1.About the Organisation 2.Introduction 2.1Introduction to futures 3.Commodity Futures Market 3.1hierarcial structure of the market 3.

2 Major exchanges 3.2.1 Mcx major commodities traded 3.2.2 NCDEX Major commodities traded 3.2.3 NYMEX 4.Market Participants 5. Pricing-Cost of Carry Model 5.1 Futures Basis 6.Comparative analysis of spot vs. futures prices of Gold Contract 7.Components of transaction 8.Regulations 9.Introduction to Technical analysis 10. current growth of the market 11. Union Budget 2010-11 12. Challenges to be faced in Commodities Market 13.reference

Executive Summary:
Commodities Market is a market where commodity future contracts are traded. Commodities’ trading has been in existence in India since 130 years but due to constant ban and tightening of regulations in the market by the government, it could never settle down and developed at a snail’s pace till recently. But with the new Exchanges like MCX and NCDEX coming in and providing a better platform for trading and with more support from the government this market is growing at a rapid pace now with over 111% growth since 2006-07. Commodities market consists of three participants namely Hedgers, Speculators and Arbitragers who trade in the market for various benefits. About the Organization: Karvy Comtrade Limited (KCTL) is another venture of the prestigious Karvy group. With well established presence in the multifarious facets of the modern financial services industry from stock broking to registry services, Karvy also entered into the commodities derivatives market. The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, they offer a wide reach through their branch network of over 225 branches located across 180 cities. The headquarters of Karvy Comtrade Limited (KCTL) is located at Karvy Comtrade Limited, 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad – 500 034, Andhra Pradesh, India. Contact Details: Mail: commodity@karvy.com Telephone: +91-40–23431569/23388708/32946279/32946313 Fax: +91-040-66259955/66255559

Introduction to Futures: Forward Market: A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. The salient features of forward contracts are: ➢ ➢ ➢ ➢ ➢ They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged. Limitations of forward contract:

Lack of centralization of trading Illiquidity, and Counterparty risk

➢ ➢

Future Market: Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or

which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. The standardized items in a futures contract are: ➢ ➢ ➢ ➢ ➢ Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement

Distinction between futures and forwards Futures Trade on an organized exchange Standardized contract terms hence more liquid Follows daily settlement Forwards OTC in nature Customized contract terms hence less liquid Settlement happens at end of period

Futures terminology
➢ ➢ ➢ ➢

Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Delivery unit: The amount of asset that has to be delivered under one contract. Basis: Basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.

➢ ➢

Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market (MTM): In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called marking-to-market.

Maintenance Margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.

Options: Options are derivative contracts which give the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a futures contract, the purchase of an option requires an upfront payment. There are two basic types of options, call options and put options. ➢ Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. ➢ Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. Options are currently not traded in the commodities future market.

Commodities Future Market:

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is only in the last decade that commodity future exchanges have been actively encouraged. History: The history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started futures trading in 1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India. Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion in Bombay (1920). However, many feared that derivatives fuelled unnecessary speculation in essential commodities, and were detrimental to the healthy functioning of the markets for the underlying commodities, and hence to the farmers. With a view to restricting speculative activity in cotton market, the Government of Bombay prohibited options business in cotton in 1939. Later in 1943, forward trading was prohibited in oilseeds and some other commodities including food-grains, spices, vegetable oils, sugar and cloth. After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952 which regulated forward contracts in commodities all over India. The Act applies to goods, which are defined as any movable property other than security, currency and actionable claims. The Act prohibited options trading in goods along with cash settlements of forward trades, rendering a crushing blow to the commodity derivatives market. Under the Act, only those associations/exchanges, which are granted recognition by the Government, are allowed to organize forward trading in regulated commodities. The Act envisages three-tier regulation: (i) The Exchange which organizes forward trading in commodities can regulate trading on a day-today basis; (ii) the Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government, and (iii) the Central Government - Department of

Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution - is the ultimate regulatory authority. The already shaken commodity derivatives market got a crushing blow when in 1960s, following several years of severe draughts that forced many farmers to default on forward contracts (and even caused some suicides), forward trading was banned in many commodities considered primary or essential. As a result, commodities derivative markets dismantled and went underground where to some extent they continued as OTC contracts at negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading rules for some commodities, but the market could never regain the lost volumes. Change in Government Policy After the Indian economy embarked upon the process of liberalization and globalization in 1990, the Government set up a Committee in 1993 to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening of the Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. Commodity futures trading in India remained in a state of hibernation for nearly four decades, mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely decision too, since internationally the commodity cycle is on the upswing. Different Components of the Commodities Market are: 1. Lot sizes: Commodities are traded in equal sized lots where the each lot specifies the minimum amount of quantity that is available for trading in that commodity. The permitted trading lot size for the futures contracts on individual commodities is stipulated by the exchange from time to time.

Example: Lot size for GOLD.995 Contract is 1KG on MCX. 2. Price Quotation: This is the price that is shown on the terminal for a specified quantity of a commodity. Example: Price Quotation for GOLD.995 Contract is 10Gram on MCX. 3. Physical Settlement: Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. Physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. ➢ There are limits on storage facilities in different states. ➢ There are restrictions on interstate movement of commodities. Besides state level octroi and duties have an impact on the cost of movement of goods across locations. 4. Warehousing: Commodity exchanges use certified warehouses (CWH) for the purpose of handling physical settlements. Such CWH are required to provide storage facilities for participants in the commodities markets and to certify the quantity and quality of the underlying commodity. The advantage of this system is that a warehouse receipt becomes good collateral, not just for settlement of exchange trades but also for other purposes too. In India, the warehousing system is not as efficient as it is in some of the other developed markets. Central and state government controlled warehouses are the major providers of agriculture-produce storage facilities. Apart from these, there are a few private warehousing being maintained. However there is no clear regulatory oversight of warehousing services. 5. Quality of underlying assets: When the underlying asset is a commodity, the quality of the underlying asset is of prime importance. There may be quite some variation in the quality of what is available in the marketplace. When the asset is specified, it is therefore important that the exchange stipulate the

grade or grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality assurance/ certification procedures. A good grading system allows commodities to be traded by specification. Currently there are various agencies that are responsible for specifying grades for commodities. For example, the Bureau of Indian Standards (BIS) under Ministry of Consumer Affairs specifies standards for processed agricultural commodities whereas AGMARK under the department of rural development under Ministry of Agriculture is responsible for promulgate standards for basic agricultural commodities. Apart from these, there are other agencies like EIA, which specify standards for export oriented commodities. Hierarchy of Commodities Market:

Major Exchanges: Multi Commodity Exchange (MCX):

MoCA-Ministry of Consumer Affairs FMC-Forward Market MCX-Multi Commodity NCDEX-National

Headquartered in the financial capital of India, Mumbai, Multi Commodity Exchange of India Commission Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised the Government of India to facilitate online trading, and clearing and settlement operations for

Exchange set up by Financial Technologies (India) Ltd (FTIL) has permanent recognition from Exchange

commodity futures across the country. The Exchange started operations in November 2003, and Commodity & Derivatives Exchange has risen to the No. 1 position among all commodity exchanges in India. MCX has been certified to three ISO standards including ISO 9001:2000 quality management
NMCE-National Multi Commodity Exchange

standard, ISO 27001:2005 information security management standard and ISO 14001:2004 environment management standard. MCX offers futures trading in more than 40 commodities from various market segments including bullion, energy, ferrous and non-ferrous metals, oil and oil seeds, cereal, pulses, plantation, spices, plastic and fibre. It has strategic alliances with various leading International Exchanges, including Tokyo Commodity Exchange, London Metal Exchange, New York Mercantile Exchange, Bursa Malaysia Derivatives Berhad, among others. For MCX, staying connected to the grassroots is imperative. Its domestic alliances aid in improving ethical standards and providing services and facilities for overall improvement of the commodity futures market.

Key shareholders: Promoted by FTIL, MCX enjoys the confidence of blue chips in the Indian and international financial sectors. MCX's broad-based strategic equity partners include NYSE Euronext, State Bank of India and its associates (SBI), National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd (NSE), SBI Life Insurance Co Ltd, Bank of India (BOI) , Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Ventures, IL&FS, Kotak Group, Citi Group and Merrill Lynch. Major Commodities Traded: GOLD.995 SILVER CRUDE OIL ZINC ALUMINIUM GOLDMINI SILVERMINI NICKEL NATURAL GAS CRUDEPALMOIL GOLDGUINEA COPPER LEAD MENTHOL POTATO

Table showing the one rupee movement and Breakeven Point (BEP) of the above commodities in MCX

Commod ity
gold.995 goldM goldGuinea silver silverM copper

Tic PQ
10gra ms 10 grams 8 grams 1kg 1 kg 1 kg 1 1 kg 100 1 grams 8 1 grams 1 30 kg 1 5 kg 0.05 1 MT

100 10 1 30 5 100

B of MP
1809 2 1808 9 1421 9 2971 5 2971 4 318. 542.76 54.267 4.2657 267.435 44.571 95.625

B(.03) *2
1085.52 108.534 8.5314 534.87 89.142 191.25



18102. 86 18099. 85 14227. 53 29732. 83 29731. 83 318.94

0 100 crude oil Nickel Lead ZINC Natural Gas Menthol Aluminium *Cardamo m crude palm oil Potato *Almond 1 BBL 1 kg 1 kg 1 kg 1 mmBt u 1 kg 1 kg 1 kg 10 kg 100 kg 1 kg 1 BBL 0.1 250 kg 0.05 5 MT 0.05 5 MT 1250 0.1 mmBtu 0.1 360 kg 0.05 5 MT 0.1 100 kg 0.1 10 MT 0.1 30 MT 0.25 500 kg 100 250 500 0 500 0 125 0 360 500 0 100 100 0 300 500

75 3384 1020 .4 91.5 94.0 5 193. 8 703. 2 95.1 1540 366 479 354 72.675 75.9456 142.65 46.2 109.8 43.11 53.1 145.35 151.8912 285.3 92.4 219.6 86.22 106.2 101.52 76.53 137.25 141.075 203.04 153.06 274.5 282.15

13 3386.0 3 1021.0 12 91.554 9 94.106 43 193.91 63 703.62 19 95.157 06 1540.9 24 366.21 96 479.28 74 354.21 24

* indicates commodities rarely/less traded on MCX Where: PQ=Price Quotation ML=Market Lot MG=Money Generated MP=Market Price as on 12/5/2010 B=Brokerage (3 paisa) BEP=Breakeven Point when bought at Market Price

National Commodities and Derivatives Exchange (NCDEX): NCDEX is a public limited nation-level, technology driven de-mutualised on-line commodity exchange with an independent Board of Directors and professional management - both not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. It was incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations. NCDEX headquarters are located in Mumbai and offers facilities to its members from the centres located throughout India. The Exchange, as on May 21, 2009 when Wheat Contracts were re-launched on the Exchange platform, offered contracts in 59 commodities - comprising 39 agricultural commodities, 5 base metals, 6 precious metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed, Gaur Seed, Soyabean Seeds, Turmeric and Jeera. Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Other shareholders: Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE) and Shree Renuka Sugars Limited Major Commodities Traded: CHANA CHILLI COCUD




Table showing the one rupee movement and Breakeven Point (BEP) of the above commodities in NCDEX

