A SUMMER PROJECT ON
“COMMODITIES GLOBAL PERSPECTIVE”
FOR KARVY STOCK BROKING LTD
BY Savita Nathawat
SADHANA CENTRE FOR MANAGEMENT AND LEADERSHIP DEVELOPMENT (2005-2007) IN PARTIAL FULLFILLMENT OF MASTERS OF BUSINESS ADMINISTRATION
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Serial no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Particulars Acknowledgement Executive summary Company profile Need of study Objective of study Introduction Derivatives Commodity derivatives Commodity market an overview Convenience yield, term structure &volatility across the market Commodity as a distinct asset class Commodity allocation from a private client perspective Commodity and financial market instrument Global commodity exchanges Indian commodity market Gold & Copper Awareness Conclusion Recommendations Bibliography
Page no. 3 4 6 8 9 10 12 14 15 23 27 30 33 35 42 46 53 54 55 56
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IT gives me immense pleasure in completing this project and submitting the final project report. The last two months with KARVY STOCK BROKING LTD had been full of learning and sense of contribution toward the organization. I would like to thank KARVY STOCK BROKING LTD for giving me an opportunity for learning and contributing through this project. I also take this opportunity to thank everybody who made this experience a memorable one. A successful project can never be done by an individual to whom the project is assigned, it requires help and guardianship of some conversant person who helped the undersigned actively or passively in the completion of successful project. In this context as a student of SADHANA CENTRE FOR MANAGEMENT AND LEADERSHIP DEVELOPMENT, Pune. I would first of all like to express my gratitude to Mr. Ravi Gaikwad for assigning me such a worthwhile topic Commodities global perspective. The project couldn’t have been completed without timely and vital help of Anurag Kataria (regional head, Karvy Comtrade Ltd), other office staff. Special thanks to Mr. Shivraj , Mr Sushil, Mr Gaurav Lanjekar Mr Ninad Raghatate, Mr Kuldeep bhorkar, Mr. Abhijeet singh, Mr.Vikrant Joshi, Ms.Sonal Chopra,Ms Shweta ,Mr Viyay for there invaluable guidance, keen interest cooperation inspiration, and of course moral support through my project session.
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EXECUTIVE SUMMARY:The project titled “Commodities global perspective” being carried out for KARVY STOCK BROKING LTD. KARVY operates in various financial products and services like, Consultancy, Stock Broking, Mutual Fund, Insurance, Registrar and Transfer Agent, Research, Commodity etc. The project is devoted to understand commodity futures market both Indian and global and to find out the level of awareness about this market among investors. Commodities, in simple words are any goods that are common and unbranded. Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common commodities. For e.g. apple juice can be a commodity whereas the ‘Real’ apple juice cannot be called a commodity. Another feature of commodities is that they are commonly available. Commodity markets represent the formal system for the interplay of demand for and supply of commodities. These markets can be broadly classified into spot market and futures market.This market helps in fair price discovery. Commodity market works basically on the function of demand and supplies any imbalance in demand and supply result in the changes in commodity prices. If demand override supply prices will go up, and if supply is more than demand prices falls. During my study I realize hat global exchanges are very specialized for eg: LME trades only in base metals and recently in plastics, NYMEX trades only in energy futures, Whereas Indian exchanges are trading in all commodities, All these global exchanges when compared to that of Indian having very high turnovers. 4 by Savita Nathawat Presented
Commodity market is negatively co related to stock markets, except the stocks of the companies engaged in commodities business, and positively correlated to inflation. As the consumption of commodities all over the word is increasing and no new sources of natural resources are known, so prices of commodities in future can go only in one direction that is up. So this is the right time to invest in commodities market. It was also observed that globally commodities market shows negative correlation with stock market but in India it is positively correlated. As seen that from 2004 when futures trading in commodity market was permitted by government both stock markets and commodity markets were in bull phase and recently as stock market came down commodities also experience the fall in prices. The survey conducted for finding out the awareness of commodity market among the investors we found that less than 95% of them don’t know what is commodity market so this market has immense opportunities to explore
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It is also a member of National Stock Exchange and Bombay Stock Exchange. In the span of 25 years KARVY has entered into capital market activity too.
Principal activity of KARVY areKARVY CONSULTANTS LTD.
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. It also comprises of 6000 employees and professionals. Where commodity trading is done. it is an insurance distributor which avails all insurance policies of all companies. In spite of all this KARVY has its RESEARCH CENTER in Hyderabad and also a member of Hyderabad Stock exchange. PRIVATE CLIENT GROUP is a special service offered to HNI clients for portfolio management services. Around 6000 active business associates are being attached with KARVY across the country.COMPANY PROFILE
KARVY is founded by a group of Hyderabad based CHARTED ACCOUNTANTS in 1982 as a professional service firm. KARVY INVESTOR SERVICE LIMITED includes Merchant Banking and Corporate Finance. Over 500+ NSE and BSE terminals spread across the country. It is a paid service provided. KARVY is spread over 357 cities having about 532 offices. Deals in Depository Participant services and IT enabled services. is a big distributor of equity and other financial product. KARVY INSURANCE BROKING Ltd. A KARVY COMTRADE Ltd. KARVY SECURITIES LTD. KARVY COMPUTERSHARE PRIVATE LIMITED performs transfer agency services for corporate and mutual fund and also registrar for IPO’s.
preferred service provider to our customer.
Ranking 8th in Merchant banking services.ACHIEVEMENTS Largest independent distributor for financial products Amongst the top 5 stock brokers Amongst the top 3 Depository participants Largest network of branches and business associates Amongst top 10 investment Bankers.
Ranking 1st in retail procurement in equity IPOs.
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. and technology driven organization which will set the highest standards of service and business ethics. enterprising. and they aim to achieve this leadership position by building an innovative.
MISSION OF KARVY: Their mission is to be a leading.
cocoa. cotton. prices can go only in one direction that is up So we can say that a bull market is on the way and it is an great opportunity to make money But does Indian markets are efficient when compared to global markets??? Does investors are aware of this market and its potential??????
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. bonds. Commodities are so pervasive that you can’t be a successful investor in stock. the things we all need for our lives would be scarce and often too costly. wool. cattle. contrary to all myths about how risky. Commodity is the essential of not only our life but lives of the every one in this world. Commodity markets work on the basis of demand and supply functions and today as all the natural resources are depleting due to the heavy consumption by developed and emerging economies and further investment in natural resources infrastructure is virtually non existent and with this kind of imbalance of supply and demand. and even major downturn in economy. Too many so-called smart investors consider themselves diversified if they have invested in stocks. or may be in some currencies. sugar coffee. soybeans. real estate. But commodities rarely though that have done quite well over a time . and the 80 or so other things listed in CRB (Commodity research bureau) yearbook. wheat. or currencies without understanding them. rubber. bonds. gold. Investing in commodities can be a hedge against the bear market in stocks. volatile complex and dangerous putting money on commodities is supposed to be. Commodities belong to every truly diversified portfolio. corn. lumber. One should understand commodities even if he invests only in stocks and bonds. silver. These essentials include oil.Need of Study
Commodity market world’s best market but gets no respect in the eyes of investor. high inflation. rice. natural gas. copper. aluminum. Without the commodities “futures market” to set and regulate prices.
Objectives of the study
1) What is commodity market ? 2) Indian scenario of commodity market? 3) Global scenario of commodity market? 4) Level of awareness about commodity market ? 5) Commodities market from personal client perspective?
