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FUTURE TRADING & COMMODITY

EXCHANGE
.
CONTENTS
S.No TOPIC
1 Future Trading
--Introduction
--Function
--Characteristic
--Evolution
--Benefits
-- Method Of Participating In Future Trading
Settlement Of Dispute

2 Future Market
Participant In Future Market
Function Of Future Market

3 Future Contracts
--Need
--Types
-- How To Choose Future Contract
-- Process Of Price Discovery
-- After The Closing Bell
-- Trading
-- Margins
--Trading Strategies
--Requisite In Future Contract
--Commodity Future Contract
--Trading Mechanism
--Clearing System
--Delivery System
--Provision when Default Occur
--Term Used in Future Trading

4 Commodity Exchange
--Introduction
--Policy Initiatives
--National Wide Multi Commodity Exchange
--Indian Commodity Exchange

5 Multi Commodity Exchange Of India Ltd


--Introduction
--Objective
--Corporate Objective
--Benefits Of MCX
--List Of Commodity Traded in MCX
6 Analysis

7 Recommendation

8 Bibliography
Future Trading

The process of trading commodities is also known as futures trading.


Futures Contracting is an important activity for any economy to meet
raw material requirements, to facilitate storage as a profitable
economic activity and also to manage supply and demand risk,
forward contracts gives rise to price risk, so to the need of price risk
management, unlike other kinds of investments, such as stocks and
bonds, when investor trade futures, he/she do not actually buy
anything or own anything. He/she are speculating on the future
direction of the price in the commodity in which they are trading. This
is like a bet on future price direction. The terms "buy" and "sell"
merely indicate the direction you expect future prices will take.

In other word Forward/Future trading is an activity in which a trader


takes a position in an equity in advance of an action which he/she
knows his/her brokerage will take that will move the equity's price in a
predictable fashion also called front running. Future / forward trading
involves a passage of time between entering into a contract and its
performance making thereby the contracts susceptible to risks,
uncertainties, etc

Many people have become very rich in the commodity markets. It is


one of a few investment areas where an individual with limited capital
can make extraordinary profits in a relatively short period of time,
nevertheless most of the people lose money, commodity trading has
a bad reputation as being too risky for the average individual. The
truth is that commodity trading is only as risky as you want to make it.
Functions Of Futures Trading

Basically Futures trading perform two important functions


Price discovery
Price risk management

Price discovery: Describing the possible price of future contract in the


future
Price risk management: Price risk management related with
reference to the given commodity by buying and selling futures
contracts that establish a price level now for items to be delivered
later.
Characteristic Of Future Trading

A "Futures Contract" is a highly standardized contract with certain


distinct features. Some of the important features are as under :

a. Futures’ trading is necessarily organized under the auspices of


a market association so that such trading is confined to or
conducted through members of the association in accordance
with the procedure laid down in the Rules & Bye-laws of the
association.
b. It is invariably entered into for a standard variety known as the
"basis variety" with permission to deliver other identified
varieties known as "tenderable varieties".
c. The units of price quotation and trading are fixed in these
contracts, parties to the contracts not being capable of altering
these units.
d. The delivery periods are specified.
e. The seller in a futures market has the choice to decide whether
to deliver goods against outstanding sale contracts. In case he
decides to deliver goods, he can do so not only at the location
of the Association through which trading is organized but also
at a number of other pre-specified delivery centers.
f. In futures market actual delivery of goods takes place only in a
very few cases. Transactions are mostly squared up before the
due date of the contract and contracts are settled by payment
of differences without any physical delivery of goods taking
place.
Evolution Of Futures Trading
Organized futures market evolved in India by the setting up of "Bombay
Cotton Trade Association Ltd." in 1875. In 1893, following widespread
discontent amongst leading cotton mill owners and
merchants over the functioning of the Bombay Cotton Trade Association,
a separate association by the name "Bombay Cotton Exchange Ltd." was
constituted. Futures’ trading in oilseeds was organized in India for the first
time with the setting up of Gujarati Vyapari Mandali in 1900, which carried
on futures trading in groundnut, castor seed and cotton. Before the
Second World War broke out in 1939 several futures markets in oilseeds
were functioning in Gujarat and Punjab.

Futures trading in Raw Jute and Jute Goods began in Calcutta with the
establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East
Indian Jute Association Ltd., was set up in 1927 for organizing futures
trading in Raw Jute. These two associations amalgamated in 1945 to form
the present East India Jute & Hessian Ltd., to conduct organized trading in
both Raw Jute and Jute goods. In case of wheat, futures markets were in
existence at several centers at Punjab and U.P. The most notable
amongst them was the Chamber of Commerce at Hapur, which was
established in 1913. Other markets were located at Amritsar, Moga,
Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and
Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Gaziabad,
Sikenderabad and Barielly in U.P.

Futures market in Bullion began at Mumbai in 1920 and later similar


markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and
Calcutta. In due course several other exchanges were also created in the
country to trade in such diverse commodities as pepper, turmeric, potato,
sugar and gur (jaggory).

The National Agriculture Policy announced in July 2000 and the


announcements of Hon'ble Finance Minister in the Budget Speech for
2002-2003 were indicative of the Governments resolve to put in place a
mechanism of futures trade/market. As a follow up the Government issued
notifications on 1.4.2003 permitting futures trading in the commodities,
with the issue of these notifications futures trading is not prohibited in any
commodity. Options’ trading in commodity is, however presently
prohibited.
After independence, the Constitution of India brought the subject of
"Stock Exchanges and futures markets" in the Union list. As a result,
the responsibility for regulation of commodity futures markets
devolved on Govt. of India. A Bill on forward contracts was referred to
an expert committee headed by Prof. A.D.Shroff and Select
Committees of two successive Parliaments and finally in December
1952 Forward Contracts (Regulation) Act, 1952, was enacted. The
Act provided for 3-tier regulatory system;

(a) An association recognized by the Government of India on the


recommendation of Forward Markets Commission,

(b) The Forwar d Markets Commission (it was set up in September


1953) and

(c) The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central


Government in July,1954 The Act divides the commodities into 3
categories with reference to extent of regulation, viz:

(a) The commodities in which futures trading can be organized


under the auspices of recognized association.

