A Research Project On

IMPACT OF COMMODITY FUTURE TRADING ON COMMODITY SPOT PRICES WITH SPECIAL REFERENCE TO SUGAR,CHANNA&TURMERIC ON NCDEX(1 Jan. 1,2009- Dec. 31, 2009)
SUBMITTED TO: KURUKSHETRA UNIVERSITY, KURUKSHETRA, IN THE FULFILLMENT OF DEGREE OF MASTER OF BUSINESS ADMINISTRATION (MBA) SESSION (2008-10) UNDER THE GUIDANCE OF: Miss Poonam Bakshi Faculty MBA TIMT, YNR SUBMITTED BY: Shelly Singhal D/o Sh Vijay Kumar Singhal Class:- MBA (Final) Class Roll No.:-1125/08 Univ. Regi. No- 05-MY-1142 Univ. Roll No.

Tilak Raj Chadha Institute of Management & Technology (TIMT)

(Affiliated to Kurukshetra University, Kurukshetra and Approved By AICTE) MLN College Educational Complex, Yamuna Nagar- 135001 (Haryana) Ph. 01732-220103, 234110. Fax:+91-1732-220103 E-mail: info@timt.ac.in, Web Site: www.timt.ac.in

DECLARATION

I Shelly Singhal, Roll No.1125/08, MBA (4th Semester) student of the Tilak Raj Chadha Institute of Management and Technology, Yamunanagar hereby declare that the Research Report entitled Impact of commodity future trading on commodity spot prices with special reference to sugar,channa&turmeric on ncdex(1 Jan. 1,2009- Dec. 31, 2009) is an original work and the same has not been submitted to any other Institute for the award of any other degree.

(Shelly Singhal)

ACKNOWLEDGEMENT
The present report is an amalgamation of hard work and contribution of experience of eminent personality. This work is synergistic product of many minds. I am grateful for the inspiration of many thinkers and for the hang together sources & roots of this wisdom. This project report has been made possible through the direct & indirect co- operation of various people whom I wish to express my thanks and gratitudes. First of all I would like to thank the supreme power, the Almighty GOD who is obviously the one who has always directed me to work on the right path of my life. With his grace this project could become a reality. Then I express my sincere gratitude and thanks to Dr. Vikas Daryal (Director) and Mrs. Vandana Madaan ( HOD-MBA Deptt., TIMT) for their inspiration and helpful attitude. I am also deeply thankful to Ms. Poonam Bakshi (Faculty, TIMT YNR.) for her guidance, regular counseling, keen interest and constant encouragement. Without her guidance, this project would not have a successful end. I owe my sincerely thanks to all my faculty members and the associated staff for their support given to me time to time. Also, I would like to thank all my friends and family members for their support given to me time to time. Finally, with blessings of my parents who are a source of strength and inspiration for me in this endeavor. (Shelly Singhal)

PREFACE
Theoretical knowledge without the practical exposure is of little value. Theoretical studies in classroom are not sufficient to understand the functioning and nature of research. Therefore it becomes necessary to undergo research project work. Practical project supplements the theoretical studies i.e. it covers what is left uncovered in the classroom. It exposes a student to invaluable pleasure of experiences. My study topic deals with Analysis of productivity and operational efficiency of public sector banks.. This dissertation deals with the application of theory to study the operational and productivity efficiency on the basis of CAR, total income, interest earned, business per employee and profit per employee. I would learn a lot of new things which could never been learned from the theory classes. This dissertation report is a presentation of my work. The main objective of dissertation and project i.e. familiarization with the necessary theoretical input and to gain sufficient practical exposure to establish a distant linkage between the conceptual knowledge acquired at the institute and practicing these concepts. . Prior to making reference to working of the dissertation prepared the analysis, feasibility and all other aspects were taken into consideration. In the forthcoming pages attempt has been made to present a comprehensive report concerning different aspects of my research. The overall gain to me will be reflected in the report itself.

EXECUTIVE SUMMARY

Contents Page No

1. 2. 3. 4.

INTRODUCTION COMPANY OR INDUSTRY PROFILE TOPIC THEORETICAL FRAMEWORK -CONSTRUCT -DEPENDENT & INDEPENDENT VARIABLE 5. LITERATURE REVIEW 6. RESEARCH OBJECTIVE 7. RESEARCH METHODOLOGY RESEARCH DESIGN TYPE OF RESEARCH DESIGN TIME HORIZON STUDY SETTING MEASUREMENT AND SCALING FLOW CHART FOR SELECTION OF STATISTICAL TOOLS ii. HYPOTHESIS DEVELOPMENT AND TESTING iii. SAMPLE & SAMPLING DESIGN iv. DATA COLLECTION v. ANALYTIVAL TOOLS vi. STATISTICAL TOOLS 8. DATA ANALYSIS 9. RESULTS & FINDINGS 10. POLICY IMPLICATIONS 11. SUGGESTIONS 12. BIBLIOGRAPHY 13. ANNEXURES i.

INTRODUCTION

What is commodity?
A commodity may be as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except actionable claims, money and securities. Commodities actually offer immense potential to become a separate asset class for market savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfavorable market. But commodities are easy to understand as for as fundamentals of demand and supply are concerned. Retail investors should understand the risk and advantages of trading in commodities futures before keeping a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds that provides an efficient portfolio diversification option. Meaning of commodity market: Commodity markets are market where raw or primary products are exchanged. The raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of government, nor investment, nor investment, nor debt can be seen as commodity. Article on reinsurance markets, stock markets, bond markets and currency markets cover those concerns separately and in more depth. On focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets. Commodity market is an important constituent of the financial markets of any country. it is the market where a wide range of products precious metals, base metals, crude oil, energy and soft commodities like oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

FUTURE CONTRACT:
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date.

BASIC FEATURES OF FUTURE CONTRACT:

1.Standardization: Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted. The delivery month. The last trading date. Other details such as the tick, the minimum permissible price fluctuation.

2.Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position.

Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. 3.Settlement Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract:

'Physical delivery' - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). The Nymex crude futures contract uses this method of settlement upon expiration.

Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market.

Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts (as well as for most equity options), this happens on the Last Thrusday of certain trading month. On this day the t+2 futures contract becomes the t forward contract. For example, for most

How do Futures Work? Futures are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location. Commodity trading with futures contracts takes place at a futures exchange and, like the stock market, is entirely anonymous. For example: the buyer might be an end-user like Kelloggs. They need to buy corn to make cereal. The seller would most likely be a farmer, who needs to sell his corn crop. They create a contract of December Corn futures at the current market price. A contract of corn at the CBOT consists of 5,000 bushels. Therefore, the farmer would have to deliver 5,000 bushels of corn to Kelloggs in December at a designated location. Making Money in Futures A speculator is someone who invests in a business with the goal of turning a profit. In the case of commodities, speculators are traders who try to buy futures low and sell them high to make money. The reason why speculators can do so with futures is that traders arent required to hold the futures contracts for the duration of the contract; they can buy or sell anytime they want. So, to use the Kelloggs example above, a speculator could buy the corn contract from the farmer at a certain price, then wait for the price of corn to go up before selling the contract to Kelloggs, even if the contract wont come due for another couple of months, turning a profit in the process.

Players Involved in Commodities Trading There are three different types of players in the commodity markets: 1. Commercials: The entities involved in the production, processing or merchandising of a commodity. For example, both the corn farmer and Kelloggs from the example above are commercials. Commercials account for most of the trading in commodity markets. 2. Large Speculators: A group of investors that pool their money together to reduce risk and increase gain. Like mutual funds in the stock market, large speculators have money managers that make investment decisions for the investors as a whole. 3. Small Speculators: Individual commodity traders who trade on their own accounts or through a commodity broker. Both small and large speculators are known for their ability to shake up the commodities market. How to Start Trading Commodities In order to trade commodities, you should educate yourself on the futures contract specifications for each commodity and of course learn about trading strategies. Commodities have the same premise as any other investment you want to buy low and sell high. The difference with commodities is that they are highly leveraged and they trade in contract sizes instead of shares. Remember that you can buy and sell positions whenever the markets are open, so rest assured that you dont have to take delivery of a truckload of soybeans. What Does Commodity Futures Contract Mean? An agreement to buy or sell a set amount of a commodity at a predetermined price and date. Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements

Pricing of future contract Futures In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, , will be found by discounting the present value at time to maturity

by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields; see futures contract pricing. Any deviation from this equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds.

2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit.

Overall growth During 2005-06, the total value of commodity futures trade was Rs. 21.34 lakh crore as compared to Rs. 5.71 lakh crore during 2004-05 showing an increase of 274%. The volume of trade has also gone up to 6685 lakh tonnes during 2005-06 as compared to 1942 lakh tonnes during 2004-05. The trade volume has also gone up by 244% during 2005-2006. The trading volume and value have increased manifold after the three national level Exchanges were set up. Department of Consumer Affairs granted recognition to these Exchanges as indicated below:National Multi-Commodity Exchange of India, Ahmedabad (NMCE), started trading in November 2002 and the other two national Exchanges viz. Multi Commodity Exchange of India Ltd., Mumbai (MCX) and National Commodity and Derivatives Exchange Ltd., Mumbai (NCDEX) started trading in November 2003. The following table shows the increase in volume and value of trading in commodity futures since the setting up of these national Exchanges. Commodity Futures Trading Value and Volume since 2001-02 2002-03 Volume of Trading (in lakh tonnes) Value of trading (Rs. in crore) 314.4 (44.4)* 2003-04 492.9 (57.7)* 2004-05 1,942.1 (294)* 2005-06 6,685.09 (244)*

66,530 (92.8)*

1,29,363 (94.4)*

5,71,759 (341.9)*

21,34,471 (274)*

*Figures in parenthesis are % change over previous year.

Benefits to industry from future trading:

Hedging the price risk associated with future contractual commitments. Spaced out purchases possible rather than large cash purchased and its storage. Efficient price discovery prevents seasonal price volatility Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informal lending Hedged position of producers and processors would reduce the risk of default faced by banks. Lending for agriculture sector would go up with greater transparency in pricing and storage. Commodity exchanges to act as distribution network to retail agri-finance from bank to rural households. Providing trading limit finance to traders in commodities exchanges.

Future prospect
Future prospect of commodity derivative trading is upbeat. Futures market size (both commodities and securities) relative to Gross Domestic Product (GDP at current prices) in the US is about 90%, in China about 85%, and in Brazil about 200%. Commodities derivatives trade value relative to GDP (at current price) in India was 5.81 % in 2003-04, 20.14% in 2004-05 and it has gone up to 66 % during 2005-06. The commodity futures trade has taken a big leap in the past two years. Likely participation of Banks, Mutual Funds and Foreign Institutional Investors along with introduction of options trading after amendments to FCR Act, 1952, will boost the commodity futures trading further in the coming years.

Meaning of commodities exchanges:

A Commodity Exchange is defined as a market where multiple buyers and sellers trade commodity linked contracts on the basis of terms and conditions laid down by the exchange(UNCTAD 2007).Since the commodity exchange provide a forum for trading commodity linked contracts, they reduce the transaction cost associated with finding a buyer or seller. Further, most importantly, the hedging and price discovery functions of future markets promote more efficient production planning, storage, marketing, rationalization of transaction cost and better margin for producers.

