“A STUDY ON COMMODITY MARKET

WITH REFERENCE TO KARVY ”

A Project report submitted to Jawaharlal Nehru Technological University,

Hyderabad, in partial fulfillment of the requirements for the award of the
degree of
MASTER OF BUSINESS ADMINISTRATION

By
T PAVAN KUMAR
Reg. No. 10241E0046

Under the Guidance of

Y.GAYATHRI
Associate Professor

Department of Management Studies

Gokaraju Rangaraju Institute of Engineering & Technology
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 (Affiliated to Jawaharlal Technological University, Hyderabad)
Hyderabad
2010-2012

CERTIFICATE

This is to certify that the project entitled “A Study on

Commodity Market ” has been submitted by Mr. T.PAVAN
KUMAR (Reg. No. 10241E0046) in partial fulfillment of the
requirements for the award of Master of Business
Administration from Jawaharlal Nehru Technological
University, Hyderabad. The results embodied in the project
has not been submitted to any other University or Institution
for the award of any Degree or Diploma.

(Y. Gayathri) (KVS Raju)

Internal Guide Professor & HOD
Associate Professor DepartmentofManagement
Studies
Department of Management Studies GRIET

2
 GRIET

(S. Ravindra Chary)

(Project Coordinator)
Associate Professor
Department of Management Studies
GRIET

DECLARATION

I hereby declare that the project entitled “A Study on COMMODITY

MARKET at KARVY STOCK BROKING LIMITED ” submitted in partial
fulfillment of the requirements for award of the degree of MBA at Gokaraju
Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal
Nehru Technological University, Hyderabad, is an authentic work and has not
been submitted to any other University/Institute for award of any degree/diploma.

3
 T. PAVAN KUMAR
(10241E0046)
MBA, GRIET
HYDERABAD

ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution
Gokaraju Rangaraju Institute of Engineering & Technology, which created a great
platform to attain profound technical skills in the field of MBA, thereby fulfilling our
most cherished goal.
I would thank all the FINANCE department of KARVY STOCK BROKING

LIMITED specially Mr. MUKARJI –Asst Manager Finance, and the employees in the
Finance department for guiding me and helping me in successful completion of the
project.

I am very much thankful to our Y. Gayathri (Internal Guide) Madam for

extending her cooperation in doing this project.

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 I am also thankful to our project coordinator Mr. S. Ravindra Chary for extending
his cooperation in completion of Project..

I convey my thanks to my beloved parents and my faculty who helped me directly

or indirectly in bringing this project successfully.

T. PAVAN KUMAR
(10241E0046)

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 PAGE Nos.

EXECUTIVE SUMMARY 1

1 INTRODUCTION 2-10

2 COMMODITY INDUSTRY 11-16

2.1 COMPANY PROFILE 17-26

3 LITERATURE REVIEW 27-73

4 DATA ANALYSIS AND INTERPRETATION 74-77

ANALYSIS AND INTERPRETATION OF
4.1 QUESTIONNAIRE 78-91

4.2 CROSS TABS AND CHI SQUARE TESTS 92-101

5 FAQ'S 102-104

6 FINDINGS 105-107

6.1 CONCLUSION 108

6.2 SUGGESTIONS 109-110

6.3 ANNEXURE 111-112

113
6.4 BIBLIOGRAPHY

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 CHAPTER-1
INTTRODUCTION

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COMMODITIES MARKET

INTRODUCTION:
Commodities Futures’ trading…! in India have a long history. The first
commodity futures market appeared in 1875. But the new standardized form of trading in
the Indian capital market is an attractive package for all the people who earn money
through speculation by trading into FUTURES. It is a well-known fact and should be
remembered that the trading in commodities through futures’ exchanges is merely, “Old
wine in a new bottle”.

The trading in commodities was started with the first transaction that took place
between two individuals. We can relate this to the ancient method of trading i.e.,
BARTER SYSTEM. This method faced the initial hiccups due to the problems like: store
of value, medium of exchange, deferred payment, measure of wealth etc.. This led to the
invention of MONEY. As the market started to expand, the problem of scarcity piled up.

The farmers/traders then felt the need to protect themselves against the fluctuations in
the price for their produce. In the ancient times, the commodities traded were – the
Agricultural Produce, which was exposed to higher risk i.e., the natural calamities and
had to face the price uncertainty. It was certain that during the scarcity, the farmer
realized higher prices and during the oversupply he had to loose his profitability. On the
other hand, the trader had to pay higher price during the scarcity and vice versa. It was at
this time that both joined hands and entered into a contract for the trade i.e., delivery of
the produce after the harvest, for a price decided earlier. By this both had reduced the
future uncertainty.

One stone still remained unturned- ‘surety of honoring the contract on part from
either of the parties’. This problem was settled in the year 1848, when a group of traders
in CHICAGO came forward to standardize the trading. They initiated the concept of “to-
arrive” contract and permitted the farmers to lock in the price upfront and deliver the
grain at a contracted date later. This trading was carried on a platform called CHICAGO

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BOARD OF TRADE, one of the most popular commodities trading exchanges’ today. It
was this time that the trading in commodity futures’ picked up and never looked back.

Although in the 19th century only agricultural produce was traded as a futures
contract, but now, the commodities of global or at least domestic importance are being
traded over the commodity futures’ exchanges. This form of trading has proved useful as
a device for HEDGING and SPECULATION. The commodities that are traded today are:

Agro-Based Commodities… Wheat, Corn, Cotton, Oils, Oilseeds etc..

Soft Commodities…………….. Coffee, Cocoa, Sugar etc
Livestock………………………. Live Cattle, Pork Bellies etc
Energy………………………….. Crude Oil, Natural Gas, Gasoline etc
Precious Metals……………….. Gold, Silver, Platinum etc
Other Metals…………………… Nickel, Aluminum, Copper etc

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NEED AND IMPORTENCE OF STUDY

One of the single best things you can do to further your education in trading commodities
is to keep thorough records of your trades. Maintaining good records requires discipline,
just like good trading. Unfortunately, many commodity traders don’t take the time to
track their trading history, which can offer a wealth of information to improve their odds
of success Most professional traders, and those who consistently make money from
trading commodities, keep diligent records of their trading activity. The same cannot be
said for the masses that consistently lose at trading commodities.
Losing commodity traders are either too lazy to keep records or they can’t stomach to
look at their miserable results. You have to be able to face your problems and start
working on some solutions if you want to be a successful commodities trader. If you
can’t look at your mistakes and put in the work necessary to learn from them, you
probably shouldn’t be trading commode

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 OBJECTIVES OF THE STUDY

To study the perception of investors in commodities market.

To study about major exchanges trading in Indian commodity market.

To study the commodity trading practices in India.

To study the working procedure, trading and settlement mechanism for

commodities (Gold and Silver) In Indian stock exchange.

Study aims at understanding the governance for commodity

Derivatives exchanges, traders, investors and other participants.

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SCOPE OF THE STUDY

The study mainly focuses on Indian commodity market, its history and latest
developments in the country in commodities market (Gold And Silver). The study also
keeps a birds-eye view on global commodity market and its development. The study
vastly covered the aspects of commodity trading (Gold And Silver), clearing and
Settlement mechanisms in Indian commodity exchanges. The scope of the study is
limited to Indian commodity market

A network of 2500 business locations spread over 500 cities across India facilitates the
smooth acquisition and servicing of a large customer base. Most of our offices are
connected with the corporate office in Mumbai with cutting edge networking technology.
The group helps service more than a million customers, over a variety of mediums viz.
online, we cannot study all the data in the organization.

