Professional Documents
Culture Documents
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Introduction
Commodities have always been a part of our day to day existence as one
of the finest investment avenues available. But we have been unaware of them. The
wheat in our bread, the Cotton in our clothes, our gold jewels, the oil that runs our
cars, etc,are all traded across the world in major exchanges.
The journal of accounting and finance volume 20. No. 2
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On the recommendation of the Khusro committee in 1980, the Government
reintroduced futures trading in some selected commodities including cotton, jute
potatoes etc. As a part of economic reforms, the government of India appointed an
expert committee on forward markets under the chairmanship of K N Kabra in the year
1993.
The committee submitted its report in 1944 and recommended for the
reintroduction of futures, with a wider coverage of and scope for more agricultural
commodities. In order to give a thrust to the agricultural sector, the National
Agricultural Policy 2000 envisaged external and domestic market reforms and the
dismantling of all controls and regulations on the agricultural commodity market. It
also proposed enlargement of the coverage of futures market to reduce wide
fluctuations in commodity prices and for hedging the risk arising from price
fluctuations.
Over the ages, commodities have been the basis for trade and industry.
They have spurred commerce, encouraged exploration and altered the histories of
nation. Today they play a very important role in the world economy with billion of
dollars of these commodities traded each day of exchanges across the world, so much
Evolution of futures trading Indian economy
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so that today the commodity market are roughly 4-5 times the size of the equity market,
where ever they are actively traded.
Options on futures contracts can remove two related and major barrier to
the use of commodity futures in the forward-pricing of agricultural commodities. The
Basics of commodity futures page no 6. chapter 6
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first is the producer’s constant fear that forward prices of future sales have been set too
low or that forward prices (i.e., costs) of futures purchases have been set too high.
Second and related barrier to direct use of the futures markets is the need to
∆
manage a margin account and answer margin calls as the market rallies against a short
position in the futures. Neither producers nor their lenders have always understood the
need for a special and additional credit line to answer margin calls. There are countless
examples of producers being forced to offset short hedges due to the inability or lack of
a willing creditor to provide the needed margin funds. Often, the market turns lower
after the upward price move that forced the producer to offset the short hedges. A loss
is incurred in the futures account and than the producer is without price protection as
the market turns and trends lower.
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CHAPTER 2
2.1 Introduction
7
Unknown to us the commodities that have always been a Part of our day
to day existence are also one of the finest Investment avenues available. The wheat in
our bread, the Cotton in our cloths, our gold jewels, the oil that runs our cars, etc; are
all trades across the world in major exchanges.
Over the ages, commodities have been the basis for trade and industry. They
have spurred commerce, encouraged exploration and altered the histories of nation.
Today they play a very important role in the world economy with billion of dollars of
these commodities traded each day of exchanges across the world, so much so that
today the commodity market are roughly 4-5 times the size of the equity market, where
ever they are actively traded.
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c) Permanent changes: These are affecting one or a few countries owing to
technological changes or the discovery of a new technology which alters
competitiveness.
There have been a large number of studies made in the field of investment and
creation of portfolios. All the studies made are in reference with income levels in
general. Income levels even though same but the field of work and the life style of a
particular segment differ from others, which in turn affects the saving and investment
priorities.
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Benefits of review of literature
The review of literature was beneficial for the successful completion of the
project work and to carry out the survey in the right direction. The literature review
updates the knowledge of the researcher on portfolio creation techniques and the need
of the individual. It benefited in the learning of the profile of the respondents and their
preferences.
The main focus on potential investors and those who invest regularly
commodity futures there return, risk and expectation towards commodity futures of this
study is to asses
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2.6 Hypothesis statement:
Testing: For hypothesis testing ‘Chi square’ test is used. The total no of
respondents who are involved in the survey are 60 out of which 45 respondents are
regular investors in commodity futures remaining 15 were potential investors
Hypothesis to be tested:
2.7 Methodology
There are various factors such as the personal factors as well as the market
factors that motivate a person to save and invest. Thus, the questionnaire will be
directed towards the respondents to give the feed back about their savings interest and
the various investment opportunities they are aware about and it also give respondents
to rethink about their investment criteria and upgrade it to maximize their returns.