Its evolution in India:

Commodity exchange in India

In India there are about 25 authorized commodities out of which Multi Commodity Exchange of India Ltd (MCX), National Commodity & Derivatives Exchange Ltd (NCDEX) and National Multi Commodity Exchange of India Ltd (NMCE) are the three big exchanges handling very high proportion of volumes. Headquartered in Mumbai MCX, is promoted by SBI group and many other financial institutions including the Financial Technologies (India) Ltd. MCX started trading in November 2003 and has edge in non agricultural commodities. Another Mumbai based NCDEX commenced operations on December 15, 2003. This commodity exchange was promoted by national institutions such as NABARD, NSE, LIC and ICICI Bank Ltd. Etc. it is a well managed online multi commodity exchange that has edge in agricultural commodities. NMCE started its operation in November 26, 2002. It was supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. As per the date released by Forward Market Commission (FMC), commodity exchanges in the country recorded a total business of Rs 210,276 crore in futures segment during the first fifteen days of 2008 which was 43% higher as compared to the same period last year. Out of it the turnover of MCX stood at Rs 169572.92 crore, while the NCDEX clocked a turnover of Rs 32682.39 crore during the period and Ahmadabad-based NMCE registered a turnover of Rs 633.72 crore. Presently, about 90 agricultural commodities or their variants are traded in future markets in India. Pepper (International), turmeric, gur, casterseed, hessian, jute, sacking, cotton, potato, castor oil (international), soybean (oil and cake), kapas, palmolein, sugar and tea are the important agricultural commodities traded in such markets Leading commodity markets of India The government has allowed national commodity exchanges, similar to the BSE & NSE to come up and let them deal in commodity derivatives in an electronic trading environment. Multi commodity exchange (MCX) located at Mumbai National commodity and derivatives exchange ltd (NCDEX) located at Mumbai National multi commodity exchange (NMCE) located at Ahmadabad

INDIAN COMMODITY EXCHANGES MARKET SHARES

MCX, 59%

Other regional exchanges, NMCE, 4% 3% NCDEX, 34%

NMCE Other regional exchanges NCDEX MCX

About NCDEX

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. The shareholders of NCDEX comprises of large national level institutions, large public sector bank and companies. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management - both 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 transparency. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations.

NCDEX headquarters are located in Mumbai and offers facilities to its members from the centres located throughout India. The Exchange, as on May 21, 2009 when Wheat Contracts were re-launched on the Exchange platform, offered contracts in 59 commodities - comprising 39 agricultural commodities, 5 base metals, 6 precious metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed, Gaur Seed, Soyabean Seeds, Turmeric and Jeera. Share Capital details as on December 31, 2009 Authorized Capital Rs. 70,00,00,000/-, comprising : 6,00,00,000 equity shares of Rs. 10/- each, aggregating Rs. 60,00,00,000/1,00,00,000 preference shares of Rs. 10/- each, aggregating Rs. 10,00,00,000/Issued, Subscribed and Paid-up 3,00,00,000 equity shares of Rs. 10/- each, aggregating Rs. Capital 30,00,00,000/1,00,00,000 preference shares of Rs. 10/- each, aggregating Rs. 10,00,00,000

SHARE OF VARIOUS COMMODITIES ON NCDEX :Commodity groups Bullion Agriculture 2004-05 1.8 3.9 11..92 2005-06 7.79 2006-07 21.29 13.17 2007-08 26.24 9.41

Energy Others Total

0.02 0 5.72

1.82 0.02 21.55

2.31 0.001 36.77

5 0 40.65

Commodity wise trends in volume traded Share % 13.6 9.5 18.5 Share 2006 % 104557 3 30.9 137372 635647 4.1 18.8 Share 2007 % 204261 87181 182363 22.6 9.6 20.1

COMMODITY 2005 SUGAR CHANNA TUR 206398 144288 280935

Sugar
At approximately twenty thousand B.C., people in the islands of the S. Pacific were the first to find the sugar in the canes of sugar that grew naturally in their area. Anyhow, the country of India was the 1st country to extract natural cane juice to make the first crude sugar. They called it "gur",loosely translated as "sweet tasting", in five hundred B.C. From there, the knowledge of making sugar spread toward the west, into the Arabic nations, and then to Europe by the Crusaders. For 100s of years, sugar was a highly valued and costly "spice" that was used only in the homes of high society and royalty. Christopher Columbus took the cane to plant in the Caribbean, leading to the blossoming of sugar in the New World. In the mid-1700's, a German scientist developed an substitute to sugar, through the use of sugar beets. Since then, the sugar beet has become the main source of sugar in Europe.

Sugar as a product
Sugar performs a array of functions in edible products, in addition to providing a sweet essence and flavor. Sugar is used as a conservative, as is the case in jams and jellies, where sugar reserves the growth of micro organisms. Sugar is used in baked goods, like cakes, to hold moisture and prevent the staleness that we notice in these foods after time.. In canned fruit and many vegetables, sugar enhances consistency and their colors. Sugar is also used to prevent large ice crystals from forming in frozen sweet mixtures, like ice cream, and to support fermentation in products containing yeast, such as bread. In these roles and others, sugar is an important and versatile food ingredient.

Supply
There are two main types of sugar grown in the world: cane and beet. Both produce the identical refined sugar product. Sugar cane is a bamboo-like grass grown in semi-topical regions. It accounts for about 70% of world production. Beet sugar comes from the sugar beet plant, which grows in temperate climates and accounts for the balance of world production. Intemperate weather, disease, insects, soil quality and cultivation affect both cane and beet production, as do trade agreements and price support programs. India, Brazil, China, Thailand, Cuba and Mexico are among the leading sugar cane producers. European Union nations, the Russian Federation and Ukraine produce the majority of all sugar beets. The European Union, Brazil, Thailand, Australia, Cuba and Ukraine are leading sugar exporters. U.S. sugar cane is grown in Florida, Louisiana, Hawaii, Texas and Puerto Rico. Beet sugar is grown in 14 states, with Minnesota, Idaho, North Dakota and California leading production. The sugar industry closely monitors the level of sugar stocks relative to sugar consumption as a measure of available supply. In the past, small changes in the ratio have led to large sugar futures price movements in the opposite direction.

Demand
Industrialized nations account for most sugar consumption. The European Union, Russian Federation, United States, China and Japan are among the worlds largest sugar importers. An imbalance between world consumption and production in 1980 again sent sugar futures prices skyward - from around 15 cents per pound at the beginning of the year to about 45 cents per pound in the fall. By 1982, however, sugar futures prices had fallen back to their 1977-79 range, averaging over 8 cents per pound for the year. Ample supplies and an evolving geo-political scene have led to prices in the 2 cents/pound to 16 cents/pound range since then. Beyond price, other factors influencing sugar demand include: refinery activity; consumer income; candy and confectionery sales; changing eating habits; and sugars use in new technologies, such as ethanol production for automobile fuel. Many South American countries use sugar and corn based ethanol in their unleaded gasoline and diesel engines. An unexpected increase in demand can lead to much higher sugar futures prices.

The Role of the Exchange

Since all sugar futures and options contracts are standardized (with delivery months and locations, quantity and grade constant), only price is negotiable. These prices are determined by "open outcry" trading on the exchange floor. With open outcry, all market participants are afforded the opportunity to buy or sell at the best available current price. All trading activity is closely monitored by the Exchange according to guidelines established by the CFTC. The Exchange is committed to maintaining markets of the highest quality. To help fulfill this self- regulatory mandate, the ICE employs advanced technological systems to perform a variety of surveillance and compliance procedures.

Trading Sugar Options

In 1982, the CSCE introduced options on world (#11) sugar futures - the nation's first exchange -traded option on commodity futures. Because options strategies are numerous and can be tailored to meet a wide array of risk profiles, time horizons and cost considerations, hedgers and investors have increasingly realized the vast potential of sugar futures options.

Buyers
Option buyers obtain the right, but not the obligation, to enter the underlying sugar futures market at a predetermined price within a specific period of time. A "call" option confers the right to buy (go long) sugar futures, while a "put" options confers the right to sell (go short) sugar futures. The predetermined price is known as the "strike" or "exercised" price, and the last day when an option may be exercised is the "expiration Date". Buyers pay sellers a premium for their rights. Because an option holder is under no obligation to enter the sugar futures market, losses are limited to the premium paid. There are no margin calls. If the underlying sugar futures market moves against an options position, the holder can simply let the option for the sugar futures expire worthless. After all, the holder of an option to buy sugar at 13.00 cents per pound (call option) probably won't be interested in exercising the option if the then-current market price is 10.00 cents per pound. On the other side, potential gains are unlimited, net of the premium cost. Being able to participate in the market at a known cost with essentially unlimited profit potential has made the purchase of straight call and put options popular among sugar futures investors. The same features allow hedgers to guard against adverse price movements at a known cost without foregoing the benefits of favorable price movements. In an options hedge, gains are only reduced by the premium paid - unlike a sugar futures hedge, where gains in the cash market are more wholly offset by sugar futures market losses.

Option holders can exit their position in one of three ways: exercise the option and enter the futures market; sell the options back in the market (at a profit or loss depending on the difference between purchase and sell price); or let the option expire worthless.

Sellers
Option sellers, or "writers", receive a premium for granting option rights to buyers. In exchange for the premium, writers assume the risk of being assigned a position opposite that of the buyer in the underlying sugar futures market at any time prior to expiration. Writers of call options must be prepared to assume short positions at the option's strike price at the option holder's discretion, while put option writers may be assigned long sugar futures positions. Writing put and call options can serve as a source of additional income during relatively flat market periods. Because option writers must be prepared to enter the sugar futures market at any time upon exercise, they are required to maintain a margin account similar to that for sugar futures positions. Sellers can offset their positions by buying back their options in the market.

Strike Prices
Traders agree on premiums in an open outcry auction similar to that for sugar futures contracts. The Exchange generally lists several strike prices for each option month: one at or near the sugar futures price and a series above and below. As sugar futures prices rise or fall, higher or lower strike prices are introduced according to a present formula.

Premiums
A number of factors impact premium levels in the market. Intrinsic value is the dollars and cents difference between the option strike price and the current sugar futures price. An option with intrinsic value has a strike price making it profitable to exercise and is said to be "in-themoney" (strikes below futures price for calls, above for puts). An option not profitable to exercise is "out-of-the-money" (strikes above sugar futures price for calls, below for puts).

"At-the-money" options have strike prices at or very near sugar futures prices. In general, an option's premium is at least equal to intrinsic value (the amount by which it is "in-the-money") "Time value" is the sum of money buyers are willing to pay for an option over and above any intrinsic value the option may presently have. Time value reflects a buyer's anticipation that, at some point prior to expiration, a change in the futures price will result in an increase in the options value. The premium for an "out-of-the-money" option is entirely a reflection of its time value. Premiums are also affected by volatility in the underlying sugar futures market. Because high levels of volatility increase the probability an option will become valuable to exercise, sellers command larger premiums when markets are more volatile. Finally, premiums are affected by supply and demand forces and interest rates relative to alternative investments.

