicted, The Mid-session Report, timed to arrive during lunch break , where the market forecast for the rest of the day is given and The Post-session Report, the final report for the day, where the market and the report itself is reviewed. To add to this repository of information, we publish a monthly magazine. The Finapolis, which analyzes the latest stock market trends and takes a close look at the various investment options, and products available in the market, while a weekly report, called Karvy Bazaar Baatein keeps you more informed on the immediate trends in the stock market. In addition, our specific industry reports give comprehensive information on various industries. Besides this, we also offer special portfolio analysis packages that provide daily technical advice on scripts for successful portfolio management and provide customized advisory services to help you make the right financial moves that are specifically suited to your portfolio. Our Stock Broking services are widely networked across India, with the number of our trading terminals providing retail stock broking facilities. Our services have


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Awareness of commodity market with reference Derivative investors increasingly offered customer oriented convenience, which we provide to a spectrum of investors, high-net worth or otherwise, with equal dedication and competence. Karvy Commodities Broking Limited

At Karvy Commodities, we are focused on taking commodities trading to new dimensions of reliability and profitability. We have made commodities trading, an essentially age-old practice, into a sophisticated and scientific investment option. Here we enable trade in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like oil, pulses and cotton

through

a

well-systematized

trading

platform.

Our technological and infrastructural strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group.

Quality Policy:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations. About Karvy Comodities Broking Limited:

Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multicommodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system.


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Awareness of commodity market with reference Derivative investors The futures contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for hedging the risks of the farmers, importers, exporters, traders and large scale consumers. They also make open an avenue for quality investments in precious metals. The commodities market, as the movements of the stock market or debt market do not affect it provides tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into this market. Karvy Commodities Broking Limited is another venture of the prestigious Karvy group. With our well established presence in the multifarious facets of the modern Financial services industry from stock broking to registry services, it is indeed a pleasure for us to make foray into the commodities derivatives market which opens yet another door for us to deliver our service to our beloved customers and the investor public at large. With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of us, the intermediaries to deliver these benefits at the doorsteps of our esteemed customers. With our expertise in financial services, existence across the lengths and breadths of the country and an enviable technological edge, we are all set to bring to you, the pleasure of investing in this burgeoning market, which can touch upon the lives of a vast majority of the population from the farmer to the corporate alike. We are confident that the commodity futures can be a good value addition to your portfolio. The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.

KARVY Advantage:

Trade from anywhere in India Karvy, with its network of branches across the length and breadth of the country, is always within your reach, no matter where you are. This gives you the facility to trade from anywhere in India.


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Reliable research

Karvy has a dedicated team of research analysts who work round the clock to provide the best research newsletters and advices. We reach your desk daily, weekly and monthly. Personalized Services Karvy, with its wide array of personalized services from registry to stock broking

takes the pleasure of adding one more service, commodities broking with the same personal touch . State of Infrastructure The strong IT backbone of Karvy helps us to provide customized direct services through our back office system, nation-wide connectivity and website.

Round the clock operations in commodities trading

Indian commodities market, unlike stock market keeps awake till 11 in the night and Karvy is all

poised to offer round the clock services through its dedicated team of

professionals. The account opening forms are available at our branch offices and with our business associates. You are requested to kindly contact a branch nearby your area and complete the account opening formalities for commodities trading at the branches.

Also you can take a print out and fill out a simple account opening form from our website and complete the necessary documentation as per the checklist enclosed in the form. The form after duly filled up may be deposited at the nearest Karvy Branch or Associate along with a cheque/DD favouring “Karvy Commodities Broking Private Limited” payable at Hyderabad towards initial margin.Please remember the MemberClient agreement has to be executed on a non-judicial stamp paper, as per the applicable by the ‘Stamp Duty Act’ of the relevant state.


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DepositInitialMargin:

You need to deposit an initial upfront margin as specified by the exchange (usually between 5-10% of the contract value).The cheque/DD should be in favour of “Karvy Commodities Broking Private Limited” Mark to Market Margin: In addition to initial margin, you also need to keep a mark to market margin for

taking care of the adverse price movements, if any.

Achievements Among the top 5 stock brokers in India (4% of NSE volumes) • •

India's No. 1 Registrar & Securities Transfer Agents

•

Among the to top 3 Depository Participants

•

Largest Network of Branches & Business Associates

•

ISO 9002 certified operations by DNV

•

Among top 10 Investment bankers

•

Largest Distributor of Financial Products

•

Adjudged as one of the top 50 IT uses in India by MIS Asia

•

Full Fledged IT driven operations


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ORGANISATION CHART Managing Director

Chief Managing Director

Vice-President

Karvy Securities Ltd.

Vice-President

Vice-President

Vice-President

Karvy

Karvy

Karvy Stock Broking Ltd

Consultants Ltd. Investors Services Ltd.

. Deputy General Manager

SeniorManager

Deputy General Manager


Senior Manager

Senior Manager


SenoirManager

Branch Manager

Number of Team Leaders

Number of Executives


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Introduction to derivatives

The origin of derivatives can be traced back to the need of farmers to protect themselves against Fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk ñ that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be a futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the `to arrive’ contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. These were eventually standardized, and in 1925 the First futures clearing house came into


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Awareness of commodity market with reference Derivative investors existence. Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of Financial underlying like stocks, interest rate, exchange rate, etc.

Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the index futures and stock futures but the underlying happens to be commodities instead of stocks and indices. Commodity futures market has been in existence in India for centuries. The Government of India banned futures trading in certain commodities in 70s.However trading in commodity futures has banned permitted again by the government in order to help the commodity products ,traders, and investors. Worldwide, commodity exchanges originated before the other financial ex\changes. In fact most of the derivatives instruments had their birth in commodity exchanges. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated exchanges, in which they are bought and sold in standardized Contracts. Commodity Future is a Derivative instrument where the underlying asset is a commodity. Commodity future are exchanges traded contracts to sell or buy standardized futures contract.

Some commonly used derivatives Forwards : As we discussed, a forward contract is an agreement between two entities to

buy or sell the underlying asset at a future date, at today's pre-agreed price.

Futures : A futures contract is an agreement between two parties to buy or sell the

underlying asset at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded.

Options : There are two types of options - calls and puts. Calls give the buyer the right

but not the obligation to buy a given quantity of the underlying asset, at a given price on


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Awareness of commodity market with reference Derivative investors or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Warrants : Options generally have lives of upto one year, the majority of options traded

on options exchanges having a maximum maturity of nine months. Longer dated options are called warrants and are generally traded over the counter.

