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Chapter Topic Page
No No.
1 Introduction to Commodity Market 04
2 History of Evolution of Commodity 08
3 India and the Commodity Market 10
4 International Commodity Exchanges 15
5 How Commodity Market Works? 17
6 How to Invest in a Commodity 19
7 Current Scenario in Indian 23
Commodity Market
8 Commodities 28
9 Analysis 38
Summary 55
Bibliography 56

Cha pter 1

Introduction to Commodity Market

What is “Commodity”?
Any product that can be used for commerce or an article
of commerce which is traded on an authorized commodity exchange is
known as commodity. The article should be movable of value,
something which is bought or sold and which is produced or used as
the subject or barter or sale. In short commodity includes all kinds of
goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952
defines “goods” as “every kind of movable property other than
actionable claims, money and securities”.
In current situation, all goods and products of agricultural
(including plantation), mineral and fossil origin are allowed for
commodity trading recognized under the FCRA. The national
commodity exchanges, recognized by the Central Government, permits
commodities which include precious (gold and silver) and non-ferrous
metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils
and oilcakes, raw jute and jute goods, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange?

A commodity exchange is an association or a company or any
other body corporate organizing futures trading in commodities for
which license has been granted by regulating authority.

What is Commodity Futures?

A Commodity futures is an agreement between two parties to
buy or sell a specified and standardized quantity of a commodity at a
certain time in future at a price agreed upon at the time of entering
into the contract on the commodity futures exchange.
The need for a futures market arises mainly due to the
hedging function that it can perform. Commodity markets, like any
other financial instrument, involve risk associated with frequent price
volatility. The loss due to price volatility can be attributed to the
following reasons:

Consumer Preferences: - In the short-term, their influence on price

volatility is small since it is a slow process permitting manufacturers,
dealers and wholesalers to adjust their inventory in advance.

Changes in supply: - They are abrupt and unpredictable bringing

about wild fluctuations in prices. This can especially noticed in
agricultural commodities where the weather plays a major role in

affecting the fortunes of people involved in this industry. The futures
market has evolved to neutralize such risks through a mechanism;
namely hedging.

The objectives of Commodity futures: -

• Hedging with the objective of transferring risk related to the
possession of physical assets through any adverse moments in
price. Liquidity and Price discovery to ensure base minimum
volume in trading of a commodity through market information
and demand supply factors that facilitates a regular and
authentic price discovery mechanism.

• Maintaining buffer stock and better allocation of resources as it

augments reduction in inventory requirement and thus the
exposure to risks related with price fluctuation declines.
Resources can thus be diversified for investments.
• Price stabilization along with balancing demand and supply
position. Futures trading leads to predictability in assessing the
domestic prices, which maintains stability, thus safeguarding
against any short term adverse price movements. Liquidity in
Contracts of the commodities traded also ensures in maintaining
the equilibrium between demand and supply.
• Flexibility, certainty and transparency in purchasing commodities
facilitate bank financing. Predictability in prices of commodity
would lead to stability, which in turn would eliminate the risks
associated with running the business of trading commodities.
This would make funding easier and less stringent for banks to
commodity market players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic
price discovery and an efficient price risk management. The
beneficiaries include those who trade in the commodities being offered
in the exchange as well as those who have nothing to do with futures
trading. It is because of price discovery and risk management through
the existence of futures exchanges that a lot of businesses and
services are able to function smoothly.

1. Price Discovery:-Based on inputs regarding specific market

information, the demand and supply equilibrium, weather
forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers
and sellers conduct trading at futures exchanges. This

transforms in to continuous price discovery mechanism. The
execution of trade between buyers and sellers leads to
assessment of fair value of a particular commodity that is
immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common

method of price risk management. It is strategy of offering price
risk that is inherent in spot market by taking an equal but
opposite position in the futures market. Futures markets are
used as a mode by hedgers to protect their business from
adverse price change. This could dent the profitability of their
business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers,
manufacturers, exporters, importers etc.

3. Import- Export competitiveness: - The exporters can hedge

their price risk and improve their competitiveness by making use
of futures market. A majority of traders which are involved in
physical trade internationally intend to buy forwards. The
purchases made from the physical market might expose them to
the risk of price risk resulting to losses. The existence of futures
market would allow the exporters to hedge their proposed
purchase by temporarily substituting for actual purchase till the
time is ripe to buy in physical market. In the absence of futures
market it will be meticulous, time consuming and costly physical

4. Predictable Pricing: - The demand for certain commodities is

highly price elastic. The manufacturers have to ensure that the
prices should be stable in order to protect their market share
with the free entry of imports. Futures contracts will enable
predictability in domestic prices. The manufacturers can, as a
result, smooth out the influence of changes in their input prices
very easily. With no futures market, the manufacturer can be
caught between severe short-term price movements of oils and
necessity to maintain price stability, which could only be possible
through sufficient financial reserves that could otherwise be
utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability has a

direct bearing on farmers in the absence of futures market.
There would be no need to have large reserves to cover against
unfavorable price fluctuations. This would reduce the risk
premiums associated with the marketing or processing margins

enabling more returns on produce. Storing more and being more
active in the markets. The price information accessible to the
farmers determines the extent to which traders/processors
increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it
is very likely to benefit the farmers. Also, due to the time lag
between planning and production, the market-determined price
information disseminated by futures exchanges would be crucial
for their production decisions.

6. Credit accessibility: - The absence of proper risk management

tools would attract the marketing and processing of commodities
to high-risk exposure making it risky business activity to fund.
Even a small movement in prices can eat up a huge proportion of
capital owned by traders, at times making it virtually impossible
to payback the loan. There is a high degree of reluctance among
banks to fund commodity traders, especially those who do not
manage price risks. If in case they do, the interest rate is likely
to be high and terms and conditions very stringent. This posses
a huge obstacle in the smooth functioning and competition of
commodities market. Hedging, which is possible through futures
markets, would cut down the discount rate in commodity

7. Improved product quality: - The existence of warehouses for

facilitating delivery with grading facilities along with other related
benefits provides a very strong reason to upgrade and enhance
the quality of the commodity to grade that is acceptable by the
exchange. It ensures uniform standardization of commodity
trade, including the terms of quality standard: the quality
certificates that are issued by the exchange-certified warehouses
have the potential to become the norm for physical trade.

Chapter 2

History of Evolution of commodity markets

Commodities future trading was evolved from need of
assured continuous supply of seasonal agricultural crops. The concept
of organized trading in commodities evolved in Chicago, in 1848. But
one can trace its roots in Japan. In Japan merchants used to store Rice
in warehouses for future use. To raise cash warehouse holders sold
receipts against the stored rice. These were known as “rice tickets”.
Eventually, these rice tickets become accepted as a kind of commercial
currency. Latter on rules came in to being, to standardize the trading
in rice tickets. In 19th century Chicago in United States had emerged
as a major commercial hub. So that wheat producers from Mid-west
attracted here to sell their produce to dealers & distributors. Due to
lack of organized storage facilities, absence of uniform weighing &
grading mechanisms producers often confined to the mercy of dealers
discretion. These situations lead to need of establishing a common
meeting place for farmers and dealers to transact in spot grain to
deliver wheat and receive cash in return.
Gradually sellers & buyers started making commitments to
exchange the produce for cash in future and thus contract for “futures
trading” evolved. Whereby the producer would agree to sell his
produce to the buyer at a future delivery date at an agreed upon price.
In this way producer was aware of what price he would fetch for his
produce and dealer would know about his cost involved, in advance.
This kind of agreement proved beneficial to both of them. As if dealer
is not interested in taking delivery of the produce, he could sell his
contract to someone who needs the same. Similarly producer who not
intended to deliver his produce to dealer could pass on the same
responsibility to someone else. The price of such contract would
dependent on the price movements in the wheat market. Latter on by
making some modifications these contracts transformed in to an
instrument to protect involved parties against adverse factors such as
unexpected price movements and unfavorable climatic factors. This
promoted traders entry in futures market, which had no intentions to
buy or sell wheat but would purely speculate on price movements in
market to earn profit.
Trading of wheat in futures became very profitable which
encouraged the entry of other commodities in futures market. This
created a platform for establishment of a body to regulate and
supervise these contracts. That’s why Chicago Board of Trade (CBOT)
was established in 1848. In 1870 and 1880s the New York Coffee,
Cotton and Produce Exchanges were born. Agricultural commodities
were mostly traded but as long as there are buyers and sellers, any
commodity can be traded. In 1872, a group of Manhattan dairy
merchants got together to bring chaotic condition in New York market
to a system in terms of storage, pricing, and transfer of agricultural