Option Months
Regular options trade on sugar futures contracts having March, May, July and October delivery periods as well as a January expiration option which is based upon the March sugar futures contract. Serial options are short-life options contracts providing additional option expirations on existing sugar futures contracts. In general, the last trading day for sugar options is the second Friday of the month proceeding the stated futures month.

Example: Buying a Sugar Call

Buying a call can be employed to profit from, or achieve protection against, an increase in the price of sugar. Except for the cost of the option, the profit potential is similar to having a long position in the underlying sugar futures contract. Moreover, this strategy may provide greater "staying power" in the event of a temporary price setback than having an outright long sugar futures position - there are no margin calls because one cannot lose more than the premium paid for the option.

For example, assume that in August an investor expects sugar futures prices to increase by late winter. With March futures trading at 12.00 cents/pound, the investor decides to purchase a March 12.00 call (an at-the-money option) for 0.75 cents/pound. Since each contract represents 112,000 pounds of sugar, the total premium paid is $840. The maximum loss the holder of a long call can incur is the premium paid, regardless of how far the underlying sugar futures prices fall. The potential profit is unlimited, however, since the option holder gains dollar-for-dollar in the rise of the underlying sugar futures price minus the cost of the premium. Out-of-the-money options do not gain dollar-for-dollar on the rise of the sugar futures price. Call options can be purchased for price protection as well as for the pursuit of trading profits. Commercial firms buying call options effectively establish a maximum purchase cost equal to the exercise price of the option plus the option premium. Employed in this way, options offer hedgers price "insurance", while at the same time allowing them to benefit from price declines since they can allow the option to expire unexercised.

Example: Buying a Sugar Put

Whereas buyers of calls can profit from rising prices, buyers of put options - rights to sell sugar futures contracts at the option exercise price - can profit from price declines. Except for this difference the properties of puts and calls are the same. To realize a profit at expiration, the underlying sugar futures price must be below the option exercise price by an amount greater than the premium paid for the option. If it is higher, a portion or the entire premium will be lost. In no case, however, can losses exceed the premium paid. For example, the sugar futures investor in May expecting depressed sugar prices at autumn's onset can purchase October puts. With October sugar futures trading at 12.00 cents/pound, the investor purchases an October 12.00 put for 0.65 cent/pound (0.65 cent x 112,000 pounds = total of $728/contract).

The sugar futures investor can lose no more than the premium paid, plus commissions and fees no matter how high sugar futures prices climb. On the other hand, if prices decline, the investor can realize substantial gains. A sugar futures sale at the strike price would have similar profit opportunities in a falling market - plus the premium paid to obtain the option. Losses from a short sugar futures position, however, would be unlimited in a rising market. Commercial firms can purchase put options against inventory as "insurance" against price decreases. The firm may choose the cost or "deductible" for the insurance by selecting either in-the-money, at-the-money, or out-of the- money puts. For example, say an October 10.00 put would cost 0.08 cent/pound and an October 11.00 put cost 0.27 cent/pound

Chana

Chana is considered one of the chief pulses; it carries great significance especially for Indian market. Chana (chickpeas) is consumed in various forms. Major use of chana consist of making flour- popularly known as besan, around 60% of total chana consumption is in the form of besan. Around 15-20% of chana (chickpeas) is used for seeding purpose, and the balance is consumed in raw form or used as chana dal. Fourth Quarter considered as prime months for Besan consumption, as majority sweet consumption takes places during these month on account of festive season.

Trading system Ticker symbol Basis Unit of trading Delivery Unit Quotation/Base Value Tick size

NCDEX Trading System CHARJDDEL Desi ex-warehouse Delhi inclusive of all taxes and levies 10 MT 10 MT Rs. Per Quintal Re 1

Desi Chana The material should be free of Mathara and Khesari and live infestation Foreign Matter (Other than Varietal admixture) 1% basis

Green (Cotyledon colour), Immature, 3% basis Shrunken, Shriveled Seeds Brokens, Splits; Damaged and Weeviled Moisture Quality specification Varietal admixture Kantawalla Chana The material should be free of Mathara and Khesari and live infestation Foreign Matter (Other than Varietal admixture) 1% basis 2% basis 3% basis (Weeviled 2% max) 10% basis 3% Max

Green (Cotyledon colour), Immature, 3% basis Shrunken, Shriveled Seeds Broken, Splits Damaged and Weeviled 3% basis 3% basis (Weeviled max 2%)

Varietal admixture Quantity Variation +/-5%.

3% Max

Desi Chana to be delivered at Delhi (up to the radius of 50 Delivery centre kms from the municipal limits ) Chana was looking fundamentally very strong on the back of demand-supply scenario, but this Kantawalla Chana to be delivered only at Indore (up to the equation changed when Rajasthan Government imposed the stock limit in pulses on 10th August radius of 50 kms from the municipal limits) Also States like 2009. deliverable Punjab, Haryana and Maharashtra too followed the suit. Stock limit was mainly Desi Chana can also be delivered at Bikaner (up to the imposed due to soaring prices of pulses (other than chana), and there was a huge pressure from radius of 50 Kms from municipal limit) the Central Government to do so. As per directions ofled to a downside trigger in Chana spot This development the Forward Markets Commission from time Rs. 2500/quintal prices, and prices fell from the levels ofto time, currently - to Rs. 2200/quintal within a months time. NCDEX August contract too Mondays through Fridays: 10:00 a.m. to 5:00 p.m.Rs 2450plunged till Rs. 2001/quintal which was trading at Hours of Trading 2500/quintal during first week of Saturdays: 10.00 a.m. to 2.00 p.m. August. Looking ahead The Exchange may vary the above timing with due notice. Upon expiry of the contract all outstanding positions will If prices still continue to trade result in delivery. at Rs. 2200- 2250/quintal levels, we expect a huge buying Delivery specification The penalty structure for failure to meet delivery obligations coming in Spot market especially from the as per circular no. NCDEX/TRADING- to be double will be millers, as demand for chana is expected during last quarter of the year, and 086/2008/2162200/quintal is a price which normally prevails moreover Rs dated September 16, 2008. Delivery Logic Compulsory delivery during the months of Feb-May as when the arrivals are at its peak in those months. No. of active contracts As per launch calendar Trading in any contract month will open on the 10th day of As it has started raining off lately, but this monsoon has got nothing to do with fall or rise in the month. Opening of contracts If people of the tendency to relate rainfall with agricultural chana prices during the current phase,10th dayhave a month happens to be a non-trading day, contracts would open on the next trading day crop, but current rainfall will impact on next years chana production and its price, as chana 20th day of the delivery month being a rabi crop and its sowing begins during Dec-Jan If 20th happens to be a holiday, a Saturday or a Sunday then the due date shall be the immediately preceding trading day We have witnessed a surge in prices for all the pulses except for chana, thereby reducing the of the Exchange, which is other than a Saturday probability of implementation of stock limitexpiry of a by Madhya outstanding open positions Upon the in chana contract all Pradesh State Government. Closing of contract This development make us believewouldeven though stock limit is implemented in chana and that result in compulsory delivery Daily price be sustainable for (+/-) 3%. If the trade hits the prices fall further, these lower prices would not fluctuation limit is a longer period as there will be prescribed daily price limit there will be a cooling off period good demand from millers on account of festive Trade will be allowed during this cooling off for 15 minutes. and marriage season coming ahead, period within the price band. peak during the last quarter as demand for besan is at its Thereafter the price band Price band would be raised by another (+ / -) 1%. If the price again hits the revised price band (4%) during the day, trade will only be allowed by 30-40% due to below Current years production of kharif pulses is expected to declinewithin the revised price band. No trade / order shall be permitted during the day average rainfalls. Moreover if this current rainfall would hardly provide any relief to any of the beyond the revised limit of (+ / -) 4% kharif pulses; as soon, the harvesting of kharif pulses will for all contracts or rainfall the Member-wise: 40,000 MT kickoff and any 15% of during market-wide hamper the output as well the quality harvesting and pre harvesting season will further open position, whichever is higher. Client-Wise : 10,000 MT The above limits will not apply to bona fide hedgers. For bona fide hedgers, the Exchange will, on a case to case basis, decide the hedge limits. Please refer to Circular No. NCDEX/TRADING-100/2005/219 dated October 20,2005 Due date/Expiry date

Position limits

For near month contracts: The following limits would be applicable from one month prior to expiry date of a contract Member: Maximum of 8,000 MT or 15% of the marketwide near month open position, whichever is higher. Client: Maximum of 2,000 MT Chana which we are importing currently is from Tanzania at 475$ (Roughly Rs.2375Quality Premium/Discount 2400/quintal), this price doesnt include the freight charges of Rs.180-220/quintal from port to Desi Chana mandis. So at mandis these chana will be introduced at price of Rs.2550-2600/quintal, which is Foreign spot price, moreover the quality of chana that we at premium of Rs. 250/quintal than currentmatter import from Tanzania are among the inferior ones, as around 78-82 kg of 1% acceptable but up Chana with Foreign Matter more than to 100 kg of chana 1:1 it also contains dust be great extent, Chana dal is extracted after processing2% maximum on and discount which shall to aapplied to such content above 1% rounded off to the higher 0.5% whereas Indian Chana provides an output of around 84-86 kg chana dal after processing 100kgs Green (Cotyledon colour), Immature, Shriveled Seeds of Chana Chana with Green (Cotyledon colour), Immature, Shriveled Seeds more than 3% acceptable but up to 4% maximum on 2:1 discount which shall be applied to such content above 3% rounded off to the higher 0.5% Outlook Chana current stock available in the country is around 16-17 The outlook for Chana looks bullish as thewith Green (Cotyledon colour), Immature, Shriveled Seeds more than 4% rejected lakh tonnes and demand gainst is around 21-22 lakh tonnes for the remaining quarter and year. Brokens, Splits This development states that we are well short of supply of around 4-5 lakh tonnes of chana. Despite of government interventionChana with Brokens, Splits more than 2% acceptable but up we feel over current quarter prices of Chana may move up. to 3% on 2:1 discount which shall be applied to such October We recommend to go long in October Chana contract between 2250-2300/quintal in content above 2% rounded off to the higher 0.5% contract as such decline would not be sustainable for a longer period of time as fundamentals are Chana with Brokens, Splits more than 3% rejected favoring bulls in the current scenario. October contract may touch Rs.2500/quintal Moisture Chana with Moisture more than 10% acceptable but up to 12% on 1:1 rebate which shall be applied to such content above 10% rounded off to the higher 0.5% Chana with Moisture more than 12% rejected Damaged, Weeviled Seeds Chana with Damaged, Weeviled Seeds more than 3% (with Weeviled not more than 2%) acceptable but up to 10% maximum (with Weeviled not more than 2% ) at a discount of 2:1 which shall be applied to such content above 3% rounded off to the higher 1% Chana with Damaged, Weeviled Seeds more than 10% rejected Other deliverables at Premium/ Discount Kantawalla Chana Foreign matter