(b) The Commodities in which futures trading is prohibited.

(c) Those commodities which have neither been regulated for


being traded under the recognized association nor prohibited are
referred as Free Commodities and the association organized in such
free commodities is required to obtain the Certificate of Registration
from the Forward Markets Commission.

In the seventies, most of the registered associations became inactive,


as futures as well as forward trading in the commodities for which
they were registered came to be either suspended or prohibited
altogether. The Khusro Committee (June 1980) had recommended
reintroduction of futures trading in most of the major commodities ,
including cotton, kapas, raw jute and jute goods and suggested that
steps may be taken for introducing futures trading in commodities,
like potatoes, onions, etc. at appropriate time. The government,
accordingly initiated futures trading in Potato during the latter half of
1980 in quite a few markets in Punjab and Uttar Pradesh.

After the introduction of economic reforms since June 1991 and the
consequent gradual trade and industry liberalization in both the
domestic and external sectors, the Govt. of India appointed in June
1993 one more committee on Forward Markets under Chairmanship
of Prof. K.N. Kabra. The Committee submitted its report in September
1994. The majority report of the Committee recommended that
futures trading be introduced in

1) Basmati Rice
2) Cotton and Kapas
3) Raw Jute and Jute Goods
4) Groundnut, rapeseed/mustard seed, cottonseed, sesame seed,
sunflower seed, safflower seed, copra and soybean, and oils and
oilcakes of all of them.
5) Rice bran oil
6) Castor oil and its oilcake
7) Linseed
8) Silver and
9) Onions.

The committee also recommended that some of the existing


commodity exchanges particularly the ones in pepper and castor
seed, may be upgraded to the level of international futures markets.

The liberalized policy being followed by the Government of India and


the gradual withdrawal of the procurement and distribution channel
necessitated setting in place a market mechanism to perform the
economic functions of price discovery and risk management.
Benefits of Future trading

Futures’ trading is useful and beneficial to all segments of the


economy like
◊ To Producer
◊ To Consumer
◊ To Exporter
◊ Other benefits

To Producer
Futures trading is useful to the producer because he can get the
idea of the price likely to prevail at a future point of the time and
therefore can decide between various competing commodities ,
the best that suit him.

To Consumer
Futures’ trading is useful to the consumer because he/she get an
idea of the price at which the commodity would be available at a
future point of the time.

To Exporters
Futures trading is useful to the exporter because it provide an
advance indication of the price likely to prevail and thereby help the
exporter in quoting a realistic price and there by secure export
contract in a competitive market , Futures trading enable exporter to
hedge his/her risk by operating in future market.
Other benefits
The other benefits which are served by futures trading are:
(i) Price stabilization-in times of violent price fluctuations - this
mechanism dampens the peaks and lifts up the valleys i.e. the
amplititude of price variation is reduced.
(ii) Leads to integrated price structure throughout the country.
(iii) Facilitates lengthy and complex, production and manufacturing
activities.
(iv) Helps balance in supply and demand position throughout the
year.
(v) Encourages competition and acts as a price barometer to farmers
and other trade functionaries.
Futures’ trading is also capable of being misused by unscrupulous
speculators. In order to safeguard against uncontrolled speculation
certain regulatory measures are introduced from time to time. They
are:
• Limit on open position of an individual operator to prevent
over trading;
• Limit on price fluctuation (daily/weekly) to prevent abrupt
upswing or downswing in prices;
• Special margin deposits to be collected on outstanding
purchases or sales to curb excessive speculative activity
through financial restraints;
• Minimum/maximum prices to be prescribed to prevent future
prices from falling below the levels that are un remunerative
and from rising above the levels not warranted by genuine
supply and demand factors.
Exchange And Commodities In Which Future Contract Are Traded
In India

The following are the list of exchange and commodities in which


futures contracts are traded in India are as follows

S.No Exchange Commodity


1 India pepper & Spice Trade Perrer (both domestic and
Association , Kochi(IPSTA) international contracts)
2 Vijay Beopar chamber Ltd., Gur
Muzaffarnagar
3 Rajdhani oil & oilseed exchange Gur, Mustard seed its oil &
ltd, Delhi oilcake
4 Bhatinda Om & oil exchange Gur
ltd ,Bhantada
5 The chamber of commerce Gur , potatoes and Mustard
,Hapur seed
6 The Meerut Agro Commodity Gur
Exchange ltd., Meerut
7 The Bombay Commodity Oilseed complex
Exchange Ltd., Bombay
8 Rajkot seeds, oil & Bullion Castrol seed, Ground nut,
Merchants Association , Rajkot its oil & cake, cottonseed its
oil &cake, cotton & RBD
Palmolein
9 The Ahmedabad Commodity Castrol seed, cottonseed ,
Exchange, Ahmedabad its oil and oilcake
10 The East India Jute & Hussian Hessian & sacking
Exchange Ltd., Calcutta
11 The East India cotton Cotton
Association Ltd., Calcutta
12 The Spices & Oilseeds Turmeric
Exchange Ltd, Sangli
13 Kanpur Commodity Exchange Rapeseed/Mustard seed,
Ltd., Kanpur its oil and cake
14 National Board of trade, Indore Soya seed, Soya oil and
Soya meals.
Rapeseed/Mustard seed its
oil and oilcake and RBD
Palmolien
15 The First Commodities Copra/Coconut, its oil&
Exchange of India Ltd., Kochi oilcake
16 Central India Commerce Gur and Mustard Seed
Exchange Ltd., Gwalior
17 E-Sugar India Ltd., Mumbai Sugar
18 National Multi –Commodity Oilseed complex and
Exchange of India Ltd., Rubber , sugar, Aluminum,
Ahmedabad nickel ,Zinc, Copper, Lead.
tin ,pepper, Gram and
Sacking

19 Coffee Futures Exchange India Coffee


Ltd.,Bangalore
20 Surendranagar Cotton oil & Cotton,.Cotton seed, Kapas
Oilseeds, Surendranagar
21 E-Commodities Ltd.,New Delhi Sugar
22 Bullion Merchants Association , Mustard seed its oil &
Bikaner oilcake
Futures Market

Futures markets have been described as continuous auction markets


and as clearing houses for the latest information about supply and
demand. They are the meeting places of buyers and sellers of an
ever-expanding list of commodities that today includes agricultural
products, metals, petroleum, financial instruments, foreign currencies
and stock indexes. Trading has also being imitated in future
contracts , enabling option buyers to participate in future market with
known risks
In other words Futures markets have been described as continuous
auction market and as a clearing house for the latest information
about supply and demand.