products. In 1933, during the Great Depression, the Commodity
Exchange, Inc. was established in New York through the merger of
four small exchanges – the National Metal Exchange, the Rubber
Exchange of New York, the National Raw Silk Exchange, and the New
York Hide Exchange.
The largest commodity exchange in USA is Chicago Board
of Trade, The Chicago Mercantile Exchange, the New York Mercantile
Exchange, the New York Commodity Exchange and New York Coffee,
sugar and cocoa Exchange. Worldwide there are major futures trading
exchanges in over twenty countries including Canada, England, India,
France, Singapore, Japan, Australia and New Zealand.

Chapter 3

India and the commodity market

Histo r y of Commodit y Mar ket in I ndia:-
The history of organized commodity derivatives in India
goes back to the nineteenth century when Cotton Trade Association
started futures trading in 1875, about a decade after they started in
Chicago. Over the time datives market developed in several
commodities in India. Following Cotton, derivatives trading started in
oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912),
Wheat in Hapur (1913) and Bullion in Bombay (1920).
However many feared that derivatives fuelled unnecessary
speculation and were detrimental to the healthy functioning of the
market for the underlying commodities, resulting in to banning of
commodity options trading and cash settlement of commodities futures
after independence in 1952. The parliament passed the Forward
Contracts (Regulation) Act, 1952, which regulated contracts in
Commodities all over the India. The act prohibited options trading in
Goods along with cash settlement of forward trades, rendering a
crushing blow to the commodity derivatives market. Under the act only
those associations/exchanges, which are granted reorganization from
the Government, are allowed to organize forward trading in regulated
commodities. The act envisages three tire regulations: (i) Exchange
which organizes forward trading in commodities can regulate trading
on day-to-day basis; (ii) Forward Markets Commission provides
regulatory oversight under the powers delegated to it by the central
Government. (iii) The Central Government- Department of Consumer
Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is
the ultimate regulatory authority.
The commodities future market remained dismantled
and remained dormant for about four decades until the new
millennium when the Government, in a complete change in a policy,
started actively encouraging commodity market. After Liberalization
and Globalization in 1990, the Government set up a committee (1993)
to examine the role of futures trading. The Committee (headed by
Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening Forward
Markets Commission, and certain amendments to Forward Contracts
(Regulation) Act 1952, particularly allowing option trading in goods
and registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and futures’
trading was permitted in all recommended commodities. It is timely
decision since internationally the commodity cycle is on upswing and
the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices
of any commodity are not fixed, in an organized way. Earlier only the
buyer of produce and its seller in the market judged upon the prices.
Others never had a say.
Today, commodity exchanges are purely speculative in
nature. Before discovering the price, they reach to the producers, end-
users, and even the retail investors, at a grassroots level. It brings a
price transparency and risk management in the vital market. A big
difference between a typical auction, where a single auctioneer
announces the bids and the Exchange is that people are not only
competing to buy but also to sell. By Exchange rules and by law, no
one can bid under a higher bid, and no one can offer to sell higher
than someone else’s lower offer. That keeps the market as efficient as
possible, and keeps the traders on their toes to make sure no one gets
the purchase or sale before they do. Since 2002, the commodities
future market in India has experienced an unexpected boom in terms
of modern exchanges, number of commodities allowed for derivatives
trading as well as the value of futures trading in commodities, which
crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity
datives market was virtually non- existent, except some negligible
activities on OTC basis.
In India there are 25 recognized future exchanges, of
which there are three national level multi-commodity exchanges. After
a gap of almost three decades, Government of India has allowed
forward transactions in commodities through Online Commodity
Exchanges, a modification of traditional business known as Adhat and
Vayda Vyapar to facilitate better risk coverage and delivery of
commodities. The three exchanges are: National Commodity &
Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity
Exchange of India Limited (MCX) Mumbai and National Multi-
Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There
are other regional commodity exchanges situated in different parts of

Legal framework for regulating commodity futures in India:-

The commodity futures traded in commodity exchanges
are regulated by the Government under the Forward Contracts
Regulations Act, 1952 and the Rules framed there under. The regulator
for the commodities trading is the Forward Markets Commission,
situated at Mumbai, which comes under the Ministry of Consumer
Affairs Food and Public Distribution

Forward Markets Commission (FMC):-
It is statutory institution set up in 1953 under Forward
Contracts (Regulation) Act, 1952. Commission consists of minimum
two and maximum four members appointed by Central Govt. Out of
these members there is one nominated chairman. All the exchanges
have been set up under overall control of Forward Market Commission
(FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited
(NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance
Corporation of India (LIC), National Bank of Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited
(NSC). Punjab National Bank (PNB), Credit Ratting Information Service
of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative
Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to
the equity shares have joined the promoters as a share holder of
exchange. NCDEX is the only Commodity Exchange in the country
promoted by national level institutions.
NCDEX is a public limited company incorporated on 23
April 2003. NCDEX is a national level technology driven on line
Commodity Exchange with an independent Board of Directors and
professionals not having any vested interest in Commodity Markets.
It is committed to provide a world class commodity exchange platform
for market participants to trade in a wide spectrum of commodity
derivatives driven by best global practices, professionalism and
NCDEX is regulated by Forward Markets Commission
(FMC). NCDEX is also subjected to the various laws of land like the
Companies Act, Stamp Act, Contracts Act, Forward Contracts
Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its
members in more than 550 centers through out India. NCDEX
currently facilitates trading of 57 commodities.

Commodities Traded at NCDEX:-

• Bullion:-
Gold KG, Silver, Brent
• Minerals:-
Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots
• Oil and Oil seeds:-

Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),
Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM
seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,
Caster seed, Yellow soybean, Meal
• Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,
• Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow
red maize
• Spices:-
Jeera, Turmeric, Pepper
• Plantation:-
Cashew, Coffee Arabica, Coffee Robusta
• Fibers and other:-
Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28
mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium
Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
• Energy:-
Crude Oil, Furnace oil

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an
independent and de-mutulized exchange with permanent
reorganization from Government of India, having Head Quarter in
Mumbai. Key share holders of MCX are Financial Technologies (India)
Limited, State Bank of India, Union Bank of India, Corporation Bank of
India, Bank of India and Cnnara Bank. MCX facilitates online trading,
clearing and settlement operations for commodity futures market
across the country.
MCX started of trade in Nov 2003 and has built strategic
alliance with Bombay Bullion Association, Bombay Metal Exchange,
Solvent Extractors Association of India, pulses Importers Association
and Shetkari Sanghatana.
MCX deals wit about 100 commodities.

Commodities Traded at MCX:-

• Bullion:-
Gold, Silver, Silver Coins,
• Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead
• Oil and Oil seeds:-

Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,
Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy
meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil,
Sunflower Oil cake, Tamarind seed oil,
• Pulses:-
Chana, Masur, Tur, Urad, Yellow peas
• Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
• Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
• Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
• Fiber and others:-
Kapas, Kapas Khalli, Cotton (long staple, medium staple,
short staple), Cotton Cloth, Cotton Yarn, Gaur seed and
Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art
Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
• Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly
Vinyl Chloride (PVC)
• Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas

National Multi Commodity Exchange of India Limited

National Multi Commodity Exchange of India Limited
(NMCEIL) is the first de-mutualised Electronic Multi Commodity
Exchange in India. On 25th July 2001 it was granted approval by
Government to organize trading in edible oil complex. It is being
supported by Central warehousing Corporation Limited, Gujarat
State Agricultural Marketing Board and Neptune Overseas
Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter
is at Ahmedabad.