Chana with Foreign matter more than 1% basis acceptable up to 2% maximum on 1:1 discount which shall be applied to such content above 1% rounded off to the higher 0.5% Green (Cotyledon colour), Immature, Shriveled Seeds

TURMERIC Chana with Green (Cotyledon colour), Immature, Shriveled Seeds more than 3% acceptable up to 4% maximum on 2:1 discount which shall be applied to such content above 3% rounded off turmeric is related A yellow spice with a warm and mellow flavor, to the higher 0.5% to ginger. Turmeric is used in
prepared mustard and curry powder, and with Green (Cotyledon colour), Immature, Shriveled Chana it's a popular ingredient in Middle Eastern cooking. Seeds more than 4% rejected Turmeric is a spice derived from a Brokens,(a type of root) native to India and Southeast Asia. rhizome Splits Turmeric was prized as a dye for centuries, thanks to its power to tint fabric--or food--a brilliant Chana with Brokens, Splits more than 3% acceptable up to yellow-gold. The dried, powdered rhizome is used in curry powder, some typesapplied to such 5% maximum on 2:1 discount which shall be of pickles, and content food coloring, in cheese, higher 0.5% prepared mustard, and is used as a naturalabove 3% rounded off to thefor instance. Turmeric is sometimes substituted for saffron (which is far Brokens, Splits more than 5% rejected color, the Chana with more expensive); but aside from their two spices have little in common. Turmeric's flavor has been described as peppery and somewhat Moisture bitter, so it's important to be judicious when adding this spice to foods. Chana with Moisture more than 10% acceptable up to 12% maximum on 1:1 rebate which shall be applied to such content above 10% rounded off to the higher 0.5%

Top exporters

Chana with Moisture more than 12% rejected India (largest exporter of spices) Damaged, Weeviled Seeds Thailand and other Southeast Asian countries Various Pacific islands Chana with Damaged, Weeviled Seeds more than 3% (with Central and Latin American Weeviled not more than 2%) acceptable but up to 10% countries maximum (with Weeviled not more than 2% ) at a discount Taiwan of 2:1 which shall be applied to such content above 3% rounded off to the higher 1% Chana with Damaged, Weeviled Seeds more than 10% rejected Premium/Discount for Chana delivery at additional delivery centers The Premium and discount for different locations shall be announced by the Exchange before launching of contract In case of additional volatility, a special margin at such percentage, as deemed fit, will be imposed in respect of outstanding positions, which will remain in force as long as the volatility exists, after which the special margin may be relaxed.

Special margins

Top importers

Japan Sri Lanka Iran North African countries Middle Eastern countries Ethiopia United States United Kingdom

Major Trading Centres

Nizamabad Dugirala in Andhra Pradesh Sangli in Maharashtra Salem Erode Dharmapuri Coimbatore in Tamil Nadu

Contract Name of Commodity Ticker symbol Trading System Basis Unit of trading Delivery unit Quotation/base value Tick size

Futures Contract Specifications Turmeric TMCFGRNZM NCDEX Trading System Unpolished turmeric fingers Nizamabad quality ex warehouse Nizamabad inclusive of Sales Tax/VAT 10 MT 10 MT Rs. per Quintal Re. 1 Unpolished turmeric fingers of the current year with the follow specifications as the basis Unpolished turmeric fingers #

Quality specification

Inferior quality Turmeric* should not be more than 1.5% Length o Fingers that are broken/those less than 15mm should not be more than 3.0% o At least 75% of turmeric should be more than 3 cm in length Damage due to moisture (i.e. Lokhandi) or over boiling (i.e. Kadh) should not be more than 1.2% Unboiled or less boiled turmeric should not be more than 0.3% Bhusa, chaff dirt, earth clods and stones should not be more than 0.75% Bulbs should not be more than 3% Moisture o Basis 12% o Allowed at 1:1 discount upto 13% Turmeric should be free from fungus Turmeric should not be artificially coloured with dyes or chemicals

#Farmer polished turmeric will be treated as good for delivery at 'on par' basis * Chora/atthu finger, khota gatha, markha Also Deliverable The following qualities will be acceptable at Exchange specified premium/discount

Only farmer polished fingers will be acceptable in case of Rajapore, Desi Cuddapah, Erode and Salem qualities Farmer polished fingers/unpolished fingers will be acceptable in the case of Duggirala and Warangal qualities

Quantity variation Delivery center

+/- 2% Nizamabad (up to the radius of 50 Km from the municipal limits) Sangli, Erode, Duggirala and Warangal (up to the radius of 50 Km from the municipal limits) with location wise premium/discount as announced by the Exchange from time to time As per directions of the Forward Markets Commission from time to time, currently:

Additional delivery centres

Hours of Trading

Mondays through Fridays: 10:00 a. m. to 5:00 p.m. Saturdays: 10.00 a.m. to 2.00 p.m. The Exchange may change the above timing with due notice. 20th day of the delivery month

Due Date/ Expiry Date

If 20th happens to be a holiday, a Saturday or a Sunday then the due date shall be the immediately preceding trading day of the Exchange, which is other than a Saturday. Compulsory delivery Upon expiry of the contract all outstanding positions will result in delivery. The penalty structure for failure to meet delivery obligations will be as per circular no. NCDEX/TRADING086/2008/216 dated September 16, 2008. Trading in any contract month will open on the 10th day of the month. If 10th happens to be a non-trading day, contracts would open on the next trading day On the expiry of the contract, all the outstanding position would have to be settled by physical delivery As per Annexure. Daily price limit will be 2%. If the price touches 2%, trading will continue with 2% limit for the 15 minutes period from

Delivery logic

Delivery Specification

Opening of Contracts Closing of contract No. of active contracts Daily Price fluctuation limit

the time 2% limit was reached. Thereafter, price limit would be extended by another (+)/ (-) 2 %. No trade would be permitted during the day beyond the price limit of (+)/(-) 4% from the previous days closing price Member: 9,000 MT for all contracts or 15% of market wide open position whichever is higher. Client: 3,000 MT for all contracts The above limits will not apply to bona fide hedgers. For bona fide hedgers, the Exchange will, on a case to case basis, decide the hedge limits For near month contracts: The following limits would be applicable from 28 days prior to expiry date of a contract Member: Maximum of 1,800 MT or 15% of market wide open interest in near month whichever is higher Client: Maximum of 600 MT In case of additional volatility, a special margin at such other percentage, as deemed fit, will be imposed in respect of outstanding positions, which will remain in force as long as the volatility exists, after which the special margin may be relaxed

Position limits

Special margins

Tolerance limit for outbound deliveries for all the contracts expiring in August 2007 and therafter

Indian Scenario

India has 185.32 lakh hectares under turmeric cultivation with a total production of 701.66 lakh tonnes. Andhra Pradesh topped both in area and production with 73.93 lakh hectares and 375.77 lakh tonnes respectively. Tamil Nadu follows with 33 lakh hectares with 158.64 lakh tonnes (As per latest Statistics). Productivity was highest in Tamil Nadu 6118 Kg/ha.

Turmeric is a seasonal product which is available in the market mainly in two seasons, commencing in mid February to May and second season is mid August to October. .

The important varieties used in India are: 'Alleppey Finger' (Kerala) and 'Erode and Salem turmeric' (Tamil Nadu), 'Rajapore' and 'Sangli turmeric' (Maharashtra) and 'Nizamabad Bulb' (Andhra Pradesh). In Tamilnadu, the important varieties cultivated are Erode local, BSR-1, PTS-10, Roma, Suguna, Sudarsana and Salem local. Among these varieties, 70-75% is occupied by the local varieties. .

Some of the important turmeric varieties exported from India are Allepey Finger Turmeric, Rajapuri, Madras and Erode variety. The processed forms of turmeric exported are dry turmeric, fresh turmeric, turmeric powder and oleoresin. India in 2003-04 is estimated to have exported 34500 tons of turmeric, valued at Rs. 127.5 crores. .

United Arab Emirates (UAE) is the major importer accounting for 24.06 % of the total exports followed by United States of America (USA) with 12.93 %. The other leading importers are Japan, United Kingdom and Sri Lanka. The quality stipulation followed by USA is considered to be more important for export of turmeric.

Global Scenario

India is the largest producer, consumer and exporter of turmeric. .

Other producers in Asia include Bangladesh, Pakistan, Sri Lanka, Taiwan, China, Burma (Myanmar), and Indonesia. Turmeric is also produced in the Caribbean and Latin America: Jamaica, Haiti, Costa Rica, Peru, and Brazil. The use of the spice spread widely in Oceania, but it is not used as a condiment in Melanesia and Polynesia..

Major importers are the Middle East and North African countries, Iran, Japan and Sri Lanka. These importing countries represent 75% of the turmeric world trade, and are mostly supplied by the Asian producing countries..

Europe and North America represent the remaining 15%, and are supplied by India and Central and Latin American countries. Taiwan exports mostly to Japan. The United States imports of turmeric come from India at 97%, and the rest is supplied by the islands of the Pacific, and Thailand..

The total yearly consumption of Turmeric all around the globe is approximately 38 Lakh bags to 40 Lakh bags depending on the rates.

Uses of Turmeric
Turmeric is a member of the Curcuma botanical group, which is part of the ginger family of herbs, the Zingiberaceae. The root and underground stem of the Curcuma longa L. plant is

crushed and powdered into ground Turmeric. Ground Turmeric is used worldwide as a seasoning, to make curry, and for its medicinal properties. Curcumin, composing 3% of Turmeric, is the herbs most biologically active phytochemical compound. It is extracted and researched for its renowned range of therapeutic effects.

Potent anticancer properties Reduces beta-amyloids which cause Alzheimer's disease Lowers cholesterol levels in kidney and liver tissue Potent antioxidant properties Helps protect against or lessen the degree of kidney lesions Increase the production of digestive fluids and reduce gas Protected against free radical damage Neutralizing of free radicals Possesses anti-inflammatory actions Increases catabolism of cholesterol into bile acids Possesses hypolipidemic action Reduces excess gas in the stomach and intestines Helps prevent oxidation of blood cholesterol Possesses anti-thrombotic activity Relieves pain and inflammation in mucosal tissue Acts as an anti-mutagenic and chemoprotective

Relationship between Spot prices and Futures trading

Certainly, there is a relationship between the spot prices and future prices; future prices are just an indication of a common opinion of the public at large on how the spot prices

are going to behave in the future. Future prices are derivates of spot prices but not independent of what is happening on the spot front.

Spot prices are driven by current demand supply conditions, and the high inflation today is due to these imbalances. Futures trading provides valuable signals about expected output for taking economic decisions. If the market believes that the crop would be suboptimal, prices would move up in the futures market, while if current stocks are in abundance, then spot prices will remain low. As long as the market is efficient and not being concerned ,which the exchange and regulation ensure, there would be a discipline in the market.