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so that even if the prices happen to fall after three months. silver. Another feature of commodities is that they are commonly available. The other major group of participants in the commodity futures market are the importers and the exporters. are some of the common commodities. Commodity markets represent the formal system for the interplay of demand for and supply of commodities. For eg: A cooldrinks can manufacturing company may buy tin futures. in simple words are any goods that are common and unbranded. so that even if the prices happen to rise later. These markets can be broadly classified into spot market and futures market. rubber. However in India options on commodities are not available and are expected to be introduced soon. Arbitragers and investors.Introduction
Commodities. apple juice can be a commodity whereas the ‘Real’ apple juice cannot be called a commodity. Usually traded ones are the futures and options. Since they have confirmed obligations to export/import fixed quantity of commodities at a particular period of time. they can take opposite positions in the futures market. The players in the spot market are the actual producers and the consumers of the commodities. he can still manage to sell at the price at which the contract was struck. Commodities for immediate delivery are traded through the spot market. thy can be assured of the supply of raw materials at the pre-determined price. sugar. For e. (Please go through the material on ‘Futures and Options’ to understand about futures) These markets make available for trading. The other type of market called the ‘Futures market’ is for facilitating contracts for future delivery. The large scale consumers of the products can also make use of the futures to secure their purchase. jute. wheat. For eg: A wheat farmer who expects his harvest to be over in 3 months time may sell a futures contract with an expiry of three months. Gold. pepper. 10 by Savita Nathawat Presented
.. You may be surprised to know that in the US commodities markets there are futures available even on cattle. Hedgers are those who hold simultaneous positions in the spot market also. These are generally the actual consumers or the producers of the commodities. cotton etc. the various derivatives based on commodities.g. The players in the futures markets are Hedgers.
options and option futures. Some of the most popular commodity exchanges in the world arelistedbelow:
London Metals Exchange. Chicago London International Financial Futures and Options Exchange (LIFFE). Chicago Chicago Board of Trade. However in an ‘efficient’ market arbitraging is not possible. Investors are those who participate in the market for profits and are ready to face the risk involved in the market.Arbitrage is a process of making profits using the price differences between two markets without exposing oneself to any risk. Tokyo Winnipeg Commodity Exchange. An investor can be anyone from an individual who has a small surplus income to the treasury desks of banks and corporate. Canada
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. Arbitraging is a very profitable business. Most commonly traded derivatives around the world are futures. New York Chicago Mercantile Exchange. It is possible to arbitrage between two different futures markets or between the futures market and the spot market. because any price gap is closed immediately as soon the arbitragers enter the market. London New York Mercantile Exchange. London Tokyo Commodity Exchange.
Speculator traders shift to more controlled environment of derivative markets Derivative markets help in increasing saving and investment in long run
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. Underlying can be Equity. ----The Forward market commissions continues to have jurisdiction over commodities forward /future contract -----Derivatives are sec under SCRA (security contract regulation act and therefore trading of derivative is governed by the regulatory framework under SCRA Participants 1) Hedgers :.a derivative is a product whose value is derived from the value of one or more underlying assets in a contractual manner. they can take large positions on the market 3) Arbitragers:. that is by putting small amount of money upfront.Derivatives
Definition:. regulates the future/forward contract in commodities in India.Commodity. or any other asset. 1952.
Economic functions performed by derivative markets
• • • • Prices in an organized market reflects the perception of participants about the future and lead prices of underlying to the perceived future level. forex . ---The forward contract (regulation) act.They use futures or option market to reduce risk 2) Speculators:-Futures and options market can give them leverage.Arbitragers work at making profit by taking advantage of difference between the prices of two markets. It helps to transfer risk frm those who have them but don’t like them to those who has appetite for them.
2) Futures:.longer. 7)Swaptions:. They iffer from forward in the sense that they are standardized and exchange traded.
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. To pre arranged formula the two commonly used swaps are: • Interest rate swaps:.Swapping both principal and interest between the parties.thus a swapton is an option on forward swaps. at todays pre-agreed price.swapping only the interest related cash flows between the parties in the same currency • Currency swaps:.dated options (more than one year) and generally traded OTC 5)Basket:-Basket options are options of underlying portfolio 6)Swaps:-Swaps are private agreement between two parties to exchange cash flows in in the future acc.Derivative markets
• • Spot v/s forward transactions Exchange traded v/s OTC derivatives
Difference between Otc and exchange traded derivatives OTC derivatives !)Forward contract 2)Customized contract terms 3)Less liquid 4) No margin payment 5)Settlement happens at the end of the period Exchange traded derivatives 1) Futures contract 2) Standardized contract terms 3) More Liquid 4) Requires margin payment 5) Follows daily settlement
Some commonly used derivatives
1) Forwards:.at a given price on or before a given future date 4)Warrants:.A futures contract is an agreement between two parties to buy or sell the underlying asset at a future date at a today’s future price. 3) Options:-There are two type of option a) Call---it gives the buyer right but not obligation to buy a given quantity of underlying asset .A forward contract is an agreement between two parties to buy and sell the underlying asset at a future date.swaptions are options to buy or sell a swap that will become operative at the expiry of the options .at a given price on or before a given future date b) Put ---it gives buyer the right but not the obligation to sell a given quantity of underlying asset . with the cash flows in one direction being in a different currency than those in the opposite direction.
one of the main difference between the financial and commodity derivatives is the need for ware housing 3) Quality of underling asset:-variance in quality is not an issue in financial derivatives as the physical attribute is missing but when the underlying is commodity .
Difference between commodities and financial derivatives
1) Physical settlement:.In case of physical settlement financial assets are not bulky and do not need special storage facility. --Trading in commodities future has been in existence with organized trading in cotton through the establish ment of cotton trade association in 1875. typically at an accredited warehouse .Physical settlement involves the physical delivery of commodity. they were then found useful as a hedging tool in financial markets.delivery notice period Sec step:-assignment (done by clearing house) Third step:-Delivery 2) Warehousing:. ---. ----whereas due to the bulky nature of underlying asset settlement in commodities creates the need for warehousing Physical settlement in commodities First step:. te quality of underline asset is of prime importance -----currently there are various agencies that are responsible for specifying grades for commodities • Bureau of Indian Standards (BIS) under ministry of consumer affairs specifies standards for processed agriculture commodities • AGMARK under the department of rural development under ministry of agriculture is responsible for promulgating standards for basic agriculture • EIA specify std for export oriented commodities ---------CBOT and CME are two oldest derivative exchange in the world
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Derivative as a tool for managing risk first organized in commodities market .
Japan.Commodities Market An Overview
The History & Development of Commodity Exchanges
The origins of commodity exchanges are typically traced back to the 17th century and the trading of rice futures in Osaka. Commodity Energy Exchange New York Mercantile Exchange International Petroleum Exchange Tokyo Commodity Exchange Central Japan Commodity Exchange New York Mercantile Exchange London Metal Exchange Shanghai Futures Exchange Philadelphia Board of Trade Tokyo Commodity Exchange New York Mercantile Exchange Nordic Power Exchange European Energy Exchange UK Power Exchange Abbreviation NYMEX IPE TOCOM CJCE COMEX LME SFE PHLX TOCOM NYMEX NORDPOOL EEX UKPX
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. During the same period the development of commodity exchanges was being given an additional push by Britain’s industrial revolution. Table 1 details the major commodity exchanges according to sector type and location. which was founded in 1898 as the Chicago Butter and Egg Board. Almost overnight the UK became an insatiable consumer of industrial metals. However. the New York Mercantile Exchange (NYMEX) is the world’s largest. the largest US exchange by volume is the Chicago Mercantile Exchange. However. the sweet crude oil contract on the New York Mercantile Exchange in 1983 and the Brent crude futures in 1988. well before then trading in commodity futures was being reported in ancient Greece and China. To ensure a more organized market structure the London Metal Exchange (LME) was established in 1877. However. The first commodity exchange to be established in the United States was the Chicago Board of Trade in 1848 in response to the growth in agricultural production in the economy. the development of an international energy futures market only began in the 1980s following the listing of the gas oil futures contract on the International Petroleum Exchange (IPE) in 1981. in terms of commodity futures alone. Today.
