COMMODITY Working Of Commodities MARKETS

Exchanges In India

Presented By: Ankur Gupta Ankur Rohatgi Kaustav Sarkar Nishaad Mahendru

Commodities Exchange
A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Speculators and investors also buy and sell the futures contracts to make a profit and provide liquidity to the system.

Commodity Ecosystem

Commodity Market Structure
Quality Certification Agencies Warehouses

Spo t Mark et
Hedger (Exporters/ Millers/ Industry) Producers (Farmers/ Co-operatives/ Institutional)

Clearing Bank

Commodities Ecosystem

Transporters/ Support Agencies

Traders (Speculators) Arbitrageurs/ Client) Consumers (Retail/ Institutional)

Gl oba l C ommo di ti es Mark et

Indian commodity market – set for paradigm shift
Four licenses recently issued by Govt. of India to set-up National Online Multi Commodity Exchanges – to ensure a transparent price discovery and risk management mechanism List of commodities for futures trade – increased from 11 in 1990 to over 100 in 2003 Reforms with regard to sale, storage and movement of commodities initiated Shift from administered pricing to free market pricing – WTO regime Overseas hedging has been allowed in metals Petro-products marketing companies have been allowed to hedge prices Institutionalization of agriculture

India’s Place in World Market
COMMODITY RICE (PADDY) WHEAT PULSES GROUNDNUT RAPESEED SUGARCANE TEA COFFEE(GREEN) JUTE AND JUTE FIBERS COTTON (LINT) INDIA 240 74 13 6 6 315 0.75 0.28 1.74 2.06 WORLD 2049 599 55 35 40 1278 2.99 7.28 4.02 18.84 SHARE 11.71 12.35 23.64 17.14 15.00 24.65 25.08 3.85 43.30 10.09 RANK THIRD SECOND FIRST SECOND THIRD SECOND FIRST EIGTH SECOND THIRD

Participants in Commodity Futures
Δ Farmers/ Producers Δ Merchandisers/ Traders Δ Importers Δ Exporters Δ Consumers/ Industry Δ Commodity Financers Δ Agriculture Credit providing agencies Δ Corporate having price risk exposure in commodities

Commodity Exchange in India
The Government of India permitted establishment of National level Multi-Commodity exchanges in the year 2002. They are Multi Commodity Exchange (MCX) located at Mumbai National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai National Board of Trade (NBOT) located at Indore National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Who regulates the commodity exchanges?
Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by Forwards Market Commission (FMC); Forwards Market Commission is under the purview of the Ministry of Food, Agriculture and Public Distribution.

Different types of commodities that are traded
Precious Metals: Gold, Silver, Platinum etc Other Metals: Nickel, Aluminum, Copper etc Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar etc Live-Stock: Live Cattle, Pork Bellies etc Energy: Crude Oil, Natural Gas, Gasoline etc

•Better Reach in all parts of the country

Nation-wide Multi Exchanges vis-a-vis Regional Exchanges

•Wider base for speculators from other markets including securities market •Broad basing of the underlying commodity •Industry diffused in several parts of the country may also directly participate •Few commodities can be projected viable for an international futures Contract, with participation from global player •Best management practices, end of day mark to market, online margining and surveillance, daily pay-in & pay-out are some of the features to woo the players

How risky are these markets compared to stock & bond markets?
Commodity prices are generally less volatile than the stocks and this has been statistically proven. Therefore it's relatively safer to trade in commodities. Also the regulatory authorities ensure through continuous vigil that the commodity prices are marketdriven and free from manipulations. However all investments are subject to market risk and depends on the individual decision. There is risk of loss while trading in commodity futures like any other financial instruments.

Are the trades/ settlement guaranteed by the exchanges?
YES, the commodity exchanges have got some of the most high profile corporate as their promoters. Multi Commodity exchange of India, promoted by Financial Technologies Ltd has got on board institutions such as SBI, HDFC Bank, Canara Bank, Corporation Bank, Bank of India, Union Bank of India, Bank of Baroda. The National Commodity and Derivatives Exchange (NCDEX) has got NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as the major share-holders. Such a high profile share-holding provides these exchanges valuable experience, knowledge and also high standards of operations . Also the exchange guarantees the settlement of trades and so eliminates the counter-party risk in the transactions.

Different segments in the commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Majority of the derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

What are Commodity Futures?
Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.

Commodity futures market has been in existence in India for centuries. The Government of India banned futures trading in certain commodities in 70s. However trading in commodity futures has been permitted again by the government in order to help the Commodity producers, traders and investors. World-wide, commodity exchanges originated before the other financial exchanges. In fact, most of the derivatives instruments had their birth in commodity exchanges.

Who benefits from dealing in commodity futures and how?
If you are an investor, commodities futures represent a good form of investment because of the following reasons: Diversification – The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations by individuals. High Leverage – The margins in the commodity futures market are less than the F&O section of the equity market.

If you are an importer or an exporter, commodities futures can help you in the following ways: Hedge against price fluctuations – Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any fluctuation in prices that happen subsequently

If you are a producer of a commodity, futures can help you as follows: Lock-in the price for your produce – If you are a farmer, there is every chance that the price of your produce may come down drastically at the time of harvest. By taking positions in commodity futures you can effectively lock-in the price at which you wish to sell your produce. Assured demand – Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest. Increase in holding power – You can store the underlying commodity in exchange approved warehouse and sell in the futures to realize the future value of the commodity.

If you are a large scale consumer of a product, here is how this market can help you: Control your cost – If you are an industrialist, the raw material cost dictates the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material. Ensure continuous supply – Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

Are there physical deliveries in commodity futures exchanges?
YES, the exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the price of futures and spot prices coincide during the settlement so that the arbitrage opportunities do not exist.

How the deliveries are made possible?
The exchange has enlisted certain cities for specific commodities as the delivery centers. The seller of commodity futures, upon expiry of the contract may choose to deliver physical stock instead of settling the positions by cash, in which case he would be required to deliver the stocks to the specified warehouses. The buyer of the commodity futures, if he is interested in physical delivery would be matched with a seller and would be required to take delivery of the specified quantity of stock from the designated warehouse. In case of NCDEX it is mandatory to open a Demat account with an approved DP by the buyer and seller if they wish to take/ give delivery of goods.

Speculation Hedging Arbitrage

Working of Commodity Exchange

Settlement Of Future Contracts
How would contracts settle? What would be the settlement period? Are deliveries compulsory? How would the settlement take place in commodity futures market?

Neat Trading terminal

Delivery Information

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