B of Commodi ty

Tic PQ
100 KG 100 KG 100 KG 100 KG 100 KG 10 KG 100 KG 100 KG 100 KG 40 KG 100 KG

100 100 100 50 100 100 0 100 50 100 250 30

0.03 B(.03) MP
381. 75 3085 2178 4441 960 363 2801 4955 2312 974 1215 3


11.45 25 92.55 65.34 66.61 5 28.8 108.9 84.03 74.32 5 69.36 73.05 109.3 77

22.905 185.1 130.68 133.23 57.6 217.8 168.06 148.65 138.72 146.1 218.754

381.97 91 3086.8 51 2179.3 07 4443.6 65 960.57 6 363.21 78 2802.6 81 4957.9 73 2313.3 87 974.58 44 12160. 29

0.2 10 MT 0.5 10 MT 0.5 10 MT 1 5 MT 0.5 10 MT 0.0 5 10 MT 1 10 MT 1 5 MT 1 10 MT 0.2 10 MT 1 3 MT


0.0 5 10 MT 0.0 5 10 MT 0.1 360 KG 0.1 15 MT 1 1 MT 0.0 5 10 MT 1 1 MT 0.0 5 10 MT 10 10 MT 0.5 10 MT 0.0 5 10 MT 1 10 MT 0.2 10 MT 100 0.5 BARREL 10 10 MT 100 1 BARREL 1250 0.1 mmBtu 0.1 2 MT 0.0 1 MT

100 0 100 360 150 10 100 0 10 500 10 100 100 0 100 100 460 894 783 449 1650 0 403 1533 2 500 1652 0 2004 446. 65 1472 5 1155 138 26.82 84.56 4 20.20 5 49.5 120.9 45.99 6 75 49.56 60.12 133.9 95 441.7 5 34.65 109.7 100 10 3658 2510 4 7.53 101.2 100 125 0 200 0 100 3374 184. 1 187. 8 317. 2 69.03 75 112.6 8 95.26 202.44 138.075 225.36 190.53 219.48 15.06 276 53.64 169.128 40.41 99 241.8 91.992 150 99.12 120.24 267.99 883.5 69.3

460.27 6 894.53 64 783.46 98 449.26 94 16509. 9 403.24 18 15341. 2 500.3 16529. 91 2005.2 02 446.91 8 14733. 84 1155.6 93 3660.1 95 2511.5 06 3376.0 24 184.21 05 187.91 27 317.74


0 100 10

55 1827 3 1805 1

5 548.1 9 54.15 3 1096.38 108.306

05 18283. 96 18061. 83

1837 100 100 0 250 250 9 92.4 1036 .2 2521 2900 5 30 30 10 500 0 0 2950 0 3052 3 2506 0 94.4

551.3 7 27.72 77.71 13 189.0 75 1102.74 55.44 155.4225 378.15

18390. 03 92.455 44 1036.7 72 2522.5 13 29017.

43.5 265.5 274.7 07 75.18 141.6

87 531 549.414 150.36 283.2

4 29517. 7 30541. 31 25075. 04 94.456 64

* indicates commodities rarely/less traded on NCDEX Where: PQ=Price Quotation ML=Market Lot MG=Money Generated MP=Market Price as on 12/5/2010

B=Brokerage (3 paisa) BEP=Breakeven Point when bought at Market Price New York Mercantile Exchange The New York Mercantile Exchange (NYMEX) is the world's largest physical commodity futures exchange, located in New York City. Its two principal divisions are the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX) which were once separate but are now merged. The parent company of the New York Mercantile Exchange, Inc., NYMEX Holdings, Inc. became listed on the New York Stock Exchange on November 17, 2006, under the ticker symbol NMX. On March 17, 2008, Chicago based CME Group signed a definitive agreement to acquire NYMEX Holdings, Inc. for $11.2 billion in cash and stock. History: Commodity exchanges began in the middle of the 19th century, when businessmen began organizing market forums to make buying and selling of commodities easier. These marketplaces provided a place for buyers and sellers to set the quality, standards, and establish rules of business. By the late 1800s about 1,600 marketplaces had sprung up at ports and railroad stations. In 1872, a group of Manhattan dairy merchants got together and created the Butter and Cheese Exchange of New York. Soon, egg trade became part of the business conducted on the exchange and the name was modified to the Butter, Cheese, and Egg Exchange. In 1882, the name finally changed to the New York Mercantile Exchange when opening trade to dried fruits, canned goods, and poultry. As centralized warehouses were built into principal market centers such as New York and Chicago in the early 20th century, exchanges in smaller cities began to disappear giving more business to the exchanges such as the NYMEX in bigger cities. In 1933, the COMEX was established through the merger of four smaller exchanges; the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. On August 3, 1994, the NYMEX and COMEX finally merged under the NYMEX name. Now, the NYMEX operates in a trading facility and office building with two trading floors in the World Financial Center in downtown Manhattan Commodities Traded:

NYMEX Division Coal Gasoline Palladium Crude Oil Heating oil Platinum Electricity Natural gas Uranium

COMEX Division Aluminum Copper Gold Silver

Market Participants: There are 3 different types of Participants in the commodities market namely: ➢ Hedgers ➢ Speculators ➢ Arbitragers Hedgers: Many participants in the commodity futures market are hedgers. They use the futures market to reduce a particular risk that they face. This risk might relate to the price of wheat or oil or any other commodity that the person deals in. The classic hedging example is that of wheat farmer who wants to hedge the risk of fluctuations in the price of wheat around the time that his crop is ready for harvesting. By selling his crop forward, he obtains a hedge by locking in to a predetermined price. Hedging does not necessarily improve the financial outcome; indeed, it could make the outcome worse. What it does however is, that it makes the outcome more certain. Hedgers could be government institutions, private corporations like financial institutions, trading companies and even other participants in the value chain, for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices. There are basically two kinds of hedges that can be taken:

Short Hedge: A short hedge is a hedge that requires a short position in futures contracts. It is appropriate when the hedger already owns the asset, or is likely to own the asset and expects to sell it at some time in the future. Long Hedge: Hedges that involve taking a long position in a futures contract are known as long hedges. A long hedge is appropriate when a company knows it will have to purchase a certain asset in the future and wants to lock in a price now. Hedge Ratio: Hedge ratio is the ratio of the size of position taken in the futures contracts to the size of the exposure in the underlying asset.