APX POWERNEXT CME NYCE CBT DCE KCBT MGE TGE CME CSCE NYBOT TGE EURONEXT NCDEX
Grains & Oilseeds
In the current decade. Sugar and Cocoa Exchange New York Board of Trade Tokyo Grain Exchange EURONEXT. in terms of market turnover there remains a high degree of market concentration with the lion’s share of commodity trading occurring in just four countries: the US. The proliferation of commodity exchanges has occurred as more and more countries have deregulated their economies and removed price supports. the number of commodity exchanges in China totaled more than 40. However.
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. UK National Commodity & Derivatives Exchange Ltd. However. Japan. in 1994 the Chinese Securities Regulatory Committee embarked on a programme of consolidation which resulted in three commodity exchanges emerging in the country: 1) The Shanghai Futures Exchange (SFE) 2) The Zhengzhou Commodity Exchange (ZCE) 3) The Dalian Commodity Exchange (DCE) Following this rationalisation. Exhibit 1.Amsterdam Power Exchange Paris Power Exchange Fibres Chicago Mercantile Exchange New York Cotton Exchange Chicago Board of Trade Dalian Commodity Exchange Kansas City Board of Trade Minneapolis Grain Exchange Tokyo Grain Exchange Chicago Mercantile Exchange Coffee. China and the UK. there are more than thirty commodity exchanges operational around the world. the major growth in commodity futures trading is expected to occur in Asia and specifically China. In the early part of the 1990s..
corn. soybeans and fuel oil.Exhibit1:Commodity
Market concentration The number and composition of futures contracts traded in these four centres are detailed in Exhibit 2.
In terms of the composition of futures contracts listed. wheat. the US and Japan dominate not only in terms of turnover. typically in the early stages of a country’s development commodity futures have tended to be in agricultural products. Not surprisingly. copper. China’s three exchanges currently offer eleven futures contracts including aluminum. rubber. For
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. but. cotton. also in the number of commodity futures contracts listed on their exchanges at 82 and 52 respectively.
NYMEX. annual volumes hit 163. metals and energy contracts will become more prevalent. market activity remained heavily concentrated in just one commodity. rice and soy oil.
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. However. It is expected that as the country industrialises and deregulates its financial markets. The next phase of the LME’s development is launch of futures contracts for polypropylene (PP) and linear low density polyethylene (LL) on 27 May 200
In 2004. a reflection of the London Metal Exchange’s dominance in trading non-ferrous metals. commodity futures trading is highly skewed to the metals sector. which represented 39. On NYMEX.2 million contracts last year. To highlight this. In the UK. the Dalian Commodity Exchange is the country’s largest exchange by turnover. with metals accounting for less than 10% of total turnover with the bulk of this represented by the COMEX gold future. Indeed there are plans to launch new listed futures’ products for crude oil. the introduction of an energy futures market only occurred in the 1980s following the launch of the sweet crude oil futures contract on the New York Mercantile Exchange (NYMEX) in 1983. many of these commodity excha nges reported traded volumes at or close to record highs and although these individual exchanges offer a wide variety of futures contracts. take an example of market turnover in commodity futures contracts in the top four exchanges. up 17% compared to 2003.9 million lots in 2004. the DCE and the LME. gas oil. steel. the West Texas Intermediate light. or 52. market activity tends to be concentrated in just one or two contracts. the Tokyo Commodity Exchange (TOCOM). sweet crude oil futures contract.7% of total turnover on the exchange. natural gas.example. Today energy and agricultural futures trading constitute the lion’s share of turnover on US commodity exchanges. in China 80% of commodity futures’ volumes traded in 2004 were in agricultural contracts. In the US. coal. As a result.
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corn and natural gas the most widely traded commodity futures contracts.Commodities in comparison Despite the growth in financial futures trading over the past two decades.
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. We find that commodities occupy seven of the top 15 products traded with crude oil. Table 3 details the top 15 futures contracts traded in the United States during 2003. commodities remain an important part of overall futures trading.
natural gas and power.New developments during this decade The main developments to emerge relating to commodity exchanges this decade are: · The listing of new commodity futures’ products. On the Shanghai Futures Exchange a petroleum futures contract is being considered while the Dalian Commodity Exchange is set to launch a soy oil futures contract in the next few months. The Zhengzhou Commodity Exchange is preparing to launch a sugar and rapeseed futures contract this year as well as develop new products for coal. Despite the launch of the LME’s polypropylene and linear low density polyethylene futurescontracts next month as well as the NYBOT’s pulp future most of the development of new commodity futures products is taking place in Asia and specifically China.
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. · The increasing cooperation and competition between exchanges. · The move from open outcry to electronic trading platforms.
In addition. The IPE’s decision this month to end open-outcry is a significant step since at the end of last year only 5% of IPE’s volume was accounted for by electronic trades. For example. This would further enhance NYMEX’s status as the world largest physical commodity exchange by market turnover. Listed products would span across both the energy and soft commodity sectors. Regulatory approval for NYMEX’s plans are expected to be granted in the second half of 2005. the plans to open the Dubai Commodity Exchange is a joint venture with NYMEX and the government of Dubai. TOCOM began offering energy and metals futures trading on NYMEX’s internet based trading platform. traded volumes of the IPE’s Brent futures contract has risen by 160% compared to a 124% increase in trade volumes on the sweet crude oil contract listed on NYMEX.
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. Cooperation between exchanges is also occurring on a global basis. The IPE’s decision also makes the LME the last exchange in London to operate an open outcry system. Since 1995. Last year.In terms of increasing cooperation between exchanges this year could see the merger of NYMEX and NYBOT. Another feature of this decade has been the move towards electronic trading platforms. last month saw the signing of a Memorandus of Undestanding between the Chicago Board Options Exchange (CBoE) and the Dalian Commodity Exchange with the aim to enhance the development of options and other derivative products on both exchanges. Two aims are the listing of sour crude oil future and well as for Dubai to become the centre of gold futures trading in the region. Trading on the exchange will be open-outcry in contrast to the IPE which switched to a solely electronic platform on April 8. April 2005 An Investor Guide To Commodities Deutsche Bank@17 NYMEX also plans to launch a London based exchange to compete directly with the IPE and its Brent crude oil futures contract.
Term Structures & Volatility Across Commodity Markets
The term structure for commodities The forward curve for foreign exchange rates is simply calculated by the difference between short and long-term interest rates. among other things.
What drives term structure? While energy markets are typically characterised by backwardated markets. These two types of term structures are represented by the WTI crude oil and gold price forward curves in Exhibit 1. when the forward price of a commodity declines as tenor increases the market is in backwardation.(Convenience Yield – Storage) 23 by Savita Nathawat Presented
. weather and inventory levels. These differing term structures between the energy and metals complexes can be explained by the Theory of Storage and the existence of convenience yield. this is not the case for the precious and industrial metals’ markets. the process is more complicated since forward curves also have to contend with. contango is where the forward price rises as tenor increases. that is. In normal market conditions . In terms of market definitions. Conversely. the forward price for industrial metals tedns to rise as tneor increases. In commodity markets. the market is in contango.Convenience Yields. changes to production costs. The relationship between the forward and spot price is defined as: Formula 2: Forward Price = Spot Price + Interest Rate .
