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CHANDRESH (1)

CHANDRESH (1)

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Published by: Chandresh Gujar on Jul 14, 2012
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INSTITUTE FOR FUTURE EDUCATION, ENTERPRENERSHIP AND LEADERSHIP SUMMER INTERNSHIP PROJECT-2012 A PROJECT REPORT ON COMMODITY PRICE

RISK MANAGEMENT

CARRIED UNDER THE GUIDANCE OF MS. RASHMI NIHALANI ASSISTANT VICE-PRESIDENT PRODUCT KNOWLEDGE MANAGEMENT TEAM MULTI COMMODITY EXCHANGE (MCX) SUBMITTED BY: CHANDRESH GUJAR PGDM(2011-2013)

To qualify as a commodity for futures trading. ARUN SAXENAFACULTY . SUMMER INTERNSHIP PROJECT REPORT 1 UDEY SINGH KATOCH -155 ITM BUSINESS SCHOOL 2010 INSTITUTEFORTECHNOLOGYANDMANAGEMENT SUMMER INTERNSHIP PROJECT-2010 A PROJECT REPORT ON STUDYOFGOLDAS ACOMMODITYINDOMESTICMARKET &ASSISTINGBUSINESSDEVELOPMENT TEAM CARRIED UNDER THE GUIDANCE OF MR. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals. sold. Commodities are basically the products of the primary sector of an economy.. natural gas). ITM BUSINESS SCHOOL Introduction to Commodity Market What is a market? A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global financial and commodity markets. This consideration is usually money. buyers and sellers from different locations can transact business in an electronic marketplace. which serve as basic inputs for the secondary sector of the economy. and consumed. an article or a product has to meet some basic characteristics: . bought. energy (crude oil. which can be produced. In an Information Technology-enabled environment. DHARMESH PANDYA NATIONAL HEADICEX SUBMITTED BY: UDEYSINGHKATOCHKHR2009PGDMF155 SUBMITTED TO: PROF. What is a commodity? A commodity is a product that has commercial value.NDIAN COMMODITY EXCHANGE . etc.

Though these different varieties of crude oil can be treated as different commodities and traded as separate contracts. which are refined from metal ores. which means that there cannot be much differentiation in a product based on its quality. The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract).1. natural gas). There are of course some exceptions to this rule. The product must not have gone through any complicated manufacturing activity. 5. For example. Usually. Markets have existed for centuries worldwide for selling and buying of goods and services.etc. This would also ensure adequate liquidity for the commodity futures being traded. aluminum. The concept of market started with agricultural products and hence it is as old as the agricultural products or the business of farming itself. distribute. A major consideration while buying the product is its price. . nickel. and sugar. zinc. Traditionally. 4. 3. lead. etc. unprocessed state. metals. Their presence is required to ensure widespread trading activity in the physical commodity market. the product must be in a basic. thus ensuring price discovery mechanism. raw. Existence of a vibrant. It is therefore important to have active commodity markets functioning in a country. active. farmers used to bring their products to a central marketplace (called mandi / bazaar) in a town/village where grain merchants/ traders would also come and buy the products and transport. coffee. liquid. cashew. there are different varieties of crude oil. there can be a standardization of the commodities for futures contract based on the largest traded variety of crude oil. tin). These commodities include bullion (gold. and transparent commodity market is normally considered as a sign of development of an economy. silver). Fundamental forces of market demand and supply for the commodity determine the commodity prices. non-ferrous (base) metals (copper. In other words. Commodity Market: A Perspective A market where commodities are traded is referred to as a commodity market. The product has to be fairly standardized. pepper. palm oil. 2. energy (crude oil. many competing sellers of the product will be there in the market. This would ensure a fair representation of the commodity for futures trading. which is processed from sugarcane. except for certain basic processing such as mining. cropping. agricultural commodities such as soya oil. and sell them to other markets. For example.