7.1 Sampling
All items under study in any field of survey are known as a universe or
population. A complete enumeration of all items in the population is census enquiry,
which is not practically possible. Thus sample design is done which basically refers to
the definition plan defined by any data collection for obtaining a sample from a given
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population.
Convenient Sampling approach is adopted here. This is due to the fact that the
respondents were available only at the colleges and only at the duty time, to get the
clear idea of their approach the nearest colleges were selected and the study was made.
Sample design or sample procedure refers to a definite plan followed for the
collection of sample from a given population. The process followed was, firstly a
questionnaire was prepared with the objective in mind. The respondent from various
financial institutions were determined. The second step includes convenience sampling
whereby the selected population was considered and the questionnaire was
administered.
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7.6 Instruments
In dealing with real life problems it is often found that data at hand are
inadequate, and hence, it becomes necessary to collect data that are appropriate. The
data can be of two types- Primary data and Secondary data.
The secondary data are those data which already exist. This data is also an
important input for the study, and in this case the secondary data is collected from
various records, magazines, text books, internet, discussion with various in house
faculties etc.
Some of the potential investors were reluctant to disclose their financial data
and the personal details.
The findings and conclusions drawn out of the study will reflect only existing
trends in the sector.
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The accuracy and authenticity of the observations made and conclusions drawn
largely depend upon the corresponding accuracy and authenticity of the
information supplied by the respondents at large.
The respondents being investors, who are basically very busy people,
most of them were in hurry during the survey. So some errors may have occurred in
filling of the questionnaires.
The data collected through questionnaire and the secondary data available was
examined in detail; it was further classified and tabulated for the purpose of analysis to
generalize percentages.
The tabulated data is being graphically represented for the better analysis.
Factor analysis
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Method
Factor analysis begins with the construction of a new set of variables based
on the relationships in the correlation matrix. While this can be done in a number of
ways, the most frequently used approach is principal components analysis. This method
transforms a set of variables into a new set of composite variables or principal
components that are not correlated with each other.
For explaining the variables not accounted for by the first factor. In turn,
there may be a third, fourth, and component, each being the best linear combination of
variables not accounted for by the previous factors.
Cross tabulation
The cells are individually identified by their row and column numbers,
as illustrated. Row and column totals, called marginal, appear at the bottom and right
“margins” of the table. They show the counts and percentages of the separate rows and
columns.
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When tables are constructed for statistical testing, we call them
contingency tables, and the test determines if the classification variables are
independent. Of course, tables may be larger than 2*2.
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CHAPTER 3
17
Industry profile
HEDGING
Many participants in the commodity futures market are hedgers. They
use the futures market to reduce a particular risk that they face. This risk might relate to
the price of wheat or oil or any other commodity that the person deals in. The classic
hedging example is that of wheat farmer who wants to hedge the risk of fluctuations in
the price of wheat around the time that his crop is ready for harvesting. By selling his
crop forward, he obtains a hedge by locking in to a predetermined price.
SHORT HEDGE
A short hedge can also be used when the asset is not owned at the
moment but is likely to be owned the future. For example, an exporter who knows that
he or she will receive a dollar payment three months later. He makes a gain if the dollar
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increases in a value relative to the rupee and makes a loss if the dollar decreases in
value relative to the rupee. A short futures position will give him the hedge he desires.
LONG HEDGE
Hedges that involve taking a long position in futures contract are
known as long hedges. A long hedge is appropriate when a company knows it will have
to purchase a certain asset in the future and wants to lock in a price now.
SPECULATION
An entity having an opinion on the price movements of a given
commodity can speculate using the commodity market. While the basics of speculation
apply to any market, speculation in commodities is not as simple as speculating on
stocks in the financial market.
For a speculator who thinks the shares of a given company will rise, it
is easy to buy the shares and hold them for whatever duration he wants to. However,
commodities are bulky products and come with all the costs and procedures of handling
these products. The commodities futures markets provide speculators with an easy
mechanism to speculate on the price of underlying commodities.