Cha pter 4


Futures’ trading is a result of solution to a problem related

to the maintenance of a year round supply of commodities/ products
that are seasonal as is the case of agricultural produce. The United
States, Japan, United Kingdom, Brazil, Australia, Singapore are homes
to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the world’s biggest
exchange for trading in physical commodity futures. It is a primary
trading forum for energy products and precious metals. The exchange
is in existence since last 132 years and performs trades trough two
divisions, the NYMEX division, which deals in energy and platinum and
the COMEX division, which trades in all the other metals.
Commodities traded: - Light sweet crude oil, Natural Gas, Heating
Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,
Aluminum, Platinum, Palladium, etc.

London Metal Exchange:-

The London Metal Exchange (LME) is the world’s
premier non-ferrous market, with highly liquid contracts. The exchange
was formed in 1877 as a direct consequence of the industrial
revolution witnessed in the 19th century. The primary focus of LME is in
providing a market for participants from non-ferrous based metals
related industry to safeguard against risk due to movement in base
metal prices and also arrive at a price that sets the benchmark
globally. The exchange trades 24 hours a day through an inter office
telephone market and also through a electronic trading platform. It is
famous for its open-outcry trading between ring dealing members that
takes place on the market floor.
Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc,
Aluminum Alloy, North American Special Aluminum Alloy (NASAAC),
Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade:-

The first commodity exchange established in the world
was the Chicago Board of Trade (CBOT) during 1848 by group of
Chicago merchants who were keen to establish a central market place
for trade. Presently, the Chicago Board of Trade is one of the leading
exchanges in the world for trading futures and options. More than 50
contracts on futures and options are being offered by CBOT currently

through open outcry and/or electronically. CBOT initially dealt only in
Agricultural commodities like corn, wheat, non storable agricultural
commodities and non-agricultural products like gold and silver.
Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat,
Oats, Ethanol, Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM):-

The Tokyo Commodity Exchange (TOCOM) is the second
largest commodity futures exchange in the world. It trades in to
metals and energy contracts. It has made rapid advancement in
commodity trading globally since its inception 20 years back. One of
the biggest reasons for that is the initiative TOCOM took towards
establishing Asia as the benchmark for price discovery and risk
management in commodities like the Middle East Crude Oil. TOCOM’s
recent tie up with the MCX to explore cooperation and business
opportunities is seen as one of the steps towards providing platform
for futures price discovery in Asia for Asian players in Crude Oil since
the demand-supply situation in U.S. that drives NYMEX is different
from demand-supply situation in Asia. In Jan 2003, in a major
overhaul of its computerized trading system, TOCOM fortified its
clearing system in June by being first commodity exchange in Japan to
introduce an in-house clearing system. TOCOM launched options on
gold futures, the first option contract in Japanese market, in May
Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,
Platinum, Aluminum, Rubber, etc

Chicago Mercantile Exchange:-

The Chicago Mercantile Exchange (CME) is the largest
futures exchange in the US and the largest futures clearing house in
the world for futures and options trading. Formed in 1898 primarily to
trade in Agricultural commodities, the CME introduced the world’s first
financial futures more than 30 years ago. Today it trades heavily in
interest rates futures, stock indices and foreign exchange futures. Its
products often serves as a financial benchmark and witnesses the
largest open interest in futures profile of CME consists of livestock,
dairy and forest products and enables small family farms to large Agri-
business to manage their price risks. Trading in CME can be done
either through pit trading or electronically.
Commodities Traded: - Butter milk, Diammonium phosphate, Feeder
cattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk,
Urea, Urea Ammonium Nitrate, etc

Chapter 5

How Commodity market works?

There are two kinds of trades in commodities. The first is the

spot trade, in which one pays cash and carries away the goods. The
second is futures trade. The underpinning for futures is the warehouse
receipt. A person deposits certain amount of say, good X in a ware
house and gets a warehouse receipt. Which allows him to ask for
physical delivery of the good from the warehouse. But some one
trading in commodity futures need not necessarily posses such a
receipt to strike a deal. A person can buy or sale a commodity future
on an exchange based on his expectation of where the price will go.
Futures have something called an expiry date, by when the buyer or
seller either closes (square off) his account or give/take delivery of the
commodity. The broker maintains an account of all dealing parties in
which the daily profit or loss due to changes in the futures price is
recorded. Squiring off is done by taking an opposite contract so that
the net outstanding is nil.
For commodity futures to work, the seller should be able to
deposit the commodity at warehouse nearest to him and collect the
warehouse receipt. The buyer should be able to take physical delivery
at a location of his choice on presenting the warehouse receipt. But at
present in India very few warehouses provide delivery for specific
Following diagram gives a fair idea about working of the
Commodity market.

Today Commodity trading system is fully computerized.
Traders need not visit a commodity market to speculate. With online
commodity trading they could sit in the confines of their home or office
and call the shots.
The commodity trading system consists of certain
prescribed steps or stages as follows:

I. Trading: - At this stage the following is the system implemented-

- Order receiving
- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits

II. Clearing: - This stage has following system in place-

- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.

III. Settlement: - This stage has following system followed as follows-

- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.

Chapter 6

How to invest in a Commodity Market?

With whom investor can transact a business?

An investor can transact a business with the approved clearing
member of previously mentioned Commodity Exchanges. The investor
can ask for the details from the Commodity Exchanges about the list of
approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will ask
for identity proof. For which Xerox copy of any one of the following can
be given
a) PAN card Number
b) Driving License
c) Vote ID
d) Passport

What statements should be given for Bank Proof?

The front page of Bank Pass Book and a canceled cheque of a
concerned bank. Otherwise the Bank Statement containing details can
be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing member
will insist on Xerox copy of Ration card or the Pass Book/ Bank
Statement where the address of investor is given.

What are the other forms to be signed by the investor?

The clearing member will ask the client to sign
a) Know your client form
b) Risk Discloser Document

The above things are only procedure in character and the risk
involved and only after understanding the business, he wants to
transact business.

What aspects should be considered while selecting a

commodity broker?
While selecting a commodity broker investor should ideally keep
certain aspects in mind to ensure that they are not being missed in
any which way. These factors include

• Net worth of the broker of brokerage firm.
• The clientele.
• The number of franchises/branches.
• The market credibility.
• The references.
• The kind of service provided- back office functioning being
most important.
• Credit facility.
• The research team.
These are amongst the most important factors to calculate
the credibility of commodity broker.

The Broker is essentially a person of firm that liaisons between
individual traders and the commodity exchange. In other words the
Commodity Broker is the member of Commodity Exchange, having
direct connection with the exchange to carry out all trades legally. He
is also known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity

To become a commodity trader one needs to complete certain
legal and binding obligations. There is routine process followed, which
is stated by a unit of Government that lays down the laws and acts
with regards to commodity trading. A broker of Commodities is also
required to meet certain obligations to gain such a membership in
To become a member of Commodity Exchange the broker of
brokerage firm should have net worth amounting to Rs. 50 Lakh. This
sum has been determined by Multi Commodity Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person
should comply with the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by
statutory/regulatory authority,
There are following three types of Memberships of Commodity

Trading-cum-Clearing Member (TCM):-
A TCM is entitled to trade on his own account as well as on account
of his clients, and clear and settle trades himself. A sole proprietor,
Partnership firm, a joint Hindu Undivided Family (HUF), a corporate
entity, a cooperative society, a public sector organization or any other
Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1
refers to transferable non-deposit based membership and TCM-2 refers
to non-transferable deposit based membership.
A person desired to register as TCM is required to submit
an application as per the format prescribed under the business rules,
along with all enclosures, fee and other documents specified therein.
He is required to go through interview by Membership Admission
Committee and committee is also empowered to frame rules or criteria
relating to selection or rejection of a member.

