Professional Documents
Culture Documents
p-1280 - Commodity Market
p-1280 - Commodity Market
MARKET
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INDEX
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Chapter 1
What is “Commodity”?
Any product that can be used for commerce or an article
of commerce which is traded on an authorized commodity exchange is
known as commodity. The article should be movable of value,
something which is bought or sold and which is produced or used as
the subject or barter or sale. In short commodity includes all kinds of
goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952
defines “goods” as “every kind of movable property other than
actionable claims, money and securities”.
In current situation, all goods and products of agricultural
(including plantation), mineral and fossil origin are allowed for
commodity trading recognized under the FCRA. The national
commodity exchanges, recognized by the Central Government, permits
commodities which include precious (gold and silver) and non-ferrous
metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils
and oilcakes, raw jute and jute goods, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices. Etc.
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Changes in supply: - They are abrupt and unpredictable bringing
about wild fluctuations in prices. This can especially noticed in
agricultural commodities where the weather plays a major role in
affecting the fortunes of people involved in this industry. The futures
market has evolved to neutralize such risks through a mechanism;
namely hedging.
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forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers
and sellers conduct trading at futures exchanges. This
transforms in to continuous price discovery mechanism. The
execution of trade between buyers and sellers leads to
assessment of fair value of a particular commodity that is
immediately disseminated on the trading terminal.
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There would be no need to have large reserves to cover against
unfavorable price fluctuations. This would reduce the risk
premiums associated with the marketing or processing margins
enabling more returns on produce. Storing more and being more
active in the markets. The price information accessible to the
farmers determines the extent to which traders/processors
increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it
is very likely to benefit the farmers. Also, due to the time lag
between planning and production, the market-determined price
information disseminated by futures exchanges would be crucial
for their production decisions.
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Chapter 2
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were mostly traded but as long as there are buyers and sellers, any
commodity can be traded. In 1872, a group of Manhattan dairy
merchants got together to bring chaotic condition in New York market
to a system in terms of storage, pricing, and transfer of agricultural
products. In 1933, during the Great Depression, the Commodity
Exchange, Inc. was established in New York through the merger of
four small exchanges – the National Metal Exchange, the Rubber
Exchange of New York, the National Raw Silk Exchange, and the New
York Hide Exchange.
The largest commodity exchange in USA is Chicago Board
of Trade, The Chicago Mercantile Exchange, the New York Mercantile
Exchange, the New York Commodity Exchange and New York Coffee,
sugar and cocoa Exchange. Worldwide there are major futures trading
exchanges in over twenty countries including Canada, England, India,
France, Singapore, Japan, Australia and New Zealand.
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Chapter 3
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trading was permitted in all recommended commodities. It is timely
decision since internationally the commodity cycle is on upswing and
the next decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices
of any commodity are not fixed, in an organized way. Earlier only the
buyer of produce and its seller in the market judged upon the prices.
Others never had a say.
Today, commodity exchanges are purely speculative in
nature. Before discovering the price, they reach to the producers, end-
users, and even the retail investors, at a grassroots level. It brings a
price transparency and risk management in the vital market. A big
difference between a typical auction, where a single auctioneer
announces the bids and the Exchange is that people are not only
competing to buy but also to sell. By Exchange rules and by law, no
one can bid under a higher bid, and no one can offer to sell higher
than someone else’s lower offer. That keeps the market as efficient as
possible, and keeps the traders on their toes to make sure no one gets
the purchase or sale before they do. Since 2002, the commodities
future market in India has experienced an unexpected boom in terms
of modern exchanges, number of commodities allowed for derivatives
trading as well as the value of futures trading in commodities, which
crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity
datives market was virtually non- existent, except some negligible
activities on OTC basis.