A significant correlation

between spot and futures(notional)commodity indices as

maintained by MCX and NCDEX .The relationship, however is stronger in the case of non-agro commodities and agro-commodities which are mostly commercial in nature .Since the spot prices for agro-commodities vary widely across the regions and producers even for the same crop, hedging effectiveness seems to be lower.

Relationship between futures trading and rise in prices of the agricultural commodities

Background

Futures trading in most commodities were prohibited in India under the provisions of the Forward Contract Regulation Act, 1952 since the early days of development planning. While the prohibition was progressively lifted for many commodities in the postliberalization period, essential commodities like wheat, rice (non-basmati), pulses, edible oils and sugar continued to remain outside its purview. It was in 2003 that the BJP led NDA Government lifted all prohibition on futures trading and even allowed online trading of essential commodities in newly established commodity exchanges.

However, opposition to futures trading in essential commodities gathered momentum in the backdrop of high inflation being experienced in the country since 2006, particularly the sharp rise in prices of essential commodities. Besides the Left Parties, which have consistently opposed futures trading in essential commodities, other political parties had also started voicing similar demands.

ECFT Report

This Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices (ECFT), chaired by Planning Commission member Prof. Abhijit Sen, has recently submitted its report to the Government. The main report, which has been agreed upon by all the committee members, states: current evidence available does not provide any conclusive evidence about whether there is any causal relationship between futures trading and rise in prices of the agricultural commodities.

However, it needs to be noted that the evidence collated and analyzed by the ECFT report does not rule out the possibility of futures trading contributing to inflation. In Para 4.12 the report says: Both monthly and weekly data show that the annual trend growth rate in prices was higher in the post-futures period in 14 commodities, viz. Chana, Pepper, Jeera, Urad, Chillies, Wheat, Sugar, Tur, Raw Cotton, Rubber, Cardamom,

Maize, Raw Jute and Rice; and lower in 7 commodities, viz. Soy oil, Soy bean, Rape seed/Mustard seed, Potato, Turmeric, Castor seed, and Gur..

.The number of commodities in which inflation accelerated is double the number in which this decelerated, and their weights are also much higher in both futures trading and in the WPI. Also, significantly, all sensitive commodities (i.e. food grains and sugar) recorded some acceleration in inflation after the start of futures trading.

But the report goes on to say in Para 4.13: there is the problem that the period during which futures markets have been in operation is much too short to discriminate adequately between the effect of opening up futures markets and what might simply be normal cyclical adjustments. Thus, while the price rise of most agricultural commodities in the post-futures trading period is clearly established, whether or how much futures trading has caused or contributed to the price rise could not be conclusively ascertained.

Commodity Futures do affect Spot Prices(UNCTAD REPORT)

In sharp variance to the findings of an expert panel set up by India, a UN agency says futures trading in commodities affects spot prices of physical markets across the world, calling for concerted regulatory action by governments. Released worldwide Monday, the report by the United Nations Conference on Trade and Development (Unctad) blames large financial investors for influencing commodity prices through futures trading, without regards to the actual demand-

Incidentally, a government panel headed by economist Abhijit Sen had said in a report last year that there was no empirical evidence to suggest a link between futures trading and rising prices in India.

Unctads annual Trade and Development Report says commodities were being treated as merely an asset class and futures trading in its current form held the power to shift prices, irrespective of the supply-demand situation.

Individual market participants may take position changes that are so large relative to the size of the market that they move prices, which can be called the weight-of-money effect, says the report.

The UN agency, accordingly, calls for international collaboration among countries and regulators to bring about a comprehensive framework to deal with excessive speculation that has been blamed by several countries including India for the surge in food prices.

These last two years, there was no connection between real demand and supply situation and the way commodity prices at exchanges went. This affects us all, said professor Jayanti Ghosh of the Jawaharlal Nehru University who unveiled the report here.

The investors can always move out to another country if they find regulations in one country to be detrimental to their interest, what we need is collaborative action, Ghosh added.

The Abhijit Sen committee had said in its report that negative sentiments had been created in India by the decision to de-list futures trading in some important agricultural commodities.

Accordingly, the Forward Markets Commission, the watchdog, had said suspension of futures trading in commodities

Accordingly, the Forward Markets Commission, the watchdog, had said suspension of futures trading in commodities would hinder the markets development, apart from negatively impacting on the confidence of stakeholders.

The government, however, went ahead and banned futures trading in four commodities rice, wheat, urad dal and tur dal. Last year, soya oil, rubber and potato were added to the list but the notification was allowed to lapse in December. Presently, futures trading is also banned in sugar till December.

Objectives of study

Primary objective: To know the impact of Commodity Futures Trading on Volatility of

Commodity spot prices.

Secondary objectives:
To know the relationship between current spot prices and future prices. To know the reason of the relationship between current spot prices and future prices. To know the contribution of commodity future in causing rise in prices of food commodities

Theoretical Framework
CONSTRUCT: To study the impact of commodity futures trading on volatility of commodity spot price with special reference to Sugar,Chana &Turmeric on NCDEX. VARIABLES: There are basically two types of Variables, as follows: Independent Variable Dependent Variable

The following are the variables of the study: Independent Variable: Commodity future Prices Commodity future Traded Volume Commodity future Traded Value

Dependent variable: Commodity spot prices Commodity spot Traded volume Commodity spot Traded Value Moderating variable: Stock Exchange Index i.e.NCDEX As per the construct, the basic aim of this study is to study the impact of commodity futures trading on spot price of commodities traded on NCDEX.

LITERATURE SURVEY & REVIEW

Once the area of interest is selected then the researcher should undertake extensive literature survey connected with the problem or the topic of interest.For this problem, the abstracting and indexing journals and published or unpublished bibliographic are the first place to go to. Academic journals, conference proceedings, government reports, books etc must be tapped depending upon nature of problem.

Conceptual literature:Conceptual literature is that which relates with concepts and theories. Help from different books should be taken for different concepts and theories.

Empirical literature:Empirical literature consists of study made by other in the same field. The published data in newspapers books & magazines available for discussion with people of organization. Such as: Newspapers Journals Case Studies Websites Books Bulletins

Books: Sharan V., International Financial Management, Prentice Hall Of India, New Delhi,pp.386-403(5) This book will help me to learn about Forex Market Mechanism. On the other hand this book will also enable me to learn facts about the Interest Rate Risk & How does it deal in the currency future market. Miller W Thomas, Derivatives, Z. A Printers, Delhi,pp.87-112(6) This book contains a lot of information regarding Derivatives but the best part I found is the mechanism of future pricing in Derivative market, what various factors effect the pricing of the future derivatives. Kothari C.R. ,Research methodology methods & techniques(7) : Knowledge about research process, sample design, research design etc. The information regarding the basics of research and research methodology, what are the different types of research designs, problem statement, sampling, sampling methods and sampling techniques, sources of data collection and methods of data collection are given in this section. Hair Joseph F., Marketing research-within a changing information environment.3rd edition.TATA Mcgraw Hill Publishing Company ltd. New Delhi. Page no. 350-378. - Tell about what is a construct, how to develop it and basic concepts of scale measurement and types of data collected in research practices. Apart it also tell about basic level of scale i.e. 5 types of scales these are nominal. Ordinal, class interval, and hybrid ordinally- interval and ratio scales. It also provides information about what is a measurement and object. It tells about the construct operationalization. Ratio scale is widely used because it not only identifies the absolute difference between each scale point but also to make comparisons between responses. Cochran William G., sampling technique2006. of sample size, steps in determining the sample size, the formula for n in sampling for proportions, the formula for n with continues data, advance estimates of population variances, sample size more than one item and sample size in decision problems. There are many formulas for determining sample size Edition -3rd. Replika press Pvt.ltd India. Page no.72-85. Tell about estimation which formula have to be used for determining sample size is different in different studies which have to be used is estimated with these topics.

Sekaran Uma , research methods for business-a skill building approach2006. Edition-4th.Pashupati printers (p) ltd.page-174-185.It tells about measurement of variables: operational definition and scales, how variables are measured, operational definition: dimensions and elements, concept of achievement motivation, operationalizing the concept of learning and elements of achievement motivation.

Black Tathan Multivariate data analysis, edition fifth, new delhi page no: 326-338: It gives the information about the analysis of variance (ANOVA).what is ANOVA, basic principle of ANOVA, ANOVA technique. One way ANOVA and two ways ANOVA. It also tell about the Analysis of co-variance (ANOCOVA), why anocova and about the anocova technique. It tell about applications of these i.e. where weve to apply these in practical use.

Krishnaswamy

K.N.,

management

research

methodology

integration

of

principles.methods and techniques. Baba Bareka nath printers. Page no.-268-273. Tell about types of scaling i.e. scale classification, methods of successive intervals, quantitative judgment methods, scale construction techniques, judgment methods, factor scales. Bryman Alan, business research methods2003, edition 2nd. Oxford university press, in India Gopsons papers ltd Noida. Page no.-179-205. Tell about steps in conducting social survey, basic terms and concepts in sampling, sampling error, types of probability sample, sample size, types of non probability sampling, and sources of error in social survey research, error in survey research and sources of sampling and non sampling error in a survey of the effect t of privatization. Churchill Gilbert A., marketing research-methodological foundations, Edition8th.Chennai Micro Print pvt.ltd. Page no. 373-397. It give the information about attitude scaling procedures, self report attitude scales, which scale to use, how to construct a scale, most important considerations when shopping for selected appliances. N.D.Vohra & B.R.Bagri futures and option, 2ndedition, 2008 V.K. (India) delhi. Page no.233-240: tell about the basics of the future contracts and the features of Indian commodity market. It depicts the information about the supply, demand of commodity market and about captive market (agro products are produced and consumed locally),

waiting for explode i.e. about the value of production and expected future market potential value. Surendra S.Yadav ,P.K.Jain foreign exchange markets8, 2007 macmillan publication delhi.. Page no.216-247: Tell about the future contracts used for commodity markets. It tells about the standardization, future time expiry, dealing point (exchange), standard time and standard quantity of commodities and about the actual delivery/square offs of the contracts. Alan C.Shapiro Multinational Financial Management. Edition-4th, 2002, printice hall of India private limited New Delhi. Page -478-492: tell about the commodity market and their dealing and about the benefits of the future commodity trading. Apart from this it also tell about the flexibility certainty, hedging the price risk associated with future contractual commitments, trading limits to traders in commodity exchanges, hedged position of producers and processors and reduction of the default risk faced by banks. S.S Yadav commodity market operations. 2nd edition, 2005, vidya publications New Delhi.Page no.214-230: It provides information about commodity shares in Indian derivatives market. It also provides information about the operations performed by commodity markets and their fluctuations in the prices. It also tells about that the share of commodity derivative market is increasing day by day as compare to the stock futures and index futures. The value is 72% in 2007-08.this is the highest value till now. J.N.Dhankhar, The Indian commodity-Derivatives Market in Operation, Edition 2005, Skylark Publications, New Delhi. Page no.144-153,183-193: Ive taken the meaning of commodity and commodity exchange and the features of present commodity exchanges. It also tells about the basics of commodity future market and provides knowledge about the operations of the same. It also tells about settlement of traders i.e. about the both systems-cash and delivery mechanism. Also tell about important playersHedgers, Speculators, arbitrageurs and about the sale tax and registration procedure, how to start the trading in the commodity futures. J Coakes Sheridan SPSS Version 13.0 for Windows analysis without anguish Wikely student edition, Saras Graphics, Noida: it gives the information about each and

every tools for analyzing the data by using the software SPSS. It is used to conclude about whether the study is significant or not. Redhead Keith, Financial derivatives: An introduction to futures, forwards Eastern economy edition(14):- It tells me about the reasons of rising derivative, introduction of future, meaning of future, meaning of forward, difference between forward &future. Tucker Alan L Financial futures, Options and Swaps(15) :- Economies importance of future, application of future contract, meaning of future, types of future, history of swap, future classification, initial margin, mark to marking margin.