Institutional Trading-cum-clearing Member (ITCM):-

Only an Institution/ Corporate can be admitted by the Exchange
as a member, conferring upon them the right to trade and clear
through the clearing house of exchange as an Institutional Trading-
cum-clearing Member (ITCM). The member may be allowed to make
deals for himself as well as on behalf of his clients and clear and settle
such deals. ITCMs can also appoint sub-brokers, authorized persons
and Trading Members who would be registered as trading members.

Professional Clearing Member (PCM):-

A PCM entitled to clear and settle trades executed by other
members of the exchange. A corporate entity and an institution only
can apply for PCM. The member would be allowed to clear and settle
trades of such members of the Exchange who choose to clear and
settle their trades through such PCM.

Membership Details for NCDEX:-1

Trading-cum-clearing Member: - TCM

Particulars NCDEX: TCM
Interest Free Cash
1 15.00 Lakhs
Security Deposit
2 Collateral Security Deposit 15.00 Lakhs
3 Admission Fee 5.00 Lakhs
4 Annual Membership Fees 0.50 Lakhs
5 Advance Minimum 0.50 Lakhs

Transaction Charges
6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCM

Particulars NCDEX: PCM
Interest Free Cash
1 25.00 Lakhs
Security Deposit
Collateral Security Deposit
2 25.00 Lakhs
Annual Subscription
3 1.00 Lakhs
Advance Minimum
4 1.00 Lakhs
Transaction Charges
5 Net worth Requirement 5000.00 Lakhs

Membership Details for MCX:-2

Initial Net worth Criteria

Admission Annual
Category Security
Fees Subscription Corporate Partnership Individual
Rs. 10 Rs. 15 Rs. 50
TCM-1 Rs 50,000 Rs 50 Lakhs Rs. 50 Lakhs
Lakhs Lakhs Lakhs
Rs. 5 Rs. 50 Rs. 50 Rs. 50
TCM-2 Rs 50,000 Rs. 50 Lakhs
Lakhs Lakhs Lakhs Lakhs
Rs. 10 Rs. 50 Rs. 50
ITCM Rs 50,000 N.A. N.A.
Lakhs Lakhs Lakhs
Rs. 50
PCM Nil Rs 1,00,000 Rs. 5Crores N.A. N.A.

Chapter 7

MCX Certified Commodity Professional Reference Material

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-

India is among top 5 producers of most of the Commodities, in
addition to being a major consumer of bullion and energy products.
Agriculture contributes about 22% GDP of Indian economy. It
employees around 57% of the labor force on total of 163 million
hectors 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 centre for trading of commodity derivatives.

Trends in volume contribution on the three National


Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in
terms of trade volumes, further it has even become the third largest in
bullion and second largest in silver future trading in the world.
Coming to trade pattern, though there are about 100
commodities traded on MCX, only 3 or 4 commodities contribute for
more than 80 percent of total trade volume. As per recent data the
largely traded commodities are Gold, Silver, Energy and base Metals.
Incidentally the futures’ trends of these commodities are mainly driven
by international futures prices rather than the changes in domestic
demand-supply and hence, the price signals largely reflect
international scenario.
Among Agricultural commodities major volume contributors
include Gur, Urad, Mentha Oil etc. Whose market sizes are
considerably small making then vulnerable to manipulations.

Pattern on National Commodity & Derivatives Exchange

NCDEX is the second largest commodity exchange in the
country after MCX. However the major volume contributors on NCDEX
are agricultural commodities. But, most of them have common
inherent problem of small market size, which is making them
vulnerable to market manipulations and over speculation. About 60
percent trade on NCDEX comes from guar seed, chana and Urad
(narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE):-

NMCE is third national level futures exchange that has been
largely trading in Agricultural Commodities. Trade on NMCE had
considerable proportion of commodities with big market size as jute
rubber etc. But, in subsequent period, the pattern has changed and
slowly moved towards commodities with small market size or narrow

Analysis of volume contributions on three major national

commodity exchanges reveled the following pattern,

Major volume contributors: - Majority of trade has been

concentrated in few commodities that are

• Non Agricultural Commodities (bullion, metals and energy)

• Agricultural commodities with small market size (or narrow
commodities) like guar, Urad, Mentha etc.

Trade strategy:-
It appears that speculators or operators choose commodities or
contracts where the market could be influenced and extreme
speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to
impose restrictions on positions and raise margins on those
commodities. Consequently, the operators/speculators chose another
commodity and start operating in a similar pattern. When FMC brings
restrictions on those commodities, the operators once again move to
the other commodities. Likewise, the speculators are moving from one
commodity to other (from methane to Urad to guar etc) where the
market could be influenced either individually or with a group.

Beneficiaries: - So far the beneficiaries from the current nature of

trading are
Exchangers: - making profit from mounting volumes

In order to understand the extent of progress the trading the

trading in Commodity Derivatives has made towards its specified
objectives (price discovery and price risk management), the current
trends are juxtaposed against the specification

Specified and actual pattern of futures trade:-3

Process Aught to be Actual
FMC & TECL research

Commodities There should be large Largely Traded are
demand for and supply of
the commodity- no • Bullion, Metals and
individual or a group of • Commodities with small
persons acting in concert market size (or narrow
should be in a position to Commodities) like guar,
influence the demand or Burmese Urad, Mentha etc.
supply, and consequently
the price substantially
Towards this, the major
Produced or consumed
Commodities in the
Country such as wheat,
rice, jute etc. and India is
top first or second
producer of these

Trade Hedging together with Over speculation and

Strategy Moderate speculation to Manipulation leading to wide
Smoothen the price Fluctuations.
Beneficiaries Farmers/producers,, So far exchangers,
Consumers and traders arbitrageurs,
Either through direct Operators etc.,
Participation or through Further there were instances of
Price signals. Wrong price signals accruing
losses to farmers in case of
menthe, and to traders in case
Of imported pulses.
Price Discovery • Pure replication of
International trends not
Taking in account of
Domestic D-S in case of
Non-agril. Commodities
• Wide fluctuations from
Over speculation and
Manipulation in case of
Largely traded agril.
Risk Management No such evidences and
contrarily, the extreme
volatilities in certain
commodities are making
More risky for participants.

Thus it is evident that the realization of specified objectives is
still a distinct destination. It is further, evident from the nature of the
commodities largely traded on national exchanges that the factors
driving the current pattern of futures trade are purely speculative.

Reasons for prevailing trade pattern:-

No wide spread participation of all stake holders of commodity
markets. The actual benefits may be realized only when all the stake
holders in commodity market including producers, traders, consumers
etc trade actively in all major commodities like rice, wheat, cotton etc.

Some Suggestions to make futures market as a level playing field

for all stake holders:-
• Creation of awareness among farmers and other rural
participants to use the futures trading platform for risk
• Contract specifications should have wider coverage, so that
a large number of varieties produced across the country
could be included.
• Development of warehousing and facilities to use the
warehouse receipt as a financial instrument to encourage
participation farmers.
• Development of physical market through uniform grading
and standardization and more transparent price
• Delivery system of exchanges is not good enough to attract
investors. E.g.- In many commodities NCDEX forces the
delivery on people with long position and when they tend to
give back the delivery in next month contract the exchange
simply refuses to accept the delivery on pretext of quality
difference and also auctions the product. The traders have to
take a delivery or book losses at settlement as there are
huge differences between two contracts and also sometimes
few contracts are not available for trading for no reason at
• Contract sizes should have an adequate range so that
smaller traders can participate and can avoid control of
trading by few big parties.
• Setting of state level or district level commodities trading
helpdesk run by independent organization such as reputed
NGO for educating farmers.