The size of future market has increased from 14 million future


contracts traded in 1970 to 179 million future at option on futures
contract traded in 1985.
Participants in Future Market

The following are the participant in future market which are as


follows:
 Hedgers
 Speculators
 Floor traders

Hedgers:
Hedgers are individuals and firms that makes purchases
and sales in the future market solely for the purpose of
establishing a known price level –weeks or month in
advance -for something they later intended to buy and
sell in the cash market in this way they attempt to protect
themselves against the risk of unfavorable price change
in the interim .Hedgers may use futures to lock in an
acceptable margin between their purchases price and
their selling price

Speculators
Speculators are individuals and firms investors who
accept the risk. In other words the speculator are
individual and firms who seek to profit from anticipated
increase or decrease in future price .
Someone who expects a future price to increase
would purchase futures contracts in the hope later
being able to sell them at a higher price ,this is known as
“going long”
while on the other hand someone who expects a
future price decline would sell futures contracts in hope
of later being able to buy back identical and offsetting
contacts at lower price , the practice of selling futures
contracts in anticipation of lower price is known as
“going short”
Most of the speculative investor have no
intention of making or taking delivery of the commodity
but, rather seek to profit from a change in the price .

Floor traders
Floor traders are person who buy and sell for their own
accounts on the trading floors of the exchange and are the
least known and understood of all futures market
participants ,Actually they have no guarantee they will
realize a profit , they can loss of money on any trade,
basically the floor trader make more liquid and competitive
market
Futures Contracts

Futures contract involves obligations of both parties to perform in the


future--the buyer (long) to purchase the asset underlying the future
and the seller (short) to deliver the asset. Thus, both the buyer and
the seller of a futures contract must initially post and maintain, on a
daily basis, margin to assure contract performance and the integrity
of the marketplace. In other words Futures contract is the agreement
between two parties to buy or sell an asset at a certain time in the
future for a certain prices. It is normally traded in the exchange

Forward contracts are bilateral contracts to manage price risk and


quantity risk to certain extent and would act as a boost for futures
markets for the following reasons
Why Need Of Futures Trading

Futures trading in commodities results in and fair price discovery on


account of large-scale participations of entities associated with
different value chains. It reflects views and expectations of a wider
section of people related to a particular commodity. It also provides
effective platform for price risk management for all segments of
players ranging from producers, traders and processors to
exporters/importers and end-users of a commodity. It also provides
hedging, trading and arbitrage opportunities to market players.
Types Of Futures Contract

There are two types of futures contracts which are as follows


 Physical delivery of commodity contracts
 Call for a cash settlement contracts

Physical delivery of commodity contracts: in this type of futures


contract the physical delivery of the commodity is based on the desire
of the buyer and seller both at the time of contract expired.

Call for a cash settlement contracts: Cash settlement futures


contracts are precisely that contracts which are settled in cash rather
than by delivery at the time of the contract expired.
How To Choose The Future Contract

The market of for one commodity may be highly volatile at one time
but not highly volatile at another time. The investor must consider
following thing while choosing any future contract which are as
follows:
• Liquidity
• Timing
• Stop Orders
• Spreads
• Options on futures contracts

Liquidity : A liquid market will exist for offsetting a futures


contract that investor have previously brought or sold , two
useful indicator of liquidity are the volume of trading and the
open interest

Timing: In future trading it is necessary to anticipate the


timing of the price change which may reflect the decision of the
investor

Stop Orders :A stop order is an order , placed with broker


to buy or sell a particular future contract at the market price if
and when the price reaches a specified level stop order are
often used by future traders in an effort to limit the amount
they have
Spreads :  Spread involves buying one future contract and
selling another future contract , the main purpose is to profit
from an expected change in the relation ship between the
purchase price of one and the selling price of the other. In
other words the spread involves the purchases of one futures
contract and the sale of a different future contract in hope of
profiting from a widening or narrowing of the price difference.

Options on futures contracts: The Put and Call option are


being traded on a growing number of future contracts. The main
principal attraction of buying an option is that they make it
possible to speculate to increase or decrease future price with a
known and limited risk
In call option buyers acquires the right but not the
obligation to purchase a particular futures contract at a
specified price at any time during the life of the option.
A Put option convey the right to sell a particular futures
contract at specified price , put option can be purchased to profit
from an anticipated price decrease.
The Process Of Price Discovery

The process of price discovery in futures contract is continuous. The


price of future increases and decreases largely because of the myriad
factors that influence buyers and the seller’s judgment about what a
particular commodity will be worth at a given time in the future. With
the arrival of new or more accurate information the price of the
futures contract might increase or decreases in response to changing
expectations
As a new supply and demand development occurs as new and more
current information becomes available, these judgments s are
reassessed and the price of a particular future contract may be bid
upward and downward
After The Closing Bell

Closing bell signals the end of a day’s trading , the exchange’s


clearing organization matches each purchase made a day with the
corresponding sales and tallies each member firm gain or losses
based on that day’s price change , a massive undertaking
considering that near two-third of a million futures contracts are
bought and on an average day. Gains and losses on futures
contracts are calculated on daily basis and they are credited and
debited on a daily basis.
Trading

An absolute requisite for any one considering trading in futures


contracts that to clearly understand the concept of leverage as well
as the amount of gain and loss that will result from any given
change in the futures price of the particular futures contract in
which you are liking to deal. If you cannot afford the risk, or even you
are not comfortable with the risk then it is not suitable to trade in
futures
Margins