Black Tathan Multivariate Data Analysis, edition fifth, New Delhi, pp.326-338(12) It gives the information about the analysis of variance (ANOVA).what is ANOVA, basic principle of ANOVA, ANOVA technique. One way ANOVA and two ways ANOVA. It also tell about the Analysis of co-variance (ANOCOVA), why anocova and about the anocova technique. It tell about applications of these i.e. where weve to apply these in practical use

JOURNALS: Chartered and financial analyst 2008,13 commodity future trading-page no.-58-62: It tell about the benefits of future trading like distribution network, transparency in procuring commodities, cash purchase and its storage Economic and political weekly Jan 2008, page no. 18-23 Impact of future trading on commodity prices: This article attempts to explore the effect of introduction of future trading on the spot prices. Journal of finance, (2006) the price effect of future introduction- page no.487-498: It tells about the MCX market share among national commodity exchanges Economic and political weekly Aug 2008, page no. 35-42 Expert committee on commodity futures: Agreements and disagreements. This article attempts to explore the effect of futures trading in India on price volatility. Global business review elasticities of commodity group using time-series data covering the 50 year period. Chartered and financial analyst 2007, Special issue- commodity futures-a future tool for Indian banks.- It provides the information about the turnover in financial markets and commodity market. It also tells about the relationship between equity and commodity future market. It also shows the percentage to GDP contribution of different segments like government security market, Forex market, NSE and BSE and of commodity market also. Apart it also tell about the comparison of price volatility of various commodities traded on MCX and NSE Nifty Index. Journal of financial economies vol-10- different shares of different commodity markets-page no.61-78: It provides the information about the Indian commodity exchanges market shares. It shows that MCX has a share of 59%, NCDEX has a share of 34%, NMCE has a share of 4% and other regional exchanges have a share of 4% in all. It also provides information about future market and stock return volatility. So it shows that MCX has more share in all. Journal of future market, vol-26 page no.185-196: It revealed the information about structure of commodity market. It also shows the participants in commodity market like NCDEX, MCX, and NMCE. These come under the national exchange and in the regional exchange NBOT and other 20 exchanges are included.

Journal of commodity participants Association of India, Vol-1: It provides the detailed information about the participants of different exchanges along with their turnover. This also shows that in 2005 the maximum turnover was of the NCDEX (Mumbai) but in 2006 the maximum turnover was of the MCX (Mumbai) and also in the 2007. This journal of commodity participants association informed us about the various members of organization and the working of various exchanges.

Reserve bank of India (RBI) Bulletin (Jul 2008) Indias BOP development during 4th quarter of 2007-08 (i.e. Jan-march 2008) and April-march 2007-08, page no.1143-1161: It tell about the balance of payment development during Jan-march 2008,merchandise trade, trade deficit, invisible account that is receipts and payments, invisible that is current account deficit, key components of invisible receipts that is software, non software services, private transfers, capital account, reconciliation of import data, detail of business services, movement in current account balance, quarterly movement in trade balance from April-June 2003 to Jan-march 2008 and details of private transfer to India.

Finance India , Dec.08, Vol. XXIII, No. 4,pp.1355-1367(24) Does The Introduction Of Derivatives Affect The Underlying Return Volatility? By Wejda Ochi In this Study, an empirical analysis of the relation between the future market & the Euro spot market is presented. Two aspects of this relation has been analysed , the effect can be on volatility due to introduction of of derivatives in India & interaction between level of exchange on the futures market & variability on the returns.

Indian Journal Of Finance, April 2009, Vol.III,pp.28-35(23) Currency Future Trading In India By K.S. Jaiswal In this study, various aspects of commodity future in India has been covered from the introduction to different advantages & to the critical analysis. As well as the future prospects of commodity future in India.

Finance India , Dec.08, Vol. XXIII, No. 4,pp.1355-1367(24) Does The Introduction Of Derivatives Affect The Underlying Return Volatility? By Wejda Ochi In this Study, an empirical analysis of the relation between the future market & the Euro spot market is presented. Two aspects of this relation has been analysed , the effect can be on volatility due to introduction of of derivatives in india & interaction between level of exchange on the futures market & variability on the returns.

WEBSITES:
http//www.papers.ssrn.com/sol3/delievery/SSRN code1291830.pdf?... There are some research paper available regarding Future Derivative India. http//www.docstoc.com/docs/10235684/Indian-Derivative This will ID1428685

enable me to learn me about the Recent Trend in Derivative market.

http://ncdex.com/

This

will

enable

me

to

learn

about

the

commodities traded on the exchange.

www.bis.org/review/r080903e.pdf
This will tell about review of commodity future India.

http//www.iief.com/research/chapio.pdf This will enable me to look upon the legal framework & regulation of derivative India.

http//www.mcxindia.com/cds/faqs.asp This will help me to learn about Trading of commodity future on mcx & its turnover

http//www.ftkmc.com/pdf/Benefits-Of-launching commodity Future-in India.pdf This helps me to learn about the reasons due to which commodity futures are launched in India..

RESEARCH METHODOLOGY(11,12)
Research methodology is a way to systematically solve the problem. It is a game plan for conducting research. In this we describe various steps that are taken by the researcher, All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry and inquiry leads to invention. Research in a common parlance is a search for knowledge. Research is an art of scientific and systematic investition. Thus research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data, making deductions and reaching conclusions. Research methodology is the arrangement of condition for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research Methodology is the conceptual structure within which research is conducted. It constitutes the blueprint for the collection measurement and analysis of the data. Research methodology is a framework for the study and is used as a guide in collecting and analyzing the data. It is a strategy specifying which approach will be used for gathering and analyzing the data. it also includes time and cost budget since most studies are done under these two constraints. The research methodology include over all research design, the sampling procedure, the data collection method and analysis procedure.3 Issues regarding research are: To gain familiarity with the phenomenon or to achieve new insight into it. To portray accurately the characteristics of a particular individual, situation or group. To determine the frequency with which something occur.4

SIGNIFICANCE OF RESEARCH
Research provides the basis for all government policies in our economic system. It has its special significance in solving various operational and planning issues of business and industry. For professional in research methodology, research may mean a source of live hood.

RESEARCH DESIGN
This part contains relevant information pertaining to research design and methodology used in the research project. The research design has been distinctive described to the objective of the study. There are three types of research design that are used frequently used by the various researchers. These are: Exploratory research Descriptive research Causal research

THE RESEARCH PROCESS(11)

1 OBSERVATION Broad area of research interest identified

3 PROBLEM DEFINITION Research Problem Delineated

4 THEORETICAL FRAMEWORK Variables clearly identified and labelled

5 GENERATION OF HYPOTHESES 6 SCIENTIFIC RESEARCH DESIGN

7 DATA COLLECTION, ANALYSIS AND INTERPRETATION

2 PRELIMINARY DATA GATHERING Interviewing Literature Survey

8 DEDUCTION Hypotheses substantiated? Research question answered? NO Yes 11 Manager ial decision making

9 Report writing

10 Report Presentat ion

1. COLLECTION OF DATA:Both the primary & secondary data has been collected from the market & company. The company provided the secondary data & primary data is collected through the medium of faceto-face interaction & interview from various persons in the enterprise.

2. ORGANISATION OF DATA:
Data once collected the further processing is done, the data collected by me are carefully done through in a useful & relevant manner &properly organized.

3. PRESENTATION OF DATA:The data collection is of no use unless & until it is given in the presentable form. Thus after proper organization the data is given in presentable form with the complete details, with the help of bar diagram, pie carts etc.

4. ANALYSIS OF DATA:The data is carefully analyzed keeping in the consideration both the pros & cons for the purpose of arriving at concrete conclusion.

5. INTERPRETATION OF DATA:After carefully analyzed the data, it has been aptly interpreted in order to give concrete conclusion & proper recommendation.

RESEARCH DESIGN(11)
Research design involves a series of rational decision making benefits at each point from such sophisticated design to ensure accuracy, confidence and commensurate with large investment of resources.

PURPOSE OF STUDY:
Exploratory Descriptive Hypothesis testing The purpose of my study is descriptive. A descriptive study is undertaken in order to ascertain be able to describe the characteristics of variables of interest in a situation. It is also hypothesis testing also. Because studies that engage in hypothesis testing usually explain the nature of certain relationship or establish the difference among groups or independence of the two or more factors in the situation.

EXTENT OF RESEARCHER INTERFERENCE IN STUDY(11,12)

Minimal: studying events as they normally occurs Manipulation and/or control and/or simulation The extent of research interference in my study will be minimal. Ive to just collect and analyze the data for findings. There will be no need for simulation tests etc.

MEASUREMENTS AND MEASURES(15)

Operational definition Items (measures) Scaling Categorization Coding Measurements and measures for my study will be scaling that is interval scaling.

UNITS OF ANALYSIS (POPULATION TO BE STUDIED)(16)

Individuals Dyads Groups Organization Machines etc. The units of analysis or the population that will be studied in my research will be forex prices and values of Currency Future .

SAMPLING DESIGN(10)
It is a definite plan for obtaining a sample from sampling frame. It is determined before collection of data. Sampling size for my study will be of 15 Months. In other words sampling size will be more than 350 values as studies is to be done on daily basis.

TYPES OF INVESTIGATION(11)
CAUSAL STUDY CORRELATIONAL STUDY

A Researcher should determine whether a Causal & Correlational Study to find an Answer to the issue at hand. The former is done when it is necessary to establish Cause-Effect Relationship. However, if all that the researcher wants is mere the identification of the important factors associated with the problem then, then Correlational study. In this study, Correlational Study is to be done, because I am interested in delineating the important associated variables.

STUDY SETTING(11)
CONTRIVED NONCONTRIVED

As We know that Research can be done in the natural environment where work proceeds normally or in artificial settings. A Contrived Setting with researcher interference to an excessive degree. Whereas, A Noncontrived Setting with researcher interference with minimal degree or moderate extent. In this Study, the study setting will be Contrived Setting due to high degree of interference of researcher & influences by a no. of variables.