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RESEARCH METHODOLOGY

The present study is conducted to provide information to the company regarding the
investor perception towards commodity market.

The main objective of the study is to understand the Commodities sector of the
market, it s trading in India and majorly research on How are Commodities used as
Assets (Preferences on the basis of which they make a decision between equities and
other investment zones and Commodities).

SOURCES OF DATA
Primary data

Data was collected in systematic manner by meeting the existing investors in commodity
market & other individuals.
Primary and secondary data were utilized for the purpose of the study by the researcher.
The research is aimed to obtain the data mainly through primary sources. Survey method
has been used to obtain information.
Secondary data
Secondary data was collected from companies and from commodities (Gold And Silver)
trading websites.

TYPE OF RESEARCH

Based on the objectives of the study, the descriptive research method is used . Descriptive
study is taken up when the researcher is interested in knowing the investor perception in
commodities market. The conclusions are arrived at from the collected data. Statistical
tools were used to analyze the data collected from the survey.

SURVEY METHOD

A survey was conducted amongst the investors in Hyderabad and Secunderabad. The
researcher personally met the investors, interviewed them and got their questionnaires
filled.

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INSTRUMENT DESIGN

In order to obtain information the researcher prepared a structured questionnaire. The

researcher prepared a single questionnaire according to the need of the data from the
respondent.
PRE-TESTING OF QUESTIONNAIRE

The researcher to remove questions that are of vague and ambiguity in the nature
conducted the pre-testing. The samples of 10 respondents were selected and the
questionnaire was pre-tested and the researcher made necessary modifications.

CODING AND TABULATION

After the survey was conducted, the data had to be converted in to statistical or
numerical form so that inference could be drawn about the sample collected. For this,
every option of every question was coded into alphabets (i.e; they would be represented
in alphabets). The alphabets were used to denote the option and no ranking order was
used. The coded data was entered into the data sheet. Frequencies were found out for
each option and thus giving us the percentage of the option usage, etc.

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LIMITATIONS OF THE STUDY

The survey was confirmed to the surroundings of twin cities Hyderabad &
Secundrabad.

The size of sample was only 50.

The investor’s response could have been biased.

Time of 6 weeks was constraint for the study.

Brokers can only transact futures trades if they are registered with the CFTC and
the NFA.

Only certain types of commodities (Gold And Silver) can be the basis for futures
trading.

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 CHAPTER-II
INDUSTRY PROFILE

&

COMPANY PROFILE

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 INDUSTRY PROFILE

The Securities Industry and Financial Markets Association (SIFMA) is a leading

securities industry trade group representing securities firms, banks, and asset
management companies in the U.S. and Hong Kong. SIFMA was formed on November
1, 2006, from the merger of The Bond Market Association and the Securities Industry
Association. It has offices in New York City and Washington, D. C.

In October 2008, SIFMA laid off over 25% of its staff in the United States due to the
"industry upheaval" which left its member firms in financial straits, and the loss of three
of it primary member firms—Lehman Brothers, Bear Stearns, and Merrill Lynch. The
dismissals came at the same time as the United States Congress pledged to revamp the
country's financial regulatory structure.

SIFMA announced in May 2009 that it would also shed its London-based European
operation. That operation will be merged into the London Investment Banking
Association (LIBA).

The 350-member American Securitization Forum (ASF) formerly operated as a forum of

SIFMA. On January 14, 2010, ASF announced that it had chosen to terminate its
affiliation with SIFMA as well.

Mission, members, and offices

US operation

SIFMA brings together the shared interests of more than 650 securities firms, banks, and
asset managers. SIFMA's mission is to promote effective and efficient regulation,
facilitate more open, competitive, and efficient global capital markets, champion investor
education, retirement preparedness, and savings, and ensure the public’s trust in the
securities industry and financial markets. SIFMA represents its members’ interests in the
U.S. and in Hong Kong. It has offices in New York and Washington, D.C., and its

17
associated firm, the Asia Securities Industry & Financial Markets Association
(ASIFMA), is based in Hong Kong.

In June 2009, SIFMA began a campaign to combat the “populist overreaction” against
Wall Street’s role in the global financial crisis. It hired two aides who had worked for
Henry Paulson when he was Treasury Secretary, to help cleanse Wall Street’s image in
the eyes of average Americans. The effort is aimed at policymakers and the media
worldwide, and designed to beat back public skepticism over Wall Street’s commitment
to change. SIFMA is paying $85,000 a month for polling, lobbying, and public relations
to counter the "lynch mob", according to an internal SIFMA memo. In internal memos
about confidential meetings with top financial executives, SIFMA said that the securities
industry "must be perceived as part of the solution, which will allow it to better defend
against populist overreaction."

In January 2010, SIFMA announced that it had hired the law firm Sidley Austin to
consider filing a lawsuit challenging the Obama administration's banking levy. But an
attorney familiar with the matter said: "I suspect SIFMA got out ahead of its key
members." One person with a large bank said SIFMA had not consulted the bank about
its position, and that it was "wildly premature" to pursue legal action.

In October, 2010, CEO Tim Ryan announced the organization's opposition in the
residential real estate market to a "system wide moratorium on all foreclosures," reacting
to problems and pullbacks in the market by a number of SIFMA members, saying a
moratorium "would be catastrophic." Financial writer Felix Salmon drew attention to the
position, terming it "unhelpful," detailing it as "bizarre" and "sad, ... an inchoate and
unhelpful blast of opposition ... [without] constructive solutions" proposed.

Political giving and lobbying

"SIFMA's political action committees gave more than $1 million during the 2006 election
season, putting the organization in the top 25 of all PACs. Its combined $8.5 million in
spending on federal lobbying last year placed it in the top 30. The financial-services

18
industry is the biggest corporate player in national politics. Only organized labor donates
more money to candidates for federal offices."

European operation

SIFMA also has offices in London, though it announced in May 2009 that it would shed
its European operation. The European High Yield Association (EHYA) in London is a
trade association representing participants in the European high yield market. Members
include banks, investors, issuers, law firms, accounting firms, financial sponsors, and
other participants in the European high yield market. The European Securitisation Forum
(ESF) promotes the efficient growth and continued development of securitisation
throughout Europe. It advocates the positions, represents the interests, and serves the
needs of its members—European securitisation market participants.

Groups

SIFMA has three product and customer-based groups that focus on the U.S.: Capital
Markets, Private Client, and Asset Management. The Capital Markets Group focuses on
the primary and secondary markets for equity and fixed income securities. Its customer
focus is issuers, underwriters, traders, and institutional investors. The Private Client
Group focuses on investment products sold to private clients, as well as individual
investor education. The Asset Management Group focuses on investment products about
which asset managers provide investment advice or investment management services,
and on institutional investors and hedge funds.

Senior management

T. Timothy Ryan, Jr., is SIFMA's CEO & President. He took the position after pulling his
name from consideration for a Treasury Department international policy advisor position
in April 2007, after problems were noted concerning Ryan's financial portfolio, and he
refused to take certain steps demanded by the Treasury Department's ethic lawyers.
SIFMA's other senior management consists of Kenneth E. Bentsen (EVP, Public Policy
and Advocacy), Ileane F. Rosenthal (EVP, Global Communications & Member

19
Engagement), Randy Snook (EVP), and Ira Hammerman (Senior Managing Director &
General Counsel).

In August 2008, SIFMA hired Michael Paese, former Deputy Staff Director of the
Committee on Financial Services of the House of Representatives, as EVP, Global
Advocacy; eight months later Paese left SIFMA to become director of government affairs
at Goldman Sachs. Scott DeFife, who had reported to Paese, left SIFMA in December
2009.