Margins are basically the sum of money deposited by the investors


towards his trader or broker on his/her good faith.
In futures trading the margin is required to buy or sell a
futures contract is on solely a deposit of good faith money that can
be drawn on by brokerage firm to cover loss that incurred by the
investor in course of future trading. The minimum level of margins for
a particular futures contract at a particular point of time is set by the
exchange on which the trading take place. Exchange continuously
monitor market condition and risk and as necessary, raise or reduce
the margin requirements .Individual brokerage firm may charge or
require higher margin amount from their customers than the
exchange set minimum
There are two types of margins
 Initial Margin
 Maintenance Margin

Initial Margin: Initial Margin is the sum of money that the


customer must deposit with the brokerage firm for each future
contract to brought or sold .If on any day that profit accrues on
investor open position, the profit will be added in the balance of
investors margin account

Maintenance Margin  Maintenance Margin is the additional


amount which is required to deposit by investor on call by
brokerage firm due to losses suffered in previous future
contract to get the margin to the level of initial margin. when
brokerage firm call for additional margin is called margin call
In short and simple words Maintenance Margin is the
minimum margin balance which must be maintained by investor
with brokerage firm to reduce losses at a certain level .
Trading Strategies

There are various of the different strategies and variation of


strategies are used in future trading for getting speculative profit in
short time , some of the strategies are as follows :
• Buying (Going Long) to profit from an expected price increase
• Selling (Going Short) to profit from an expected price
decreases
• Spread
Buying (Going Long) to profit from an expected price increase : In
this view the investor expecting the price of a particular commodity
or item to increase over from a given period of time can seek to
profit by buying futures contract. If forecasting is in correct direction
and timing of the price change s, the future contract can later be
sold for the higher price , there by yielding a profit, if on the other
hand price decline rather than increase , the trade will result in a
loss.

Selling (Going Short) to profit from an expected price decreases: In


this strategy the investor sells the future contract if he/she expecting
a decline in the price of the future so that a profit can be realized by
later purchasing an offsetting future contract at the lower price.

Spread : Spread involves buying one future contract and selling


another future contract , the main purpose is to profit from an
expected change in the relation ship between the purchase price
of one and the selling price of the other.
Method Of Particapting In Future Trading

The method of participating in future trading is based and depend on


the need and want of the investors in making trading decision as well
as his/her perceptions like from this we can categories the method of
participating in future trading in four categories which are as follows :
 Trade your own account
 Have someone manage your account
 Use a commodity trading advisor
 Participation in a commodity pool
Trade your own account : Under this method the investor has to
open his/her individual trading account , with or with out the
recommendation of the brokerage firm , in which the investor take
sole decision regarding trading decisions , investor will also
responsible for assuring that adequate fund s are on deposit with
the brokerage firm for margin purposes and the such funds are
promptly provided as needed
An individual trading account can be opened either directly with
a future commission Merchant or indirectly through an introducing
broker
Future Commission Merchant are required to maintain the funds
and property of their customer in segregated account (Separate from
the firm’s own money)
Introducing broker do not accept or handle investor funds but most
offer a variety of trading-related services

Have someone manage your account: A managed account is also


an individual account. The major difference is that investor give
someone rise to an account manager in which written power of
attorney is made in favors of account manger to make and execute
decisions about what and when to trade . He or she will have
discretionary authority to buy or sell for investor account or will
contract investor for approval to make traders he or she suggests
in this case the investor remain fully responsible for any losses
which may incurred and as necessary ,for meeting margin calls ,
including making up any deficiencies that exceed your margin
deposit.
Use a commodity trading advisor: A commodity trading advisor is a
individual that take a fee and provide advice on commodity
trading, include all specific recommendation such as when to
establish a particular long or short position and when to liquidate
that position , trading recommendation may be communicated by
phone , wire mail.

Participation in a commodity pool :Another alternative method of


participating in the future trading is through future trading, it is only
the method of participation in which investor will not have his own
trading account , in fact his money will be combined with that of
other pool participants b and in effects traders as a single account .
Investor share in the profit or losses of the pool in proportion to
his/her investment in the pool. One potential advantage is greater
diversification of risks than investor might obtain if investor were to
establish his own trading account. Another advantage is that the
investor risk of loss is generally limited to his/her investment in the
pool , because most pools are formed as limited partnerships a pool
must execute all of its trades through a brokerage firm which is
registered with the CFTC as a Future commission Merchant , it may
or may not have any other affiliation with brokerage firm .Some
brokerage firms, to serve those customers who prefer to
participate[ate in commodity trading through a pool , either operate
or have a relationship with one or more commodity trading pools.
Regulation Of Future Trading

The Forward Markets Commission (FMC) is the regulatory body for


commodity futures/forward trade in India. The commission was set up
under the Forward Contracts (Regulation) Act of 1952. It is
responsible for regulating and promoting futures/forward trade in
commodities. The FMC is headquartered in Mumbai while its regional
office is located in Kolkata.
Firms and individuals that conduct futures trading business with the
public are subject to regulation by the CFTC and By NFA, all future
exchange are also regulated by the CFTC . NFA is a congressionally
authorized self-regulatory organization subject to CFTC , It
exercises , regulatory Authority with the CFTC over Future
commission Merchant , introducing Brokers , Commodity Trading
advisors, Commodity pool operators and associated persons of all
the foregoing . The NFA staff consists of more than 140 field auditors
and investigators
Firms and individual that violate NFA rules of professional
ethics and conduct or fail to comply with strictly enforced financial
and record-keeping requirement can , if circumstance warrant , be
permanent barred from engaging in any future related business
with the public .
Settlement Of Dispute

There are million of future contracted settled every day their may be
lot of possibility of arising dispute between the parties who actually
involved in the future contract, some of the best way of settlement of
dispute are as follows

 The first and the foremost method of resolving dispute


between parties is to
Make direct discussion between the parties which are
involved in the future
Trading.
 The other method of solving dispute is to seek resolution
through the
Exchange where the future contract were traded
 Claim for reparations may be filed with the CFTC
 The fastest and the less expensive alternative to solve
dispute is to apply to resolve the disagreement through the arbitration
program conducted by National Futures Association (NFA).
What Are The Requisite In Future Contract

Future contract is wide contract contain various thing but the following
are the some of the requisite of future contract and must be
considered by the investor before making any decision of investment
in the future which are as follows :
o The Contract Unit
o Quotation of price
o Minimum Price Change
o Daily Price Limits
o Position Limit
The Contract Unit: The Contract Unit specifies that how much
quantity is contracted in the future contract to make settlement
at the expiration of the future contract.