For this we use industry estimates. This makes intuitive sense since in tightening market conditions consumers attach a greater benefit to the physical ownership of a commodity. This can come in the form of having a secure supply of raw materials and hence eliminating the costs associated with a supply disruption. Put another way. or what is called the convenience yield1. Formula 3: Convenience Yield = Roll Return + Storage Cost + Interest Cost To solve for the convenience yield one only has left to estimate the fixed costs of storage for each commodity. For example. in 1989 the average WTI spot price was USD19. It would take many years for the world to exhaust available gold reserves on current demand trends if every gold mine in the world were to close tomorrow.60/barrel. This reflects the fact that annual gold consumption amounts to approximately 3. any disruptions to gold mine production would have only a marginal effect on the convenience yield.200 tonnes per annum while total above ground stocks (private plus public sector holdings) exceed 145. Table 2. Hence a higher convenience yield or premium is built into the spot price. The gold market is at the other extreme. storage costs have amounted to an average of 22% per annum. Since storage costs are fixed.000 tonnes. This positive relationship between convenience yield and consumption of stock per day across a number of commodity markets is highlighted in Exhibit 3. the share of costs accounted for by storage will be a function of the spot price. Oil is the most obvious example since if world oil production ceased today the economic consequences would be felt within a matter of days.Formula 2 relies on the fact that by storing rather than selling the commodity. Hence the larger the amount of daily consumption of a particular commodity compared to available inventories the greater the convenience yield. This is the flow of services and benefits that accrues to an owner of a physical commodity but not to an owner of a contract for future delivery of the commodity 2. the convenience yield rises as the market’s precariousness increases. offsetting these costs.49%. The convenience yield A holder of inventories in a particular commodity generates a convenience yield.40x12) or 24. if not hours. are the benefits accruing from holding inventory. Fixed costs for storing a barrel of oil amount to approximately USD0.40/barrel per month and consequently for that year fixed costs were USD4. one surrenders the spot price but incurs interest rate and warehousing costs. Rearranging Formula 2 above implies that: Forward – Spot = -Roll Yield = (Interest Rate – [Convenience Yield – Storage Cost]) or. Over the 1989-2004 period. These results show that convenience yields trend higher the lower the level of inventories.80 (0.
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.500 days or sometime in 2050. In the absence of additional new mine supply the world would consequently only run out of gold after 16. However. As a result.
term structures in the six industrial metals’ markets 25 by Savita Nathawat Presented
.It is worth remembering that the convenience yield will vary over time as and when there is an increase in stocks above or below ‘requirements’. One can therefore consider the slope of the forward price term structure as an indication of the current supply of storage such that a continuing decline in inventory levels implies an even steeper backwardation and vice versa. Indeed the convenience yield is likely to rise very sharply when there is a reduction of stocks below requirements3. Commodities subject to sudden changes in inventory levels due to supply or demand shocks are particularly vulnerable in this regard.
Interestingly over the past two years. Such inventory shocks help to explain why certain markets are more prone to move from contango to backwardation in a very short space of time.
Where inventories are plentiful and the convenience yield is low so too is the volatility. it is also positively correlated with the level of volatility across various commodity markets. As the physical availability of metal inventories has declined so the convenience yield has risen. This has led term structures to flip from contango to backwardation in all six non-ferrous metal markets. which has led to a dramatic decline in inventory levels across the industrial metals complex. Since energy markets have high convenience yields and traditionally backwardated term structures it helps to explain why within any commodity index. Exhibit 5. most notably from China. consequently drives not only the term structure but also the level of volatility across the main commodity markets. This benefit. Not surprisingly those markets which have the lowest level of available inventory compared to consumption and hence the highest convenience yields typically have the highest levels of volatility.
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. Commodity volatility & the convenience yield Since convenience yield is an indication of market precariousness.
Conclusion The benefits to a consumer of a holding a particular commodity is directly related to the level of available inventories. the energy sector is typically the engine room of performance. This decline in inventory is also having an effect on commodity volatility.. This reflects strong global demand for commodities. for example crude oil and heating oil. for example gold. or convenience yield.have changed dramatically.
fiber. The commodities included in some of the most popular investable indexes represent about US$1. interest payments. It’s important stuff. These commodities include energy products.” Stuff which can be used. seen.5 trillion of annual global production. touched. livestock. and industrial and precious metals.
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. Analytically. they are not capital assets. And it’s the expected intersection of those supply and demand curves in the future that will affect (but not totally determine) the price of a commodity futures contract. The Capital Asset Pricing Model does not apply to a bushel of corn. commodities are real assets. commodities are valued because they can be consumed or transformed into something else which can be consumed. This is the unifying feature of commodities that distinguishes them as an asset class different from the other investable assets in a portfolio. Their value at any time is determined by basic laws of supply and demand. it’s the intersection of supply and demand curves that determines their price. also known as “stuff. While they are investable assets. Not only are commodities a distinct asset class. Rather. Commodities do not generate a stream of dividends. Unlike financial assets. or other income that can be discounted in order to calculate a net present value. food.Commodities as a distinct asset class
Commodities are fundamentally different from stocks and bonds. consumed. but they are an important asset class in the world economy. Hard assets as opposed to paper assets.
To see what actual returns might have been in that wide range of economic environments from 1970 to the present.] The next component of return is insurance. [True. From 1970 through 2004. the GSCI actually had higher returns than the S&P 500. since your futures positions are fully collateralized. with only slightly higher volatility —and with that diversifying aspect of negative correlation. as this is written in early 2005. which over a long period of time have returned an expected rate of inflation plus a real rate of return. An examination of returns of the various commodity indexes over shorter periods of time would also
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. Published futures indexes typically assume that this collateral is invested in T-Bills. T-Bills are yielding less than inflation. But both economic theory and longer term history demonstrate that TBills might be expected to provide a positive real yield.The first and easiest component of return is the return on your collateral.
. This is due to the low to negative correlations among the individual commodities’ returns. and certainly were not widely held.The correlation of commodity futures with inflation is positive at all horizons. Gorton and Rouwenhorst (2005) found that over the 43-year period from 1959 – 2002 commodities produced: · Returns comparable to the return on the S+P 500 · Lower standard deviation of returns than stocks · Negative correlation with the return on the S+P 500 and long-term bonds · Opposite exposure to inflation compared to stocks and bonds . such that the index itself has relatively low. Prices respond almost immediately to unexpected changes in the weather.
Risk averse investors prefer higher commodity allocations
Commodities are volatile. and also provide useful diversification in a wide range of economic environments. geopolitical risks and a host of transitory affects arriving randomly (e. sudden supply and demand shocks. a refinery fire). even though its components are highly volatile in isolation. Meanwhile.dfswell.show higher returns in the last few years. changes in regulation. you still have positive exposure to some unexpected events that might affect individual markets. this is changing. equity-like volatility.g.
Commodities versus traditional asset classes
Commodity index investments were not well understood among portfolio managers in the past. In a recent working paper published by the National Bureau of Economic Research.Stocks and bonds are negatively correlated with inflation . It wasn’t just in the 1970’s that they did | lc. This despite the fact commodities produce consistent returns that are competitive with equities. Over the most recent five years ending in 2004 this asset class performed well also. As economists turn their attention to commodity index products.
