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Published by juli_naz

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Categories:Types, Research
Published by: juli_naz on Nov 09, 2010
Copyright:Attribution Non-commercial


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CHAPTER I1. INTRODUCTION TO THE STUDYIndia, a commodity based economy where two-third of the one billionpopulation depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures marketstrades in commodity are largely used as risk management (hedging)mechanism on either physical commodity itself or open positions incommodity stock. For instance, a jeweler can hedge his inventory againstperceived short-term downturn in gold prices by going short in the futuremarkets.The article aims at know how of the commodities market and how thecommodities traded on the exchange. The idea is to understand theimportance of commodity derivatives and learn about the market fromIndian point of view. In fact it was one of the most vibrant markets tillearly 70s. Its development and growth was shunted due to numerousrestrictions earlier. Now, with most of these restrictions being removed,there is tremendous potential for growth of this market in the country.A commodity may be defined as an article, a product or material that isbought and sold. It can be classified as every kind of movable property,except Actionable Claims, Money and Securities.Commodities actually offer immense potential to become a separateasset class for market-savvy investors, arbitrageurs and speculators. Retailinvestors, who claim to understand the equity markets, may find commoditiesan unfathomable market.
But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand therisks and advantages of trading in commodities futures before taking a leap.Historically, pricing in commodities futures has been less volatile comparedwith equity and bonds, thus providing an efficient portfolio diversificationoption.In fact, the size of the commodities markets in India is also quitesignificant. Of the country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion),commodities related (and dependent) industries constitute about 58 per cent.Currently, the various commodities across the country clock an annualturnover of Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.Commodity market is an important constituent of the financial marketsof any country. It is the market where a wide range of products, viz., preciousmetals, base metals, crude oil, energy and soft commodities like palm oil,cotton etc. are traded. It is important to develop a vibrant, active and liquidcommodity market. This would help investors hedge their commodity risk,take speculative positions in commodities and exploit arbitrage opportunitiesin the market.
Cotton had been used to make fine, lightweight clothing since a long time. Ascotton clothes are not meant for wearing in the cold areas, clothing for the tropicalareas of the world had been provided by cotton for over years now. The cotton plantoriginated as a wild plant but the human beings had understood its importancemuch late. Some researchers assume that the Egyptians started using cotton inclothes as early as 12000 BC. But the actual evidence of cotton cloth was found inthe Mexican cave that is considered to be 7000 years back. One more evidence of cotton cloth was discovered from the archeological site of Mohenjo –Daro that isconsidered to be as old as the previous evidence. This makes it clear that the wildcotton was actually domesticated in Southern America and India only. In fact theearliest descriptions of this plant came from the Indian subcontinent in the Rig Vedain 1500BC that says that India has been producing the crop for more than 6000years. Herodotus, a Greek historian, also wrote about the Indian cotton, when hecame to India in around the year 500AD.In the 16th century, when the Spaniards came Peru just after the discovery of America, they found that the native people had already been growing cotton andwearing cotton clothes. They took this fiber to their homeland and it was then, whencotton was introduced to the rest of the world. With time, it grew popular andcultivation of cotton spread to the warmer places on the earth.Until the start of the 18th century, cotton became the main constituent of theclothing of the world. When Britain emerged as a super power at that time, it bannedthe import of cotton and cotton clothes into its colonies so as protect its sheep andwool industry. But the ban was lifted soon. With time the cotton textile industryencountered various technologies with the help of which it grew and developed toreach its current position.

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