σS σF

S: Change in spot price, S,

during a period of time equal to the life of the hedge

F: Change in futures price,

F, during a period of time equal to the life of the hedge


: Standard deviation of



: Standard deviation of



: Coefficient of correlation between

S and


h : Hedge ratio Hedging stretches the marketing period Hedging protects inventory values Hedging permits forward pricing of products The asset whose price is to be hedged may not be exactly the same as the asset The hedger may be uncertain as to the exact date when the asset will be bought or sold The expiration date of the hedge may be later than the delivery date of the futures

Advantages of hedging: • • • • • •

Limitation of hedging: underlying the futures contract


Speculators: An entity having an opinion on the price movements of a given commodity can speculate using the commodity market. While the basics of speculation apply to any market, speculating in commodities is not as simple as speculating on stocks in the financial market. For a speculator who thinks the shares of a given company will rise, it is easy to buy the shares and hold them for whatever duration he wants to. However, commodities are bulky products and come with all the costs and procedures of handling these products. The commodities futures markets provide speculators with an easy mechanism to speculate on the price of underlying commodities. There are 2 ways how the commodity futures markets can be used for speculation. • • Arbitragers: Bullish commodity, buy futures Bearish commodity, sell futures

Arbitrage involves simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. F = Where r =cost of financing T=time till expiration U=present value of all storage costs Whenever the futures price deviates substantially from its fair value, arbitrage opportunities arise. To capture mispricing that result in overpriced futures, the arbitrager must sell futures and buy spot, whereas to capture mispricing that result in underpriced futures, the arbitrager must sell spot and buy futures. (S+U)erT

Cost of Carry Model: Price Discovery: The process of arriving at a figure at which a person buys and another sells a futures contract for a specific expiration date is called price discovery. For pricing purposes, forward and the futures market are treated as one and the same. A futures contract is nothing but a forward contract that is exchange traded and that is settled at the end of each day. The buyer who needs an asset in the future has the choice between buying the underlying asset today in the spot market and holding it, or buying it in the forward market. If he buys it in the spot market today, it involves opportunity costs. He incurs the cash outlay for buying the asset and he also incurs costs for storing it. If instead he buys the asset in the forward market, he does not incur an initial outlay. However the costs of holding the asset are now incurred by the seller of the forward contract who charges the buyer a price that is higher than

the price of the asset in the spot market. This forms the basis for the cost-of-carry model where the price of the futures contract is defined as: F=S–C Where: F = Futures price S = Spot price C = Holding costs or carry costs The fair value of a futures contract can also be expressed as: F = S(l + r)T (Discrete Compounding) r = percent cost of financing T = time till expiration Whenever the futures price moves away from the fair value, there would be opportunities for arbitrage. If F < S(1 + r)T or F > S(1 + r)T, arbitrage would exist. Pricing of options and other complex derivative along with futures securities requires the use of continuously compounded interest rates. F = SerT e = 2.71828 Futures Basis: The cost-of-carry model explicitly defines the relationship between the futures price and the related spot price. The difference between the spot price and the futures price is called the basis. We see that as a futures contract nears expiration, the basis reduces to zero. This means that there is a convergence of the futures price to the price of the underlying asset. This happens because if the futures price is above the spot price during the delivery period it gives rise to a clear arbitrage opportunity for traders. In case of such arbitrage the trader can short his futures contract, buy the asset from the spot market and make the delivery. This will lead to a profit equal to the

difference between the futures price and spot price. As traders start exploiting this arbitrage opportunity the demand for the contract will increase and futures prices will fall leading to the convergence of the future price with the spot price. If the futures price is below the spot price during the delivery period all parties interested in buying the asset will take a long position. The trader would buy the contract and sell the asset in the spot market making a profit equal to the difference between the future price and the spot price. As more traders take a long position the demand for the particular asset would increase and the futures price would rise nullifying the arbitrage opportunity.

Fig: Variation of basis over time Comparative analysis of spot VS futures prices of Gold Contract To study the variation of basis over time, I have taken up June10 Gold contract (GCM0

) of COMEX. The specification of this contract is as under: Contract start date: 29th June 2005 Contract end date: 28th June 2010 1 lot= 100 troy oz 1 troy oz= 31.1 grams

Though the contract started in June 2005 I have taken the data from 31st December 2007 till 17th June 2010 for this study because of very low liquidity in the contract at its initial years. The contract was not actively traded because of its long trading cycle and slow movement. However the volumes started showing up in this Contract since last few months as it neared expiration as can been seen from the below table. Year 2005 2006 2007 2008 2009 2010 Volume in Lots 34 990 11541 28271 187216 7448588

Fig: No. of lots traded in GCM0 Commdy contract of COMEX from 29th June 2005 to 24th June 2010. Graph showing the movement of spot and futures price of the GCM0 Comdty from 31st Dec 2007 to 17th June 2010 is given below

Note: Daily Closing prices of spot and futures has been taken to draw the line graph. Findings: As can be seen from the above chart that as the contract nears expiration the spot and the futures prices start converging with any difference in the prices being used advantageously by the arbitragers. The prices of the contract move in almost the same ranges as the spot in the developed market with any opportunity for arbitration being captured by the arbitrages. In the above GCM0 Commodity contract of COMEX we can see that there was almost negligible volume of trades happening in the initial years and also there was a difference in the spot and

future prices during that period due to the absence of the market participants but as the contract neared expiration the volumes increased and the prices started converging and moved in the same range.