Baskets : Basket options are options on portfolios of underlying assets. The underlying

asset is usually a weighted average of a basket of assets. Equity index options are a form of basket options.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are :

Interest rate swaps : These entail swapping only the interest related cash flows between

the parties in the same currency

Currency Currency swaps: These entail swapping both principal and interest between the parties,

with the cash flows in one direction being in a different currency than those in the opposite direction. Exchange traded versus OTC derivatives

Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. These contracts were typically OTC kind of contracts. Over the counter (OTC) derivatives are privately negotiated contracts. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre- arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility those large swings would inhibit marketing the commodity after a harvest Later many of these contracts


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Awareness of commodity market with reference Derivative investors were standardized in terms of quantity and delivery dates and began to trade on an exchange.

The OTC derivatives markets have the following features compared to exchangetraded derivatives :

1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance.

The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC deriva derivati tive ve Contrac Contracts ts offer offer many many benefit benefits, s, the former former have have rigid rigid struct structure uress compar compared ed to the latter latter.. The larges largestt OTC deriva derivativ tivee market market is the interb interbank ank foreig foreign n exchange market. Commodity derivatives the world over are typically exchange traded and not OTC in nature.

Exchange traded versus OTC derivatives

Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. These contracts were typically OTC kind of contracts. Over the


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Awareness of commodity market with reference Derivative investors counter (OTC) derivatives are privately negotiated contracts. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre- arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility those large swings would inhibit marketing the commodity after a harvest Later many of these contracts were standardized in terms of quantity and delivery dates and began to trade on an exchange.

The OTC derivatives markets have the following features compared to exchangetraded derivatives :

1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information tech technol nology ogy have have cont contri ribut buted ed to a grea greatt exte extent nt to thes thesee devel developm opmen ents ts.. Whil Whilee both both exchange-traded and OTC derivative Contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the interbank


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Awareness of commodity market with reference Derivative investors foreign exchange market. Commodity derivatives the world over are typically exchange traded and not OTC in nature. Commodities trading

Over the modern age of investing, commodity trading has emerged as an important player in the way that people invest invest in and speculate. speculate. It was developed developed as a reaction reaction to the way that business is conducted, and it continues today in the form of commodities trading online. Many different people turn their business know how into a profitable venture, and it is commodities and futures trading that helps them get there. Simply put, commodities are items like, wheat, corn, gold and silver, and cattle and pork bellies, and crude oil. When When farmer farmerss take take their their crop crop to "marke "market", t", they they are selling selling commod commoditi ities. es. Tradin Trading g commodities is the world's one perfect business. The upside potential is unlimited and you can control control the downside. You can trade commodities commodities on a part time basis or a fullfulltime basis. You can spend as little as an and earn a full time income Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Speculators and investors also buy and sell the futures contracts to make a profit and provide liquidity to the system People have started with a small account and in a short period of time built their account up to the point that they have been able to quit their jobs and trade commodities full-time providing themselves with a very comfortable living.

Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline. Commodities include agricultural products such as whea t and cattle, energy products such as oil and gasoline, and metals such as gold, silver and aluminum. There are also soft commodities, or those that cannot be stored for long periods of time. Soft commodities are sugar, cotton, cocoa and coffee.


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The commodity market has evolved significantly from the days when farmers hauled bushels of wheat and corn to the local market. In the 1800’s, demand for standardized contracts for trading agricultural products led to the development of commodity futures exchanges. Today, futures and options contracts on a huge array of agricultural products, metals, energy products and soft commodities can be traded on exchanges all over the world.

Commodities have also evolved as an asset class with the development of commodity futures indexes and, more recently, the introduction of investment vehicles that track commodity indexes.

Commodity prices have been driven higher by a number of factors, including increased demand from China, India and other emerging countries that need oil, steel and other commodities to support manufacturing and infrastructure development. The commodity supply chain has also suffered from a lack of investment, creating bottlenecks and adding an insurance premium and/or a convenience yield to the returns of many commodity futures. Over the long term, these economic factors are likely to support continued gains in commodity index returns.

The potential for attractive returns is probably the most obvious reason for increased investor interest in commodities, but it isn't the only factor. Commodities may offer investors other significant benefits, including portfolio diversification and a hedge against inflation and risk.

Commodities are real assets, unlike stocks and bonds, which are financial assets. Commodities, therefore, tend to react to changing economic conditions in different ways than traditional financial assets. For example, commodities are on e of the few asset


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Awareness of commodity market with reference Derivative investors classes that tend to benefit from rising inflation. As demand for goods and services increases, the price of those goods and services usually goes up as well, as do the prices of the commodities used to produce those goods and services. Because commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge against inflation.

Why invest in commodities ?

Leverage is very important to the commodities markets. Unlike the stock market, where you might have to invest 10,000 dollars to leverage 10,000 dollars. A commodities trader can leverage tens of thousands of dollars worth of a commodity for pennies on the dollar. Also unlike stocks, commodities have intrinsic value and will not go bankrupt.

The futures markets are so crucial to the well being of our nation, that the government established the Commodity Futures Trading Commission (CFTC) to oversee the industry. There is also a self-regulatory body, the National Futures Association (NFA), who monitor the activities of all futures market professionals to ensure the integrity of the futures markets.

Commodities also give the investor the ability to participate in virtually all sectors of the world economy and have the potential to produce returns that tend to be independent of other markets. In fact portfolios that add commodity investments can actually lower the overall portfolio risk by diversification.

What is the difference between hedging and speculating? Just about every product that you consume would likely cost dramatically more without the commodities futures markets. Because of the intrinsic risks associated to being in business, lacking the ability to shift risk, a manufacturer/producer of goods or services


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Awareness of commodity market with reference Derivative investors would be forced to charge higher prices, and the consumer would have to pay those higher prices. This shifting of risk to someone willing to accept it is called hedging. Manufacturers could effectively lock in a sales price by going short an equivalent amount of goods with futures contracts. If a mining company knew that they were going to sell 1000 ounces of gold in several months, they could protect themselves for a future price decline by going short 10 gold futures contracts today. If the price of gold fell by $30 in the following months, they would receive that much less in the cash marketplace for their gold, but earn that much back when they offset their short gold futures position. The futures price will eventually become the cash price. A user or buyer of goods can use the futures market in the same manner. They would need to protect themselves from a future price increase, and therefore go long futures contracts.