• Warehousing and logistics management structure also needs
to be created at state or area level whenever commodity
production is above a certain share of national level.
• Though over 100 commodities are allowed for Derivatives
trading, in practice only a few commodities derivatives are
popular for trading. Again most of the trade takes place only
on few exchanges. This problem can possibly solved by
consolidating some exchanges.
• Only about 1% to 5% of total commodity derivatives traded
in country are settled in physical delivery due to
insufficiencies in present warehousing system. As good
delivery system is the back bone of any Commodity trade,
warehousing problem has to be handled on a war footing.
• At present there are restrictions in movement of certain
goods from one state to another. These needs to be
removed so that a truly national market could develop for
commodities and derivatives.
• Regulatory changes are required to bring about uniformity in
Octri and sales tax etc. VAT has been introduced in country
in 2005, but, has not yet been uniformly implemented by all
• A difficult problem in Cash settlement of Commodities
Derivatives contract is that, under Forward Contracts
Regulation Act 1952 cash settlement of outstanding
contracts at maturity is not allowed. That means outstanding
contracts at maturity should be settled in physical delivery.
To avoid this participants square off their their positions
before maturity. So in practice contracts are settled in Cash
but before maturity. There is need to modify the law to bring
it closer to the wide spread practice and save participants
from unnecessary hassle.

Chapter 8


Steel: -

General Characteristics: -
Steel is an alloy of iron and carbon, containing less than 2%
carbon, 1% manganese and small amount of silicon, phosphorus,
sulphur and oxygen. Steel is most important engineering and
construction material in the world. It is most important, multi
functional and the most adaptable of materials. Steel production is 20
times higher a compared to production of all non-ferrous metals put
Steel compared to other materials of its type has low
production costs. The energy required for extracting iron from ore is
about 25% of what is needed for extracting aluminum.
There are altogether about 2000 grades of steel
developed of which 1500 grades are high-grade steels. The large
number of grades gives steel the characteristics of basic production

Categories of Steel: -
Steel market is primarily divided in to two main categories-
flat and long. A flat carbon steel product is a plate product or a (hot or
cold) rolled strip product. Plate products vary in dimensions from 10
mm to 200 mm and thin flat rolled products from 1 mm to 10 mm.
Plate products are used for ship building, construction, large diameter
welded pipes and boiler applications. Thin flat products find end use
applications in automotive body panels, domestic ‘white goods’
products, ‘tin cans’ and the whole host of other products from office
furniture to heart pacemakers. Plates, HR coils and HR Sheet, CR
Sheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. are
included in this category.
A long steel product is a road or a bar. Typical rod product
are the reinforcing rods made from sponge iron for concrete, ingots,
billets, engineering products, gears, tools, etc. Wiredrawn products
and seamless pipes are also part of the long products group. Bars,
rods, structures, railway materials, etc are included in this category.
Sponge Iron/ Direct reduced iron (DRI): This is a high
quality product produced by reducing iron ore in a solid state and is
primarily used as an iron input in electric arc furnace (EAF) steel
making process. This industry is an integral part of the steel sector.

India is one of the leading countries in terms of sponge iron
production. There are a number of coal-based sponge iron/DRI plants
(in the eastern and central region) and also three natural gas based
plants (in western part of the country) in the country.

Global Scenario: -
The total output of the word crude steel in 2006 stood at 945
million tons, resulting in a growth of 6.7% over the previous year.
China is the word’s largest crude steel producer in the year
2006 with around 220.12 million tons of steel production, followed by
Japan and USA. USA was largest importer of steel products, both
finished and semi finished, in 2005, followed by China and Germany.
The words largest exporter of semi-finished and finished steel
was Japan in 2005, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by
China is estimated to increase by 12-13% in 2007.

Indian Scenario: -
India is the 8th largest producer of the steel with an annual
production of 36.193 million tons, while the consumption is around 30
million tons.
Iron & steel can be freely exported and imported from India.
India is a net exporter of steel.
The Government of India has taken a number of policy
measures, such as removal of iron & steel industry from the list of
industries reserved for public sector, deregulation of price and
distribution of iron & steel and lowering import duty on capital goods
and raw materials, since liberalization for the growth and development
of Indian iron & steel industry.
After liberalization India has seen huge scale addition to its
steel making capacity. The country faces shortage of iron and steel

Factors Influencing Demand & Supply of Steel Long and Steel

Flat: -
The demand for steel is dependent on the overall health of the
economy and the in fracture development activities being undertaken.
The steel prices in the Indian market primarily depend on the domestic
demand and supply conditions, and international prices. Government
and different producer and consumer associations regularly monitor
steel prices.
The duty imposed on import of steel and its fractions also have
an impact on steel prices. The price trend in steel in Indian markets
has been a function of World’s economic activity. Prices of input

materials of iron and steel such as power tariff, fright rates and coal
prices, also contribute to the rise in the input costs for steel making.
Monthly Variations in Steel Prices from Feb 2005- Dec 2006: -4

Percentage Change > 5% 2-5% < 2%

No. of Times
Ingots- Mandi 2 10 10
HRC 2.5 Mumbai 8 3 11
HRC 2.0 Imported 12 4 6
HRC fob- Europe 5 9 8

Contract specifications of Steel Flat

Trading Period Mondays through Saturdays
Trading session Monday to Friday:
1st session: 10.00 am to 5.00 pm
2nd session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading unit 25 MT
Price Quote Rs./ton, Ex-Taloj Kalambo
(excluding execise duty and sales tax).
Maximum order size 200 MT
Tick size (minimum Rs. 10
Price movement)
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special
margin of 2% or such other percentage, as
deemed fit, will be imposed immediately on,
both buy and sale side in respect of all
MCX certified Commodity Professional Reference Material.

outstanding position, which will remain in
force of next three days, after which the
special margin will be relaxed.
Maximum Allowable Open For individual clients: 1,00,000 MT
Position For a member collectively for all clients:
25% of open market position.
Delivery unit 25 MT with tolerance limit
Between 23.5 MT to 26.5 MT
Delivery Center(s) Warehouses at Taloja/ Kalamboli
Quality Specifications
HR coil conforming to the following specification:

Thickness 2 mm
Width either 1250mm or 910 mm at seller’s option.
It should confirm to IS 11513 Grade D/SAE 1008 (International

Delivery is acceptable only in coil form.

Contract specifications of Steel Long

Trading Period Mondays through Saturdays
Trading session Monday to Friday:
1st session: 10.00 am to 5.00 pm
2nd session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading unit 15 MT
Price Quote Rs./ton, Ex- Mandi Gobindgarh (including
excise duty but excluding sales tax).
Maximum order size 300 MT
Tick size (minimum Rs. 10
Price movement)
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special
margin of 2% or such other percentage, as
deemed fit, will be imposed immediately on,
both buy and sale side in respect of all

outstanding position, which will remain in
force of next three days, after which the
special margin will be relaxed.
Maximum Allowable Open For individual clients: 1,00,000 MT
Position For a member collectively for all clients:
25% of open market position.
Delivery unit 15 MT with tolerance limit
Between 13.5 MT to 16.5 MT
Delivery Center(s) Warehouses at Mandi Gobindgarh
Quality Specifications
Mild steels ingots “3 ½ * 4 ½ inch”
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no
piping no rising. Its surface should be plain.

Quality Specifications: -

Sponge Iron Futures

Sponge Iron Lumps

Chemical Properties (only Magnetic Portion): -

• Degree of Metallization: 88 +/- 2%.

• Total Iron: 91%.
• Carbon: 0.2% to 0.3%.
• Sulphur: 0.05% Max.
• Phosphorus: 0.06 Max.
• Sio2 + Al2o3: 6% or Max.
• Char & other process Contaminants: 1% Max.
• Size: 3 to 20 mm
• Undersize arising during tailings (-3mm): 5% Max

Steel Flat: -
HR Coil confirming to the following specification: -
• Thickness 2mm

• Width either 1250 mm or 910 mm at seller’s option.
• It should confirm to IS 11513 Grade D/ SALE 1008
(international equivalent)
• Delivery is acceptable only in coil form.
Steel Long (Bhavnagar): -
• Mild steel ingots 3 ½ * 4 ½ inch.
• Carbon composition: Below 0.25%
• Manganese: Above 0.45%
• Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.
Steel Long (Govindgarh): -
• Mild steel ingots 3 ½ * 4 ½ inch.
• Carbon composition: Below 0.25%
• Manganese: Above 0.45%
• Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.