After the 2006 merger which created SIFMA, the organization had a co-CEO structure,
with the SIA's Marc E. Lackritz and BMA's Micah S. Green filling the positions. As a
2007 report summarized it, "Lackritz [then 60] ha[d] been a friend, colleague and mentor
of Green's [then 49] for two decades." However, with slower-than-hoped-for integration
of the merged organization's operations, and with questions about the handling of
executive loans by BMA, Green resigned abruptly that year and Lackritz assumed the
role of sole CEO. Nine months later, Lackritz retired and T. Timothy Ryan was named
CEO.

Board of directors

SIFMA's Chairman of the Board is Blythe Masters (Head of Global Commodities,

JPMorgan Chase), and Vice Chair is Bernard Beal (CEO of M.R. Beal & Company).
Other directors include Samir Assaf (HSBC Bank plc), Shigesuki Kashiwagi (Nomura
Holdings America Inc.) and Sallie Krawcheck (former Chairman & CEO, Citi Global
Wealth Management), among others.

Peter Madoff, brother of fraudster and "money manager" Bernard L. Madoff, and chief
compliance officer and senior managing director of the Madoff investment advisor and
broker dealer businesses, stepped down from the SIFMA Board of Directors in December
2008. His resignation came amid growing criticism of the Madoff firm’s links to
Washington, and how those relationships may have contributed to the $50 billion Madoff
fraud.

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The Madoff family had long-standing ties to SIFMA. Bernard Madoff sat on the board of
directors of the Securities Industry Association, which merged with the Bond Market
Association in 2006 to form SIFMA. Peter Madoff served two terms as a member of
SIFMA’s Board of Directors. Over the years 2000-08, the two Madoff brothers
personally gave $56,000 to political action committees controlled by SIFMA or its
predecessor organizations in addition to dues paid to SIFMA by their firm, and tens of
thousands of dollars more to sponsor SIFMA industry meetings. In addition, Bernard
Madoff's niece Shana Madoff, who served as a compliance attorney at the Madoff firm,
was active on the Executive Committee of SIFMA's Compliance & Legal Division, but
resigned her SIFMA position shortly after her uncle's arrest.

Finances

In 2009 SIFMA had $105 million in both revenues and expenses. SIFMA's highest-paid
officers that year were Donald Kittel (then CFO), $2.1 million, Marc Lackritz (then
President & CEO), $1.5 million, and Randolph Snook (SMD), $1.1 million.

SIFMA's highest-paid officer in 2010 was its new President & CEO Tim Ryan (at
approximately $2 million, for January-October). Ryan had been hired to replace Lackritz
in January 2008, at a 43% ($600,000) higher level of compensation, for less than a full
year. In related news, ironically, Ryan wrote in a USA Today editorial in August 2009
that compensation practices at financial services firms should align with long-term, not
short-term, performance.

SIFMA's top three highest paid officers in the fiscal year ending 31 October 2011 were
CEO Tim Ryan at $2.43 million, Executive Vice President Randolph Snook at $1.04
million and General Counsel Ira Hammerman at $777,000. SIFMA received total revenue
that year of $75 million, had total expenses of $82 million, and finished the year with a
fund balance of $40 million

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 COMPANY PROFILE
INTRODUCTON TO KARVY
OVERVIEW
KARVY, is a premier integrated financial services provider, and ranked among
the top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporate,
comprising the who is who of Corporate India. KARVY covers the entire spectrum of
financial services such as Stock broking, Depository Participants, Distribution of
financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,
Commodities Broking, Personal Finance Advisory Services, Merchant Banking &
Corporate Finance, placement of equity, IPO’s, among others. Karvy has a professional
management team and ranks among the best in technology, operations and research of
various industrial segments.

EARLY DAYS

The birth of Karvy was on a modest scale in 1981. It began with the vision and
enterprise of a small group of practicing Chartered Accountants who founded the flagship
company, Karvy Consultants Limited. They started with consulting and financial
accounting automation, and carved inroads into the field of registry and share accounting
by 1985. Since then, they have utilized their experience and superlative expertise to go
from strength to strength to better their services, to provide new ones, to innovate,
diversify and in the process, evolved Karvy as one of India’s premier integrated financial
service enterprise.

Thus over the last 20 years Karvy has traveled the success route, towards building
a reputation as an integrated financial services provider, offering a wide spectrum of
services. And they have made this journey by taking the route of quality service, path
breaking innovations in service, versatility in service and finally, totality in service.

22
 Their highly qualified manpower, cutting-edge technology, comprehensive
infrastructure and total customer-focus has secured for them the position of an emerging
financial services giant enjoying the confidence and support of an enviable clientele
across diverse fields in the financial world.

Their values and vision of attaining total competence in their servicing has served
as the building block for creating a great financial enterprise, which stands solid on their
fortresses of financial strength - their various companies.

With the experience of years of holistic financial servicing behind them and years
of complete expertise in the industry to look forward to, they have now emerged as a
premier integrated financial services provider.

And today, they can look with pride at the fruits of our mastery and experience –
comprehensive financial services that are competently segregated to service and manage
a diverse range of customer requirements.

KARVY ACHIEVEMENTS

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

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KARVY QUALITY POLICY

To achieve and retain leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide superior
quality financial services. In the process, Karvy will strive to exceed Customer's
expectations.

QUALITY OBJECTIVES

As per the Quality Policy, Karvy will:

Build in-house processes that will ensure transparent and harmonious

relationships with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that
will help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with
adequate knowledge & skills so as to respond to customer's needs

Continue to uphold the values of honesty & integrity and strive to establish
unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and
clients.

Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice of
it.

Strive to keep all stake-holders (shareholders, clients, investors, employees,

suppliers and regulatory authorities) proud and satisfied.

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 Karvy has traveled the success route, towards building a reputation as an
integrated financial services provider, offering a wide spectrum of services for
over 20 years.

Karvy, a name long committed to service at its best. A fame acquired through the
range of corporate and retail services including mutual funds, fixed income, equity
investments, insurance ……… to name a few. Our values and vision of attaining total
competence in our servicing has served as a building block for creating a great financial
enterprise.

The birth of Karvy was on a modest scale in the year 1982. It began with the
vision and enterprise of a small group of practicing Chartered Accountants based in
Hyderabad, who founded Karvy. We started with consulting and financial accounting
automation, and then carved inroads into the field of Registry and Share Transfers.

Since then, we have utilized our quality experience and superlative expertise to go
from strength to strength to provide better and new services to the investors. And today,
we can look with pride at the fruits of our experience into comprehensive financial
services provider in the Country.

25
KARVY Group companies are:

he first securities registry to receive ISO 9002 certification in India. Registered

with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of
being ‘Most Admired’ Registrar is one among many of the acknowledgements we
received for our customer friendly and competent services.

The company, Member of National Stock Exchange (NSE), offers a

comprehensive range of services in the stock market through the benefits of in-depth
research on crucial market dynamics, done by qualified team of experts. Apart from stock
broking activities, the company also provides Depository Participant Services to its
corporate and retail customers.

Registered with SEBI as a Category I Merchant Banker and ranked among the top
10 merchant bankers in the country, the company has built a reputation as a professional
advisor in structuring IPO’s take over assignments and buy back exercises.

26
 Karvy Global Services is the global services arm of the Karvy Group of
Companies engaged in the business of offshore business process outsourcing in the areas
of human resource outsourcing, finance and accounting operations outsourcing, research
and analytics and back office processing operations.

The company provides investment, advisory and brokerage services in Indian

Commodities Markets. And most importantly, we offer a wide reach through our branch
network of over 225 branches located across 180 cities.