TIME HORIZON(11)
CROSS-SECTIONAL STUDIES LONGITUDINAL STUDIES

A study can be done in which data are gathered just once, perhaps a period of days or weeks or month, in order to answer a research question. Such studies are called one shot or CrossSectional Studies. On the other hand, when the researcher tries to collect Data at more than one point of time it is known as longitudinal studies. Here, in this study Cross-Sectional Design is to be used as data for study will be gathered just once.

SAMPLING AND SAMPLING DESIGN(14)

A sampling design is a definite plan for obtaining a sample from a given population. While selecting a sampling design, one must ensure that the procedure causes a relatively small sampling error and helps to control the bias in a better way. The sampling procedure followed is as follows: 1. Identification of the Universe : The universe to be studied is finite and includes the industries 2. Defining a Sampling unit : Here the sampling unit is an industrial unit (small, medium or large) where the industrial units are classified as small, medium and large on the basis of their annual turnover 3. Determining the size of the sample : Taking into consideration the size of the sample, the population variance , cost involved and the requirements of efficiency, representative ness , reliability, flexibility, and the parameters of interest in the research 4.Sampling procedure: The sampling design used is Probability Sampling (Simple Random Sampling Without Replacement ).The use of this sampling design is due to the fact that it follows the Principle of Statistical Regularity which states that if on an average, the sample chosen is a random one, the sample will have the same composition and characteristics as that of the universe. Moreover, with probability sampling, we can measure the errors of estimation which brings out the superiority of random sampling design over the other ones.

DATA COLLECTION(9)

Secondary data: It is the data, which has already collected by some organization for some purpose or research study. The data for my study has been collected from various. Secondary data means that data that are already available i.e. refers to data which has already been collected and analyzed by someone else. The sources used in this case are1. Books 2. Journals 3. Magazines 4. Internet sources 5. Newspapers

DATA COLLECTION METHOD(9)

Primary data Secondary data Interviewing Questionnaires Observations Unobtrusive methods.

My data collection is based on secondary data i.e. from websites, books, prowess etc.

DATA ANALYSIS(9)
Feel for data Goodness of data Hypothesis testing For data analysis mostly the hypothesis testing will be used. By using spss software it will be performed. Statistical tools will also be used. Analytical tools will also be used.

HYPOTHESIS TESTING(11)
H0: There is not any significant impact of commodity future trading prices, volume & value on commodity spot prices of sugar. H1: There is significant impact of commodity future trading prices, volume & value on commodity spot prices of sugar H0: There is not any significant impact of commodity future trading prices, volume & value on commodity spot prices of Channa. H1: There is a significant impact of commodity future trading prices, volume & value on commodity spot prices of Channa . H0: There is not any significant impact of commodity future trading prices, volume & value on commodity spot prices of Turmeric. H1: There is a significant impact of commodity future trading prices, volume & value on commodity spot prices of Turmeric.

GARCH MODEL
The positive correlation between volumes and volatility found for most of the exchange is unlikely to be a reflection of changes in the number of traders active in these markets. These changes appear rather to have occurred in the last 2009, when banks increasingly moved into emerging markets, and after the recession, when the sharp fall in turnover was accompanied by a significant decline in the number of traders. A more plausible explanation for the positive correlation between turnover and volatility is that both variables are driven by the arrival of new information. To test this hypothesis, I split volatility and trading volumes into expected and unexpected components. I use estimates from a GARCH(1,1) model to describe expected volatility. This model appears to fit the time series well. Ideally, volatility implied in option prices could be used, since there is evidence that it outperforms GARCH models in providing forecasts of future volatility. However, future contracts for currencies of emerging market countries are not very liquid. The GARCH(1,1) model can be written as: Following a practice common in the literature, the GARCH model is fitted on the entire time series, thus yielding in sample forecasts. where Rt is the return, its mean and ht its conditional variance at time t.

Why use GARCH:

GARCH modeling builds on advances in the understanding and modeling volatility in the last decade. It takes into consideration excess kurtosis (i.e. fat tail behavior) and volatility clustering, two important characteristics of financial time series. It provides accurate forecasts of variances and co-variances of asset return through its ability to model time varying conditional variances. As a consequence you can apply GARCH model to such diverse field such as risk management, portfolio management and asset

allocation, opinion pricing, foreign exchange and term structure of interest rates. You can find highly significant GARCH effects in equity market not only for individual stocks but for stock portfolio and equity future.

GARCH ON SUGAR SPOT PRICES FROM JAN 2009 TO DEC 2009

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-1210 time: 11:58 Included observations: 464 Convergence achieved after 31 iterations Coefficie nt Std. Error 5054.33 3 3.20043 1 3.25195 6 zStatistic 0.17999 6 2.03E05 0.27811 7

Prob. 0.8571 56 0.9999 84 0.7809 23

Omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box

909.7603 6.5E-05 0.904424 -2625.31 43.62834 339.1585

Prob Prob

3.36E10 0

INTERPRETATION
. In the above tables the values of omega is very high which shows that degree of variation is high in sugar spot price, & alpha also have high value which shows that the risk level is high in sugar trade. Volatility of crude price shows that sugar has been high fluctuative in the past year.which is not good for the Indian economy..

Verification of sugar pridiction

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-1710 time: 15:11 Included observations: 45 Convergence achieved after 32 iterations Coefficie nt Std. Error 685883. 2 239.497 4 250.559 1 zStatistic 1.44E05 1.2E-06 0.00397 7

Prob. 0.99998 9 0.99999 9 0.99682 7

Omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box

9.863551 0.000287 0.996356 -254.898 2.673574 0.001644

Prob Prob

0.26268 8 0.96765 9

INTERPRETATION
the above graph shows that what the prediction has produce by the old data is true to see the trend line of the new data of sugar prices

GARCH ON CHANA PRICES FROM JAN 2009 TO DEC 2009

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-17-10 time: 15:02 Included observations: 503 Convergence achieved after 7 iterations Std. Error 9330265 69.21263 69.98129 zStatistic 0.000817 0.000342 0.013842

Coefficient omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box 7623.36 0.023638 0.968659 -4137.95 37.95282 0.15228

Prob. 0.999348 0.999728 0.988956

Prob Prob

5.74E-09 0.696366

INTERPRETATION
In the above graph the values alpha is low which indicats there is less risk in chana trading.. Volatility of chana price shows that gold has been less fluctuative in the past year.

Verification of CHANA pridiction

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-17-10 time: 15:05 Included observations: 51 Convergence achieved after 39 iterations zStatistic 1.06E-06 6.94E-08 0.001646

Coefficient omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box 450.0008 3.95E-05 0.997566 -422.439 1.706567 6.18E-06

Std. Error 4.26E+08 568.6453 606.1444

Prob. 0.999999 1 0.998687

Prob Prob

0.426014 0.998016

INTERPRETATION
the above graph shows that what the prediction has produce by the old data is true to see the trend line of the new data of chana spot prices

GARCH ON DOLLAR TURMERIC FROM JAN 2009 TO DEC 2009

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-12-10 time: 12:05 Included observations: 516 Convergence achieved after 25 iterations Std. Error 32330.4 15.3587 1.552985 zStatistic 0.00059 4.16E-05 0.619825

Coefficient omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box 19.05934 0.000639 0.962579 -2698.15 28913.36 15.41039

Prob. 0.99953 0.999967 0.535373

Prob Prob

0 8.65E-05

INTERPRETATION
the above graph shows that what the prediction has produce by the old data is true to see the trend line of the new data of turmeric spot price

Verification of TURMERIC pridiction

GARCH(1,1) estimation of y Method: ML - BFGS with analytical gradient date: 03-17-10 time: 15:10 Included observations: 50 Convergence achieved after 17 iterations Std. Error 5413649 4182.109 3571.222 zStatistic 2.27E-08 5.39E-07 0.000279

Coefficient omega alpha_1 beta_1 Log Likelihood Jarque Bera Ljung-Box 0.122977 0.002256 0.997005 -258.091 1.186283 7.91E-06

Prob. 1 1 0.999777

Prob Prob

0.552589 0.997756

INTERPRETATION
In the above graph the values alpha is low which indicats there is less risk in turmeric trading.. Volatility of gold price shows that turmeric has been less fluctuative in the past year.

Granger causality
Granger causality test is a technique for determining whether one time series is useful in forecasting another Ordinarily, regressions reflect "mere" correlations, but Clive Granger, who won a Nobel Prize in Economics, argued that there is an interpretation of a set of tests as revealing something about causality. A time series X is said to Granger-cause Y if it can be shown, usually through a series of F-tests on lagged values of X (and with lagged values of Y also known), that those X values provide statistically significant information about future values of Y. The test works by first doing a regression of Y on lagged values of Y. Once the appropriate lag interval for Y is proved significant (t-stat or p-value), subsequent regressions for lagged levels of X are performed and added to the regression provided that they 1) are significant in and of themselves and 2) add explanatory power to the model. This can be repeated for multiple Xs

(with each X being tested independently of other Xs, but in conjunction with the proven lag level of Y). More than one lag level of a variable can be included in the final regression model, provided it is statistically significant and provides explanatory power. The researcher is often looking for a clear story, such as X granger-causes Y but not the other way around. In practice, however results are often hard-to-interpret. For instance no variable granger-causes the other, or that each of the two variables granger-causes the second.

Why we use granger

Granger casuality test is an statistical tool which use f-test to know the cause and effect relation ship between the two time series. With the help of this test we can find the right direction o f the study.

Granger casuality on sugar spot and future prices

Pairwise Granger Causality Tests Date: 04/04/10 Time: 10:54 Sample: 1 24 Lags: 2 Null Hypothesis: Obs RFUTURE does not Granger Cause 21 RSPOT RSPOT does not Granger Cause RFUTURE

F-Statistic 0.45517 0.42835

Probability 0.64230 0.65884

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5% so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude that sugar future price has significant impact on spot price and vice-versa. . Granger casuality on chana spot and future prices

Pairwise Granger Causality Tests Date: 04/04/10 Time: 10:59 Sample: 1 24 Lags: 2 Null Hypothesis: Obs RFUTURE does not Granger Cause 21 RSPOT RSPOT does not Granger Cause RFUTURE

F-Statistic 0.24116 2.95541

Probability 0.78852 0.08085

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5% so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude that chana future price has significant impact on spot price and vice-versa.

Granger casulity on usdollar and money supply

Pairwise Granger Causality Tests Date: 04/04/10 Time: 11:02 Sample: 1 24 Lags: 2 Null Hypothesis: Obs RFUTURE does not Granger Cause 21 RSPOT RSPOT does not Granger Cause RFUTURE

F-Statistic 3.48090 0.27732

Probability 0.05558 0.76138

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5% so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude that turmeric future price has significant impact on spot price and vice-versa.