The person willingly accepting a risk does so because of the opportunity to profit from price movements, this is known as speculating. The cotton in your shirt, the orange juice, cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home, the gas or ethanol that you put in your car all would be priced many times higher without the participation of speculators in the futures markets. Through supply and demand market forces, equilibrium prices are reached in an orderly and equitable manner within the exchanges, and world economies, and you, benefit tremendously from futures trading.

What commodity futures markets do? A well-developed and effective commodity futures market, unlike physical market, facilitates off setting the transactions without impacting on physical goods until the expiry of a contract. Futures market attracts


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Awareness of commodity market with reference Derivative investors hedgers who minimize their risks, and encourages competition from other traders who possess market information and price judgment. While hedgers have long-term perspective of the market, the traders, or arbitragers as they are o ften called, hold an immediate view of the market. A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information, such as price, demand and supply, climatic conditions and other market related information. All these factors put together result in efficient price discovery as a result of large number of buyers and sellers Transacting in the futures market. Futures market, as observed from the cross-country experience of active commodity futures markets, helps in efficient price discovery of the respective commodities and does not impair the long-run equilibrium Price of commodities. At times, however, price behavior of a commodity in the futures market might show Some aberrations reacting to the element of speculation and ‘bandwagon effect’ inherent in any market, but it quickly reverts to long-run equilibrium price, as information flows in, reflecting fundamentals of the respective commodity.

In futures market, speculators play a role in providing liquidity to the markets and may sometimes benefit from price movements, but do not have a systematic causal influence on prices. An effective architecture for regulation of trading and for ensuring transparency as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimize price shocks triggered by unanticipated supply demand mismatches. Participants of Commodity Market:

The participants who trade in the commodity derivatives markets can be classified as follows; Hedgers: Hedgers are participants who use commodity derivative instruments to hedge /

eliminate the price risk associated with the underlying

commodity asset held them.


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Awareness of commodity market with reference Derivative investors Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce. In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point

or

another

deal

in

the

underlying

cash

commodity.

Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce rise enough to offset cash loss on the produce.

Speculators: Speculators are participants who bet on future movements in the price of

an asset i.e. I commodity to make short term gain from the price movements. Commodity future s gives theme the leverage so to take risks on nominal margin payments and thereby increasing for bigger gains or losses. Speculators are some what like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms.


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Awareness of commodity market with reference Derivative investors Buying a futures contract in anticipation of price increases is known as ‘going long’. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. Speculative participation in futures trading has increased with the availability of alternative methods of participation.

Speculators have certain advantages over other investments they are as follows:

If the trader’s judgment is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Arbitrageurs: Arbitrageurs work at making profits by taking advantaged of existence of

difference in prices of the same product across different markets (MCX and NCDEX).

Investors: Investors are participants having a a longer term view as compared to

speculators when they enter into trade in the commodes market. E.g. Farmers, Producers, consumers, etc.


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Major Commodity Exchanges:

The Government of India permitted establishment of National-level Multi- Commodity exchanges in the year 2002 and accordingly three exchanges have come into picture.



Multi-Commodity Exchange of India Ltd, Mumbai.(MCX).



National Commodity and Derivative Exchange of India, Mumbai (NCDEX).



National Multi Commodity Exchange, Ahemdabad (NMCE).

However there is regional commodity exchanges functioning all over the country. Karvy commodities Broking Pvt.Ltd has got membership of both the premier commodity exchanges i.e. MCX and NCDEX.

The two exchanges (NCEDX&MCX) have seen tremendous growth in less than two years . the daily average on these two exchanges put together has now grown to a


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Awareness of commodity market with reference Derivative investors healthy Rs.7800 Crores. It has been believed by experts that the volumes on these exchanges would the stock market in the days to come. Commodity exchanges are regulated by Forwards Market mission (FMC); Forwards Market Commission works under the purview of the ministry of Food ,Agriculture and Public Distribution.

At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a holiday the expiry day will be the previous working day. At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiry day will be the previous day. The expiry day differs for different commodities in both the exchanges. Generally commodity futures require an initial margin between 5-10% of the contract value. The exchanges levy higher additional margin in case of excess volatility. The margin amount varies between exchanges and commodities. Therefore they provide great benefits of leverage in comparison to the stock and index futures trade on the stock exchanges. The exchange also requires the daily profits and losses to be paid in/out on open positions (mark to Market or MTM) so that the buyers and sellers do not carry a risk of not more than one day.

Functions of an Exchange



Product Conceptualization and Design



Price Discovery & Dissemination



Robust Trading & Settlement systems



Management of Counter party Credit

Risk 

Self Regulation to ensure



Overview of Trading and Surveillance



Audit and review of Members



Enforcement of Exchange rules


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Awareness of commodity market with reference Derivative investors Commodities selected in Phase I Bullion 

Gold



Silver

Agri commodities 

Soya bean



Soya oil



Rapeseed/Mustard



Seed Rapeseed/



Mustard Seed Oil



Crude Palm oil



RBD Palmolein

40 Commodities introduced in Phase II Rubber  Jute

•

•

Pepper

•

Chana (Gram)

•

Guar

•

Wheat

Commodities exchanges across the world Main commodity exchanges worldwide: Americas

Exchange

Brazilian Mercantile and

Abbreviation

BMF

Location

Brazil

Product Types

Agricultural, Biofuels, Precious


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Futures Exchange

Metals

CME

Chicago

Agricultural, Biofuels, Precious Metals

Chicago Climate Exchange CCX

Chicago

Emissions

HedgeStreet Exchange

California

Energy, industrial Metals

CME Group

Intercontinental Exchange

ICE

Energy, Emissions

Kansas City Board of Trade KCBT

Kansas City Agricultural

Memphis Cotton Exchange

Memphis

Agricultural

Agricultural

Mercado a Termino de Buenos Aires

MATba

Argentina

Minneapolis Grain Exchange

MGEX

Minneapolis Agricultural

New York Board of Trade NYBOT

New York

Agricultural, Biofuels

New York Mercantile Exchange

New York

Energy, Agricultural, Industrial Metals, Precious Metals

NYMEX

U.S. Futures Exchange

USFE

Chicago

Energy

Winnipeg Commodity Exchange

WCE

Winnipeg

Agricultural


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Asia

Exchange

Bursa Malaysia

Abbreviation Location

MDEX

Central Japan Commodity Exchange

Product Types

Malaysia Biofuels

Nagoya

Energy, Industrial Metals, Rubber

China

Agricultural, Plastics

Dubai Mercantile Exchange DME

Dubai

Energy

Dubai Gold & Commodities DGCX Exchange

Dubai

Precious Metals

Kansai Commodities Exchange

Osaka

Agricultural

Multi Commodity Exchange MCX

India

Energy, Precious Metals, Metals, Agricultural

National Commodity Exchange Limited

Karachi

Precious Metals, Agricultural

Mumbai

All

Dalian Commodity Exchange

National Commodity and Derivatives Exchange

DCE

KANEX

NCDEX


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Singapore Commodity Exchange