Wheat is cereal grain and consumed worldwide. Wheat is

more popular than any other cereal grain for use in baked goods. Its
popularity stems from the gluten that forms when lour is mixes with
water. Wheat is the most widely grown cereal grain in the world.

Global and Indian Scenario: -

The world wheat production in the recent years has been
observed to be hovering between 555 million tons to 625 million tons a
year. The biggest cultivators of wheat are EU 25, China, India, USA,
Russia, Australia, Canada, Pakistan, Turkey and Argentina. EU 25,

China, India and US are the four largest producers account for around
60% of total global production.
World’s wheat consumption is continuously growing with
growth in a population, as it is one of the major staple foods across
the world. The major consuming countries of wheat are EU, China,
India, Russia, USA and Pakistan. India has largest area in the world
under wheat. However, in terms of production, India is second largest
behind China. In India, Wheat is sown during October to December
and harvested during March to May. The wheat marketing season in
India is assumed to begin from April every year.
The major wheat producing states in India are Utter Pradesh,
Punjab, Haryana, Madhya Pradesh, Rajastan and Bihar. Which together
account for around 93% of total production. In terms of productivity,
Punjab stands first followed by Haryana, Rajastan, UP, Gujarat, Bihar
and MP. Indian wheat is largely soft/medium hard, medium protein,
bread wheat. India is also produces around 1.5 million tons of durum
wheat, mostly in central and western India, which is not segregated
and marketed separately. India consumes around 72-74 million tons of
Wheat every year.
There are around 1000 large flourmills in India, with a milling
capacity of around 15 million tons. The total procurement of wheat by
Government agencies during last 15 years from 8 to 20 million tons,
accounting for only 15-20% of the total production. India exported
around 5 m illion tons subsidized by Government in 2004-05, as a
result of surplus stock. Recently Govt. took decision to import wheat in
view of, declining stocks and increasing demand.

Key market moving Factors: -

Price tends to be lower as harvesting progresses and produce
starts coming in to the market. At the time sowing and before
harvesting price tend to rise in a view of tight supply situation.
Weather has profound influence on wheat production. Temperature
plays crucial role towards maturity of wheat and productivity.
Change in Minimum Support Price (MSP) by Govt. and the stock
available with Food corporation of India and the release from official
stock influence of the price. Though, international trade is limited, the
ups and downs in the production and consumption at all the
major/minor producing and consuming nation dose influence the long
term price trend.

Contract specifications of Wheat

Contract Period Five Months
Trading Period Mondays through Saturdays
Trading session Monday to Friday:
10.00 am to 5.00 pm
10.00 am to 2.00 pm
Trading unit 10 MT
Quotation based value 1 Quintal
Maximum order size 500 MT
Tick size (minimum 10 Paise
Price movement)
Price Quotation Ex-warehouse Delhi (including all taxes, levies
and sales tax/ VAT, as the case may be)
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special
margin at such other percentage, as deemed
fit will be imposed immediately on, both buy
and sale side in respect of all outstanding
position, which will remain in force of next 2
days, after which the special margin will be
Maximum Allowable Open Clientwise- 20000 MT, Member wise-80000 MT
Position or 20% of open position, which ever is higher.
Delivery unit 10 MT with tolerance limit of 5%

Delivery Margin 25%
Delivery Center(s) Warehouses at Delhi
Quality Specifications
Wheat of Standard Mill variety confirming to the following quality
standerds will be delieverable. The material will be tested using a 3mm

(a) Foreign Matter 2.0% (Max)
(b) Damaged Kernels 2.00 (Max) provided that infestation damaged
not to exceed 1 per 100 kernels.
(c) Shrunken Shriveled 3.00% (Max)
& broken grains
Total defects (a+b+c) Below 6%
Acceptable up to 8% With rebate on 1:1 basis
Rejected total defect is Above 8%
Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150
grams per kg/hl or pro-rata variance in hector
liter weight deducted per quintal Below 74 kg/hl
Rejected Below 74 kg/hl

Moisture 11%
Acceptable (Max)13% With rebate 1:1
Reject able Above 13%

Quality Specifications: -

Wheat of Standard Mill variety conforming to the following quality standards

will be deliverable; The material will be tested by using 3 mm sieve.
Defects: -
1. Foreign Matter (organic/inorganic) 2.0% (maximum)
2. Damaged Kernel 2.0% (maximum) provided that
infestation damaged not exceed 1
3. Sunken, Shriveled and Per 100 kernels.
Broken grains 3.00% (maximum)

Total Defects (a+b+c) Below 6%
Acceptable Up to 8% with rebate on 1:1 basis
Rejected if total defects Above 8%
Total Weight 76 kg/hl. (minimum)
Up to 74 kg/hl Acceptable with rebate of 150
grams per kg/hl or pro-rata
variance in hector liter weight
deducted per quintal weight
Below 74 kg/hl Rejected
Moisture 11% (maximum)
Acceptable Up to 13% with rebate 1:1
Reject able Above 135
Packing Packing should be in B Twill once
used 100kg jute bags, the tare
weight deduction per bag for net
weight calculation shall be 1 kg per
quintal of gross weight.


Survey was conducted across Mumbai City (in areas like

Andheri, Santacruz, Bandra Church gate) to judge the awareness of
peoples regarding investment in Commodity Market.

Sample size 30 peoples

Questionnaire for Investors

1. Do you have any investment plan?

a. YES b. NO
(if no move to question no. 4)

2. If, yes, where you would like to invest your money?

a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)

3. Why you prefer specific investment?


4. If no, why?
a. Not aware about invest avenues b. Insufficient income c. Other (specify)

5. Do you aware about Commodity Market?

a. YES b. NO
(if no move to question no 12)

6. Are you willing to invest in Commodity Market?

(If in Q. 2 Commodity Market, skip this question)
a. If YES, why? ------------------------------------------------------------------------------
b. If NO, why? ------------------------------------------------------------------------------
(If no move to the Question no.10)

7. If yes, which Commodity Exchange you will prefer for investment?
a. MCX b. NCDEX c. NMCE d. Other (specify) f. Can’t Say

8. Why you prefer specific Commodity Exchange for investment?

(if answer to Q.7 f, skip this question)

9. In which Commodities you will prefer to Invest? And why?

a. Bullion b. Agricultural c. Metals d. Fossils/Energy

10. What is your perception about Commodity Market?

a. Less Risky b. Risky c. Very Risky

11. What you think Commodity Market Advertisements (hoardings, prints etc) are
explanatory enough to give needed useful information?
a. YES b. NO

12. Gender
a. Male b. Female

13. Age Group

a. Below 21 Years b. 21 years – 30 years c.31 years – 40 years
d. 41 years – 50 years e. Above 50 years

14. Occupation
a. Govt. Job b. Private Job c. Business d. Other (specify)

15. Income Group (Per month)

a. Nil b. Below 10,000/- c. 10,000 – 20,000/-
d. 20,000 – 30,000/- e. Above 30,000/-


Quantitative Analysis

1. Investor’s preferences: -


23% Share Market


Bank F.D.

27% Commodity

Investment Prefrences specified in other category

Real Estate
Not Specified

Analysis of data revels that majority of people prefer

investment in Real Estate (28.81% of total sample) which specified in
other category investment and it is greater than share market
investment preference.

2. People’s knowledge about Commodity Market: -



Don’t Know


Very few people heard of commodity market. Vast majority of

people are unaware about Commodity Market.

3. Investor’s interested to invest in Commodity Market: -

(Out of those, who know Commodity Market)


50% 50% Not Interested

Though some people heard of commodity market due to lack

of complete knowledge about it half of then are not interested in
investing in Commodity Market.

4.Commodity Market Investors


37% Bullion

Above data revels that majority of commodity investors like

to invest in Bullion (Gold & Silver).