Components of transaction:
For any transaction to be complete it has to go under the following three components namely trading, clearing and settlement.

Trading involves the determination or fixation of price of the commodity between the buyer and the seller. Futures trading system: The trading system provides a fully automated screen-based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. Commodity futures trading cycle: Trading in any futures contract is valid until the expiration of the contract after which trading in that contract is seized. This cycle from the start of the contract till its expiry is referred to as trading cycle of that contract. EXAMPLE:

Start Date: 07Dec2009 12:00:00 AM End Date: 05Aug2010 11:59:59 PM

Contract Cycle: Contract cycle specifies the number of contracts in a given commodity available for trading at a specific period/time in the future market.

Fig. Contract Cycle in NCDEX The figure shows the contract cycle for futures contracts on NCDEX. As can be seen, at any given point of time, three contracts are available for trading - a near-month, a middle-month and a far-month. As the January contract expires on the 20th of the month, a new three-month contract starts trading from the following day, once more making available three index futures contracts for trading. Trading conditions: There are broadly three conditions attached to each order that is placed for trading namely: ➢ Time Condition ➢ Price Condition ➢ Other Condition Margins for trading in futures Margin is the deposit money that needs to be paid to buy or sell each contract. The margin requirements for most futures contracts range from 2% to 15% of the value of the contract. Types of margins as they apply on most futures exchanges are:

Initial margin: The amount that must be deposited by a customer at the time of entering into a contract is called initial margin. This margin is meant to cover the largest potential loss in one day. The margin is a mandatory requirement for parties who are entering into the contract. Maintenance margin: To ensure that the balance in the margin account never becomes negative, a maintenance margin, which is somewhat lower than the initial margin, is set. If the balance in the margin account falls below the maintenance margin, the trader receives a margin call and is requested to deposit extra funds to bring it to the initial margin level within a very short period of time. Additional margin: In case of sudden higher than expected volatility, the exchange calls for an additional margin, this is a preemptive move to prevent breakdown. Mark-to-Market margin (MTM): At the end of each trading day, the margin account is adjusted to reflect the trader's gain or loss. This is known as marking to market the account of each trader. Clearing and settlement Most futures contracts do not lead to the actual physical delivery of the underlying asset. The settlement is done by closing out open positions, physical delivery or cash settlement. All these settlement functions are taken care of by an entity called clearing house or clearing corporation. Clearing: Clearing involves finding out net outstanding. Clearing of trades that take place on an exchange happens through the exchange clearing house. A clearing house is a system by which exchanges guarantee the faithful compliance of all trade commitments undertaken on the trading floor or electronically over the electronic trading systems. The main task of the clearing house is to keep track of all the transactions that take place during a day so that the net position of each of its members can be calculated. Clearing house is responsible for the following: ➢ Effecting timely settlement. ➢ Trade registration and follow up. ➢ Control of the evolution of open interest.

➢ Financial clearing of the payment flow. ➢ Physical settlement (by delivery) or financial settlement (by price difference) of contracts. ➢ Administration of financial guarantees demanded by the participants. There are two types of clearing members: Trading cum clearing members (TCMs) The TCM membership entitles the members to trade and clear, both for themselves and/ or on behalf of their clients. Professional clearing members (PCMs) The PCM membership entitles the members to clear trades executed through Trading cum Clearing Members (TCMs), both for themselves and/ or on behalf of their clients. Clearing mechanism: The clearing mechanism essentially involves working out open positions and obligations of clearing members. This position is considered for exposure and daily margin purposes. The open positions of PCMs are arrived at by aggregating the open positions of all the TCMs clearing through him, in contracts in which they have traded. A TCM's open position is arrived at by the summation of his clients' open positions, in the contracts in which they have traded. Client positions are netted at the level of individual client and grossed across all clients, at the member level without any set-offs between clients. Proprietary positions are netted at member level without any set-offs between client and proprietary positions. Settlement Settlement involves actual exchange of commodities or settling through cash and closing out the open positions. Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract.
➢ Daily settlement price: Daily settlement price is the consensus closing price as arrived

after closing session of the relevant futures contract for the trading day. However, in the

absence of trading for a contract during closing session, daily settlement price is computed as per the methods prescribed by the exchange from time to time.
➢ Final settlement price: Final settlement price is the closing price of the underlying

commodity on the last trading day of the futures contract. All open positions in a futures contract cease to exist after its expiration day. Settlement Mechanism Settlement of commodity futures contracts is a little different from settlement of financial futures which are mostly cash settled. The possibility of physical settlement makes the process a little more complicated. Daily mark to market settlement is done till the date of the contract expiry. This is done to take care of daily price fluctuations for all trades. On the date of expiry, the final settlement price is the spot price on the expiry day. The spot prices are collected from members across the country through polling. The polled bid/ ask prices are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price. Settlement methods Settlement can be done in three ways namely: ➢ Physical delivery of the underlying asset ➢ Closing out by offsetting positions ➢ Cash settlement

At present, there are three tiers of regulations of forward/futures trading system in India, namely, government of India, Forward Markets Commission (FMC) and commodity exchanges. The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. Proper regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting

interests of society at large.. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market. Rules governing commodity derivatives exchanges