" #

The company is into distribution of Financial Products. It distributes a wide range

of financial products and services from insurance to credit cards and loans. The company
provides sound advisory services to suit the different investment needs of customers.

27
 Karvy Commodities Broking Pvt Limited

At Karvy Commodities, we are focused on taking commodities trading to new

dimensions of reliability and profitability. We have made commodities trading, an
essentially age-old practice, into a sophisticated and scientific investment option.

Here we enable trade in all goods and products of agricultural and mineral origin
that include lucrative commodities like gold and silver and popular items like oil, pulses
and cotton through a well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart

skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,
the first and foremost being our legacy of human resources, technology and infrastructure
that comes from being part of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further
supports these advantages. Regular trading workshops and seminars are conducted to
hone trading strategies to perfection. Every move made is a calculated one, based on
reliable research that is converted into valuable information through daily, weekly and
monthly newsletters, calls and intraday alerts. A dedicated team committed to giving
hassle-free service while the brokerage rates offered are extremely competitive provides
further, personalized service here.

Our commitment to excel in this sector stems from the immense importance those
commodities broking has to a cross-section of investors – farmers, exporters, importers,
manufacturers and the Government of India itself.

28
About Karvy Commodities Broking Private Limited
Commodities market, contrary to the beliefs of many people, has been in
existence in India through the ages. However the recent attempt by the Government to
permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm.
As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity
and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of
their high profile promoters and stakeholders, bundle in themselves, online trading
facilities, robust surveillance measures and a hassle-free settlement system. The futures
contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel,
Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for
hedging the risks of the farmers, importers, exporters, traders and large scale consumers.
They also make open an avenue for quality investments in precious metals. The
commodities market, as the movements of the stock market or debt market do not affect it
provides tremendous opportunities for better diversification of risk. Realizing this fact,
even mutual funds are contemplating of entering into this market.

Karvy Commodities Broking Private Limited is another venture of the prestigious

Karvy group. With our well established presence in the multifarious facets of the modern
Financial services industry from stock broking to registry services, it is indeed a pleasure
for us to make foray into the commodities derivatives market which opens yet another
door for us to deliver our service to our beloved customers and the investor public at
large.

With the high quality infrastructure already in place and a committed Government
providing continuous impetus, it is the responsibility of us, the intermediaries to deliver
these benefits at the doorsteps of our esteemed customers. With our expertise in financial
services, existence across the lengths and breadths of the country and an enviable
technological edge, we are all set to bring to you, the pleasure of investing in this
burgeoning market,

29
 Which can touch upon the lives of a vast majority of the population from the
farmer to the corporate alike? We are confident that the commodity futures can be good.

The Company provides investment, advisory and brokerage services in Indian

Commodities Markets. And most importantly, we offer a wide reach through our branch
network of over 225 branches located across 180 cities.

THE KARVY CREDO.

Our Clients, Our Focus.
Clients are the reason for our being.
Personalized service, professional care; pro-activeness are the values that help us
nurture enduring relationships with our clients

Respect for the individual.

Each and every individual is an essential building block of our organization.

We are the kilns that hone individuals to perfection. Be they our employees, shareholders
or investors. We do so by upholding their dignity & pride, inculcating trust and achieving
a sensitive balance of their professional and personal lives.

Teamwork.

None of us is more important than all of us.

Each team member is the face of Karvy. Together we offer diverse services with speed,
accuracy and quality to deliver only one product: excellence. Transparency, co-operation,
invaluable individual contributions for a collective goal, and respecting individual
uniqueness within a corporate whole, are how we deliver again and again.

Responsible Citizenship.
30
A social balance sheet is as rewarding as a business one.
As a responsible corporate citizen, our duty is to foster a better environment in the society
where we live and work. Abiding by its norms, and behaving responsibly towards the
environment, is some of our growing initiatives towards realizing it.
Integrity.

Everything else is secondary.

Professional and personal ethics are our bedrock. We take pride in an environment that
encourages honesty and the opportunity to learn from failures than camouflage them. We
insist on consistency between works and actions.

31
 CHAPTER-III
LITERATURE REVIEW

32
INTRODUCTION

Until 1990, the Gold Control Act forbade the private holding of gold bars in India. There
was physical investment in smuggled ten tola bars, but it was limited and often amounted
to keeping a few bars ready to be made into jewellery for a family wedding. Gold
investment essentially was in 22 carat jewellery.

Reserve Bank of India

Since 1990, investment in small bars, both imported ten tolas and locally-made small
bars, which have proliferated from local refineries, has increased substantially. GFMS
estimate that investment has exceeded 100 tonnes (3.2 million oz) in some years,
although it is hard to segregate true investment from stocks held by the 16,000 or more
gold dealers spread across India. Certainly gold has been used to conceal wealth,
especially during the mid-1990s, when the local rupee price increased steadily.

It was also augmented in 1998 when over 40 tonnes (1.3 million oz) of gold from bonds
originally issued by the Reserve Bank of India were restituted to the public.

In the cities, however, gold is having to compete with the stock market, investment in
internet industries, and a wide range of consumer goods. In the rural areas 22 carat
jewellery remains the basic investment.

The Gold Deposit Scheme

The government announced a new initiative in its 1999/2000 budget to tap the hoard of
private gold in India by permitting commercial banks to take gold deposits of bars, coins
or jewellery against payment of interest. Interest levels can be set by each bank, and
deposits must be for three to seven years. Interest and any capital gains on the gold will
be exempt from tax. The banks can lend the gold to local fabricators or sell it in the
Indian market or to local banks. However, the depositor has to declare the origin of the
gold, so that metal bought illegally to hide wealth cannot be deposited. The State Bank of
33
India was the first to accept deposits. To date, the amount of gold collected under this
scheme (less than 10 tonnes or 0.32 million oz) has fallen well short of the 100 tonnes
(3.2 million oz) that was mentioned when it was launched.

The introduction of a modern gold market in India:

1990 Abolition of the long-standing Gold Control Act, which had forbidden the holding
of 'primary' or bar gold except by authorised dealers and goldsmiths and sought to limit
jewellery holdings of families.

Imports were then permitted in three stages.

1992 Non-Resident Indians (NRIs) on a visit to India were each allowed to bring in up to
5 kilos (160.7 oz) on payment of a small duty of six per cent. This allocation was raised
to 10 kilos in 1997.

1994 Gold dealers could bid for a Special Import Licence (SIL) which was issued for a
variety of luxury imports.

1997 Open General Licence (OGL) was introduced, paving the way for substantial direct
imports by local banks from the international market, thus partly eliminating the regional
supplies from Dubai, Singapore and Hong Kong.

The OGL system has also largely eclipsed imports by NRIs and SILs. Additionally,
significant temporary imports are permitted under an Export Replenishment scheme for
jewellery manufacturers working for export in designated special zones.

In 2001 unofficial imports fell because of a reduction in import duties, pushing down the
local premium and making smuggling less profitable. Ten tola bars are still the preferred
form of gold in India, accounting for 95% of imports.

34
Precious Metal bulls will tell you to buy the dips. This means, wait for the price to
temporarily deflate, and then purchase your position. It is a way to maximize dollars for
gold and silver purchased while maintaining a steady buying program in that metal. The
same concept could be used for any fund or stock, as well.

This morning I woke to find gold and silver had tumbled. This doesn't surprise me
anymore because gold and silver have become hotter markets, and there will be more
speculation in them. As I wrote in Mr. Market Speaks: Flight to Safety, the market is
slowing moving away from long term debt, looking for safety of principal and inflation
protection. Gold and silver markets have benefited from this movement.