In India there are 25 recognized future exchanges, of
which there are three national level multi-commodity exchanges. After
a gap of almost three decades, Government of India has allowed
forward transactions in commodities through Online Commodity
Exchanges, a modification of traditional business known as Adhat and
Vayda Vyapar to facilitate better risk coverage and delivery of
commodities. The three exchanges are: National Commodity &
Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity
Exchange of India Limited (MCX) Mumbai and National Multi-
Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There
are other regional commodity exchanges situated in different parts of
India.
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situated at Mumbai, which comes under the Ministry of Consumer
Affairs Food and Public Distribution
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Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots
Oil and Oil seeds:-
Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),
Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM
seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,
Caster seed, Yellow soybean, Meal
Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,
Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow
red maize
Spices:-
Jeera, Turmeric, Pepper
Plantation:-
Cashew, Coffee Arabica, Coffee Robusta
Fibers and other:-
Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28
mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium
Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
Energy:-
Crude Oil, Furnace oil
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Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead
Oil and Oil seeds:-
Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,
Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy
meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil,
Sunflower Oil cake, Tamarind seed oil,
Pulses:-
Chana, Masur, Tur, Urad, Yellow peas
Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
Ginger,
Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
Coffee,
Fiber and others:-
Kapas, Kapas Khalli, Cotton (long staple, medium staple,
short staple), Cotton Cloth, Cotton Yarn, Gaur seed and
Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art
Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
Sacking,
Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly
Vinyl Chloride (PVC)
Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas
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Chapter 4
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contracts on futures and options are being offered by CBOT currently
through open outcry and/or electronically. CBOT initially dealt only in
Agricultural commodities like corn, wheat, non storable agricultural
commodities and non-agricultural products like gold and silver.
Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat,
Oats, Ethanol, Rough Rice, Gold, Silver etc.
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Chapter 5
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Today Commodity trading system is fully computerized.
Traders need not visit a commodity market to speculate. With online
commodity trading they could sit in the confines of their home or office
and call the shots.
The commodity trading system consists of certain
prescribed steps or stages as follows:
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Chapter 6
The above things are only procedure in character and the risk
involved and only after understanding the business, he wants to
transact business.
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Net worth of the broker of brokerage firm.
The clientele.
The number of franchises/branches.
The market credibility.
The references.
The kind of service provided- back office functioning being
most important.
Credit facility.
The research team.
These are amongst the most important factors to calculate
the credibility of commodity broker.
Broker:-
The Broker is essentially a person of firm that liaisons between
individual traders and the commodity exchange. In other words the
Commodity Broker is the member of Commodity Exchange, having
direct connection with the exchange to carry out all trades legally. He
is also known as the authorized dealer.
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A TCM is entitled to trade on his own account as well as on account
of his clients, and clear and settle trades himself. A sole proprietor,
Partnership firm, a joint Hindu Undivided Family (HUF), a corporate
entity, a cooperative society, a public sector organization or any other
Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1
refers to transferable non-deposit based membership and TCM-2 refers
to non-transferable deposit based membership.
A person desired to register as TCM is required to submit
an application as per the format prescribed under the business rules,
along with all enclosures, fee and other documents specified therein.
He is required to go through interview by Membership Admission
Committee and committee is also empowered to frame rules or criteria
relating to selection or rejection of a member.
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www.ncdex.com
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Transaction Charges
6 Net worth Requirement 50.00 Lakhs
Chapter 7
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MCX Certified Commodity Professional Reference Material
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Current Scenario in Indian Commodity Market
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NMCE is third national level futures exchange that has been
largely trading in Agricultural Commodities. Trade on NMCE had
considerable proportion of commodities with big market size as jute
rubber etc. But, in subsequent period, the pattern has changed and
slowly moved towards commodities with small market size or narrow
commodities.
Trade strategy:-
It appears that speculators or operators choose commodities or
contracts where the market could be influenced and extreme
speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to
impose restrictions on positions and raise margins on those
commodities. Consequently, the operators/speculators chose another
commodity and start operating in a similar pattern. When FMC brings
restrictions on those commodities, the operators once again move to
the other commodities. Likewise, the speculators are moving from one
commodity to other (from methane to Urad to guar etc) where the
market could be influenced either individually or with a group.