SICOM

Singapore Agricultural, Rubber

Tokyo Commodity Exchange TOCOM

Tokyo

Energy, Precious Metals, Industrial Metals, Agricultural

Tokyo Grain Exchange

TGE

Tokyo

Agricultural

Zhen Zhou Commodity Exchange

CZCE

China

Agricultural

Europe

Exchange

Abbreviation Location

CLIMEX

Climex

Product Types

Amsterdam Emissions

NYSE Euro next

Europe

Agricultural

European Climate Exchange ECX

Europe

Emissions

LME

London

Industrial Metals, Plastics

Hanover

Agricultural

London Metal Exchange

Risk Management Exchange RMX

Oceania

Exchange

Abbreviation Location Product Types

Australian Securities Exchange ASX

Sydney

Agricultural


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Indian Commodities Market

In India commodity markets have been in existence for decades. However in 1975 the Government banned forward contracts on commodities. Later in 2003 the Government of India again allowed forward contracts in commodities. There have been over 20 exchanges existing for commodities all over the country. However these exchanges are commodity specific and have a strong regional focus. The Government, in order to make the commodities market more transparent and efficient, accorded approval for setting up of national level multi commodity exchanges. Accordingly three exchanges are there which deal in a wide variety of commodities and which allow nation-wide trading. They are •

Multi Commodity Exchange (MCX)

•

National Commodities Derivatives Exchange (NCDEX)

•

National Multi Commodity Exchange (NMCE)

The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd. MCX allows trading on a host of commodities ranging from bullion to grains. Please check the ‘Commodities traded’ menu’. MCX has become the first exchange in the world to launch futures on steel. Recently on 11th August 2004, MCX crossed a peak daily turnover of Rs.950 Crores.

NCDEX is promoted by an elite group of financial institutions including NSE, LIC, SBI, UBI etc., NCDEX also allows trading of futures on a host of commodities. National Commodities and Derivatives Exchange, NCDEX At Karvy Commodities, we are focused on taking commodities trading to new dimensions of reliability and


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Awareness of commodity market with reference Derivative investors profitability. We have made commodities trading, an essentially age-old practice, into a sophisticated and scientific investment option.

Here we enable trade in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like oil, pulses and cotton through a well-systematized trading platform.

Our technological and infrastructure strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further supports these advantages. Regular trading workshops and seminars are conducted to hone trading strategies to perfection. Every move made is a calculated one, based on reliable research that is converted into valuable information through daily, weekly and monthly newsletters, calls and intraday alerts. Further, personalized service is provided here by a dedicated team committed to giving hassle-free service while the brokerage rates offered are extremely competitive.

Our commitment to excel in this sector stems from the immense importance that commodities broking has to a cross-section of investors farmers, exporters, importers, manufacturers and the Government of India itself.

Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.


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COMMODITY MARKET IN INDIAN PERSPECTIVE.

India, a commodity based economy where 75% of the one billion populations depend on agriculture, surprisingly has an underdeveloped commodity market. The history of commodity markets in India is more than a century old. The institution of formal commodity market in India is almost as old as the UK and the US.

The first organized commodity market in India was established in the late 19th century, Bombay Cotton Association Ltd. was set up in 1875 by the Bombay Cotton Exchange ltd. In 1893, due to widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade Association. Commodities markets offer immense potential to become a separate asset class for market savvy investors, arbitrageurs and speculators. Commodities markets are easy to understand as far as the demand and supply fundamentals are concerned as these are two things that guide these markets. The investors will have to understand the risks and the advantages before jumping the band wagon. Commodities futures are less volatile as compared to equity and bonds. Some of the other advantages linked to commodity futures are better risk adjusted, good hedge against downfall in equities or bonds as there is no or very less correlation and also a very effective hedge against inflation.


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Awareness of commodity market with reference Derivative investors The futures market in commodities offers both cash and delivery-based settlement. Investors can choose between the two. If the buyer chooses to take delivery of the commodity, a transferable receipt from the warehouse where goods are stored is issued in favor of the buyer. On producing this receipt, the buyer can claim the commodity from the warehouse. All open contracts not intended for delivery are cashsettled. While speculators and arbitrageurs generally prefer cash settlement, commodity stock lists and wholesalers go for delivery. Trading in any contract month will open on the twenty first day of the month, three months prior to the contract month. For example, the December 2005 contracts open on 21 September 2005 and the due date is the 20-day of the delivery month.

All contracts settling in cash will be settled on the following day after the contract expiry date. Commodity trading follows a T + 1 settlement system, where the settlement date is the next working day after expiry. However, in case of delivery-based traders, settlement takes place five to seven days after expiry

Commodities like chana, urad, soya bean oil, guar gum, sugar, pepper, wheat, jeera, gold, silver and crude oil have found fancy with Indian Investors. Expecting the turnover on the three online commodity exchanges to spurt to more than Rs.15000 crores per day, banks are keen to tap the commodity trade-financing front. Commercial banks are chasing the commodity industry with attractive lending rates between 8% and 8.5% as against the normal lending rate between 11% and 14%. Commodity exchanges in India will contribute significantly towards the development of Indian economy as a whole. Commodity market is undergoing some breakthrough changes like demat, trading of commodities like crude oil and plastics, also GOI is contemplating of implenting Options trading.


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Awareness of commodity market with reference Derivative investors Today commodity market has provided investors with an opportunity to invest in an asset class which yields high returns with low risk. In next 5 years time will be seeing resurgence of the century old commodity market The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency . India Commodity Market can be subdivided into the following two categories: •

Wholesale Market

•

Retail Market

Let us now take a look at what the present scenario of each of the above markets is like.

The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: •

The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.

•

The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt. In recent years, the extent of the retail market (both organized and unorganized)

has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered around the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now

being provided at well distributed retail outlets throughout the country.