Quotation of price: Future price are usually quoted the same


way price are quoted in the cash market while the cash
settlement contract prices are quoted in terms of an index
number , usually stated to two decimal points

Minimum Price Change: Exchanges establish the minimum


amount that the price fluctuates upward or downward. The
process of establishing the minimum amount by exchange is
known as “TICK”

Daily Price Limits : Exchange establishes daily price limits


for trading in future contracts , the limits are stated in terms of
the previous day’s closing price plus and minus so many cost
per trading unit . Once a future price has increased by its
daily limit , there can be no trading at any higher price until
the next day of trading , if on the other hand if the futures
prices has declined by its daily limit there can be no trading at
any lower price until the next day of trading. The daily Price
Limits set by the exchange is subject to change

Position Limit : Exchanges and the CFTC establish limits on


the maximum speculative position that one person have at
one time in any one future contract, the main purpose is to
prevent one buyer or seller from being able to exert undue
influence on the price in either the establishment or
liquidation of positions, Position limits are stated in the
number of contracts or total units of the commodity.
Function Of Future Market

There are various function performed by future market which are as


follows

• Fair Price Indicator


• Balancing back price differences by areas and times
• Hedging and Arbitrage
• Investment Opportunity
• Bulky traders
Commodity Future Contracts

Commodity futures contracts are trades of specific commodity to be


delivered at the contracted price, irrespective of any changes of
market price, subject to both buyers and sellers being allowed to
liquidate the contract by cash settlement of price differences between
the contracted price and liquidated price not later than the last trading
session of the contract month.
Trading Mechanism

The trade in this system is held at fixed time, 4-5 times a day at the
Exchange trading floor, which is called open outcry session trading.
The trade starts with a guideline price indicated by an auctioner of
Exchange staff and floor traders send hand-sign to show their
purchasing and selling intention at the guide lined price. When buying
interest exceeds selling interest, an auctioner raises indicated price to
induce more selling interest or let buyers withdraw their buying
interest and an auctioner takes the other way round when selling
interest exceeds buying interest. When buying interest and selling
interest become equal, an auctioner declares a conclusion of contract
of the session and contract month.
The following are the diagrammatically procedure through
which trading take place
Clearing System

The Clearing system of future trading is as follows:

Clearing Mechanism

Feature of Clearing system

Features

• In-House Clearing System


• Daily Clearing System
Delivery System
There is always a provision for delivery in commodity futures trading
to ensure that the future prices are in conformity with the underlying.
The option for delivery is normally with the seller; the buyer/seller has
to express his intention for delivery about five to seven days before
the expiry. However provisions vary from exchange to exchange. The
contracts which are not assigned for delivery will be settled in cash.
The Delivery system of future trading is simple as any contracts for
current month, which are not liquidated as of current month expired,
are to be settled with the delivery of contracted commodity on the last
business day of the month. The Delivery Mechanism of forward
trading is as follows:
What Happens If Delivery Fails or Default Occurs

The exchanges have a penalty clause in case of any default by any


member. There is also a separate arbitration panel of exchanges.
Both the exchanges (NCDEX and MCX) will also maintain settlement
guarantee funds
Points To Be Remembered While Considering Any
Investment

Following points to be consider by the investors while taking any


investment in future market are as follows
• Information about the investment and risk involved in it
• Who are the other market participant are
• Other alternative method of participation
• What is the cost of trading
• How the gains and losses are realized
• What forms of regulation and protection exist
• Liquidity position of the investor
• The experience , integrity and track record of your broker and
advisor to whom you are going to appoint
• The financial stability of the firm with which you are dealing
Some Terms Used in Future Trading

Arbitrage
Arbitrage is the process in which simultaneous purchase and
sale of identical or equivalent financial instruments or
commodity futures in order to benefit from a discrepancy in their
price relationship.

Ask
Also called "offer" Indicates a willingness to sell a futures
contract at a given price.

Back Months
The futures or options on futures months being traded that are
furthest from expiration.

Bear
Bear is that person who believes prices will decrease.

Bear Market
A market in which prices are declining.

Bid
Bid is the price that the market participants are willing to pay.

Bull
Bull is a person who expects prices to rise.

Bull Market
A market in which prices are rising.

Buy On Close
To buy at the end of a trading session at a price within the
closing range.

Buy On Opening
To buy at the beginning of a trading session at a price within
the opening range.
Cabinet Trade or cab
A trade that allows options traders to liquidate deep out-of-the-
money options by trading the option at a price equal to one-half
tick.

Call
An option to buy a commodity, security or futures contract at a
specified price any time between now and the expiration date of
the option contract.

Cash Commodity
The actual physical commodity as distinguished from a futures
commodity.

Close, The
The period at the end of the trading session.

Closing Range (or Range)


The high and low prices, or bids and offers, recorded during the
period designated as the official close.

Commission (or Round Turn)


The one-time fee charged by a broker to a customer when a
futures or an option on futures position is liquidated either by
offset or delivery.

CFTC
CFTC - The Commodity Futures Trading Commission as
created by the Commodity Futures Trading Commission Act of
1974. This government agency currently regulates the US
commodity futures industry.

Contract
Unit of trading for a financial or commodity future. Also, actual
bilateral agreement between the parties (buyer and seller) of a
futures or options on futures transaction as defined by an
exchange.
Contract Month
The month in which futures contracts may be satisfied by
making or accepting delivery. (See delivery month.)

Day Order
An order that is placed for execution during only one trading
session. If the order cannot be executed that day, it is
automatically cancelled.

Day Trading
Refers to establishing and liquidating the same position or
positions within one day's trading, thus ending the day with
open position in the market.