STATISTICAL TOOLS: Regression

Regression is the study of the nature of relationship between the variables so that one may be able to predict the unknown value of one variable for a known value of another value. It is the measure of average relationship between two or more variables. Types of regression analysis:-

Simple and multiple regression: - In case of simple regression, we study only two variables i.e. one dependent and one independent. But in case of multiple regression we take more than two variables i.e. one dependent and other independent. Linear and Non-linear regression: - When one variable changes with another variable in some fixed ratio, it is called as linear regression. But if this ratio is not constant, it is known as Nonlinear regression. Partial and Total regression: - If from more than two variables only two variables are taken into consideration. It is called as partial regression. But all variables are taken into consideration at a single slank. It is called as total regression

REGRESSION
HYPOTHESIS TESTING H0: There is not any significant impact of commodity future trading prices on commodity spot prices of sugar. H1: There is significant impact of commodity future trading prices on commodity spot prices of sugar VARIABLES: Dep. Sugar spot Prices Sugar future volume Sugar future value Indep. Sugar future prices

Model Summaryb Adjusted R Model 1 R .639a R Square .408 Square .402 Std. Error of the Estimate 223.56239 Durbin-Watson .162

a. Predictors: (Constant), sfutval, sfutprice, sfutvol b. Dependent Variable: ssptprice

INTERPRETATION: From the R-Square value (model summary table) we can say that about 40% of sugar spot price is predicted with the help of sugar future price, volume and value.

H0: There is not any significant impact of commodity future trading prices on commodity spot prices of Channa. H1: There is significant impact of commodity future trading prices on commodity spot prices of Channa. VARIABLES: Dep. Channa spot Prices Channa future volume Channa future value Indep. Channa future prices

Model Summaryb Adjusted R Model 1 R .484a R Square .235 Square .227 Std. Error of the Estimate 78.41028 Durbin-Watson .095

a. Predictors: (Constant), cfutval, cfutprice, cfutvol b. Dependent Variable: csptprice

INTERPRETATION: From the R-Square value (model summary table) we can say that about 25% of Channa spot price is predicted with the help of channa future price, volume and value.

H0: There is not any significant impact of commodity future trading prices on commodity spot prices of Turmeric. H1: There is significant impact of commodity future trading prices on commodity spot prices of Turmeric. VARIABLES: Dep. Turmeric spot Prices Turmeric future volume Turmeric future value
Model Summaryc Adjusted R Model R R Square Square Std. Error of the Estimate Durbin-Watson

Indep. Turmeric future prices

.912b

.832

.828

856.46699

.526

a. Predictors: (Constant),, tfutvol, tfutprice, tfutval c. Dependent Variable: tsptprice

INTERPRETATION: From the R-Square value (model summary table) we can say that about 80% of Turmeric spot price is predicted with the help of Turmeric future price, volume and value.

CO-RRELATION The correlation analysis refers to the techniques used in meaning the closeness of the relationship between the variables. These two variables are:1. 2. Static Dynamic

Thus whenever two variables are so related that a change in the value of one is accompanied by a change in the value of other, in such a way that an increase or decrease in one variable is accompanied by an increase or decrease in the other, then the variable are said to be correlated. DEFINITION Correlation is an analysis of the co-variation between two or more variables A. M. Tuttle The effect of correlation is to reduce the range of uncertainty of ones prediction Tippett TYPES OF CORRELATION Correlation is classified in several different ways. Three of the most important ways are: Positive and Negative Correlation: When two variable X and Y move in same direction is Positive Correlation and when both variables move in opposite direction that is Negative Correlation. Simple, Partial and Multiple Correlations: When we study the relationship between two variables only that is Simple Correlation. When three or more variables are taken but relationship between any two of the variable is studied, assuming other variables as constant that is Partial Correlation and when we study the relationship among three or more variables that is Multiple Correlation. Linear and Curvi-Linear Correlation: when the ratio of change of two variables X and Y remains constant throughout, then they are said to be Linear Correlated and when the ratio of change between the two variables is not constant but changing, then

correlation is said to be Curvi-Linear. DEGREE OF CORRELATION:Sr. No. 1 2 3 4 5 Degree of correlation Perfect correlation High Degree of correlation Moderate Degree of Correlation Low Degree of Correlation Absence of Correlation Positive +1 Between +.75 to+1 Between +.25 to+.75 Between 0 to+.25 0 Negative -1 Between -.75 to-1 Between -.25 to-.75 Between 0 to-.25 0

CORRELATION
Correlation between sugar spot prices and sugar future prices:

Correlations sfutprice Sfutprice Pearson Correlation Sig. (1-tailed) N ssptprice Pearson Correlation Sig. (1-tailed) N 270 .258** .000 270 388 1 ssptprice .258** .000 270 1

**. Correlation is significant at the 0.01 level (1-tailed).

INTERPRETATION: As the value of pearson coefficient of correlation is +ve. This signifies that there is a significant correlation between sugar spot prices and sugar future prices

Correlation between Channa spot prices and Channa future prices

Correlations cfutprice Cfutprice Pearson Correlation Sig. (1-tailed) N csptprice Pearson Correlation Sig. (1-tailed) N 441 .548** .000 441 770 1 csptprice .548** .000 441 1

**. Correlation is significant at the 0.01 level (1-tailed).

INTERPRETATION: As the value of pearson coefficient of correlation is +ve. This signifies that there is a significant correlation between channa spot prices and channa future prices.

Correlation between Turmeric spot prices and Turmeric future prices

Correlations tfutprice Tfutprice Pearson Correlation Sig. (1-tailed) N Tsptprice Pearson Correlation Sig. (1-tailed) N 243 .838** .000 243 506 1 tsptprice .838** .000 243 1

**. Correlation is significant at the 0.01 level (1-tailed).

INTERPRETATION: As the value of pearson coefficient of correlation is +ve. This signifies that there is a significant correlation between turmeric spot prices and turmeric future prices.

Reliability
Reliability analysis is an engineering discipline that applies various mathematical techniques to the measurement and prediction of the reliability of components and systems. The components under study may be mechanical, electronic, software, or other types. "Systems" could include anything from computers to rail transit. Measurements include failure rates, cumulative failures, and component lifetimes (time until failure). A variety of techniques are employed, drawn mainly from probability, statistics, and the theory of stochastic processes

Scale: ALL VARIABLES

Dep. Spot price, spot volume, spot value Indep. Future price, future volume, future value

Reliability Statistics Cronbach's Alpha .749 N of Items 21

INTERPRETATION: As the value of Cronbach alpha comes out +ve 0.749.This signifies that the data taken for the study is the reliable data.

RESULTS AND FINDINGS

POLICY IMPLICATIONS

RECOMMENDATIONS

BIBLIOGRAPHY Books:1. Sharan V., International Financial Management, Prentice Hall Of India, New Delhi,pp.386-403 2. Miller W Thomas, Derivatives, Z. A Printers, Delhi,pp.87-112 3. Kothari C.R. ,Research methodology methods & techniques 4. Hair Joseph F., Marketing research-within a changing information environment.3rd edition.TATA Mcgraw Hill Publishing Company ltd. New Delhi. Page no. 350-378 5. Cochran William G., sampling technique2006 6. Sekaran Uma , research methods for business-a skill building approach2006. Edition-4th.Pashupati printers (p) ltd.page-174-185. 7. Black Tathan Multivariate data analysis, edition fifth, new delhi page no: 326-338 K.N., management research methodology integration of principles.methods and techniques. Baba Bareka nath printers. Page no.-268-273. 9. Bryman Alan, business research methods2003, edition 2nd. Oxford university press, in India Gopsons papers ltd Noida. Page no.-179-205. 10. Churchill Gilbert A., marketing research-methodological foundations, Edition8th.Chennai Micro Print pvt.ltd. Page no. 373-397 11. N.D.Vohra & B.R.Bagri futures and option, 2ndedition, 2008 V.K. (India) delhi. Page no.233-240 12. Surendra S.Yadav ,P.K.Jain foreign exchange markets8, 2007 macmillan publication delhi.. Page no.216-247 13. Alan C.Shapiro Multinational Financial Management. Edition-4th, 2002, printice hall of India private limited New Delhi. Delhi.Page no.214-230 15. J.N.Dhankhar, The Indian commodity-Derivatives Market in Operation, Edition 2005, Skylark Publications, New Delhi. Page no.144-153,183-193 Page -478-492 14. S.S Yadav commodity market operations. 2nd edition, 2005, vidya publications New 8. Krishnaswamy

16. J Coakes Sheridan SPSS Version 13.0 for Windows analysis without anguish Wikely student edition, Saras Graphics, Noida
17.Redhead Keith, Financial derivatives: An introduction to futures, forwards Eastern economy edition

18. Tucker Alan L Financial futures, Options and Swaps

19.Black Tathan Multivariate Data Analysis, edition fifth, New Delhi, a. pp.326-338(12)

20. It gives the information about the analysis of variance (ANOVA).what is ANOVA, basic principle of ANOVA, ANOVA technique. One way ANOVA and two ways ANOVA. It also tell about the Analysis of co-variance (ANOCOVA), why anocova and about the anocova technique. It tell about applications of these i.e. where weve to apply these in practical use

JOURNALS: 21. Chartered and financial analyst 2008,13 commodity future trading-page no.-58-62: 22. Economic and political weekly Jan 2008, page no. 18-23 Impact of future trading on commodity prices 23. Journal of finance, (2006) the price effect of future introduction- page no.487-498: 24. Economic and political weekly Aug 2008, page no. 35-42 Expert committee on commodity futures: Agreements and disagreements 25. Global business review elasticities of commodity group using time-series data covering the 50 year period. 26. Chartered and financial analyst 2007, Special issue- commodity futures-a future tool for Indian banks 27. Journal of financial economies vol-10- different shares of different commodity markets-page no.61-78 28. Journal of future market, vol-26 page no.185-196 29. Journal of commodity participants Association of India, Vol-1 30. Reserve bank of India (RBI) Bulletin (Jul 2008) Indias BOP development during 4th quarter of 2007-08 (i.e. Jan-march 2008) and April-march 2007-08, page no.1143-1161 31. Finance India , Dec.08, Vol. XXIII, No. 4,pp.1355-1367(24) Does The Introduction Of Derivatives Affect The Underlying Return Volatility? By Wejda Ochi 32. Indian Journal Of Finance, April 2009, Vol.III,pp.28-35(23) Currency Future Trading In India By K.S. 33. Finance India , Dec.08, Vol. XXIII, No. 4,pp.1355-1367(24) Does The Introduction Of Derivatives Affect The Underlying Return Volatility? By Wejda

WEBSITES:

34.http//www.papers.ssrn.com/sol3/delievery/SSRN code1291830.pdf?...

ID1428685

i. There are some research paper available regarding Future Derivative India. 35.http//www.docstoc.com/docs/10235684/Indian-Derivative This will enable me to learn me about the Recent Trend in Derivative market. 36. http://ncdex.com/ This will enable me to learn about the commodities

traded on the exchange. 37. www.bis.org/review/r080903e.pdf i. This will tell about review of commodity future India. 38.http//www.iief.com/research/chapio.pdf i. This will enable me to look upon the legal framework & regulation of derivative India. 39.http//www.mcxindia.com/cds/faqs.asp i. This will help me to learn about Trading of commodity future on mcx & its turnover 40.http//www.ftkmc.com/pdf/Benefits-Of-launching India.pdf i. This helps me to learn about the reasons due to which commodity futures are launched in India.. commodity Future-in