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Awareness of commodity market with reference Derivative investors Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand is owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually sell a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for

commodities is likely to become four times by 2010 than what it presently is.

What can commodity market offer?

If you are an investor, commodities futures represent a good form of investment because of the following reasons.. •

High Leverage – The margins in the commodity futures market are less than the F&O

section of the equity market. •

Less Manipulations - Commodities markets, as they are governed by international price

movements are less prone to rigging or price manipulations. •

Diversification – The returns from commodities market are free from the direct influence

of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. If you are an importer or an exporter, commodities futures can help you in the following ways… •

Hedge against price fluctuations – Wide fluctuations in the prices of import or export

products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a


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Awareness of commodity market with reference Derivative investors price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently. If you are a producer of a commodity, futures can help you as follows: •

Lock-in the price for your produce – If you are a farmer, there is every chance that the

price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce •

Assured demand – Any glut in the market can make you wait unendingly for a buyer.

Selling commodity futures contract can give you assured demand at the time of harvest. If you are a large scale consumer of a product, here is how this market can help you: •

Control your cost – If you are an industrialist, the raw material cost dictates the final

price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material.

•

Ensure continuous supply – Any shortfall in the supply of raw materials can stall your

production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

The effective mechanism of settlement and delivery procedures adopted and employed by MCX has once again undergone rigorous tests and have come out extremely successful. This is signified with the surging trading volume in bullion contracts and high open interest entering the settlement period resulting in healthy quantities getting physically delivered. This whole process underscores the efficacy & transparency of the complete trading, settlement and delivery process employed by MCX. The complete delivery procedure right from getting the possession of the precious metal from the sellers, necessary quality certifications, consignment movement, handing over the precious metal to the buyers, etc was completed in flat 5 days period. The


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Awareness of commodity market with reference Derivative investors complete process has been worked out at a very optimal cost and on an average each participant involved in the delivery process had incurred only Rs. 350/- per transaction.

When the MCX Gold Contract entered into settlement period the Open Interest in Gold was 670 Kgs after reducing from over 4000 Kgs few days ago. This open interest resulted in 152 Kgs of gold getting delivered and the balance gold, which entered into the delivery period, was squared up. The total volume in MCX Gold December futures contract was 230233 Kgs valuing around Rs. 14577 crores. On the same pattern Open Interest in Silver was 16,740 Kgs after reducing from over 1,60,000 Kgs few days back. However, the actual delivery in Silver was 12,698 kgs and the balance Silver that entered into the delivery period was squared up. The total volume in MCX Silver December futures contract was 22950 M. Tons valuing around Rs. 25024 crores. In all the previous settlements also MCX platform has always seen appropriate percentage of open interest position resulting in physical delivery. Gold has seen a cumulative physical delivery of 245 Kgs and Silver 2190 Kgs across all the settlements completed before the current settlement. Gold & silver futures contracts are getting recognized as the most reliable & dependable investment options that are today available to traders and investors who are looking to widen their portfolio beyond equity instruments. This is because of the credibility that these commodities have enjoyed globally and the technical & fundamental analysis that has gone in arriving at various trading strategies. India is the largest importer for Gold in the world, around 800 tons per year, realizing this potential of Gold, Government of India has set up a committee to examine the regulatory structure of the gold industry to make India a gold trading hub. This committee is constituted under the Chairmanship of Secretary, Department of Commerce, and Ministry of Commerce & Industry. MCX is a member of the committee and looks forward to contributing suggestions on the role that Futures market can play in making India a global gold trading hub. The first meeting for the Gold Committee is being held under the Chairmanship of Commerce Secretary on 10th December 2004.


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Problems Facing by Commodity Future market

1. The spot/physical markets are fragmented. This may be because of the restrictions on the free movement of commodities in the physical form under the Essential Commodities Act, APMC Act, Licensing restrictions, etc. Hence, the creation of an integrated and vibrant domestic market for physical trading in commodities with adequate infrastructure and transparent trading system is a pre-requisite for broad based commodity derivatives markets.

2. Lack of mechanism for standardization of warehousing receipts. The absence of the regulatory authority for accreditation of warehouses and for setting standards for scientific grading, packaging, storage and preservation. As a result, though Banks grant credit against warehouse receipts now, they are largely restricted to the ones issued by the Central Warehousing Corporation and those promoted by the State Governments. However, this problem is being sorted out by the Food Ministry, which is in the process of drafting a Warehouse Development and Regulation Act to promote warehouse receipts-based lending and commodity derivative transactions. 3. Dematerialized settlement system for commodities which has the standardization of warehouse receipts as a pre-requisite. A system of physical delivery of commodities backed by warehouse receipt system can help eliminate the quality risk and price risk. It will facilitate seamless nation wide spot market for commodities.

4. Creation of depository system for electronically facilitating transfer and delivery of commodities in dematerialized form.

5. Need to make warehouse receipts transferable. We understand that a bill to amend the Forward Contracts (Regulation) Act, 1952 is slated to be taken up during the current budget session of the Parliament, which proposes to permit the transferability of warehouse receipts by scrapping Section 18(2) of the Act. This will also easy


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Awareness of commodity market with reference Derivative investors access to finance from banks and financial institutions against produce stored in warehouses.

6. Most of the commodity exchanges function as specialized product bourses. This is even true of the national multi commodity exchanges because of lack of volumes in many commodities in spite the trading being allowed in many formally.

While

NCDEX technically trades in 35 commodities, about 90 per cent of its volume comes from just 8 products. In case of MCX, gold and silver account for a major share in the trading volume, though it trades in 41 commodities. Pepper, cardamom, rubber, coffee and jute products are the five products that are prominently traded in NMCE even though about 59 commodities are traded here. This may be attributed to the fact that there are different players for different commodities. 7. There are no uniform contract specifications for the same commodity traded on various exchanges. As a result, there is no proper mechanism to assess price of the same commodity across various exchanges, as price depends on the contract specification.

8. Online trading at the national level is mandatory only in respect of National level multi commodity exchanges, while such a compulsion is not applicable to the regional ones. Hence transparency suffers.

9. Demutualization is yet to happen completely. Many exchanges are associations of members who retain trading rights and ownership. This interest of the promoters as traders has serious implications for the integrity of these exchanges.