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ARBITRAGE
A central idea in modern economics is the law of one price. This states that
in a competitive market, if two assets are equivalent from the point of view of risk and
return, they should sell at the same price. If the price of the same asset is different in
two markets, there will be operators who will buy in the market where the asset sells
cheap and sell in the market where it is costly.
This activity termed as arbitrage, involves the simultaneous purchase and
sale of the same or essentially similar security in two different markets for
advantageously different prices. The buying cheap and selling expensive continues till
prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices
and restore market efficiency.
Indian commodity exchange and progress
The Calcutta Hessian exchange ltd and the East India Jute Association
Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. Futures
trading in cotton were organized in Mumbai under the auspices of East India cotton
Association in 1921. Simultaneously, several exchanges were set up in major
agricultural centers in North India before the World War broke out and they were
∆
mostly engaged in wheat futures until it was prohibited in 1921.
All the exchanges, which deal with forward contracts, are required to obtain
certificate of registration from the FMC. Besides, they are subjected to various laws of
the land like the companies Act, Stamp Act, Contracts Act, Forward commission Act
and various other legislations, which impinge on their working.
1. Limit on net open position as on the close of the trading hours. Some times limit
is also imposed on intra- day net open position. The limit is imposed operator-
wise, and in some cases, also member-wise.
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4. Circuit breakers or minimum/maximum prices these are prescribed to prevent
futures prices from falling below as rising above not warranted by prospective
supply and demand factors.
5. Skipping trading in certain derivatives of the contract, closing the market for a
specified period and even closing out the contract.
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CHAPTER 4
23
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
income * age 60 92.3% 5 7.7% 65 100.0%
Table No 1
Income * age Cross tabulation
age Total
.25 25 to 40 40 to 50 50 above
incom >200000 Count
8 7 0 0 15
e
% within income 53.3% 46.7% .0% .0% 100.0%
% within age 100.0% 43.8% .0% .0% 25.0%
200000 to Count
0 9 3 0 12
300000
% within income .0% 75.0% 25.0% .0% 100.0%
% within age .0% 56.3% 25.0% .0% 20.0%
300000 to Count
0 0 9 6 15
375000
% within income .0% .0% 60.0% 40.0% 100.0%
% within age .0% .0% 75.0% 25.0% 25.0%
375000 & ab Count 0 0 0 18 18
% within income .0% .0% .0% 100.0% 100.0%
% within age .0% .0% .0% 75.0% 30.0%
Total Count 8 16 12 24 60
% within income 13.3% 26.7% 20.0% 40.0% 100.0%
% within age 100.0% 100.0% 100.0% 100.0% 100.0%
INFERENCE:
According to the survey most of the investors are falling under there
income more than375000 and age group 50 & above are regular investors among
other age and income group because it could be they are more aware about
trading system and their annual income also high.
Figure No .1
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20 age
.25
25 to 40
40 to 50
50 above
15
Count
10
income
25
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
income *
occupati 60 92.3% 5 7.7% 65 100.0%
on
Table No .2
300000 to Count
375000 12 0 0 3 15
% within income
80.0% .0% .0% 20.0% 100.0%
% within
occupation 57.1% .0% .0% 30.0% 25.0%
375000 & Count
above 9 9 0 0 18
% within income
50.0% 50.0% .0% .0% 100.0%
% within
occupation
42.9% 100.0% .0% .0% 30.0%
Total Count
21 9 20 10 60
% within income
35.0% 15.0% 33.3% 16.7% 100.0%
% within
occupation 100.0% 100.0% 100.0% 100.0% 100.0%
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INFERENCE:
Figure No 2
Occupation
14 pvt emp
govt emp
Businessman
12 proffessional
10
Count
Income
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Statistics
trader1
N Valid 60
Missing 5
Minimum 1.00
Maximum 2.00
Table No 3
Cumulative
Respondent Frequency Percent Valid Percent Percent
Valid regular trader 49 75.4 81.7 81.7
potential customer 11 16.9 18.3 100.0
Total 60 92.3 100.0
Missing System 5 7.7
Total 65 100.0
INFERENCE:
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Figure No .3
trader1
100
80
60
Percent
40
20
0
regular trader potential customer
trader1
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Table No .4
Attributes of satisfaction
Trade on an organized 12
exchange
24.48%
Total 49 100%
30
Source: Primary Data
INFERENCE:
Figure No 4
regular investo
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Cumulative
Frequency Percent Valid Percent Percent
Valid influences the
price variation 25 38.5 41.7 41.7
not influence the
price variation 35 53.8 58.3 100.0
Total 60 92.3 100.0
Missing System 5 7.7
Total 65 100.0
N Valid 60
Missing 5
Std. Deviation .49717
5. Do you think futures trading influence the price and price variation?
Influences
Table No 4.1
32
Sources Primary Data
INFERENCE:
According to the survey most of the investors believe that price and
price variation dose not influence the price variation.
Survey indicated that the major influencing factor that is 35% says that
price dose not influence the commodity futures.
Figure No 5
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influences
Summery
N Valid 25
Missing 40
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Minimum 1.00
Maximum 4.00
Table No .6
Cumulative
Frequency Percent Valid Percent Percent
Valid seasonal price variation 10 15.4 40.0 40.0
inter and intra seasonal
fluctuation in price 5 7.7 20.0 60.0
short term oscillation in
prices 5 7.7 20.0 80.0
average received by
producers and paid by 5 7.7 20.0 100.0
consumers
Total 25 38.5 100.0
Missing System 40 61.5
Total 65 100.0
INFERENCE:
According to the survey most of the investors believe that price and
price variation influences the fluctuation of the market.
Survey indicated that the major influencing factors, seasonal price
variation that influence in short term volatility in the market so table shows that
15.4 % among other variables got for seasonal price variation.
Figure No 6
35
10
8
Frequ
ency
Mean =2.20
Std. Dev. =1.19024
0 N =25
0.00 2.00 4.00
Influence
7 .if price and price variation dose not influence commodity futures by various
commodity trading.
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Table No .7
40
By speculation 15
By arbitrage
8 30
35 100
TOTAL
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Price and variation
Table No .8
30 30 0 0 0
By hedging
By
40 30 10 100 3.333
speculation
By arbitrage
30 30 - 10 100 3.333
Total
90 90 0 6.666
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Since calculated value of χ 2 = 6.666 is greater than the
tabulated value 5.991, it is significance. Hence we conclude that the future
trading dose not influence the price and price variation.
Table No: 9
R2 25
15
10 16.66
R3
R4
10 16.66
R5 10 16.66
R6 5 8.33
TOTAL 60 100
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Source: Primary Data
INFERENCE:
According to the survey most of the investors are satisfied above mentioned
options i.e. R1, R2, R3, R4, R5, R6.
Survey indicated that the major influencing factors for commodity futures
are fair price discovery and transparent trading. So it helps investors to track
the current fluctuation in price and proper price discovery.
Figure No .9
satisfied futur
5 10
5
40
Attributes
R1-Transparent trading
R5- To bring together the entities that the market can trust
Table No: 10
R1 10 16.66%
30%
R2 18
R3 8 13.33%
R4 12 20%
R5 12 20%
Total 60 100%
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Source: Primary Data
Attributes
R1- Limit on net open position as on the close of the trading hours.
Inference:
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According to the survey most of the investors are satisfied current
regulatory measures that is above mentioned options i.e. R1, R2, R3, R4, and
R5.
Survey indicated that the major influencing factors for commodity
futures are Minimum\maximum prices-these are prescribed to prevent futures
prices from falling below as rising above not warranted prospective supply or
demand.
Figure No.10
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Reguletery m
18
16
14
12
10
Repondents
8
6
4
2
0
Reguletry R2
mechanism
attrib
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CHAPTER 5
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The following prerequisites are certain to give a big boost to commodity futures
trading in India:
b.) An agency is to be set up to help the seller and buyer by grading the stocks
being offered by them for sale and certify their quality so that the buyer can be
sure of buying them.