Gold has steadily been moving relatively sideways the last two days, as seen in the
following Kitco chart. But also notice the sharp drop off on Jan 20th at approximately
8am.

Silver looked exactly the same. The sharp downward move happened about the same
time.

So I took a look at a 5 minute gold chart and found a 15 minute sharp drop, which I
circled in red.

I have written before about how sharp, quick movements in liquid markets don't signal
normal price action. Even on bad news, liquid markets take time to react and respond
because they are traded by people. And people take time to make decisions on the overall
balance of the news in a given market in a given time frame.

So I decided to take a look at what the news was in the precious metals market. CNBC
didn't have much.

35
On gold, Bloomberg Businessweek had a piece on everyone getting out of gold.
Definitely bearish. The Street agreed with that assessment, commenting that interest rate
hikes in Brazil and buying of US Dollars weakened gold demand domestically. But the
article also notes that China continues to buy gold in Brazil. The Wall Street Journal
reports gold weakness on improving economic conditions.

Bloomberg had a piece about silver profit taking potentially lowering silver 20%.
Definitely bearish and timely. I also found an article from FMX Connect on silver,
discussing reasons for silver contango yesterday.

The two main reasons FMX outlines for this movement in silver would either be an
interest rate move (none) or metals delivery issues. If metals delivery issues, then this is
bullish for silver (and potentially gold) as a complementary inflation-protection
investment.

Ben Davies has commented before on a coming short squeeze in the gold and silver
markets. So has Ted Butler. And Robert Lenzner. Is it finally time, or is it profit taking in
the silver market that has been hovering around $30 for a while?

On the whole, it sounds like there is bearish sentiment and bullish sentiment on gold and
silver, which sounds like a perfectly normal market condition. That is why the sharp price
movements over very small time frames, as noted in the charts above, is disturbing. Even
if a large share of the market decided to take profits and sell, it is not likely to have
happened within a 15 minute window at 8am in the morning. This smells of market
manipulation to me.

On balance, I remain bullish on gold and silver. I don't buy paper versions of these
investments as I think those markets are fractional reserved upon meager physical metal
backing. I recommend investing in the physical metals. And the current price action
sounds like a perfect opportunity to purchase gold and silver on the cheap.

I will continue to follow gold and silver news and vette it out in a reasonable manner. If
the markets turn bearish upon a real economic recovery, then I may change my position.

36
And I will write about it when I do. But for now, I am not buying the gold and silver
markets top story. I think we are firmly going the other direction, regardless of what this
morning's price activity is saying.

FINANCIAL DERIVATIVES

The term derivatives refer to a large number of financial instruments whose value
is derived from the underlying assets. Derivative instruments like the options and futures
facilitate the trading in financial contracts. The most important underlying instruments in
the market are in the form of Equity, treasury bills, and foreign exchange. The trading in
the financial derivatives has attracted the prominent players of the equity markets.

The primary purpose of a derivative contract is to transfer risk from one party to
another i.e. risk is transferred from a party that wants to get rid of it to another party i.e.
willing to take it. The major players seen in the derivatives segment are the
SPECULATORS whose sole objective is to buy and sell for a profit alone. The
HEDGERS are the other breeds of players, who aim merely to have a hedge positions.
They are risk free investors whose intention is to have a safety mechanism and wish to
protect their portfolio. Nevertheless, they are pursued as a cheap and efficient way of
moving risk within the economic system. But the world of derivatives is riddled with
jargons making it more awesome.

The trading in equity through the derivatives in India was introduced in the year
2000 by the Securities and Exchange Board of India [SEBI] and this was described as the
“India’s derivative explosion”. Although this took a definite form in 2000 but the idea
was initiated in the year 1995. it was then in the year 2000 that SEBI permitted the
trading the in the options on the platforms of India’s premier exchange platforms i.e., the
National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange
[BSE] in the individual securities. But the futures contracts took 17 long months to get
launched on November 09’ 2001.

37
 The trading in options and futures in the individual stocks were permitted to trade
on the stable stocks only. The small and highly volatile stocks were an exemption from
the trade in derivatives. Futures and options are important tools that help the investors to
derive profit. The futures facilitate the investor to enter into a contract to deliver the
underlying security at a future date whereas, the options allow it to his discretion as to
whether he wants to buy (call) or sell (put) the contract.

The current trading behavior in the derivatives segment reveals that single stock
futures continues to account for a sizeable proportion. A recent report indicates that the
trading in the individual stock futures in the Indian exchanges has reached global
volumes. One possible reason for such a behavior of the trader could be that futures
closely resemble the erstwhile ‘BADLA’ system.

COMMODITY DERIVATIVES

Commodity market is an important constituent of the financial markets of any

country. It is the market where a wide range of products, viz., precious metals, base
metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is
important to develop a vibrant, active and liquid commodity market. This would help
investors hedge their commodity risk, take speculative positions in commodities and
exploit arbitrage opportunities in the market.

The need for a futures market in the commodities, especially, in the primary
commodities was emphasized because such a market not only provides ample
opportunities for effective management of price risk, but also, assists inefficient
discovery of prices which can serve as a reference for the trade in the physical
commodities in both the external as well as in the internal market.

India, a commodity based economy where two-third of the one billion population
depends on agricultural commodities, surprisingly has an under developed commodity
market. Unlike the physical market, futures markets trades in commodity are largely used

38
as risk management (hedging) mechanism on either physical commodity itself or open
positions in commodity stock.

There was an effort to revive these markets but all went in vain due to improper
infrastructure and facilities. However, after India joined the WORLD TRADE
ORGANIZATION the need to protect the agricultural community against the price
fluctuations cropped up. The National agricultural policy 2000 was formulated and
proposed to expand the coverage of the futures market to minimize the volatility in the
commodities prices and hedging the risk arising out of the fluctuations in the prices. As a
result of this there is a standardized form of commodity futures trading in the country,
today and a lot number of people are active in the commodities exchanges, taking it to a
great high.

The active players in these exchanges are Traders, Speculators and the Hedgers. It
is said that now-a days the prices of the commodities in the Physical Market (Mandis) is
derived in accordance to the spot prices in the commodity exchanges.

Clearly, in the nascent stage, the derivatives market in India is heading in the right
direction. In the terms of the number of contracts in a single commodity/stock it is
probably the largest market globally. It is no longer a market that can be ignored by any
of the serious participants. The Indian economy, now, is at the verge of greater expansion
the any other economies in the globe today. This has attracted a large number of
institutional investors, both – the Indian as well as foreign, to invest in to the Indian
stocks and commodities, thereby bringing in a lot of forex reserves. As predicted by the
popular investment Gurus’ and the great Economists world wide, “

. We
can conclude that, with the institutional participation set to increase and a broader product
rollout inevitable, the market can only widen and deepen further.

39
TRADING INSTRUMENTS

Derivatives in the recent times have become very popular because of their wide
application. Before getting into the hard talks about the commodities trade, let us know
about the trading instruments in the derivatives, as they are similarly applicable to the
commodities derivatives.

There are 4 types of Derivatives instrument:

Forward contract

Future contract

Options contract

Swap

Futures and Options are actively used in many exchanges whereas; Forwards and
Swaps are mostly trade Over the Counter (OTC).

FORWARDS CONTRACT

A spot or cash market is the most commonly used for trading. A majority of our
day-to-day transactions are in the cash market. In addition to the cash purchase, another
way trading is by entering into a Forward contract. A Forward contract is an agreement
to buy or sell an asset on a specified date of a specified price. These contracts are usually
entered between a financial institution and its corporate clients or two financial
institutions themselves. In the context to the Commodity trading, prior to the
standardization, the trade was carried out as a forwards contract between the
Associations, Producers and Traders. Where the Association used to act as counter for the
trade.