10. Residents in India, engaged in import and export trade, may hedge the price risk of commodities in the international commodity exchanges/markets. Applications for commodity hedging are to be forwarded to RBI. A one-time approval will be given by RBI along with the guidelines for undertaking this activity. The Reserve Bank of India, which is considering a proposal to grant blanket approval to Indian companies


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Awareness of commodity market with reference Derivative investors that have an exposure to commodities to freely hedge in the international exchanges, must also ensure that they use the products available in the Indian commodity derivatives markets.

11. Options trading in commodities are prohibited as of now which puts constraints on the markets. Introduction of options trading in commodities is a necessary condition for institutional investors to trade in commodity derivatives trading, as this would make it easier for the institutional investors to convert the commodity derivatives products as financial products.

If the institutional investors, like banks and mutual funds, whose presence as of now is only in capital markets need to start operating in commodity derivatives markets as well then these additional issues are also required to be addressed.

12. Convergence of the regulators of capital markets and commodity markets is a prerequisite for free flow of funds between markets.

13. The players in capital markets must acquire the required expertise for trading in commodity markets and vice versa to have an integrated view of all markets.

Why are Commodity Derivatives Required?

India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives.

It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It


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Awareness of commodity market with reference Derivative investors was a mistake other emerging economies of the world would want to avoid. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. Such suspicions might normally arise due to a misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset.

Two important derivatives are futures and options.

(i) Commodity Futures Contracts:

A futures contract is an agreement for buying or selling a Commodity for a predetermined delivery price at a specific future time. Futures are standardize contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of


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Awareness of commodity market with reference Derivative investors Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months’ time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity.

(ii) Commodity Options contracts:

Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties – the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a ‘call’ option gives the holder a right to buy a commodity at an agreed price, while a ‘put’ option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date).

The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a ‘premium’ of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal

Modern Commodity Exchanges

To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the


Page 53

Awareness of commodity market with reference Derivative investors commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Unresolved Issues and Future Prospects Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved. Agreed, the number of commodities allowed for derivative trading have increased, the volume and the value of business has zoomed, but the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. Some of the main unresolved issues are discussed below.

a. Commodity Options:

Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of this important derivative. Both futures and options are necessary for the healthy growth of the market. While futures contracts help a participant (say a farmer) to hedge against downside price movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is an immediate need to bring about the necessary legal and regulatory changes to introduce commodity options trading in the country. The matter is said to be under the active consideration of the Government and the options trading may be introduced in the near future.

b. The Warehousing and Standardization:

For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country.


Page 54

Awareness of commodity market with reference Derivative investors The Habibullah (2003) task force admitted, “A sophisticated warehousing industry has yet to come about”. Further, independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located. Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses across the country with a storage capacity of 10.4 million tonnes. This is obviously not adequate for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new and expand the existing rural godowns. Large scale privatization of state warehouses is also being examined.

c. Cash versus Physical Settlement:

It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trade in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A International Research Journal of Finance and Economics - Issue 2 (2006) 161

particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles.

d. The Regulator:


Page 55

Awareness of commodity market with reference Derivative investors As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regular, similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets.

e. Lack of Economy of Scale:

There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board of India, and the Department of Company affairs etc.

f. Tax and Legal bottlenecks:

There are at present restrictions on the movement of certain goods from one state


Page 56

Awareness of commodity market with reference Derivative investors to another. These need to be removed so that a truly national market could develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by all states. To study the Trading mechanism of Commodity Future market and Wholesale/ Local market Second objective is completed by Collecting Primary as well as secondary data. Primary data is collected through personal interview and discussion with the Wholesale merchants in APMC yard Belgaum and secondary data is collected through Web sites. The following Chart Shows the Present Trading System of Local /Wholesale market.

Chart showing Trading System of Local Mark

Consumer

Super Markets

Large retailers

Local Retail Stores

Sub Wholesaler

Ration/Fair Price Shops

Food Corporation of India

Wholesaler

Market Yard

Operated be either Govt Mandis or Private Players

Village level Consolidation Small & Marginal Farmers The emergence of organized sector retail chain stores and a rise in competition is likely to


Page 57

Awareness of commodity market with reference Derivative investors be a catalyst for bringing about much needed reform in the agriculture-related supply chain. The large players in the retail sector and fast moving consumer goods are also influencing the government to liberalize the regulations, which hitherto have constricted the operational environment. In addition, political pressure is rising, invoking a response from the government to change the regulations so as to enable farmers to operate more productively.



First, instead of using the current chain, which results in large mark-ups due to a multiple number of intermediaries, the farmers are beginning to transact directly with the large corporate, reducing inefficiencies.



Second, some of the large retail players will start contract manufacturing with farmers, providing them with the right quality inputs (fertilizers and seeds), capital support and signals on the mix of output they need to produce to earn maximum returns.



Third, an increase in direct sourcing by large players will also encourage the private sector to invest in the logistics and infrastructure needed to improve the productivity and efficiency of the supply chain.

Trading System of NCDEX

The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. 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


Page 58

Awareness of commodity market with reference Derivative investors 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.

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. Contract cycle The following figure shows the contract cycle for futures contracts on NCDEX. As can be seen, at any given point of time, three contracts are available for trading ñ a nearmonth, a middle-month and a far-month. As the January contract expires on the 20th of the month, a new three month contract starts trading from the following day, once more making available three index futures contracts for trading.


Page 59


INTRODUCTION TO PULSE MARKET

India is the world's largest pulse producer, consumer and importer accounting for 27% of the global pulse production. However, stagnant production has led to declining per capita consumption over the past 20 years. The per capita availability has progressively declined from 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led the Government of India to ease the norms related to importing of pulses.

In India, pulses are grown on 22-23 million hectares area with an annual production of 13-15 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19% of the gross cropped area and less than 8% of the total food grain production of the country. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas (Gram or Desi Chana). Their share in the total pulses production is about 20% and 33% respectively. Important Pulse Markets in India are Mumbai, Delhi, Chennai, Indore, Kanpur, Bikaner, Hapur, Hyderabad, Jaipur, Jalandhar, Ludiana, and Sangrur.


Page 60

Awareness of commodity market with reference Derivative investors Indian pulse market is very price sensitive market. There is a great deal of substitutability between pulse crops. If pigeon peas are high priced, more yellow peas will be consumed. If desi chickpeas are low priced, more chickpeas will be consumed. This dynamic pulse consumption pattern combined with the large, and sometimes variable, domestic production makes Indian market demand difficult to predict on a year-to-year basis.