Limit on net open position as

on the close of the trading hours. Sometimes limit is also imposed on intra-day net open position. The limit is imposed operator-wise, and in some cases, also member wise. 2. Circuit-filters or limit on price

fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. 3. Special margin deposit to be

collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the exchange. 4. Circuit breakers or

minimum/maximum prices: These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the exchanges. 5. Skipping trading in certain

derivatives of the contract, closing the market for a specified period and even closing out the contract: These extreme measures are taken only in emergency situations. Penalties for default: Any buyer or seller if fails to take or deliver the commodities which he/she is obliged to, then in such condition penalty is imposed on such defaulters by closing out their derivatives contracts by the exchange. It can also use the margins deposited by such clearing member to recover the loss. The settlement for the defaults in delivery is to be done in cash within the period as prescribed by

the exchange at the highest price from the last trading date till the final settlement date with a markup thereon as may be decided from time to time. Clearing and settlement process Settlement obligations statements for TCMs: The exchange generates and provides to each trading clearing member, settlement obligations statements showing the quantities of the different kinds of commodities for which delivery/ deliveries is/ are to be given and/ or taken and the funds payable or receivable by him in his capacity as clearing member and by professional clearing member for deals made by him for which the clearing Member has confirmed acceptance to settle. The obligations statement is deemed to be confirmed by the trading member for which deliveries are to be given and/ or taken and funds to be debited and/ or credited to his account as specified in the obligations statements and deemed instructions to the clearing banks/ institutions for the same. Settlement obligations statements for PCMs: The exchange/ clearing house generates and provides to each professional clearing member, settlement obligations statements showing the quantities of the different kinds of commodities for which delivery/ deliveries is/ are to be given and/ or taken and the funds payable or receivable by him. The settlement obligation statement is deemed to have been confirmed by the said clearing member in respect of every and all obligations enlisted therein. Rules governing investor grievances, arbitration In matters where the exchange is a party to the dispute, the civil courts at Mumbai have exclusive jurisdiction and in all other matters, proper courts within the area covered under the respective regional arbitration center have jurisdiction in respect of the arbitration proceedings falling/ conducted in that regional arbitration center.

Research-Technical analysis
Introduction to Technical Analysis The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes

a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. The art of technical analysis is to try to identify trend changes at an early stage and maintain an investment or trading posture until the weight of evidence shows or proves that the trend has reversed. Evidence here refers to price patterns, trend lines, moving averages, momentum and so forth [1]. One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. Take a look at the chart below:

Source: investopedia.com

Types of Trend There are three types of trend: •Uptrends •Downtrends •Sideways/Horizontal Trends

As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere. Trend Lengths Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look at the below Figure to get a sense of how these three trend lengths might look.

Chart by MetaStock


A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. Support: Support can be defined as buying, actual or potential, sufficient in volume to halt a downtrend in prices for an appreciable period. Support can be thought of as a temporary floor. Resistance: Resistance can be defined as selling, actual or potential, sufficient in volume to satisfy all bids and hence stop prices going higher for a time. Resistance can be thought as a temporary ceiling. Below chart shows the support and resistance lines:

Chart by MetaStock

Charts: A chart is simply a graphical representation of a series of prices over a set time frame. There are four main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart, the candlestick chart and the point and figure chart.

I will be concentrating on candlestick charts in this report. Candlestick Chart: In this type of charts the candles consists of a vertical rectangle with two lines spiking up and down. The vertical rectangle is known as the real body and encompasses the trading activity between the opening and closing prices. For example, if the opening price is higher than the closing price, it will be recorded at the top of the real body and the closing price at the bottom. The vertical line above the body measures the distance between the high of the day and the higher of the opening or closing price. The lower line represents the distance between the low of the day and the lower of the opening or closing price. Days when the close is higher than the opening are represented by transparent real bodies; days when the opening is higher than the close are displayed by a solid real body.

Source: StockCharts.com

Long Versus Short Bodies: Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

Source: StockCharts.com

Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. Long Versus Short Shadows The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlestick with long shadows show that traded extended well past the open and close.

Source: StockCharts.com

Spinning Tops: Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session.

Source: StockCharts.com

Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word "Doji" refers to both the singular and plural form.

Source: StockCharts.com

Bulls Versus Bears A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time. An analogy to this battle can be made between two football teams, which we can also call the Bulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown for the Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to the high, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer the Bears are to a touchdown. While there are many variations, I have narrowed the field to 6 types of games (or candlesticks):

Source: StockCharts.com

1. Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game. 2. Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game. 3. Small candlesticks indicate that neither team could move the ball and prices finished about where they started. 4. A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback. 5. A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback. 6. A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff. Candlestick Positioning:

Star Position A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star

position has a small real body. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action. Harami Position A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it's preferable if they are.

Source: StockCharts.com

Source: StockCharts.com

Moving Averages: Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor. Types of Moving Averages

There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential. Conclusion: It’s all very well knowing the principles and theory of technical analysis, but it is equally important to be able to put them in practice. You must be prepared to change your position if market conditions change or if things do not work out as you originally expected. Technical analysis can do a lot of help if we have patience, discipline, and objectivity to apply the basic principles. But it is not a guarantee success system you must be ready for failures also as there is and never can be a sure shot successful predictions about any market, we can only get close to perfection with more and more evidence of the market movements in any direction. Growth of Commodities Market

The above bar chart shows that the volumes traded in the commodity market is steadily growing from 3676926.67 crore in 2006-07 to 7764754.05 crore in 2009-10(till 31st may 2010) which shows a growth of over 111.17% . The yearly growth from Apr-2006 to May-2010 has been 10.98 %, 29.09% and 47.92% for the years 2006-7 to 2007-08, 2007-08 to 2008-09, 2008-09 to 2009-10 respectively which shows that the commodity market has been steadily growing over the years. Share of different commodities for the year Apr2009 to March2010 (till 31st March) and Apr2008 to March2009 (till 31st March)


The Bullion Commodities has the highest percentage of share among all the commodities traded in the commodities market with 56.65% and 40.75% in the years 2008 & 2009 respectively