Deferred
Another term for "back months."

Delivery
The tender and receipt of an actual commodity or financial
instrument, or cash in settlement of a futures contract.

Exercise or Strike Price


The price at which the holder (buyer) may purchase or sell the
underlying futures contract upon the exercise of an option.

Expiration Date
The last day that an option may be exercised into the
underlying futures contract. Also, the last day of trading for a
futures contract.

Floor Broker
An exchange member who is paid a fee for executing orders for
Clearing Members or their customers. A Floor Broker executing
orders must be licensed by the CFTC.

Floor Trader
An exchange member who generally trades only for his/her own
account or for an account controlled by him/her are also
referred to as a "local".
Futures
A Futures Contract is an agreement between a buyer and a
seller to receive and deliver on a future date a specified amount
of a product at an agreed price.

Futures Commission Merchant


A firm or person engaged in soliciting or accepting and handling
orders for the purchase or sale of futures contracts, subject to
the rules of a futures exchange and, who, in connection with
solicitation or acceptance of orders, accepts any money or
securities to margin any resulting trades or contracts. The FCM
must be licensed by the CFTC.

Hedge
Hedgers are individuals and firms that make purchases and
sales in the futures market solely for the purpose of establishing
a known price level--weeks or months in advance--for
something they later intend to buy or sell in the cash market.

Holder
One who purchases an option.

Initial Margin (Also referred to as Initial Performance Bond)


The funds required when a futures position (or a short options
on futures position) is opened.

Limit Order
An order given to a broker by a customer that specifies a price;
the order can be executed only if the market reaches or betters
that price.

Limit Price
The maximum amount the contract price can change, up or
down, during one trading session, as stipulated by Exchange
rules.

Liquidation
Any transaction that offsets or closes out a long or short futures
position.
Long
One who has bought a futures or options on futures contract to
establish a market position through an offsetting sale; the
opposite of Short.

Long Hedge
The purchase of a futures contract in anticipation of an actual
purchase in the cash market. Used by processors or exporters
as protection against and advance in the cash price.

Maintenance Margin (also known as a Maintenance Performance


Bond)
A sum, usually smaller than--but part of--the initial margin,
which must be maintained on deposit in the customer's account
at all times. If a customer's equity in any futures position drops
to, or under, the maintenance margin level, a "margin call" is
issued for the amount of money required to restore the
customer's equity in the account to the initial margin level.

Margin (also known as Performance Bond)


Funds that must be deposited as a margin by a customer with
his or her broker, by a broker with a clearing member, or by a
clearing member, with the Clearing House. The margin helps to
ensure the financial integrity of brokers, clearing members and
the Exchange as a whole.

Margin Call (also known as Performance Bond Call)


A demand for additional funds because of adverse price
movement.

Mark-To-Market
The daily adjustment of margin accounts to reflect profits and
losses.

Market Order
An order for immediate execution given to a broker to buy or
sell at the best obtainable price.

Minimum Price Fluctuation


Smallest increment of price movement possible in trading a
given contract often referred to as a tick.
MIT
Market-If-Touched. A price order that automatically becomes a
market order if the price is reached.

Nearby
The nearest active trading month of a futures or options on
futures contract. Also referred to as "lead month."

Offer
Also called "ask". Indicates a willingness to sell a futures
contract at a given price.

Offset
Selling if one has bought, or buying if one has sold, a futures or
options on futures contract.

Open Interest
Total number of futures or options on futures contracts that
have not yet been offset or fulfilled by delivery. An indicator of
the depth or liquidity of a market (the ability to buy or sell at or
near a given price) and of the use of a market for risk- and/or
asset-management.

Open Order
An order to a broker that is good until it is canceled or
executed.

Opening, The
The period at the beginning of the trading session during which
all transactions are considered made or first transactions were
completed.

Opening Price (Or Range)


The range of prices at which the first bids and offers were made
or first transactions were completed.

Option
A contract giving the holder the right, but not the obligation,
hence, "option," to buy or sell a futures contract in a given
commodity at a specified price at any time between now and
the expiration of the option contract.
Out-Trades
A situation that results when there is some confusion or error
on a trade. A difference in pricing, with both traders thinking
they were buying, for example, is a reason why an out-trade
may occur.

Position
An interest in the market, either long or short, in the form of
open contracts.

Premium
1.) The excess of one futures contract price over that of
another, or over the cash market price. 2.) The amount agreed
upon between the purchaser and seller for the purchase or sale
of a futures option --purchasers pay the premium and sellers
(writers) receive the premium.

Put
An option to sell a commodity, security, or futures contract at a
specified price at any time between now and the expiration of
the option contract.

Rally
An upward movement of prices following a decline; the opposite
of a reaction.

Range
The high and low prices or high and low bids and offers,
recorded during a specified time.

Reaction
A decline in prices following an advance. The opposite of rally.

Registered Representative
A person employed by, and soliciting business for, a
commission house or a Futures Commission Merchant.

Round-Turn
Procedure by which a long or short position is offset by an
opposite transaction or by accepting or making delivery of the
actual financial instrument or physical commodity.

Scalp
To trade for small gains. Scalping normally involves
establishing and liquidating a position quickly, usually within the
same day, hour or even just a few minutes.

Settlement Price
A figure determined by the closing range that is used to
calculate gains and losses in futures market accounts.
Settlement prices are used to determine gains, losses, margin
calls, and invoice prices for deliveries.

Short
One who has sold a futures contract to establish a market
position and who has not yet closed out this position through an
offsetting purchase; the opposite of long.

Short Hedge
The sale of a futures contract in anticipation of a later cash
market sale. Used to eliminate or lessen the possible decline in
value of ownership of an approximately equal amount of the
cash financial instrument or physical commodity.

Speculator
One who attempts to anticipate price changes and, through
buying and selling futures contracts, aims to make profits; does
not use the futures market in connection with the production,
processing, marketing or handling of a product. The speculator
has no interest in making or taking delivery.