5. Perception about Commodity Market


Less Risky
Very Risky


Analysis of data shows that majority of people who are

aware about commodity market; feel that investment in commodity
market is very risky. So efforts should be done to minimize the risk in
commodity investment and make peoples about minimum risk in
commodity investment.

6. Opinion about Commodity Market Advertisements

(Expressed by those who know commodity market)

Not Info rmative


There is no second opinion amongst commodity investors, that

commodity market advertisements do not give all the necessary

Qualitative Analysis

1. Investment preferences: -
Most of the investors prefer least risky investment which
gives higher returns. That is why majority (70% of sample) of
people interested in investments other than Share and commodity
Very less number of people (only 7%) showed their
interest in investment in commodity market. Main reason for this is
lack of awareness and complete information about commodity

2. Commodity Exchanges: -
People who are interested in commodity investment
showed more concern towards NCDEX; for its brand name and
people think there might be surety of transaction at NCDEX.

3. Commodities: -
Bullion is most preferred commodity for investment. Because
one can expect maximum returns from such investment due to
rapidly increasing prices of bullion in market.

4. Advertisements: -
Commodity market Advertisements should be more
informative. And it is the failure of commodity market’s
advertisement campaign to attract people’s attention; as majority
of people are not aware about commodity market.


Questionnaire for Brokers

1. Since how many years you are working as a broker?


2. How does one become broker?


3. Which Commodity Exchange you prefer to work?

a. MCX b. NCDEX c. NMCE d. Other (specify)

4. Why do you prefer the specific Commodity Exchange?


5. In which commodities do you deal?


6. Why do you prefer those commodities?


7. If one wants to invest in Commodity Market, how to go about it?


10. What is your perception about Commodity Market?

a. Less Risky b. Risky c. Very Risky

11. Any suggestion for commodity market?


12. Gender
a. Male b. Female

13. Age Group

a. Below 21 years
b. 21 years – 30 years
c. 31 years – 40 years
d. 41 years – 50 years
e. Above 50 years

14. Income Group (per year)

a. Below 1,00,000/-
b. 1,00,000 – 1,50,000/-
c. 1,50,000 - 2,50,000/-
d. Above 2,50,000/-


Questionnaire for Officials

1. What is MCX/ NCDX/ NMCE/…….



2. History behind formation of MCX/ NCDX/ NMCE/………………..


3. What are the departments at MCX/ NCDX/ NMCE/……….


4. How work is done in each department?


5. How one can become broker at MCX/ NCDX/ NMCE/………….


6. How one can become member of MCX/ NCDX/ NMCE………..



Terms and Definitions related to Commodity Market: -
• Accruals:- Commodities on hand ready for shipment, storage
and manufacture

• Arbitragers: - Arbitragers are interested in making purchase

and sale in different markets at the same time to profit from
price discrepancy between the two markets.

• At the Market: - An order to buy or sell at the best price

possible at the time an order reaches the trading pit.

• Basis: - Basis is the difference between the cash price of an

asset and futures price of the underlying asset. Basis can be
negative or positive depending on the prices prevailing in the
cash and futures.

• Basis grade: - Specific grade or grades named in the exchanges

future contract. The other grades deliverable are subject to price
of underlying futures

• Bear: - A person who expects prices to go lower.

• Bid: - A bid subject to immediate acceptance made on the floor

of exchange to buy a definite number of futures contracts at a
specific price.

• Breaking: - A quick decline in price.

• Bulging: - A quick increase in price.

• Bull: - A person who expects prices to go higher.

• Buy on Close: - To buy at the end of trading session at the price

within the closing range.

• Buy on opening: - To buy at the beginning of trading session at

a price within the opening range.

• Call: - An option that gives the buyer the right to a long position
in the underlying futures at a specific price, the call writer
(seller) may be assigned a short position in the underlying
futures if the buyer exercises the call.

• Cash commodity: - The actual physical product on which a
futures contract is based. This product can include agricultural
commodities, financial instruments and the cash equivalent of
index futures.

• Close: - The period at the end of trading session officially

designated by exchange during which all transactions are
considered made “at the close”.

• Closing price: - The price (or price range) recorded during the
period designated by the exchange as the official close.

• Commission house: - A concern that buys and sells actual

commodities or futures contract for the accounts of customers.

• Consumption Commodity: - Consumption commodities are

held mainly for consumption purpose. E.g. Oil, steel

• Cover: - The cancellation of the short position in any futures

contract buys the purchase of an equal quantity of the same
futures contract.

• Cross hedge: - When a cash commodity is hedged by using

futures contract of other commodity.

• Day orders: - Orders at a limited price which are understood to

be good for the day unless expressly designated as an open
order or “good till canceled” order.

• Delivery: - The tender and receipt of actual commodity, or in

case of agriculture commodities, warehouse receipts covering
such commodity, in settlement of futures contract. Some
contracts settle in cash (cash delivery). In which case open
positions are marked to market on last day of contract based on
cash market close.

• Delivery month: - Specified month within which delivery may

be made under the terms of futures contract.

• Delivery notice: - A notice for a clearing member’s intention to

deliver a stated quantity of commodity in settlement of a short
futures position.

• Derivatives: - These are financial contracts, which derive their
value from an underlying asset. (Underlying assets can be
equity, commodity, foreign exchange, interest rates, real estate
or any other asset.) Four types of derivatives are trades forward,
futures, options and swaps. Derivatives can be traded either in
an exchange or over the counter.

• Differentials: - The premium paid for grades batter than the

basis grade and the discounts allowed for the grades. These
differentials are fixed by the contract terms on most exchanges.

• Exchange: - Central market place for buyers and sellers.

Standardized contracts ensure that the prices mean the same to
everyone in the market. The prices in an exchange are
determined in the form of a continuous auction by members who
are acting on behalf of their clients, companies or themselves.

• Forward contract: - It is an agreement between two parties to

buy or sell an asset at a future date for price agreed upon while
signing agreement. Forward contract is not traded on an
exchange. This is oldest form of derivative contract. It is traded
in OTC Market. Not on an exchange. Size of forward contract is
customized as per the terms of agreement between buyer and
seller. The contract price of forward contract is not transparent,
as it is not publicly disclosed. Here valuation of open position is
not calculated on a daily basis and there is no requirement of
MTM. Liquidity is the measure of frequency of trades that occur
in a particular commodity forward contract is less liquid due to
its customized nature. In forward contracts, counter- party risk
is high due to customized & bilateral nature of the transaction.
Forward contract is not regulated by any exchange. Forward
contract is generally settled by physical delivery. In this case
delivery is carried out at delivery center specified in the
customized bilateral agreement.

• Futures Contract:- It is an agreement between two parties to

buy or sell a specified and standardized quantity and quality of
an asset at certain time in the future at price agreed upon at the
time of entering in to contract on the futures exchange. It is
entered on centralized trading platform of exchange. It is
standardized in terms of quantity as specified by exchange.
Contract price of futures contract is transparent as it is available
on centralized trading screen of the exchange. Here valuation of

Mark-to-Mark position is calculated as per the official closing
price on daily basis and MTM margin requirement exists. Futures
contract is more liquid as it is traded on the exchange. In futures
contracts the clearing-house becomes the counter party to each
transaction, which is called novation. Therefore, counter party
risk is almost eliminated. A regulatory authority and the
exchange regulate futures contract. Futures contract is generally
cash settled but option of physical settlement is available.
Delivery tendered in case of futures contract should be of
standard quantity and quality as specified by the exchange.

• Futures commission merchant: - A broker who is permitted

to accept the orders to buy and sale futures contracts for the

• Futures Funds: - Usually limited partnerships for investors who

prefer to participate in the futures market by buying shares in a
fund managed by professional traders or commodity trading

• Futures Market:-It facilitates buying and selling of standardized

contractual agreements (for future delivery) of underlying asset
as the specific commodity and not the physical commodity itself.
The formulation of futures contract is very specific regarding the
quality of the commodity, the quantity to be delivered and date
for delivery. However it does not involve immediate transfer of
ownership of commodity, unless resulting in delivery. Thus, in
futures markets, commodities can be bought or sold irrespective
of whether one has possession of the underlying commodity or
not. The futures market trade in futures contracts primarily for
the purpose of risk management that is hedging on commodity
stocks or forward buyers and sellers. Most of these contracts are
squared off before maturity and rarely end in deliveries.