The part of share of bullion commodities has gone to the metals in the year 2009-10 with the metals growing from 11.79% to 23.20% The share value of Agriculture Commodities has gone up from 11.95% in 2008-09 to 15.69% in 2009-10 which is due the after recession effects and relaxing of rules by the regulator

The share value of Metals other than bullion has gone up from 11.79% in 2008-09 to 23.20% in 2009-10 due to the huge rally in the leading 5 metals commodities lead by copper which was due to lower prices and growth in the china’s industries which caused huge demand for these metals thereby making these metals fundamentally strong for participants to invest

• •

The share value of Energy commodities is more or less constant at 20% The share value of Other commodities also remained constant at 0.05%

Growth in different categories of commodities traded in the market

Findings: From the above bar chart we can observe that the growth in the Metals Commodities has been the highest with 191.16% followed by Agriculture, Energy, Other and Bullion with 94.15%, 53.72%, 13.53% and 6.4% of growth respectively. However the bullion commodities still lead the race in the trading volume with a share of 40.75% for the year 2009-10 though there has been a decrease in this from 57% as in the year 2008-09.This decrease in share of bullions in the market has been captured by the Metals with 23.20% in 2009-10 from 12% in 2008-09. The total volumes traded on different National Exchanges for the year 2009 (1st Jan to 31st May) are

Findings: It is evident from the above chart that Multi Commodity Exchange (MCX) has the highest volumes traded compared to all other Exchanges with 88% share followed by National Commodities and Derivatives Exchange (NCDEX) with 10% share even though both have started functioning in the same year i.e. in 2003. This huge share of MCX in the commodities market can be attributed to the promotional strategies carried out by its promoters FTIL in popularizing the exchange whereas NCDEX being an entity of National Stock Exchange (NSE) could not gain such popularity, as NSE had its commitments in promoting and handling its core business in Share Market. Note: Trade volumes on other regional exchanges are negligible and have not been considered here for calculation.

The total volumes traded on different National Exchanges for the year 2010 (1st Jan to 31st May) are

Findings: It is evident from the above chart that Multi Commodity Exchange (MCX) has the highest volumes traded compared to the other Exchanges with 82% share in the year 2010 also followed by National Commodities and Derivatives Exchange (NCDEX) with 10% share. However its (MCX) share has gone down from 88% to 82% with the commencement of the new National Exchange, Indian Commodities Exchange Limited (ICEX) which started on 27th November 2009. This exchange has been able to take 5% share of the market surpassing the already established National Multi Commodity Exchange (NMCE). Note: Trade volumes on other regional exchanges are negligible and have not been considered here for calculation.

Comparison between the volumes in the National Exchanges for the years 2009 & 10 from 1 st Jan to 31st May

Findings: The above chart shows that the growth in volumes traded is highest in NMCE with 76.2% followed by NCDEX and MCX with 53.5% and 41.6% respectively. However its (NMCE) share has grown by a mere 1% from its 2009 levels. MCX still has the highest volumes traded among all the exchanges with 88 % and 82% share of the total volumes traded in the market in years 2009 and 2010 respectively. Share of Volume traded by value in major commodities of MCX for the years 2008-09 & 200910 from 1st April to 31st March

1. The share of Gold is highest in both the years though there has been a decrease in it from

46% in 2008-09 to 30% in 2009-10 due to sharp rises in the prices of gold and the recovery of economy after recession which in turn made the other market stable with lots of opportunity
2. Share of silver remained unchanged with 18% in both the years 3. Share of copper has increased by 5% from 9% in 2008-09 to 14% in 2009-10 which can

be attributed to the rise in industries in china along with the huge opportunity which lied in the metals after it had a huge fall in prices in 2008 4. Share of crude oil had a slight loss of its share from 21% in 2008-09 to 19% in 2009-10
5. Share of other commodities traded on MCX increased from 6% in 2008-09 to 19% in

2009-10 due to the recovery of the markets and opportunities lying in that rest of the 18 commodities regularly traded. The market was driven by the metal commodities from front Volume traded in no. of LOTS in major commodities of MCX for the years 2008-09 & 2009-10 from 1st April to 31st March

Findings: Growth in terms of Percentage: Volumes in Lots Commodities 2008-09 2009-10 Percentage Gold 32064397 26832155 -19.49 Silver 25412753 29332735 13.36 Copper 16809421 31354624 46.38 Crude Oil 28381734 36821896 22.92

1. No. of lots traded in all the Gold contracts has seen a dip from 32064397 in 2008-09 to

26832155 in 2009-10 thereby having a decline of 19.49% also it has lost its no. 1 position in terms of volume of lots traded.
2. No. of lots traded in all silver contracts has increased from 25412753 in 2008-09 to

29332735 in 2009-10 thereby having a rise of 13.36%.
3. No. of lots traded in Copper contracts has increased from 16809421 in 2008-09 to

31354624 in 2009-10 thereby having a rise of 46.38%. This commodity has seen the highest growth percentage among all others.
4. No. of lots traded in Crude Oil contracts has increased from 28381734 in 2008-09 to

36821896 in 2009-10 thereby having a rise of 22.92% making it the highest traded commodity w.r.t to no. of lots. Union Budget 2010-11: What’s in store for commodities market? The Union Budget 2010-11 has mainly focused on broad-based growth for the country and priority has been given to food security. The budget has incorporated measures covering the investment scenario, fiscal consolidation and infrastructure. Initiatives have been introduced for sustained and inclusive growth. The main focus of the Finance Ministry is now to revert to the high GDP growth, remove weakness at different levels of governance, improve public delivery mechanism and ensure better management of supply-demand imbalance.