C.)There must be a Clearing House that takes care of the commodity that is
being traded in the derivatives exchanges and ensures that quality is maintained
till the stock under the traded contact is delivered to the ultimate buyer, at a
reasonable cost.
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G.) The market must be efficient with widespread awareness amongst various
market players. The liquidity would increase further with a well-diversified
basket of commodities.
I.)The union Finance Minister, in his Budget-2005 speech, pleaded for a single
regulatory regime. It will find very difficult to tackle complexities in the socio
economic dimensions of the fledging commodity future.
K.)The market should be made broader based by allowing banks and FIIs to
participate in commodity futures. Options should be allowed to be traded as that
will give one more efficient tool to the participants to apply various hedging
strategies for averting their price risks.
CONCLUSION
The agriculture industry requires increasing formation, improved
availability of agriculture inputs, infrastructure facility agricultural business, etc
A conductive environment also helps in bringing cost effectiveness by
influencing the existence of commodity exchange will strengthen the market
based trading system, which could also be used for by the Government.
Definitely, commodity exchange will create an environment where farmers will
have many options of selling their commodities like spot market, future market
and future market referred OTC forward market. Due to future market being
executable at national level in electronic format, integration of banks and
institutional traders in commodities market would create several institutional
traders in farmers. Thus MCX is likely to play a pivotal role in the process
enable “Second Green Revolution”.
With all its attendant benefits, we are confident that the
commodity exchange will initiate the ‘Second Green Revolution’ by making it
the ‘development mantra ‘of the country in the 21st century. Therefore, the
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challenge right now for us is to take the fruits of the commodity futures make a
difference by establishing a sustainable model for the development of “kissan”of
the nation.
Developing countries have large exposure to commodity price risk.
Can be eliminated by speculation hedging and arbitrage and seasonal price
fluctuation. Exports are often concentrated in a few primary commodities with
positively correlated price movements. The dependence on a few commodities
and uncertain commodity prices expose such countries to uncertain revenues and
expenditures. This has varied consequences such as affect the government
revenue, have an adverse impact on commodity financing in terms of increased
cost of debt or no or low debt due to poor credit worthiness etc.
The beta calculation reflects a measure of historical alignment of
the price of a stock with that of the market. Hence many regard it as a
“measurement” of past relationship that cannot be naively used as an “estimate”
of future risk. Why? Two reasons are commonly given;
To overcome this limitation, some adjustment may be required. A
procedure that is sometimes recommended is to take a weight average of the
historical beta, on the one hand, and 1.0 (the value of market beta) on the other.
The weighting scheme should take into account the degree of historical
estimation error and the dispersion of individual firms around the average. If the
historical estimation error is large, the weight assigned to the historical beta
should be small.
The future is certainly bright for the Indian commodities market.
Once the much awaited institutional participation enters the market, it will create
speculation, arbitration and hedging for all kinds of players in the market
SUGGESTION
48
Delay the transfer of commodities in the name of transferee
Effect take part either directly or indirectly transactions, which are likely
to have effect of artificially, raising or depressing spot or derivatives
contract.
Indulge in falsification of his books accounts and records for the purpose
of manipulation
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BIBLIOGRAPHY
50
Books Referred:
Websites Visited:
www.mcx.com
www.sbi.com
www.google.com
www.ncdex.Com
www.capitaline.com
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PART- A
52
Personal Information
25 TO 40 50AND
ABOUE
GOVT.EMPLOYEE PROFESSIONAL
RS 25000TO5000 RS 75000TABOUE
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Part – B
Yes No
2. If yes, why?
3. Do you think futures trading influence the price and price variation?
Yes No
4. If yes, why?
5. If no, why?
a. By hedging
b. By speculation
c. By arbitrage
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Yes No
a. Transparent trading
8. If no, comment
i. ----------------------------------------------------------------------
ii. --------------------------------------------------------------------
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