Pulse Market Volatility

Global pulse trade has expanded rapidly in the last twenty years. However, the trade history is somewhat volatile due to supply and demand variability. Trade patterns have also shifted during this time period. Former exporters (like Chile as a lentil exporter) 12 have disappeared and new exporters have developed. The next twenty-year period is likely to see these types of changes continue as Canada puts pressure on the supply side.

The prices in the domestic market fluctuate according to the domestic and international demand and supply scenario. Generally, the prices drop when the new crop comes in the market. The analysis of five years price trend of gram at Indore reveal that the prices are on an increasing trend from June to September, while it starts falling from November, with the lowest prices being reported in March and April, when the new crop arrives in the market.


Page 61


Analysis & Interpretation


Page 62


occupation

Valid

Frequency 24

Percent 24.0

Valid Percent 24.0

Cumulative Percent 24.0

profession

13

13.0

13.0

37.0

govt service

37

37.0

37.0

74.0

private service

25

25.0

25.0

99.0

1

1.0

1.0

100.0

100

100.0

100.0

business

others Total

occupation others 1.0% private service 25.0%

business 24.0%

profession 13.0%

govt service 37.0%


Page 63

Awareness of commodity market with reference Derivative investors Interpretation: the above graph depicts that 37% of the respondents are government

employees ,25% are from private service,1% are from others like agriculturist , 24% are businessmen & 13% are private service Inference: most of the respondents are were from government service & business men

Annual income

Valid

Frequency 6

Percent 6.0

Valid Percent 6.0


5000-100000

37

37.0

37.0

43.0

10001-200000

38

38.0

38.0

81.0

200001-400000

14

14.0

14.0

95.0

5

5.0

5.0

100.0

100

100.0

100.0

below 50000

more than 400001 Total


Page 64


more than 400001 5.0% 200001-400000

below 50000 6.0%

14.0%

50000-100000 37.0%

10001-200000 38.0%

Interpretation: above graph depicts that most of the investors income lies between

10001-200000 followed by 38%,37% investors income lies between 50000-100000,14% of the investors lies between 20001-400000,6% of the investors lies below 50000 & 5% of the investors lies more than 400000


Page 65


Investment criteria they prefer to invest

Valid

Frequency 10

Percent 10.0

Valid Percent 10.0


4

4.0

4.0

14.0

32

32.0

32.0

46.0

commodity future market

7

7.0

7.0

53.0

mutual fund

5

5.0

5.0

58.0

life insurance

8

8.0

8.0

66.0

32

32.0

32.0

98.0

2

2.0

2.0

100.0

100

100.0

100.0

Bank deposit Real estate stocks

derivitive market bonds Total

Bank deposit bonds 2.0%

10.0% Real estate 4.0%

derivitive market 32.0%

stocks 32.0% life insurance 8.0%

commodity future mar

mutual fund

7.0%

5.0%

Interpretation: From this chart it is known that 32% of the respondents prefer to invest

in derivative and stocks,

10% of the respondents in bank deposit, 8% & 7% in life

insurance & commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds


Page 66


Awarene ss of derivitive market

Valid

yes

Frequency 100

Percent 100.0

Valid Percent 100.0


Awareness of derivitive market

yes 100.0%

Interpretation: as my targeted customer is derivative investors the above diagram

depicts about the awareness level of the derivative investors is 100%


Page 67


Have you investe d in future & options

Valid

yes

Frequency 100

Percent 100.0

Valid Percent 100.0


Have you invested in future & options

yes 100.0%

Interpretation: as my targeted customer is derivative investors the above diagram

depicts about the investment level of the derivative investors is 100% that is respondents are purely from derivative market


Page 68


factors considered while inve sting in derivitive market

Valid

Frequency 9

Percent 9.0

Valid Percent 9.0


risk

39

39.0

39.0

48.0

return

45

45.0

45.0

93.0

7

7.0

7.0

100.0

100

100.0

100.0

price

demand & supply Total


Page 69


factors considered while investing in derivitive market demand & supply

price

7.0%

9.0%

risk

return

39.0%

45.0%

Interpretation: Most of the investors consider 45% of return,39% of risk,9% price& 7%

demand and supply .while investing in derivatives mainly they considered returns & risk

Awareness level of commodity market


Page 70


Valid

yes no Total

Frequency 64

Percent 64.0

Valid Percent 64.0


36

36.0

36.0

100.0

100

100.0

100.0

no 36.0%

yes 64.0%

Interpretation: The above pie chart depicts that 64% of the trader aware about the

Commodity Future market and 36% of them are not aware about Commodity Future Market. So there is a need to create awareness about the commodity future market and its benefits. There is a lot of potential is there to create customer and influence them to invest in Commodity Future market


Page 71

Awareness of commodity market with reference Derivative investors have you invested in commodity market

Valid

yes no Total

Frequency 39

Percent 39.0

Valid Percent 39.0


61

61.0

61.0

100.0

100

100.0

100.0

have you invested in commodity market

yes 39.0%

no 61.0%

Interpretation : From the above diagram we can say that out of 100 traders only 39%

have invested in commodity market 61% have not invested in commodity market so even though the most of the traders are aware about Commodity Future market they are not trading in Future market traders feel there is a high risk involved in the future market.


Page 72


how do you came to know abou t commodity market

Valid

not attempted frnds/colleauges bill boards/advt/brochure agents Total

Frequency 61

Percent 61.0

Valid Percent 61.0


12

12.0

12.0

73.0

9

9.0

9.0

82.0

18

18.0

18.0

100.0

100

100.0

100.0

how do you came to know about commodity market agents 18.0%

bill boards/advt/bro 9.0% not attempted frnds/colleauges

61.0%

12.0%

Interpretation : most of the investors came to know about the commodity by agents the

respondents who have invested in commodity market from them 18% of the people came to know by agents ,9% from the bill boards /advertisement/brochure &12% people came to know by there friends and colleagues. Here not attempted indicates the people who have not invested in commodity market have not attempted this question.


Page 73


commodity you pre fer for trading

Valid

not attempted

Frequency 64

Percent 64.0

Valid Percent 64.0


Agro pr oducts

10

10.0

10.0

74.0

5

5.0

5.0

79.0

16

16.0

16.0

95.0

5

5.0

5.0

100.0

100

100.0

100.0

Base metals Precious metals Energy products Total


Page 74

Awareness of commodity market with reference Derivative investors commodity you prefer for trading Energy products 5.0% Precious metals 16.0%

Base metals 5.0% Agro products

not attempted

10.0%

64.0%

Interpretation : among the persons who have invested in commodity in them 10% prefer

to trade in agro products, 5% in base metals, 16% in precious metals & 5 % in energy products .here not attempted indicates the people who have not invested in commodity market have not attempted this question.