1. Import duty on Silver has been raised from Rs1,000/kg to Rs1,500/kg and this move could affect the demand pattern of the white metal. 2. Precious metal prices have risen sharply in the last year and this has affected demand for these commodities in India. If cost pressures on the commodity continue to rise then demand could be affected further. 3. Customs duty on Gold and Platinum has also been raised from Rs200 per 10 grams to Rs300 per 10 grams. This rise in customs duty is negative for the gems and jewelry sector in India. The move will make gold and platinum costlier commodities, thereby hurting demand and imports will come down. But one aspect for gold demand from the Indian perspective is that demand for jewelry can never die out as gold has a traditional value attached in India. The country has held its position as the world's largest gold consuming nation in 2009 as consumer demand boosted in the fourth-quarter. 4. Basic customs duty on Gold Ore and Concentrates reduced from 2% (according to value) to a specific duty of Rs140 per 10 grams of gold content with full exemption from special additional duty. Further, excise duty on refined gold made from such ore or concentrate reduced from 8% to a specific duty of Rs280 per 10 grams. This move will help to boost domestic gold refining capacity in India. 5. The budget has overall tried to incorporate measures for each sector. This gives the country scope for further improvement in GDP growth. Special emphasis is placed on infrastructure growth which could help to boost demand for steel. 6. The budget provides Rs173,552cr for infrastructure and this accounts for more than 46% of the total plan allocation. Though no specific mention has been made with regard to Steel, growth in infrastructure will obviously translate into growth for the steel sector as well. 7. The Finance Ministry has also decided to formally give a symbol to the Indian Rupee. This will help to give a stand to India's currency especially as India has now ventured into currency futures. 8. For the metals sector as well, the budget could prove beneficial as 46% has been allocated for the infrastructure space. This could lead to demand for steel and other metals.

Major Challenges of Commodities Market: As Commodity futures markets are the strength of an agricultural surplus country like India. Commodity exchanges play a pivotal role in ensuring stronger growth, transparency and efficiency of the commodity futures markets. This role is defined by their functions, infrastructure capabilities, trading procedures, settlement and risk management practices. However, Indian commodity exchanges are still at a nascent stage of development as there are numerous bottlenecks hampering their growth. The institutional and policy-level issues associated with commodity exchanges have to be addressed by the government in coordination with the FMC in order to take necessary measures to pave the way for a significant expansion and further development of the commodity futures markets. Some of the major problems associated with commodity markets in India include infrastructure, trading system, broking community, controlled market, integration of regional and national exchanges as also integration of spot and futures markets. Also lack of proper knowledge about the market put participants in trouble by wiping out their wealth through trades done without proper trading knowledge and skills. Thereby the participants start deserting the market after a brief stint, which damages the market sustenance in the long run. Hence, in order to ensure their own survival, the markets are duty bound to impart knowledge among the participants and help then mature in their trading skills. Such requirement is particularly more significant in commodities market which is still new compared to equity and many other markets. A trader equipped with knowledge would be able to trade with proper strategies and can create wealth for himself along with helping the market to grow on a sustained basis. There are certain set of challenges where commodity exchanges require regulatory amendments to make this market vibrant and some other set of challenges, where commodity exchanges have to take up the initiatives. Amendment in FCRA Act According to the FCRA Act (1952) definition of goods is confined to whatever is deliverable. Due to this stringent definition, commodity exchanges are unable to deliver two important products:

Weather derivatives, which will provide hedge on volumetric risk to the farmers who are exposed to the vagaries of monsoon and other climatic disturbances. Farm insurance, though seen in some pockets of the country is still not all-pervasive and weather derivatives could fill in this lacuna for the farmers.? Trading on index, which will give small investors a diversified investment option that can be easily tracked with an overall knowledge of the commodity market. FCRA Act even does not allow trading of commodity options. Unlike options, futures are not able to give the upside price advantage to an investor, but act as a good tool for hedging and covering up downward risk. This constraint is a big challenge for a derivative exchange, as lot of investors, especially farmers, are reluctant to enter this market due to the unavailability of options. Amendment in Banking Regulations Act According to the Banking Regulations Act, banks are not allowed to trade in the commodity derivatives. But contradictorily, banks have a big role to play in the development of the commodity market. As they have exposure to agriculture, they would be better off in case they were able to hedge their positions. Since banks have a strong rural reach and financial expertise, they can become aggregators and take an aggregative position on behalf of farmers. Issues on Warehouse Receipts Currently, WR is not an instrument, against which banks lend comfortably. There are number of risks associated with it. Some of them are like fraud WR, credit risk with the warehouse owner, financial strength of the warehouse, quality of the warehouse and of course the credibility of the goods valuation. Mutual Funds and FIIs are to be allowed to trade on commodity exchanges For commodity markets to pick up, retail participation is essential as this has been the experiences of most western countries which have witnessed a boom in such business. The commodity derivatives market is still distant for retail investors who have neither the knowledge nor the ability to take such decisions in the commodity space. Unlike the financial derivatives market, one can enter the commodity derivatives market with a much lower investment, since margins are lower in the range of 5-10% compared to around 30% in the securities markets. But this highly leveraged market still remains out of the purview of the retail investor due to certain

institutional reasons. A break can be achieved here in case mutual funds are allowed to participate in these markets by structuring commodity funds for retail investors. At the same time this financial instrument can stir up the awareness among the masses and become an excellent asset class and hedging tool in a retail portfolio. Unlike the stock market, commodity market has not yet gotten the exposure it deserves. Commodity mutual funds, equipped with qualified analysts and fund managers will undertake value investing and boost up the reliability for the retail investors. There is a strong conviction among mutual funds that there is need to move into commodities to diversify their portfolio and deliver better returns to investors.

References: 1. Introduction to Technical Analysis by Martin J. Pring.

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