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Commodities There should be large Largely Traded are
demand for and supply of
the commodity- no Bullion, Metals and
individual or a group of Commodities with small
persons acting in concert market size (or narrow
should be in a position to Commodities) like guar,
influence the demand or Burmese Urad, Mentha etc.
supply, and consequently
the price substantially
Towards this, the major
Produced or consumed
Commodities in the
Country such as wheat,
rice, jute etc. and India is
the
top first or second
producer of these
Commodities.
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Thus it is evident that the realization of specified objectives is
still a distinct destination. It is further, evident from the nature of the
commodities largely traded on national exchanges that the factors
driving the current pattern of futures trade are purely speculative.
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Though over 100 commodities are allowed for Derivatives
trading, in practice only a few commodities derivatives are
popular for trading. Again most of the trade takes place only
on few exchanges. This problem can possibly solved by
consolidating some exchanges.
Only about 1% to 5% of total commodity derivatives traded
in country are settled in physical delivery due to
insufficiencies in present warehousing system. As good
delivery system is the back bone of any Commodity trade,
warehousing problem has to be handled on a war footing.
At present there are restrictions in movement of certain
goods from one state to another. These needs to be
removed so that a truly national market could develop for
commodities and derivatives.
Regulatory changes are required to bring about uniformity in
Octri and sales tax etc. VAT has been introduced in country
in 2005, but, has not yet been uniformly implemented by all
states.
A difficult problem in Cash settlement of Commodities
Derivatives contract is that, under Forward Contracts
Regulation Act 1952 cash settlement of outstanding
contracts at maturity is not allowed. That means outstanding
contracts at maturity should be settled in physical delivery.
To avoid this participants square off their their positions
before maturity. So in practice contracts are settled in Cash
but before maturity. There is need to modify the law to bring
it closer to the wide spread practice and save participants
from unnecessary hassle.
Chapter 8
Commodities
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Steel: -
General Characteristics: -
Steel is an alloy of iron and carbon, containing less than 2%
carbon, 1% manganese and small amount of silicon, phosphorus,
sulphur and oxygen. Steel is most important engineering and
construction material in the world. It is most important, multi
functional and the most adaptable of materials. Steel production is 20
times higher a compared to production of all non-ferrous metals put
together.
Steel compared to other materials of its type has low
production costs. The energy required for extracting iron from ore is
about 25% of what is needed for extracting aluminum.
There are altogether about 2000 grades of steel
developed of which 1500 grades are high-grade steels. The large
number of grades gives steel the characteristics of basic production
material.
Categories of Steel: -
Steel market is primarily divided in to two main categories-
flat and long. A flat carbon steel product is a plate product or a (hot or
cold) rolled strip product. Plate products vary in dimensions from 10
mm to 200 mm and thin flat rolled products from 1 mm to 10 mm.
Plate products are used for ship building, construction, large diameter
welded pipes and boiler applications. Thin flat products find end use
applications in automotive body panels, domestic ‘white goods’
products, ‘tin cans’ and the whole host of other products from office
furniture to heart pacemakers. Plates, HR coils and HR Sheet, CR
Sheet and CR coils, GP/GC (galvanized plates and coils) pipes etc. are
included in this category.
A long steel product is a road or a bar. Typical rod product
are the reinforcing rods made from sponge iron for concrete, ingots,
billets, engineering products, gears, tools, etc. Wiredrawn products
and seamless pipes are also part of the long products group. Bars,
rods, structures, railway materials, etc are included in this category.
Sponge Iron/ Direct reduced iron (DRI): This is a high
quality product produced by reducing iron ore in a solid state and is
primarily used as an iron input in electric arc furnace (EAF) steel
making process. This industry is an integral part of the steel sector.
India is one of the leading countries in terms of sponge iron
production. There are a number of coal-based sponge iron/DRI plants
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(in the eastern and central region) and also three natural gas based
plants (in western part of the country) in the country.