40
 A forward contract has been in existence in the organized commodities exchanges
for quite sometimes. The first forward contract probably started in Japan in the early 18th
century, while the establishment of the CHICAGO BOARD OF TRADE (CBOT) in
1848 led to the start of a formal commodities exchange in the USA.
Forward contracts are very useful in HEDGING and SPECULATION. The
essential idea of entering into the forward contract is to Hedge the price thereto avoid the
price risk. By entering into a forward contract one is assured of the price at which the
goods/assets are bought and sold. The classic Hedging example would be that of an
exporter who expects to receive payment in foreign currency after three months. As he is
exposed to greater amount of risk in the fluctuations in the exchange rates, he can, with
the use of forwards, lock-in the rate today and reduce the uncertainty. Similarly, if a
speculator has the information of an upswing in the prices of the asset, he can go long on
the forward market instead of the cash market and book the profit when the target price is
achieved.
The forward contract is settled at the maturity date. The holder of the short
position delivers the assets to the holder of the long position on the maturity against a
cash payment that equals to the delivery price by the buyer. The price agreed in the
forwards contract is the DILIVERY PRICE. Since the delivery price is chosen at the time
of entering into the contract, the value of the contract becomes zero to both the parties
and costs nothing to either the holder of the long position or to the holder of the short
position.

The salient features of a forwards contract are:

It is a bilateral contract and hence is exposed to counter-party risk.

Every contract is unique and is custom designed in the terms of: expiration date
and the asset type and quality.

The contract price is not available in the public domain.

On the expiration, the contract is to be settled by the delivery of the asset.

Of the party wishes to reverse the contract, he has to go to the same counter-party, which
may result o attract some charges.

41
FUTURES CONTRACT

- As quoted by MERTON MILLER,

a noble lauret’ 1999.

The father of financial derivatives is Leo Me lamed. The first exchange that
traded in the financial derivatives was INTERNATIONAL MONETARY MARKET,
wing of the Chicago Mercantile Exchange, Chicago, in the year 1972.

The futures market was designed to solve the problems, existing in the forwards
market. A financial future is an agreement between two parties to buy or sell a standard
quantity of a specified good/asset on a future date at an agreed price. Accordingly, future
contracts are promises: the person who initially sells the contract promises to deliver a
specified underlying asset to a designated delivery point during a certain month, called
delivery month. The underlying asset could, well be, a commodity, stock market index,
individual stock, currency, interest rates etc.. The party to the contract who determines to
pay a price for the goods is assumed to take a long position, while the other who agrees to
sell is assumed to be taking a short position.
The futures contracts are standardized in the terms of:
Quantity of the underlying assets.

Quality of the underlying assets.

Date and month of the delivery.

Units of the price quotations and minimum price change, and

Location of the settlement.

It is due to the standardization that the futures contract has an edge with the
forward contract, in the terms of: Liquidity, safety and the security to honoring
the contract which is otherwise not secured in an OTC trading forwards contract.

42
 In short, futures contract is an exchange-traded version of the usual forward
contract. There are however, significant differences between the two and the same can be
appreciated from the above discussion.

Benefits to Industry from Futures trading:

Hedging the price risk associated with futures contractual commitments.

Spaced out purchases possible rather than large cash purchases and its storage.

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities would

aid bank lending.

Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk of default
faced by banks.

Lending for agricultural sector would go up with greater transparency in pricing

and storage.

Commodity Exchanges to act as distribution network to retail agri-finance from

Banks to rural households.

Provide trading limit finance to Traders in commodities Exchanges.

OPTIONS CONTRACT

Options have existed over a long period but were traded over the counter (OTC)
only. These contracts are fundamentally different from that of futures and forwards. In
the recent years options have become fundamental to the working of global capital
markets. They are traded on a wide variety of underlying assets on both, the exchanges
and OTC. Options like the futures are also available on many traditional products such as
equities, stock indices, commodities and foreign exchange interest rates etc., options are

43
used as a derivate instrument only in financial capital market in India and not in
commodity derivatives. It is in the process in introduction.

Options, like futures, also speculative in nature. Options is a legal contract which,
facilitate the holder of the contract, the right but not the obligations to buy or sell the
underlying asset at the fixed rate on a future date. It should be highlighted that, unlike
that the futures and forward contract the options gives the buyer of the contract, the right
to enter into a contract and he doesn’t have to necessarily exercise the right to give, take
the delivery. When a contract is made the buyer has to pay some money as a ‘Premium’
to the seller to acquire such a right.

Options are basically of two types.

Call options: A call options gives the buyer the right to buy the underlying asset
at a strike price specified in the option. The profit/loss depends on the expiration date of
the contract if the spot price exceeds the strike price the holder of the contract books a
profit and vice-versa. Higher the spot price more is the profit.

Put options: A put option give the buyer the right to sell the underlying asset at
the strike price specified in the option. The profit/loss that the buyer makes on the option
depends on the spot price of the underlying asset. If the spot price is below the strike
price he makes profit and vice-versa. If the spot price is higher than the strike price he
will wait up to the expiry or else book the profit early.

SWAPS:

Swaps were developed as a long-term price risk management instrument available

on the over-the-counter market. Swaps are private agreements between two parties to
exchange cash flows in the future according to a pre-arranged formula. These agreements

44
are used to manage risk in the financial markets and exploit the available opportunity for
arbitrage in the capital market.

A swap, generically, is an exchange. In the financial parlance it refers to an

exchange of a series of cash flows against another series of cash flows. Swaps are also
used in the asset/liability management to obtain cost-effective financing and to generate
higher risk-adjusted returns. With swaps, producers can effectively fix, i.e. lock in, the
prices they receive over the medium to long-term, and consumers can fix the prices they
have to pay. No delivery of the asset is involved; the mechanism of swaps is purely
financial.

The swaps market originated in the late 1970’s, when simultaneous loans were
arrange between British and the US entities to bypass regulatory barriers on the
movement of foreign currency .the land mark transaction

Between the World Bank and the IBM in august 1981, paved the way for the
development of a market that has grown from a nominal volume in the early 1980’s to an
outstanding turnover of US $ 46.380tn in 1999.

The swaps market offers several advantages like:

These agreements are undertaken privately while transactions using exchange

traded derivatives are public.

Since the swaps products are not standardized, counter parties can customize
cash-flow streams to suit their requirements

The swaps can be regarded as portfolios of forward contracts. The two commonly
used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between
the parties in the same currency.

45
Currency swaps: These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the
opposite direction.

PARTICIPANTS IN THE DERIVATIVE MARKET

There are three major participants in the derivatives market. They are:

HEDGERS
He is the person who enters the derivatives market to lock-in their prices to avoid
exposure to adverse movements in the price of an asset. While such locking may not be
extremely profitable the extent of loss is known and can be minimized. They are in the
position where they face risk associated with the price of an asset. They use derivatives to
reduce or eliminate risk.

For example, a farmer may use futures or options to establish the price for his
crop long before he harvests it. Various factors affect the supply and demand for that
crop, causing prices to rise and fall over the growing season. The farmer can watch the
prices discovered in trading at the CBOT and, when they reflect the price he wants, will
sell futures contracts to assure him of a fixed price for his crop.

A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis
= Spot price of asset to be hedged – Futures price of the contract used. Basis risk arises as
a result of the following uncertainties:

The exact date when the asset will be bought or sold may not be known.
The hedge may require that the Futures contract be closed before expiration.