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. which are uncorrelated with financial-asset returns. These volatile asset prices can be harnessed into a commodity index. which may explain why investors historically have not allocated to this asset class. It looks like commodities might indeed shelter a portfolio from inflation. climate. while returns in the ‘80s and ‘90s weren’t much better than just the return on T-Bills (a time period when paper assets were benefiting a portfolio).
This fell 45% from its November 1980 high of 337. companies as well as individual investors were increasingly hesitant with capital spending in the commodity complex. Although this trend was interrupted by large swings. these were not strong enough to break the downtrend. An indication of this long-term trend is highlighted by the Commodity Research Bureau (CRB) index in Exhibit 1. by and large. which sometimes persisted for several years.
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. Since economic sectors with declining prices are not particularly attractive to invest in.Commodity Allocation From A Private Client Perspective Supply
Since the oil price shock in the eighties.9 in February 1999. been on a long-term downtrend ever since. commodity prices had.60 to a low of 182.
No reversal of this process is to be expected as economic catch-up continues. which are not always available domestically – at least not at the required quantities. China became one of the principal global consumers in many commodity sectors. investments tended to flow towards those sectors with higher returns on capital while investments in commodity related sectors were curtailed. About one quarter of this is produced in developing economies with the growth rates in these 31 by Savita Nathawat Presented
The demand for commodities has changed significantly since the entry of China to the World Trade Organisation (WTO) in 2001. This shows a significant underperformance of commodity related sectors compared to other sectors of the economy.This is confirmed by examining average annual returns of the major economic sectors in the S&P 500 throughout the 1990s. As a result. In 2004 World GDP is estimated to hit USD35trillion. which we are now experiencing today. This led to an insatiable appetite for building materials. Capital withdrawal forced companies to cut costs. Over time. Extraordinary strong growth initiated a demand shock for many basic resources as structural changes began to get under way in China (urbanisation. expansion of infrastructure). Exhibit 2. this lack of investment resulted in a deterioration of the materials handling equipment and a reduction of production which has led to supply-side capacity constraints. Since relative price performance is a major driver of the allocation of capital.
On the other hand. The rising interest of noncommercial market participants can be seen by the increasing number of commodity futures contracts traded on global com modity exchanges. the raw material consumption per USD of GDP is roughly twice as much as in the industrialised countries. Due to the range of products fabricated by developing countries and the fact that they often use less expensive and less efficient technologies. As producers have not been able to quickly adjust their output. commodity investments have received more interest from this perspective as well. commodity prices have soared.
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. adequate investment vehicles must be chosen. risk aspects in investment policy and asset allocation have attracted more attention. given that commodity prices tend to move in a volatile fashion with a high degree of uncertainty of future returns. they should be treated more like growth assets in the portfolio context. Data on the oil market. it is also stimulating the interest of financial investors.economies expected to be roughly twice as fast as economic activity in industrialised countries. which differentiate between commercial and non-commercial market participants. As most of the future growth dynamics is expected from developing countries. As commodities offer attractive diversification benefits when added to portfolios with traditional securities such as equities and bonds. show a clear upward trend of the contract volume traded by non-commercial market participants along with the increase in oil prices since 2002. The high volatility and the cyclicality of commodity returns would argue for low allocation weights.
Price development and investor interest
The increase in raw material demand has occurred at a time of strong global growth and limited spare capacity to expand commodity production. As a rule of thumb commodity allocations of 3% to 10% are recommended for conservative portfolios. While price increases are not only starting to induce increases in exploration spending of commodity producers.
Commodity allocation in security portfolios
After the distress of the extended equity bear market. in order to achieve a material effect on overall risk-return of the portfolio. In order to implement such diversification strategies. the increase in commodity demand is not a one time effect but will persist and be largely driven by these countries. for example. Commodity allocation recommendations depend on the risk attitude of the investor as well as the allocation of the main part of the portfolio. In the US. the Commodity Futures Trading Commission publishes detailed weekly data on the trading volume of commodity futures. However. the allocation should not be too low.
one could choose direct inves tments in commodity futures traded on commodity exchanges such as e. wrapped into structures such as funds. The original investment aim of adding assets with low correlation to equities could thus be diluted. which is directly linked to price developments in commodities. which are either directly linked to the price of specific commodities or to an index of several commodities . exchange traded funds. In order to get exposure. commodity contracts were the smallest group. To avoid such difficulties. The problem with this proc edure is. etc. With 2. costly and difficult to handle. are still linked to influences and developments of the overall equity market. According to the BIS data. indirect investment vehicles seem to be a better way to implement such strategies. The Bank for International Settlements (BIS) publishes data on the OTC market. Financial market activity in the commodity sector has therefore increased.Commodities and financial market instruments
Traditionally. company specific policies and procedures can lead to significant deviations.g. For private investors. that the companies. The financial services industry has reacted to these needs and has created a variety of new commodity investment vehicles. Data on the dynamics of market developments across asset classes are difficult to obtain. in Chicago or London. as a rule. Such indirect vehicles are.6% of the overall amount. in general. time lags. warrants or certificates.
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. although operating in the commodity sector. the outstanding amount of OTC derivatives in June 2004 was USD 6395bn. they can provide an indication of the relocation of interest in the respective asset classes. which are more suitable for the investment needs of private clients. with respect to the price developm ents in the respective commodity sectors. however. but showed by far the strongest growth momentum in year on year terms rising 66% compared to an overall decline of 19% for total outstanding OTC derivatives. Moreover. investing in commodities via commodity futures is. Although the OTC market is only a limited part of overall financial market activity and consequently one must be careful in interpreting these data. private investors often gained exposure to commodities via investing in equities operating in one way or another in the commodity sector.
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Global Commodity Exchanges
The New York Mercantile Exchange
The New York Mercantile Exchange. natural gas. and platinum. and electricity. gasoline. Brent and West Texas Intermediate crude oil. refined products. copper. crude oil. gold. The Exchange pioneered the development of energy futures and options contracts 26 years ago as means of bringing price transparency and risk management to this vital market The wide array of trading markets provided by the Exchange include futures and options contracts for crude oil. sweet crude. Brent crude. propane. and natural gas. heating oil. home to the energy. and palladium. The Exchange also lists NYMEX miNY™ energy futures. heating oil. electricity. The contracts trade via the NYMEX ClearPort® electronic trading system and clear through the New York Mercantile Exchange clearinghouse. It is governed by CFTC (commodity futures trading commission)
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. fractional light. Inc. gasoline.. and palladium markets. and various futures contract months (calendar spreads) for light. silver. is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals throughout its 132-year history.Trading is conducted through two divisions. and options contracts on the price differentials between crude oil and gasoline. platinum. sweet crude oil and natural gas futures contracts that offer smaller investors and traders the opportunity for an efficient means of participating in energy markets. on which all other metals are traded. aluminum. NYMEX miNY™ Futures The Exchange also clears off-exchange trades for market participants who wish to avoid counterparty credit risk by using standardized contracts for natural gas. and the COMEX Division. crude oil and heating oil. the NYMEX Division. futures contracts for coal.
London Metal Exchange
History of the LME
The origins of the London Metal Exchange can be traced as far back as the opening of the Royal Exchange in 1571. it was in 1877 that the London Metal Market and Exchange Company was formed as a direct result of Britain's industrial revolution of the 19th century. This activity is referred to as hedging. The LME was formed to bring order to this activity with the establishment of a single marketplace. 11 of which take part in ring dealing (open outcry). LME Select . the LME offers. not only because the voyages were hazardous but also because the cargoes could lose value if there was a fall in price during the time it took for the metal to reach Britain. As the Exchange developed. a legally safe forum for metal and plastics trading. through price and volume transparency and audit trails. the exchange comes under 36 by Savita Nathawat Presented
. Inter-office telephone market . The Exchange has a membership of around 80 major firms. As an RIE.