• Hedging: - Means taking a position in futures market that is

opposite to position in the physical market with the objective of
reducing or limiting risk associated with price.

• In the money: - In call options when strike price is below the

price of underlying futures. In put options, when the strike price
is above the underlying futures. In-the-money options are the
most expensive options because the premium includes intrinsic

• Index Futures: - Futures contracts based on indexes such as
the S & P 500 or Value Line Index. These are the cash
settlement contracts.

• Investment Commodities: - An investment commodity is

generally held for investment purpose. e.g. Gold, Silver

• Limit: - The maximum daily price change above or below the

price close in a specific futures market. Trading limits may be
changed during periods of unusually high market activity.

• Limit order: - An order given to a broker by a customer who

has some restrictions upon its execution, such as price or time.

• Liquidation: - A transaction made in reducing or closing out a

long or short position, but more often used by the trade to mean
a reduction or closing out of long position.

• Local: - Independent trader who trades his/her own money on

the floor of the exchanges. Some local act as a brokers as well,
but are subject to certain rules that protect customer orders.

• Long: - (1) The buying side of an open futures contract or

futures option; (2) a trader whose net position in the futures or
options market shows an excess of open purchases over open

• Margin: - Cash or equivalent posted as guarantee of fulfillment

of a futures contract (not a down payment).

• Margin call: - Demand for additional funds or equivalent

because of adverse price movement or some other contingency.

• Market to Market: - The practice of crediting or debating a

trader’s account based on daily closing prices of the futures
contracts he is long or short.

• Market order: - An order for immediate execution at the best

available price.

• Nearby: - The futures contract closest to expiration.

• Net position: - The difference between the open contracts long
and the open contracts short held in any commodity by any
individual or group.

• Offer: - An offer indicating willingness to sell at a given price

(opposite of bid).

• On opening: - A term used to specify execution of an order

during the opening.

• Open contracts: - Contracts which have been brought or sold

without the transaction having been completed by subsequent
sale, repurchase or actual delivery or receipt of commodity.

• Open interest: - The number of “open contracts”. It refers to

unliquidated purchases or sales and never to their combined

• Option: - It gives right but not the obligation to the option

owner, to buy an underlying asset at specific price at specific
time in the future.

• Out-of-the money: - Option calls with the strike prices above

the price of the underlying futures, and puts with strike prices
below the price of the underlying futures.

• Over the counter: - It is alternative trading platform, linked to

network of dealers who do not physically meet but instead
communicates through a network of phones & computers.

• Pit: - An octagonal platform on the trading floor of an exchange,

consisting of steps upon which traders and brokers stand while
trading (if circular called ring).

• Point: - The minimum unit in which changes in futures prices

may be expressed (minimum price fluctuation may be in
multiples of points).

• Position: - An interest in the market in the form of open


• Premium: - The amount by which a given futures contract’s price

or commodity’s quality exceeds that of another contract or

commodity (opposite of discount). In options, the price of a call
or put, which the buyer initially pays to the option writer (seller).

• Price limit: - The maximum fluctuation in price of futures

contract permitted during one trading session, as fixed by the
rules of a contract market.

• Purchase and sales statement: - A statement sent by FMC to a

customer when his futures option has been reduced or closed
out (also called ‘P and S”)

• Put: - In options the buyer of a put has the right to continue a

short position in an underlying futures contract at the strike price
until the option expires; the seller (writer) of the put obligates
himself to take a long position in the futures at the strike price if
the buyer exercises his put.

• Range: - The difference between high and low price of the

futures contract during a given period.

• Ratio hedging: - Hedging a cash position with futures on a less

or more than one-for-one basis.

• Reaction: - The downward tendency of a commodity after an


• Round turn: - The execution of the same customer of a

purchase transaction and a sales transaction which offset each

• Round turn commission: - The cost to the customer for

executing a futures contract which is charged only when the
position is liquidated.

• Scalping: - For floor traders, the practice of trading in and out

of contracts through out the trading day in a hopes for making a
series of small profits.

• Settlement price: - The official daily closing price of futures

contract, set by the exchange for the purpose of setting margins

• Short: - (1) The selling of an option futures contract. (2) A
trader whose net position in the futures market shows an excess
of open sales over open purchases.

• Speculator: - Speculator is an additional buyer of the

commodities whenever it seems that market prices are lower
than they should be.

• Spot Markets:-Here commodities are physically brought or sold

on a negotiated basis.

• Spot price: - The price at which the spot or cash commodity is

selling on the cash or spot market.

• Spread: - Spread is the difference in prices of two futures


• Striking price: - In options, the price at which a futures

position will be established if the buyer exercises (also called
strike or exercise price).

• Swap: - It is an agreement between two parties to exchange

different streams of cash flows in future according to
predetermined terms.

• Technical analysis (charting): - In price forecasting, the use

of charts and other devices to analyze price-change patters and
changes in volume and open interest to predict future market
trends (opposite of fundamental analysis).

• Time value: - In options the value of premium is based on the

amount of time left before the contract expires and the volatility
of the underlying futures contract. Time value represents the
portion of the premium in excess of intrinsic value. Time value
diminishes as the expiration of the options draws near and/or if
the underlying futures become less volatile.

• Volume of trading (or sales): - A simple addition of

successive futures transactions (a transaction consists of a
purchase and matching sale).

• Writer: - A sealer of an option who collects the premium
payment from the buyer.


This decade is termed as Decade of Commodities.

Prices of all commodities are heading northwards due to rapid
increase in demand for commodities. Developing countries like
China are voraciously consuming the commodities. That’s why
globally commodity market is bigger than the stock market.
India is one of the top producers of large number of
commodities and also has a long history of trading in
commodities and related derivatives. The Commodities
Derivatives market has seen ups and downs, but seems to have
finally arrived now. The market has made enormous progress in
terms of Technology, transparency and trading activity.
Interestingly, this has happened only after the Government
protection was removed from a number of Commodities, and
market force was allowed to play their role. This should act as a
major lesson for policy makers in developing countries, that
pricing and price risk management should be left to the market
forces rather than trying to achieve these through administered
price mechanisms. The management of price risk is going to
assume even greater importance in future with the promotion
of free trade and removal of trade barriers in the world.
As majority of Indian investors are not aware of
organized commodity market; their perception about is of risky
to very risky investment. Many of them have wrong impression
about commodity market in their minds. It makes them
specious towards commodity market. Concerned authorities
have to take initiative to make commodity trading process easy
and simple. Along with Government efforts NGO’s should come
forward to educate the people about commodity markets and to
encourage them to invest in to it. There is no doubt that in near
future commodity market will become Hot spot for Indian
farmers rather than spot market. And producers, traders as
well as consumers will be benefited from it. But for this to
happen one has to take initiative to standardize and popularize
the Commodity Market.


• Trading Commodities and Financial Futures: A Step by

Step guide to Mastering the Market, 3rd Edition by George

• Options, Futures and Other Derivatives by Johan C. Hull






• MCX Certified Commodity Professional Reference Material

• Business World (15th September 2003)

• Business World (4th December 2006)




Speaker 1: - Introduction:- What is commodity? commodity exchange?
what is commodity futures? objective of commodity futures

Speaker 2: - Benifits of commodity futures, Evalution of history of

commodity markets

Speaker 3: -India and commodity markets history + legal frame

work+ FMC

Speaker 4: -Commodity Exchanges in India & International exchanges

Speaker 5: - Amar: -how commodity market works+ how to invest in

commodity market+ how to become a member

Speaker 6: -Current scenario+suggestions