Spread
The simultaneous purchase and sale of futures contracts for the
same commodity or instrument for delivery in different months,
or in different but related markets. A spreader is not concerned
with the direction in which the market moves, but only with the
difference between the prices of each contract.

Stop Order (Or Stop)


An order to buy or sell at the market when and if a specified
price is reached.

Tick
Refers to a change in price, either up or down.

Trend
The general direction of the market.

Volume
The number of transactions in a futures or options on futures
contract made during a specified period of time.

Writer
An individual who sells an option.
Commodity Exchange

Commodities (commodity) are basic raw materials and foodstuffs such as


metals, petroleum, coffee, grain etc. Commodities are traded on a
commodity exchange both by the companies that use them (e.g. chocolate
manufacturers) and by speculators. Futures contracts allow commodity
producers and commodity users to bring some predictability and stability to
pricing. By buying futures contracts, they can hedge against underlying price
changes in the commodity.

Commodity exchange are the exchanges where the trading of futures and
forwards take place, basically commodity exchange are trading in future
contacts on those commodities which have some regional relevance it is
not going to be as easy as a share of a company to get listed in a different
exchange.

Commodity exchanges in India are expected to contribute significantly in


the strengthening Indian economy to face the challenges of globalization.
The Commodity Exchange makes commodity money available to all as a
medium of exchange, store of wealth and unit of account. As long as the
commodity exchange does not provide credit or interest, it is easily
established and avoids banking regulations. As a barter exchange
mechanism, there is no fiduciary responsibility. With the value India
commodity economy being around Rs 300,000 crore a year

Delivery of commodity is a physical activity in which the Commodity


exchange members are stakeholder in those commodities. Importance of
commodity exchanges are linked to the stake holders of that particular
commodity
Prime minister ‘s independence Day address to the nation on August 15
2002 which enlisted nation-building initiatives , included setting up of
national commodity exchange among the important initiatives .the year
2002-03 was an eventful year in the in the term of regulatory change and
market developments that could set agenda for development for the year
to come .
Policy Initiatives

The following are the policies imitative which is taken by government


regarding commodity exchange
• Mandatory of to four entities to set up nation wide multi commodity
exchange
• Expansion of permitted list of commodities under the forward
contract(Regulation) Act
• Abolishing of restriction to complete a spot market transaction
(ready deliver contact ) is being abolished
• Non transfer specific delivery specific delivery (NTSD) contact is
removed from the preview of the forward contract(Regulation) Act

Mandatory of to four entities to set up nation wide multi commodity


exchange :- By Mandatory of to four entities to set up nation wide
multi commodity exchange , the National level exchange make the
availability of future contracts across the nation across the nation in the
most effective manner through technology and at the same time
would improve the risk management system s to improve and maintain
financial integrity of futures market in the country

Expansion of permitted list of commodities under the forward


contract(Regulation) Act :- Expansion of the list of the commodities
would make available risk management mechanism for all
commodities where such demand exist but not never made possible in
the past .

Abolition of 11day restriction on the spot transaction , and removal of


NSTD contact from the preview of the Forward contact (Regulation)
Act would efficiently mean unhindered forward contracting among the
constituent of commodity trade value chain.
Introduction To Commodity Exchange

Virtually all of the futures exchanges in the United States date from the late
nineteenth or early twentieth century. They all started as commodity
exchanges, but since the early 1980s trade in financial futures has become
more and more important for most of them. Until 1998, the Chicago Board
of Trade used to be the worlds largest futures exchange, but is now the
second-largest place with a volume of 255 million contracts in 1999 (11 per
cent of total world volume). The Chicago Mercantile Exchange, the worlds
fourth-largest, accounted for about 8.5 per cent of world volume, while the
New York Mercantile Exchange (former NYMEX and COMEX), the worlds
eighth-largest, accounted for more than 4 per cent. Among the large
exchanges, NYMEX is the only one trading solely commodities, and is the
world’s largest commodity exchange. Two years ago, the CSCE, NYSE and
NYCE merged to form the New York Board of Trade which was in 1999 the
world’s twentieth-largest exchange. Up to 1993, the United States exchanges
used to account for the major part of world futures and options trade.

Commodity futures markets have a long history in India. The first organized
futures market, for various types of cotton appeared in 1921. In the 1940s,
trading in forward and futures contracts as well as options, was either
outlawed or made impossible through price controls. This was the situation
until 1952, when the Government passed the Forward Contracts Regulation
Act, which to this date controls all transferable forward
Contracts and futures. During the 1960s, the Indian Government either
banned or suspended futures trading in several commodities. The
Government policy softened in the late 1970s and recommendations to
revive futures trading in a wide range of commodities was made. With the
full convertibility of the rupee, the ongoing process of economic
liberalization and the Indian economy’s opening to the world market; the
role of futures markets in India is being reconsidered. Most of contracts
being traded are unique in the world. Although some are clearly domestic
oriented, others (such as raw jute, pepper, and oilseeds) have the potential to
become of regional or even international importance. The first new contract
allowed was an international pepper futures contract in Cochin officially
launched in 1997. In the Philippines, the Manila International Futures
Exchange was active from 1985 to 1996, but was then closed down by
government regulators.
Nation-Wide Multi Commodity Exchange