Regulation & compliance
The Financial Services Authority (FSA) is responsible for regulating the financial soundness and conduct of LME members' business. Merchants began meeting in coffee houses where they traded with each other in order to protect themselves against this latter risk by selling the cargoes as forward contracts.this market is attended by representatives of the LME ring dealing firms. This led to a massive increase in the UK’s consumption of metal. However. Approved as a recognised investment exchange (RIE) and conforming with British and other international regulatory requirements.a 24 hour global market place transacted between member companies over the telephone. Merchant venturers were investing large sums of money in this activity and were exposed to great risk. Trading on the LME There are currently three ways to trade on the LME. its forward contracts were utilised by all aspects of industry in order to protect against price risk. recognised times of trading and standardised specifications for the contracts. which required the import of enormous tonnages from abroad. Open outcry market (ring trading) . This is where metal traders first began to meet on a regular basis.the LME's electronic trading platform. Another thirty-one broker members join them in the trading of futures and options through the telephone market and LME Select.
The LME's forward contracts allow producers. primary nickel. the LME developed the TAPO contracts. Users of the market who trade basis the MASP will tend to use TAPO contracts.the direct jurisdiction of the FSA. merchants and consumers to insure against price risk. TAPO contracts complement existing LME futures and traded options contracts. The LME's plastics contracts are based on monthly prompt dates out to 15 months forward. . primary nickel. particularly with large producers. Nickel is traded in 6 tonne lots. standard lead. LME members also operate in a strict regulatory environment policed by the FSA. as well as directives from the EU Commission in Brussels. both the exchange and its members are subject to regulatory controls and input from various UK bodies and government offices. Japanese yen. two plastics and one index comprising the six primary base metals. but the LME permits contracts in sterling.75 tonne lots. Because many users in the industry price their physical material on the basis of the LME MASP. Today the Exchange trades in eight metals. However. What is a TAPO? London Metal Exchange Traded Average Price Options (TAPOs) for copper grade A. All LME prices are quoted in US Dollars. PP and LL are traded in 24. To meet this growing demand. brokers developed off-Exchange average price option products. tin. aluminium alloy and North American Special Aluminium Alloy (NASAAC). high grade primary aluminium. Beyond this. 37 by Savita Nathawat Presented
. fabricators. In international trading. and Euros and provides official exchange rates from US Dollars for each of them. together with traded average price options contracts (TAPOs) based on the monthly average settlement price (MASP) for all metals futures contracts. Trade is conducted in lots rather than tonnes. primary aluminium. known as 'Asians' which quickly became popular. lead and zinc amounting to 25 tonnes. The LME's eight metals contracts are: copper grade A.. tin in 5 tonnes and aluminium alloy and NASAAC in 20 tonne lots.The LME also offers traded options contracts based on each of these futures contracts. copper. The LME's plastics contracts are polypropylene (PP) and linear low density polyethylene (LL). aluminium alloy. with each lot of aluminium. rules applied by overseas regulatory bodies such as the CFTC in the USA also have to be taken into account. special high grade zinc. special high grade zinc. NASAAC and tin are Exchange cleared contracts based on the LME Monthly Average Settlement Price (MASP).
news and other information and use that information to make decisions about price and enter the futures markets as investors. including U.S. established in 1848. the Exchange’s newest products. risk management and investment purposes. Treasury bonds and notes. e-cbot. on October 12. futures trading has been initiated in many financial instruments. 30-Day Federal Funds. stock indexes. oats and soybeans. More than 3. the Exchange has upgraded its electronic trading system several times. by introducing a major API upgrade. the primary method of trading at the CBOT was open auction. were introduced in 2005 in response to shifting trends in the global agricultural economy. was introduced in 1982. Whether trading futures and options on futures through an electronic platform or open auction. During the last decade. But to better meet the needs of a growing global economy.hedgers who trade using the LME's flexible daily prompt system will find futures or traded options more suitable hedging tools. options on futures. as the use of electronic trading has become more prevalent. The CBOT added a new category to its diverse product mix in 2001 with the launch of 100 percent electronic Gold and Silver futures contracts. which involved traders meeting face-to-face in trading pits to buy and sell futures contracts. thereby making the market more liquid and cost effective
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. the CBOT marked the 30th anniversary of the the Exchange's first financial futures contract. For decades. to name but a few. the CBOT successfully launched its newly enhanced electronic trading platform. Since that introduction. In October 2005. Volume at the Exchange in 2005 surpassed 674 million contracts. based on Government National Mortgage Association mortgage-backed certificates.600 CBOT member/stockholders trade 50 different futures and options products at the CBOT by open auction and electronically. These futures markets also allow speculators throughout the world to interpret economic data. Most recently. 2005. the CBOT traded only agricultural commodities such as corn. CBOT South American Soybean futures and Ethanol futures. Futures contracts at the Exchange evolved over the years to include non-storable agricultural commodities and non-agricultural products. the CBOT successfully launched its first electronic trading system in 1994. the highest yearly total recorded in its history. Another market innovation. In its early history. Speculators bridge the gap between hedgers’ bids and offers.
Chicago Board of Trade (CBOT® )
The Chicago Board of Trade (CBOT® ). wheat. is a leading futures and futures-options exchange. the CBOT’s primary role is to provide transparent and liquid contract markets for its member/stockholders and customers to use for price discovery. and swaps. powered by LIFFE CONNECT®.
The Ministry of Finance is responsible under the FIA to regulate the trading of futures contracts and to provide for matters connected or incidental to trading in futures. It is mainly responsible for providing regulatory protection and 39 by Savita Nathawat Presented
. The CME Clearing House guarantees. thus offering investors the security of trading on a regulated Exchange with similar rules and regulation as the more established markets worldwide.
Commodity Futures Trading Commission (CFTC) Futures Industry Association (FIA) and Futures Industry Institute (FII) National Futures Association (NFA)
The Bursa Malaysia Derivatives
As the 21st century dawns and the capital market in Malaysia evolves further with more varied and customised investment instruments. equities.S.Chicago Mercantile Exchange
CME is the largest futures exchange in the United States and also owns and operates the largest futures Clearing House in the world. the Bursa Malaysia Derivatives Berhad exemplifies this type of Futures Exchange. offering both futures and options contracts on a sound trading platform
The Bursa Malaysia Derivatives operates under the supervision of the Securities Commission and is governed by the Futures Industry Act (FIA) 1993. the futures industry will play a significant role in the transformation towards a more dynamic capital market and financial industry. CME became the first publicly traded U. foreign exchange. The Malaysian Securities Commission ("SC") is empowered by the Ministry of Finance to regulate all matters relating to the derivatives industry. The Exchange also falls under the jurisdiction of the Ministry of Finance
of Malaysia. CME products fall into five major areas: interest rates. Two forums are available for trading CME products: the long-standing open outcry trading floors and the CME® Globex® electronic trading platform. agricultural commodities and alternative investments. the diversity of products traded on Exchanges throughout Asia has expended tremendously and this is ably supported by sophisticated trading and clearing systems equal to the best available in developed countries. In Malaysia. financial exchange in December 2002 when the Class A shares of its common stock began trading on the New York Stock Exchange under the ticker symbol CME. In catering for increasing risk management needs. clears and settles every contract traded through the Exchange. Bursa Malaysia Derivatives was established pursuant to the provisions of the Futures Industry Act 1993 (amended in 1995)("FIA"). Founded as a not-for-profit corporation in 1898.