46
PRICE
FUTURES PRICE

BASIS

SPOT PRICE

EXPIRY DATE TIME

SPECULATORS:

A speculator is a one who accepts the risk that hedgers wish to transfer. A
speculator takes positions on expectations of futures price movements and in order to
make a profit. In general a speculator buy futures contracts when he expect futures prices
to rise and sell futures contract when he expects futures prices to fall, but has no desire to
actually own the physical commodity.

Speculators wish to bet on the future movement in the price of an asset. They use
derivatives to get extra leverage. They take positions in the market and assume risk to
profit from fluctuations in the prices. Infact, the speculators consume the information,
make forecast about the prices and put their money in these forecast. By taking positions,
they are betting that the price would go up or they are betting it would go down.
Depending on their perception, they may long or short positions on the futures or /and
options, or may hold spread positions.

ARBITRAGEURS

“Simultaneous purchase of securities in one market where the prices thereof are low and
sale thereof in another market, where the price thereof is comparatively higher. These are
done when the same securities are been quoted at different prices in the two markets, with
a view to make a profit and carried on with the conceived intention to derive advantage

47
from difference in prices of securities prevailing in the two markets”. -As defined by The
Institute of Chartered Accountants of India.

Arbitrageurs thrive on the market imperfections. They profit by trading on given

commodities, or items, that are in the business to take advantage of a discrepancy
between prices in two different markets. If, for example, they see the future prices of an
asset getting out of line with the cash price, they will take offsetting positions in the two
markets to lock in a profit.

Thus, the arbitrage involves making risk-less profit by simultaneously entering

into transactions in two or more markets. With the introduction of derivate trading the
scope of arbitrageurs’ activities extends to arbitrage over time i.e., he can buy securities
in an index today and sell the futures, maturing in the month or two.

TRADING OF COMMODITY DERIVATIVES IN INDIA

Trading of all the derivatives in India is carried over:

Exchanges

Over the counter

EXCHANGE TRADING

An asset (commodity/stock), when is traded over an organized exchange is it is

termed, to be traded on the Exchange. This type of trading is the general trading which
we see on the major exchanges world over. The settlement in the exchange trading is
highly standardized.

OVER THE COUNTER TRADING

An asset (commodity/stock) is traded over the counter usually because the
company is small and unable to meet listing requirements of the exchanges and facilitates
the trading in those areas where the exchanges are not located. Also known as unlisted

48
the assets are traded by brokers/dealers who negotiate directly with one another over
computer networks and by phone.

Instruments such as bonds do not trade on a formal exchange and are thus
considered over-the- counter securities. Investment banks making markets for specific
issues trade most debt instruments. If someone wants to buy or sell a bond, they call the
bank that makes the market in that asset.

Exchange Vs OTC Trading

The OTC derivatives markets have witnessed rather sharp growth over the last
few years, which have accompanied the modernization of commercial and investment
banking and globalization of financial activities. The recent developments in information
technology have contributed to a great extent to these developments. While both
exchange-traded and OTC derivative contracts offer many benefits, the former have rigid
structures compared to the latter. It has been widely discussed that the highly leveraged
institutions and their OTC derivative positions were the main cause of turbulence in
financial markets in 1998. These episodes of turbulence revealed the risks posed to
market stability originating in features of OTC derivative instruments and markets.
The OTC derivatives markets have the following features compared to exchange-traded
derivatives:

The management of counter-party (credit) risk is decentralized and located within

individual institutions.

There are no formal centralized limits on individual positions, leverage, or

margining.

There are no formal rules for risk and burden-sharing,

There are no formal rules or mechanisms for ensuring market stability and
integrity, and for safeguarding the collective interests of market participants,
49
 The OTC contracts are generally, not regulated by a regulatory authority and the
exchange’s self-regulatory organization, although they are affected indirectly by
national legal systems, banking supervision and market surveillance.

COMMODITIES MARKET…..
Global Perspective

Oil accounts for 40 per cent of the world's total energy demand.
The world consumes about 76 million bbl/day of oil.
United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4
million bbl/d) are the top oil consuming countries.
Balance recoverable reserve was estimated at about 142.7 billion tons (in 2002), of which
OPEC was 112 billion tons

50
The major commodities trading exchanges globally are:

Chicago Board Of Trade (COBOT). U.S.A.

New York Mercantile Exchange (NYMEX). U.S.A.

London Metal Exchange (LME). United Kingdom.

Tokyo Commodity Exchange (TOCOM). Japan

International Petroleum Exchange (IPE).

London Metal Exchange (LME). United Kingdom

Sydney Futures Exchange (SFE). Australia

Brazilian Futures Exchange (BBF). Brazil

Winnipeg Commodity Exchange (WCE). Canada

Marche a Terme International de France (MATIF). France

Hong Kong Futures Exchange (HKFE). Hong Kong

New Zealand Futures & Options Exchange (NZFOE). New Zealand

Russian Commodity and Raw Materials Exchange. Russia

Singapore International Monetary Exchange (SIMEX). Singapore

South African Futures Exchange (SAFEX). South Africa

Dalian Commodity Exchange. China

Shanghai Metal Exchange (SME). China

51
Chicago Board Of Trade (CBOT)

The Chicago Board of Trade (CBOT), established in 1848, is a leading futures and
options on futures exchange. More than 3,600 CBOT members trade 50 different futures
and options products at the exchange through open auction and/or electronically. Volume
at the exchange in 2003 was a record breaking 454 million contracts.

In its early history, the CBOT traded only agricultural commodities such as corn,
wheat, oats and soybeans. Futures contracts at the exchange evolved over the years to
include non-storable agricultural commodities and non-agricultural products like gold
and silver. The CBOT's first financial futures contract, launched in October 1975, was
based on Government National Mortgage Association mortgage-backed certificates.
Since that introduction, futures trading has been initiated in many financial instruments,
including U.S. Treasury bonds and notes, stock indexes, and swaps, to name but a few.
Another market innovation, options on futures, was introduced in 1982.

For more than 150 years, the primary method of trading at the CBOT was open
auction, which involved traders meeting face-to-face in trading pits to buy and sell
futures contracts. But to better meet the needs of a growing global economy, the CBOT
successfully launched its first electronic trading system in 1994. During the last decade,
as the use of electronic trading has become more prevalent, the exchange has upgraded its
electronic trading system several times. Most recently, on January 1, 2004, the CBOT
debuted its new electronic platform powered by the cutting-edge trading technology. As
of 1st January 2004, the Chicago Mercantile Exchange is providing clearing and related
services for all CBOT products

52
New York Mercantile Exchange (NYMEX)

The NYMEX in its current form was created in 1994 by the merger of the former
New York Mercantile Exchange and the Commodity Exchange of New York (COMEX).
Together the represent one of the world's largest markets in commodities trading.

It deals in futures (and options) in oil products, such as crude oil, heating oil,
leaded regular gasoline, natural gas, propane and in rare metals, such as platinum and
palladium. It also deals in gold and silver, aluminum and copper, sharing with the
London Metal Exchange a dominant role in the world metal trading.

London Metals Exchange

The London Metal Exchange is the world's premier non-ferrous metals market
with highly liquid contracts and a worldwide reputation. It is innovative while
maintaining its traditional strengths and remains close to its core users by ensuring its
contracts continue to meet the high expectations of industry. As a result, it is highly
successful with a turnover in excess of US$3,000 billion per annum. It also contributes to
the UK’s invisible earnings to the sum of more than £250 million in overseas earnings
each year.
The origins of the London Metal Exchange can be traced as far back as the
opening of the Royal Exchange in 1571. This is where metal traders first began to meet
on a regular basis. However, it was in 1877 that the London Metal Market and Exchange
Company were formed as a direct result of Britain's industrial revolution of the 19th
century. This led to a massive increase in the UK’s consumption of metal, which required
the import of enormous tonnages from abroad. Merchant venture’s were investing large
sums of money in this activity and were exposed to great risk, not only because the
voyages were hazardous but also because the cargoes could lose value if there was a fall
in price during the time it took for the metal to reach Britain.