Factors considere d while trading in commodity market

Valid

Frequency 65

Percent 65.0

Valid Percent 65.0


price

3

3.0

3.0

68.0

season

8

8.0

8.0

76.0

risk

13

13.0

13.0

89.0

return

11

11.0

11.0

100.0

100

100.0

100.0

not attempted

Total


Page 75


Factors considered while trading in commodity market return 11.0% risk 13.0%

season 8.0% price

not attempted 65.0%

3.0%

Interpretation: Most of the investors consider 11% of return,13% of risk,3% price& 8%

of season. While investing in commodities mainly they considered returns & risk while investing in commodity market they mainly consider returns & risk. here not attempted indicates the people who have not invested in commodity market have not attempted this question.


Page 76

Awareness of commodity market with reference Derivative investors commodity future mkt provides benefit

Valid

Frequency 62

Percent 62.0

Valid Percent 62.0


9

9.0

9.0

71.0

agree

10

10.0

10.0

81.0

neutral

18

18.0

18.0

99.0

1

1.0

1.0

100.0

100

100.0

100.0

not attemted strongly agree

disagree Total

commodity future mkt provides benefit disagree 1.0% neutral 18.0%

agree 10.0% not attemted strongly agree

62.0%

9.0%

Interpretation: most of the investors say it is in neutral position & some who are

benefited lot they will go for factors

like agree & strongly agree & percentage of

disagree is very less among invested people


Page 77


Reasons why they have not invested in commodity mkt

Valid

those who hv invested Not inter sted Info non availability high investment complex understanding high risk Total

Frequency 39

Percent 39.0

Valid Percent 39.0


5

5.0

5.0

44.0

10

10.0

10.0

54.0

7

7.0

7.0

61.0

33

33.0

33.0

94.0

6

6.0

6.0

100.0

100

100.0

100.0

Reasons why they have not invested in commodity mkt high risk 6.0%

those who hv investe complex understandin

39.0%

33.0%

high investment

Not intersted 5.0%

7.0%

Info non availabilit 10.0%

Interpretation: The above pie chart shows that most of the traders are not interested to

invest in Commodity Future Market due to complex understanding involved in it around 33% of the traders are given this reason and 5% of them are not interested in investing in


Page 78

Awareness of commodity market with reference Derivative investors this market, 6 & 7% think that it involves high risk and high investment So there is great need to create awareness about Commodity Future market by telling its advantages.

planning for trading in commodity mkt in future

Valid

yes no Total

Frequency 67

Percent 67.0

Valid Percent 67.0


33

33.0

33.0

100.0

100

100.0

100.0

planning for trading in commodity mkt in future no 33.0%

yes 67.0%

Interpretation : From the above graph we conclude that most of the traders are interested to invest in Commodity Future Market if proper awareness is created among them and


Page 79

Awareness of commodity market with reference Derivative investors other 33% are not interested to invest .These 67% of traders are the potential customers for the company.

Findings

•

More than 50% of the Traders in are aware about the commodity future Market

•

Hardly 30% traders are invested in the commodity future market

•

Most of the investors are not ready to invest in commodity future market they feel it involve high risk.

•

Returns and the Risk of the commodity are the most critical factors, which Traders will consider while investing in any commodity

•

Most of the investors are ready to invest in commodity future market if proper information is provided

•

As commodity future market is new and emerging ,many investors and farmers are not fully aware of this market .as the market helps to trade transparently without middlemen and agents

•

While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unawareness & mythical perception about commodity market.


Page 80


•

Most of the respondents are were from government service & business men

Suggestion •

There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc

•

From survey it is found that most of the potential customers are concerned about the Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage it will help to attract more and more customers.

•

More agents and marketing executives should be appointed to educate the customers because the customers having many myths in there mind

•

And also create the awareness of electronic commodity trading

•

Firm should approach people who are already into the business of commodities .special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation ,market trends etc . They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.


Page 81


CONCLUSION Commodity futures markets are new and emerging market. The awareness of the market is very less among the investors who can use this trade to sell there products without the middlemen or agents it also help the actual buyers too. Here trader also can transfer his risk to some other who can handle it or can appetite the risk through hedging techniques Compared to capital market commodity market is less risky in volatility context here the prices do not change within a fraction of second .significantly, minimum margin ready physical possession, no manipulation & fraud, maximum profitability is available over here since the commodity market helps all such as farmers, industries and individuals investors it is growing at a faster rate in global outlook.


Page 82


BIBLOGRAPHY News Papers; 

Business Line



Economic times



Times of India

Web site 

www.moneycontrol.com



www.google.com



www.MCX.com



www.NCDEX.com


Page 83


Text books

Futures & Options second addition by Vohra & Bagri

QUESTIONNAIRE

NAME : __________________________________ AGE : __________________________________ ADDRESS : __________________________________ CONTACT NO: __________________________________

1) Which of the following will best describe your occupation (Note: please tick below the option you want to choose) Business

Profession

Govt.services

Private service

Others specify

2) What is your annual income? Below 50000

50000-100000

100001-200000

200001-400000

More than 400001

3) Which among these investment criteria you usually prefer? Bank deposits Real estate

Mutual fund Life insurance


Page 84

Awareness of commodity market with reference Derivative investors Stocks

Derivative market

Commodity future trading

Bonds

4) Are you aware about the derivative market? Yes

No

5) If yes have you invested in future & option? Yes

No

6) Which factors would you consider while investing in derivative market? Price

Risk

Return

Demand & supply

7) Are you aware of commodity market? Yes

No

8) If yes have you invested in commodity market? (If no directly go to question 13) Yes

No

9) How do you come to know about commodity future trading? Friends/colleagues

Billboards /advt/brochure

Agents/ brokers

Other specify

10) Which commodity you prefer for trading? Agro products(Jeera, Soybean etc)

Base metals (aluminum, nickel)

Precious metals(gold/ Silver)

Energy Products(crude oil

Ferrous metals (iron, steel)

total

11) Which factor do you normally consider while trading in commodity market? Price

Season

Risk

Return


Demand & supply

Page 85

Commodity Market Questionnaire

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