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. All futures contracts transacted between buyers and sellers are cleared through the clearing House. however. While buyers and sellers do not meet in a trading pit. The Exchange is governed by statutory acts. Regulatory Authority Ministry of Economy. under which stand the following committtees: • General Affairs Committee • Membership Committee • Market Management Committee • Delivery Quality Committee • Market Trading Monitoring Committee
Singapore Commodity Exchange
Singapore Commodity Exchange provides a centralised and regulated marketplace for commodity futures to be traded in Singapore. Of pivotal importance. Trade and Industry Administration Responsible for the activities of TOCOM is the Board of Directors. The system ensures the best bid and offer for all the market's participants. This paves the way for Singapore to become a commodity futures trading centre complementing its international trading activities. which regulates all commodities futures and options trading in Japan. the Exchange's computerised trading network linking the market-makers/brokers provides them with an efficient price discovery system.licensing of participants in the Exchange namely
Tokyo Commodity Exchange
Juridical Character TOCOM is a non-profit membership organization as defined under the Commodity Exchange Law (1950). Integrity of its trading and financial practices is assured. The financial integrity of the marketplace is safeguarded by the Exchange through its membership criteria and trading rules. is the role of the Exchange's Clearing House.
Products:. Later in 2003 the Government of India again allowed forward contracts in commodities.Rubber . However in 1975 the Government banned forward contracts on commodities.It is regulated by The International Enterprise Singapore Board Commodity trading act 2001(CTA) authorise the International Enterprise Singapore Board (formerly known as the Singapore Trade Development Board) to regulate futures trading in commodities. There have been
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Indian Commodities Market
In India commodity markets have been in existence for decades.
MCX crossed a peak daily turnover of Rs.N. NCDEX also allows trading of futures on a host of commodities. Please check the ‘Commodities traded’ menu’.
Evolution of commodity market in India
---Bombay cotton trade association ltd. However these exchanges are commodity specific and have a strong regional focus. set up in 1875 ---The future trading in oilseeds started in 1900 with establishment of Gujarati Vyapari Mandali. SBI. Accordingly three exchanges are there which deal in a wide variety of commodities and which allow nation-wide trading. 3. accorded approval for setting up of national level multi commodity exchanges. kabra. in order to make the commodities market more transparent and efficient. OBJECTIVES 1)To asses the working of commodities exchanges and their trading practices and to make recommend with a view to making them compatible with those of other countries 2) To asses the role of forward market commission and to make recommendations with a view to make it compatible with similar regulatory agencies in other countries 3) To examine the extent to which forward trading has special role to play in promoting exports 4) To suggest amendments to the Forward contract regulation act . MCX has become the first exchange in the world to launch futures on steel. 2.950 Crores. The Government. UBI etc. They are 1.with a view to effective enforcement of act. LIC.. NCDEX is promoted by an elite group of financial institutions including NSE. K.over 20 exchanges existing for commodities all over the country.. Multi Commodity Exchange (MCX) National Commodities Derivatives Exchange (NCDEX) National Multi Commodity Exchange (NMCE)
The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd. MCX allows trading on a host of commodities ranging from bullion to grains. Recently on 11th August 2004. ----Future exchange for wheat was chamber of commerce at Hapur set up in 1913 ----Future trading in bullion began in Mumbai in 1920 -----Calcutta Hessian exchange Ltd was established in 1919 for future trading in raw jute and jute goods ----East Indian Jute Association set up in 1927 ----these two associations amalgamated in 1945 to form the east India Jute and Hassian Ltd ------Forward contract regulation act was enacted in 1952 ------Forward market commission was established in 1953 under ministry of consumer affairs and public distribution THE KABRA COMMITTEE REPORT The govt of India appointed in June 1993 a committee on forward market under chairmanship of Prof. Presented
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OBJECTIVE To provide world class comm.contract act. It is subjected to various laws of the land like companies act . Ex platform for market participants to trade in a wide spectrum of comm. Amendments to the rules and regulations and by laws of the commodities exchange should require the approval of FMC only 6)In the context of globalization . Maharashtra in Mumbai on April 23. 2)Due to in adequate facility such as space and telecomm the comm.5) To suggest measure to ensure that forward trading in the commodities in which it is allowed to be operative remains constructive and helps in maintaining prices within reasonable limit
1)The forward market commission and forward regulation act need to be strengthened .2003 It has an in dependent board of directors and professionals not having vested interest in commodity market It is regulated by Forward market commission in respect of futures trading in comm. Exchange were not be able to function effectively 3)Enforce capital adequacy norms 4)In built devices in comm. Such as vigilance committee and the panels of surveyors and arbitrators be strengthened further 5)FMC should continue to act as watch dog . some of the comm. LATEST DEVELOPMENTS • • • National Board of Trade Multi commodity exchange National Commodity & Derivative Exchange of India Ltd
• • • • • It is a tech driven commodity exchange It is a public Ltd co registered under the companies act 1956 with the registrar of companies .low cost solutions and information dissemination without noise To provide nation wide reach and consistent offering To bring together the entities that the market can trust 43 by Savita Nathawat Presented
. Derivatives driven by best global practices .tech platform. stamp act. Professionalism and transparency.comm. Market in India could not function effectively in an isolated manner . Exchanges be upgraded to the level of international markets. Therefore. To include best international practices like de-modularization .
Risk committee EXCHANGE MEMBERSHIP The members of NCDEX falls into two categories 1) Trading cum clearing members (TCM) 2) Professional clearing members (PCM) CAPITAL REQUIREMENT The members has to deposit Base Min Capital (BMC) Base min capital comprises of following 1) Interest free cash security deposit 2) Collateral security deposit TCM = 30. with the permanent recognition from Forward Markets Commission. (MCX).PROMOTERS • ICICI • NABARD • LIC • NSE GOVERNANCE It is run by an independent board of directors . The board is responsible for all operations of the exchange . Government of India has established a demutualised Nation-wide Multi Commodity Online Exchange for Futures Trading in all the important and essential commodities.00.Board appoints an executive committee and other committee for the purpose of managing activities of exchange for eg:. promoters do not participate in day to day activities. Audit committee.member committee. 44 by Savita Nathawat Presented
.00.000 The NCDEX trading system • Trading • Clearing • Settlement
Multi Commodity Exchange of India Ltd.000 PCM = 50. (MCX) Multi Commodity Exchange of India Ltd.
SBI Life Insurance Co. State Bank of Hyderabad 7. State Bank of India 3. State Bank of Indore 5. Bank of India 6. Bank of Baroda 9. 2.Key Shareholders: 1. (Commodities traded on MCX is given in annexure)
45 by Savita Nathawat
. (FTIL) in association with DMCC. International Alliances : MCX has signed MOUs with world’s leading commodity exchanges like The Tokyo Commodity Exchange (TOCOM) and The Baltic Exchange. Financial Technologies (India) Ltd. Corporation Bank 10. of Dubai has entered into a 50:50 Joint Venture to set up the Dubai Gold & Commodity Exchange (DGCX). Bank of Saurashtra 11. Union Bank of India 4. London MCX & Financial Technologies (India) Ltd. a strategic initiative of Government. Canara Bank 8.