Global Scenario: -
The total output of the word crude steel in 2006 stood at 945
million tons, resulting in a growth of 6.7% over the previous year.
China is the word’s largest crude steel producer in the year
2006 with around 220.12 million tons of steel production, followed by
Japan and USA. USA was largest importer of steel products, both
finished and semi finished, in 2005, followed by China and Germany.
The words largest exporter of semi-finished and finished steel
was Japan in 2005, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by
China is estimated to increase by 12-13% in 2007.
Indian Scenario: -
India is the 8th largest producer of the steel with an annual
production of 36.193 million tons, while the consumption is around 30
million tons.
Iron & steel can be freely exported and imported from India.
India is a net exporter of steel.
The Government of India has taken a number of policy
measures, such as removal of iron & steel industry from the list of
industries reserved for public sector, deregulation of price and
distribution of iron & steel and lowering import duty on capital goods
and raw materials, since liberalization for the growth and development
of Indian iron & steel industry.
After liberalization India has seen huge scale addition to its
steel making capacity. The country faces shortage of iron and steel
materials.
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Monthly Variations in Steel Prices from Feb 2005- Dec 2006: - 4
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Quality Specifications
HR coil conforming to the following specification:
Thickness 2 mm
Width either 1250mm or 910 mm at seller’s option.
It should confirm to IS 11513 Grade D/SAE 1008 (International
equivalent)
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Quality Specifications
Mild steels ingots “3 ½ * 4 ½ inch”
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no
piping no rising. Its surface should be plain.
Quality Specifications: -
Steel Flat: -
HR Coil confirming to the following specification: -
Thickness 2mm
Width either 1250 mm or 910 mm at seller’s option.
It should confirm to IS 11513 Grade D/ SALE 1008
(international equivalent)
Delivery is acceptable only in coil form.
Steel Long (Bhavnagar): -
Mild steel ingots 3 ½ * 4 ½ inch.
Carbon composition: Below 0.25%
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Manganese: Above 0.45%
Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.
Steel Long (Govindgarh): -
Mild steel ingots 3 ½ * 4 ½ inch.
Carbon composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.
WHEAT
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behind China. In India, Wheat is sown during October to December
and harvested during March to May. The wheat marketing season in
India is assumed to begin from April every year.
The major wheat producing states in India are Utter Pradesh,
Punjab, Haryana, Madhya Pradesh, Rajastan and Bihar. Which together
account for around 93% of total production. In terms of productivity,
Punjab stands first followed by Haryana, Rajastan, UP, Gujarat, Bihar
and MP. Indian wheat is largely soft/medium hard, medium protein,
bread wheat. India is also produces around 1.5 million tons of durum
wheat, mostly in central and western India, which is not segregated
and marketed separately. India consumes around 72-74 million tons of
Wheat every year.
There are around 1000 large flourmills in India, with a milling
capacity of around 15 million tons. The total procurement of wheat by
Government agencies during last 15 years from 8 to 20 million tons,
accounting for only 15-20% of the total production. India exported
around 5 m illion tons subsidized by Government in 2004-05, as a
result of surplus stock. Recently Govt. took decision to import wheat in
view of, declining stocks and increasing demand.
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ups and downs in the production and consumption at all the
major/minor producing and consuming nation dose influence the long
term price trend.
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Defects
(a) Foreign Matter 2.0% (Max)
(organic/inorganic)
(b) Damaged Kernels 2.00 (Max) provided that infestation damaged
not to exceed 1 per 100 kernels.
(c) Shrunken Shriveled 3.00% (Max)
& broken grains
Total defects (a+b+c) Below 6%
Acceptable up to 8% With rebate on 1:1 basis
Rejected total defect is Above 8%
Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150
grams per kg/hl or pro-rata variance in hector
liter weight deducted per quintal Below 74 kg/hl
Rejected Below 74 kg/hl
Moisture 11%
Acceptable (Max)13% With rebate 1:1
Reject able Above 13%
Quality Specifications: -
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Acceptable Up to 13% with rebate 1:1
Reject able Above 135
Packing Packing should be in B Twill once
used 100kg jute bags, the tare
weight deduction per bag for net
weight calculation shall be 1 kg per
quintal of gross weight.