In a traditional market. Deals were struck once mutual agreement was reached on the price and the quantity to be bought/ sold. These advance sales help both buyers and sellers with long-term planning. unlike cash markets that call for immediate delivery. These are traditional markets. This type of agreement was acceptable to both parties since the farmer would know how much he would be paid for his products. Forwards and Futures Markets In this case. Forwards and Futures markets allow delivery at some time in the future. shortage of a commodity in a given season would lead to increase in price for the commodity. Forward contracts laid the groundwork for futures contracts. Cash markets thus call for immediate delivery of commodities against actual payment. Example of a cash market is a mandi where food grains are sold in bulk. On the other hand. In traditional markets. agricultural products would be brought and kept in the market and the potential buyers would come and see the quality of the products and negotiate with the farmers directly on the price that they would be willing to pay and the quantity that they would like to buy. Cash Market Cash transaction results in immediate delivery of a commodity for a particular consideration between the buyer and the seller. farmers often returned from the market with their products since they failed to fetch their expected price and since there were no storage facilities available close to the marketplace. Buyers and sellers meet face to face and deals are struck. As a result. and they settle the deal in cash and take or give delivery immediately. It was in this context that farmers and food grain merchants in Chicago started negotiating for future supplies of grains in exchange of cash at a mutually agreeable price. A marketplace that facilitates cash transaction is referred to as the cash market and the transaction price is usually referred to as the cash price. the agreements are normally made to receive the commodities at a later date in future for a pre-determined consideration based on agreed upon terms and conditions. and the dealer would know his cost of procurement in advance. This effectively started the system of forward contracts. Farmers would bring their products to this market and merchants/traders would immediately purchase the products. Forwards and Futures reduce the risks by allowing the trader to decide a price today for goods to be delivered on a particular future date. oversupply of a commodity on even a single day could result in decline in price—sometimes below the cost of production. Neither farmers nor merchants were happy with this situation since they could not predict what the prices would be on a given day or in a given season. The main . which subsequently led to futures market too.

and price are discussed in person between the buyer and the seller. or other economic factors that may result in unexpected changes. There is a huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. led to the development of futures market. Indian commodities market has an excellent growth potential and has created good opportunities for market players. natural calamities. Each contract is thus unique and not standardized since it takes into account the needs of a particular seller and a particular buyer only. quality.500+ Agricultural Produce Marketing Cooperative (APMC) mandis. It has major markets in regions of urban conglomeration (cities and towns) and nearly 7. in futures contracts. and hence counterparty default risks for parties involved. the counterparty default risk has been greatly minimized. in turn. there is a network of over 27. Forward contracts help in arranging long-term transactions between buyers and sellers but could not deal with the financial (credit) risk that occurred with unforeseen price changes resulting from crop failures. since futures are standardized contracts that are traded through an exchange. Relevance and Potential of Commodity Markets in India Majority of commodities traded on global commodity exchanges are agri-based. For forward contracts. India is the world’s leading producer of more than 15 agricultural commodities and is also the world’s largest consumer of edible oils and gold. quality. factors beyond human control (floods. and delivery date) are standardized. all terms (quantity. terms like quantity. where more than 65 percent of the people are dependent on agriculture. Commodity markets therefore are of great importance and hold a great potential in case of economies like India.000+ haats (rural bazaars) that are seasonal marketplaces of various commodities. As mentioned above. Since the exchange standardizes the quality and quantity parameters and offers complete transparency by using risk management techniques (such as margining system with mark-to-market settlement on a real-time basis with daily settlement). On the other hand. The commodity trade segment employs more than five million traders.difference between these two contracts is the way in which they are negotiated. To add to this. These marketplaces play host to a variety of commodities everyday.). they can be used to minimize price risk by means of hedging techniques. inadequate storage or bottlenecks in transportation. delivery date. The potential of the sector has been well identified by the Central government and the state governments and they have invested substantial resources to boost production of . This. etc. The transaction price is discovered through the interaction of supply and demand in a centralized marketplace or exchange.

mutual funds. National Commodity and Derivatives Exchange . since India is largely a net importer There are four national-level commodity exchanges and 22 regional commodity exchanges in India. and removing legal hurdles to attract more participants have increased the scope of commodities derivatives trading in India. It is expected that foreign institutional investors (FIIs). The volumes are likely to surge further as a result of the increased interest from the international participants in Indian commodity markets. and banks may be able to participate in commodity derivatives markets in the near future. With the liberalization of the Indian economy in 1991. The launch of options trading in commodity exchanges is also expected after the amendments to the Forward Contract Regulation Act (1952). the growth in commodity futures can be expected to be phenomenal. approving new exchanges.agricultural commodities. The trading volumes are increasing as the list of commodities traded on national commodity exchanges also continues to expand. developing exchanges with modern infrastructure and systems such as online trading. it is much higher at 15 to 20 times). If these international participants are allowed to participate in commodity markets (like in the case of capital markets). Commodity trading and commodity financing are going to be rapidly growing businesses in the coming years in India. This has boosted both the spot market and the futures market in India. Trends indicate that the volume in futures trading tends to be 5-7 times the size of spot trading in the country (internationally. the commodity prices (especially international commodities such as base metals and energy) have been subject to price volatility in international markets. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities. Many nationalized and private sector banks have announced plans to disburse substantial amounts to finance businesses related to commodity trading. Many of these commodities would be traded in the futures markets as the food-processing industry grows at a phenomenal pace. The national-level exchanges are Multi Commodity Exchange of India Limited (MCX).

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