Dubai. India is the world's largest gold consumer with an annual demand of 800 tons
World Gold Markets • London as the great clearing house • New York as the home of futures trading • Zurich as a physical turntable • Istanbul. and in many cases opposed to the forces that influence most financial assets. South Africa is the world's largest gold producer with 394 tons in 2001. private players and high-carat jewelry.08 13 22 -----
Indian Gold Market • Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. Singapore and Hong Kong as doorways to important consuming regions • Tokyo where TOCOM sets the mood of Japan • Mumbai under India's liberalized gold regime
India in World Gold Industry (Rounded Figures) Total Stocks Central Bank holding Annual Production Annual Recycling Annual Demand Annual Imports Annual Exports India (In Tons) 13000 400 208 100-300 800 600 60 World (In Tons) 145000 28000 2600 1100-1200 3700 ----% Share 9 1. it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium.4 0. More than two thirds of gold's total accumulated holdings relate to 'value for investment' with central bank reserves. Due to large stocks of Gold as against its demand. 46 by Savita Nathawat Presented
. Less than one third of gold's total accumulated holdings is as a 'commodity' for jewelry in Western markets and usage in industry. followed by US and Australia.Gold
• • • • • • • •
Gold is primarily a monetary asset and partly a commodity. other major institutions and retail jewelry keep coming back to the market. Economic forces that determine the price of gold are different from. Gold market is highly liquid and gold held by central banks.
The gold hoarding tendency is well ingrained in Indian society. harvest and marriage season. In the cities gold is facing competition from the stock market and a wide range of consumer goods. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present. making them into standard bars in India. reclaimed scrap and official gold loans • Producer / miner hedging interest • World macro-economic factors . Indian jewellery offtake is sensitive to price increases and even more so to volatility. Interest rate • Comparative returns on stock markets • Domestic demand based on monsoon and agricultural output Biggest Price Movement since 1995 Between September 24 and October 5.US Dollar. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.• •
• • •
India is the world's largest consumer of gold in jewellery as investment. 13 banks are active in the import of gold. daily prices witnessed a rally of more than 21 %. as compared to the rest of the world. are insignificant.
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. 1999. based on surprised announcement by 15 European central banks of a five-year suspension on all new sales of gold from their reserves. both qualitatively and quantitatively
Market Moving Factors • Above ground supply from sales by central banks.5 percent in 2001. assaying. Facilities for refining. Domestic consumption is dictated by monsoon.
Contract Specifications of gold
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49 by Savita Nathawat
and resources in deep-sea nodules are estimated at 0. Supply and Demand : Global Scenario • Economic. for high. the United States (19. Germany and Philippines are the major importers. • The largest international sources for scrap are the United States and Europe. Japan (14%). Indonesia. World Copper Markets • LME and NYMEX are the two international markets. It is a product whose fortunes directly reflect the state of the world's economy • Copper is the best non-precious metal conductor of electricity. BSNL and MTNL consume 10% of country's copper production. makes it the preferred and safest conductor for building wiring. • India is emerging as net exporter of copper from the status of net importer on account of rise in production by three companies. which provide direction to the copper prices. • Birla Copper.3%). Sterilite Industries are two major private producers and Hindustan Copper Ltd the public sector producers. As society's need for copper increases.Copper
Characteristics of Copper • Copper ranks third in world metal consumption after steel and aluminum. either insulated or uninsulated. The metal's exceptional strength. Spain China. medium and low voltage applications.5%). and China (5. which as percentage of world copper market is 3 %. technological and societal factors influence the supply and demand of copper. • Land-based resources are estimated at 1. Cabling for power and telecommunications. Chile. 50 by Savita Nathawat Presented
. Two major states owned telecommunications service providers. • The global production of refined copper is around 15 million tons • The major copper-consuming nations are Western Europe (28. • Copper goes into various usage such as Building.7 billion tons.1%).6 billion tons of copper. and resistance to creeping and corrosion. Canada and Australia are the major exporters and Japan. Copper is also used in power cables. Growth in the building construction and automobile sector would keep demand of copper high. ductility. Indian Scenario • The size of Indian Copper Industry is around 4 lakh tons. • Copper and copper alloy scrap composes a significant share of the world's supply. Automobiles etc. new mines and plants are introduced and existing ones expanded. Copper is an essential component of energy efficient motors and transformers and automobiles.
United States. Chile. and the Federal Republic of Germany account for 67% of total refined metal production. Japan. electronics and electrical industry
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. Zambia. Germany etc. • Growth and development in the Building.Japan.The eight leading refining nations. Factors Influencing Copper Markets • Copper prices in India are fixed on the basis of the rates that rule on LME the preceding day.. • new mine and expansion of existing mine • Economic growth of the major consuming countries such as China. Canada. Belgium. viz.
450 400 350 300 250 200 150 100 50 0
1/ 4/ 2 8/ 00 6 4/ 17 20 -0 0 6 4 24 .so prices of gold will definitely rise.20 -0 06 52 5/ 00 6/ 6 12 200 /6 6 19 /20 -0 06 6 26 . But again as computers require copper the demand for copper is increasing so the prices of copper will also increase.20 -0 06 42 1/ 00 5/ 6 2 8/ 00 6 5/ 15 20 -0 0 6 5 22 .2 -0 006 620 06
Movement of copper prices in last 3 months As the inflation all over the world is increasing and it will keep on increasing as the demand is more than supply the interest rates will also keep on increasing so dollar will depreciate and gold will appreciate more and more investors will use it as hedging tool against inflation .
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.2 -0 006 5 29 . Copper is the largest used industrial metal but with the introduction of wireless phones the demand its demand fall down as it was used in telephone wires.
Only 25 People said that they want to invest in commodities market.Awareness
We conducted a survey to find out the level of awareness about commodities market among the investors Sample= IT professionals and bank employees Sample size = 2000 Out of 2000 only 100 were aware of what is commodities market. LIC. Foreign Exchange.
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. Survey was conducted through a questionnaire in which we asked them if they want to invest in which instrument they will invest and we gave them option of mutual fund. Stocks. Bonds & FD. Commodities.
Commodities market will be the market of future as this market is under a bull way because all over the world commodity resources are scarce and demand is increasing so the commodity prices will go only in one direction that is up. Commodities also provide better hedge against inflation as they have positive correlation. So this is the right time to invest in the commodities market. So this a market untapped market having great potential. and inflation is increasing all over the world that is why it is advisable to invest in commodities.
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. People are not aware of this market in India and those who are aware has a myth that it is a highly risky to invest in commodities. Commodities Exchanges in India is not efficient as compared to global exchanges they are very specialized for eg: LME trades only in metals NYMEX trades only in energy futures. Commodities market if compared to stock market will give better return in long run. Commodities are also less risky than stocks as the commodity prices can never become zero they will have some value at ant point of time. The economic data in US and UK are updated very fast whereas in India we don’t get updated data when it is required.
and demand. 5) Provide details of commodity requirement.
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. supply. 4) Provide updated data and information to the clients.Recommendations
1) Karvy should launch a campaign for the awareness of investors . 2) Personal advisory department of Karvy should also help in Creating awareness about commodities market and try to educate people about this market 3) Launch some broacher having all required information about commodity market.
com 14) www.Agriwatch.Cbot.com 10) www.jp 16) www.com 5) www..SG 12) www.com 6) Hot commodities 7) CRB yearbook 8) www.com www.Lbma.Cme.com 9) www.Crbtrader.com 11) www.BIBLIOGRAPHY
1) 2) 3) 4)
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.uk www.Tocom.or.dce.co.com 13) www.cn 15) www.com www..Karvycomtrade.com.ncdex.Sicom.brusaderivative.com.mcxindia.nymex.