These Associations/Exchanges are at different stages of completing the


procedural formalities for setting up the exchange/commencing trading.
After assessing the market situation and taking into account the
recommendations made by the Board of Directors of the Exchange, the FMC
prescribes various regulatory measures from time to time, for prudential
regulation of futures/forward trading. Govt. has recently removed
prohibition on further 81 more items, thereby removing prohibition on all
commodities. Similarly NTSD Contracts in commodities are also taken out
of the purview of FC(R) Act. .Under a World Bank aided Grant Scheme to
support development of commodity futures markets in India, a number of
consultancy assignments, training program, study tours, office automation of
FMC etc. have been undertaken. The project was successfully completed on
31st October, 2000. A Plan Scheme under the 10th Five Year Plan for
generating awareness about the activities, mechanism and benefit of futures
trading among farmers is being implemented. In enhancing the institutional
capabilities for futures trading the idea of setting up of National Commodity
Exchange(s) has been pursued since 1999. Recently on the basis of
comprehensive examination of various applications/expressions of interest
received from 16 parties, four exchanges/proposed exchanges have been
identified for giving the “National Status”. While the Online Commodity
Exchange of India Ltd (OCEIL) ( later on renamed as National Multi-
Commodity Exchange of India Ltd., NMCE) has been given final approval,
others National Board of Trade (NBOT), Indore, National Commodity &
Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity
Exchange (MCX), Mumbai have been given in-principle approval.
“National Status” implies that these exchanges would be automatically
permitted to conduct futures trading in all approved commodities,
exempting sensitive items such as rice, wheat, gold & silver, subject to
clearance of bye-laws and contract specifications by the FMC. While the
NMCE, Ahmedabad has commenced futures trading in November, 2002,
and NBOT, Indore has been trading as a regional exchange since 2000, its
up-gradation to national level and NCDEX and MCX, Mumbai commencing
operations etc
Indian Commodity Exchange

The following are the name of some commodity exchange in India where the
trading of commodity takes place which is as:

S.No Name of Commodity Exchange Commodity Traded

1 M/s NCS InfoTech Ltd., Hyderabad Sugar

2 Bombay Commodity exchange , Tea


Mumbai

3 Unites Planets Association of south Tea


India , Connoor

4 Tea Auction .com , Kolkata Tea

5 Bullion Merchants Association, Jaipur Mustered seed its oil &


oilcake

6 SGI Commodity Exchange , Mumbai Soya bean ground nut


their oils and oilcakes

7 National commodity & Derivative


Exchange ltd. ,Mumbai

8 Multi commodity Exchange Ltd.,


Mumbai
Multi Commodity Exchange of India Limited (MCX)

MCX has started operations from November 10, 2003.It is a 'new


order' Exchange with a mandate for setting up a nationwide, online
multi-commodity marketplace, offering unlimited growth opportunities
to commodities market participants. As a true neutral market, MCX
has taken several initiatives to usher in a new-generation
commodities futures market in the process, become the country's
premier Exchange.

MCX, an independent and a demutualized exchange since inception,


is all set to introduce a state-of-the-art, online digital exchange for
Commodities Futures trading in the country and has accordingly
initiated several steps to translate this vision into reality.
Objectives

The main objective of Multi Commodity is performance excellence and


affordability in promoting and popularizing Commodities Futures trading in
the country. Exchanges in the global economy will be driven by strong
service availability backed by superior technology and MCX is well poised
to emerge as the “Exchange of Choice” for the commodity futures trading
community

s
Corporate Objective
The corporate objective of MCX is to emerge as the “Exchange of Choice”
for commodity futures trading in the country with globally competitive
“best-in-class” practices. MCX is positioned to propel the Indian
commodity sector at the forefront of global commodity trading. Main
objectives of MCX are as follows:

 Building awareness on commodity futures market


 Broad basing MCX ownership structure by inviting participation
from all participants of the Commodities Ecosystem like Banks,
Warehouse companies, Corporate and others
 Extensively leverage the expertise available internally with the
Management, Exchange Advisors, Board and other support
agencies
 Establish the emerging trends of the ‘new exchange order’
wherein Exchange operations need not be capital intensive.
 Introduce Contracts / Commodities in a phased manner to
generate sufficient liquidity and trading interest
 Establish efficient and strong Risk Management systems for
controlling market risk
 Leverage the association with FTIL and access the existing
business and technology alliances of the latter – Proven,
reliable and cost-efficient technology platform.
 Continue enhancing penetration and expansion of the market.
 To be a pioneer in providing robust integrated trading / clearing
and settlement services for commodities trading.
 Undertake industry wide initiatives for creating market
awareness on commodity futures in association with policy
makers, regulators and opinion makers
 Adopt technology intensive measures forming the backbone of
an automated and secure commodity marketplace.
Benefits Of MCX

There are various benefit of MCX which can be categorized in following


categories :
 Benefits to the Country & States
 Benefits to Industry, Exporters & Importers
 Benefits to Banks

Benefits to the Country & States


• National Market in Commodities will integrate smaller markets into the
national mainstream
• Price discovery will aid Farmers, Exporters, Importers, Manufacturers and
the Government to time buy/sell decisions, ascertain expected demand
and supply, to decide on the crop to be grown.
• Market forces for pricing will integrate us with global market and also help
us in WTO regime.
• Future scenario better understood by policy makers.
Benefits to Industry, Exporters & Importers
• Hedging the price risk associated with future contractual
commitments.
• Spaced out purchases possible rather than large cash purchases
and its storage.
• Efficient price discovery smoothens seasonal price variation
• Greater flexibility, certainty and transparency in procuring
commodities would aid bank lending.

Benefits to Banks
• Facilitate ‘Informed’ lending.
• ‘Hedged’ positions of producers and processors would
reduce the risk of default faced by banks
• Lending for agricultural sector would go up with greater
transparency in pricing and storage.
• Commodity Exchange participants to act as distribution
network to retail agri-finance from Banks to rural sector.
• Provide trading limit finance to commodity exchange
members.
ANALYSIS

On viewing all situation of future trading and commodity exchange and


recommendation and views of other persons I drawn a conclusion that
presently there is limited number of commodity exchange in which limited
number of future contracted are traded in India , but in coming time it will
be mostly traded in India as well as all part of the world
RECOMMENDATION

The following are the recommendation that I like to suggest to boost up the
future market and commodity exchanges in India
o Government must take some step to establish more
commodity exchange in India
o Government also allow private players to take part in
commodity exchange and in forward trading
o Government has to frame that policies which will
boost up trading in future market
o Government has to remove trade barriers so that their
can be more trade in commodity exchange
BIBLIOGRAPHY

The various materials from different source are used in collection of


information and in preparation of this valuable report. Basically major
materials are collected through Internet, books and magazines. The
following are the some sources through which information is collected are as
follows:
Websites --> futuresmag.com ,
IndianCommodity.Com
ShareKhan.com etc
Books -->Investment Management by V K Bhalla
Investment Management by Awadhani
News Papers -->Business Line
Economics Times