ANALYSIS
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Survey was conducted across Mumbai City (in areas like
Andheri, Santacruz, Bandra Church gate) to judge the awareness of
peoples regarding investment in Commodity Market.
COMMODITY MARKET
Questionnaire for Investors
4. If no, why?
a. Not aware about invest avenues b. Insufficient income c. Other (specify)
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11. What you think Commodity Market Advertisements (hoardings, prints etc) are
explanatory enough to give needed useful information?
a. YES b. NO
12. Gender
a. Male b. Female
14. Occupation
a. Govt. Job b. Private Job c. Business d. Other (specify)
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Quantitative Analysis
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1. Investor’s preferences: -
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Very few people heard of commodity market. Vast majority of
people are unaware about Commodity Market.
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Above data revels that majority of commodity investors like
to invest in Bullion (Gold & Silver).
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6. Opinion about Commodity Market Advertisements
(Expressed by those who know commodity market)
Qualitative Analysis
1. Investment preferences: -
Most of the investors prefer least risky investment which
gives higher returns. That is why majority (70% of sample) of
people interested in investments other than Share and commodity
market.
Very less number of people (only 7%) showed their
interest in investment in commodity market. Main reason for this is
lack of awareness and complete information about commodity
market.
2. Commodity Exchanges: -
People who are interested in commodity investment
showed more concern towards NCDEX; for its brand name and
people think there might be surety of transaction at NCDEX.
3. Commodities: -
Bullion is most preferred commodity for investment. Because
one can expect maximum returns from such investment due to
rapidly increasing prices of bullion in market.
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4. Advertisements: -
Commodity market Advertisements should be more
informative. And it is the failure of commodity market’s
advertisement campaign to attract people’s attention; as majority
of people are not aware about commodity market.
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12. Gender
a. Male b. Female
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COMMODITY MARKET
Questionnaire for Officials
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ANNEXURE
Call: - An option that gives the buyer the right to a long position
in the underlying futures at a specific price, the call writer
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(seller) may be assigned a short position in the underlying
futures if the buyer exercises the call.
Closing price: - The price (or price range) recorded during the
period designated by the exchange as the official close.
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Delivery notice: - A notice for a clearing member’s intention to
deliver a stated quantity of commodity in settlement of a short
futures position.
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standardized in terms of quantity as specified by exchange.
Contract price of futures contract is transparent as it is available
on centralized trading screen of the exchange. Here valuation of
Mark-to-Mark position is calculated as per the official closing
price on daily basis and MTM margin requirement exists. Futures
contract is more liquid as it is traded on the exchange. In futures
contracts the clearing-house becomes the counter party to each
transaction, which is called novation. Therefore, counter party
risk is almost eliminated. A regulatory authority and the
exchange regulate futures contract. Futures contract is generally
cash settled but option of physical settlement is available.
Delivery tendered in case of futures contract should be of
standard quantity and quality as specified by the exchange.
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most expensive options because the premium includes intrinsic
value.
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Net position: - The difference between the open contracts long
and the open contracts short held in any commodity by any
individual or group.
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commodity (opposite of discount). In options, the price of a call
or put, which the buyer initially pays to the option writer (seller).
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Short: - (1) The selling of an option futures contract. (2) A
trader whose net position in the futures market shows an excess
of open sales over open purchases.
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Summary
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BIBLIOGRAPHY
http://commodities.in
http://finance.indiamart.com/markets/commodity/
http://www.commoditiescontrol.com
http://www.mcxindia.com
http://www.ncdex.com
http://investmentz.co.in
http://trade.indiainfoline.com
http://www.finance.indiamart.com
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Speaker 1: - Introduction:- What is commodity? commodity exchange?
what is commodity futures? objective of commodity futures
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