53
INDIAN PERSPECTIVE

There are three major exchanges for the commodity trading in India. They are:

The National Commodities and Derivatives Exchange Ltd. (NCDEX)

Multi Commodities Exchange of India Ltd. (MCX)

National Multi-Commodity Exchange Ltd. (NMCE)

National Commodity & Derivatives Exchange Limited (NCDEX)

The National Commodities and Derivatives Exchange Ltd is a professionally managed

online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life
Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab
National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services
of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara
Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange. NCDEX is the only commodity exchange in the country
promoted by national level institutions. This unique parentage enables it to offer a
bouquet of benefits, which are currently in short supply in the commodity markets.
The institutional promoters of NCDEX are prominent players in their respective fields
and bring with them institutional building experience, trust, nationwide reach, technology
and risk management skills.

NCDEX is a public limited company incorporated on April 23, 2003 under the
Companies Act, 1956. It obtained its Certificate for Commencement of Business on May
9, 2003. It has commenced its operations on December 15,2003

54
 NCDEX is a nation-level, technology driven de-mutuali zed on-line commodity
exchange with an independent Board of Directors and professionals 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.

Forward Market Commission regulates NCDEX in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and
various other legislations, which impinge on its working.

NCDEX is located in Mumbai and offers facilities to its members in more

than 390 centers throughout India. The reach will gradually be expanded to more centers.
NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed,
Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard
Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel
Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed, Raw Jute, RBD
Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar,
Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow
Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

55
Multi Commodities Exchange of India Ltd (MCX)

MCX an independent and de-mutulised multi commodity

exchange has permanent recognition from Government of India
for facilitating online trading, clearing and settlement operations
for commodity futures markets across the country. Key
shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State
Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India,
Bank Of Baroda, Canara Bank, Corporation Bank.

Head quartered in Mumbai, an expert management team with deep domain

knowledge of the commodity futures markets leads MCX. Through the integration of
dedicated resources, robust technology and scalable infrastructure, since inception MCX
has recorded many first to its credit.

Inaugurated in November 2003 by Mr. Mukesh Ambani, Chairman & Managing

Director, Reliance Industries Ltd, MCX offers futures trading in the following
commodity categories:
Agri Commodities,
Bullion, Metals- Ferrous & Non-ferrous,
Pulses,
Oils & Oilseeds,
Energy, Plantations,
Spices

MCX has built strategic alliances with some of the largest players in commodities
eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana,
United Planters Association of India and India Pepper and Spice Trade Association.
56
 Today MCX is offering spectacular growth opportunities and advantages to a
large cross section of the participants including Producers / Processors, Traders,
Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry
Associations, amongst others MCX being nation-wide commodity exchange, offering
multiple commodities for trading with wide reach and penetration and robust
infrastructure, is well placed to tap this vast potential.

Vision and Mission of the Multi Commodities exchange of India.

The vision of MCX is to revolutionize the Indian commodity markets by

empowering the market participants through innovative product offerings and business
rules so that the benefits of futures markets can be fully realized. Offering 'unparalleled
efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants.

At MCX we believe that performance excellence and affordability would be the

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

57
 COMMODITIES
SYMBOLS
Gold, Gold HNI, Gold M, I-Gold, Silver,
Silver HNI, Silver M

Castor Oil, Castor Seeds,

Castor Seeds (Disa), Cottonseed,
Crude Palm Oil, Groundnut Oil,
Kapasia Khalli (Cottonseed Oilcake),
Mustard Seed
(Hapur),
Mustard Seed (Jaipur),
Mustard /Rapeseed Oil,
Mustard Seed (Sirsa), RBD Palmolein,
Refined Soy
Oil, Sesame Seed, Soyameal Soya Seed
Cardamom, Jeera, Pepper, Red Chilli,
Turmeric

Aluminium, Copper, Nickel, Sponge Iron,

SteelFlat,
Steel Long (Bhavnagar),
Steel Long (Gobindgarh), Tin
Cotton Long Staple ,
Cotton Medium Staple,
Cotton Short Staple, Kapas
Chana, Masur, Tur, Urad, Yellow Peas,

Basmati Rice, Maize, Rice, Sarbati Rice,

Wheat

Brent Crude Oil, Crude Oil, Furnace Oil

Cashew Kernel, Rubber

High Density Polyethylene (HDPE),

Polypropylene
(PP),
Guar Seed, Guargum, Gur, Mentha Oil,
Sugar M-30, Sugar S-30,

58
" $ %& '" (

UNIT OF YIELD/TIC
UNIT OF YIELD/Re. TRADING
COMMODITY PRICE or TIC
TRADING MOVEMENT SESSION
QUOTATION VALUE
PRECIOUS METALS
GOLD-M 10gm 100gm 10.00 1.00 10.00 10:00AM-11:30PM
GOLD 10gm 1000gm 100.00 1.00 100.00 10:00AM-11:30PM
SILVER-M 1KG 5KG 5.00 1.00 5.00 10:00AM-11:30PM
SILVER 1KG 30KG 30.00 1.00 30.00 10:00AM-11:30PM
AGRICULTURAL PRODUCTS
10:00AM-5:00PM
SOYA 1QT 10QT 10.00 0.05 0.50
&
10:00AM-5:00PM
SOYA OIL 10KG 1000KG 100.00 0.05 5.00
&
PALMOLEIN 10:00AM-5:00PM
10KG 1000KG 100.00 0.05 5.00
OIL CRUDE &
PALMOLEIN 10:00AM-5:00PM
10KG 1000KG 100.00 0.05 5.00
OIL RBD &
10:00AM-5:00PM
CASTOR 100KG 1MT 10.00 0.25 2.50
&
10:00AM-5:00PM
CASTOR OIL 10KG 1MT 100.00 0.10 10.00
&
GROUND NUT 10:00AM-5:00PM
10KG 1MT 100.00 0.10 10.00
OIL &
10:00AM-5:00PM
GAUR SEED 100KG 5MT 50.00 1.00 50.00
&
BLACK 10:00AM-5:00PM
100KG 1MT 10.00 1.00 10.00
PEPPER &
10:00AM-5:00PM
KAPAS 20KG 4MT 200.00 0.10 20.00
&
INDUSTRIAL METALS
10:00AM-5:00PM
STEEL LONG 1MT 25MT 25.00 0.50 12.50
&
10:00AM-5:00PM
STEEL FLAT 1MT 25MT 25.00 0.50 12.50
&
COPPER 1KG 1MT 1000.00 0.05 50.00 10:00AM-11:30PM
10:00AM-5:00PM
NICKEL 1KG 250KG 250.00 0.50 125.00
&
TIN 1KG 500KG 500.00 0.25 125.00 10:00AM-5:00PM

59
The National Multi Commodity Exchange of India ltd.

The first state-of-the-art de-mutualized multi-commodity Exchange,

NMCE commenced futures trading in 24 commodities on 26th November,
2002 on a national scale and the basket of commodities has grown
substantially since then to include cash crops, food grains, plantations, spices, oil seeds,
metals & bullion among others. NMCE was the first Exchange to take up the issue of
differential treatment of speculative loss. It was also the first Exchange to enroll
participation of high net-worth corporate securities brokers in commodity derivatives
market. NMCE has also made immense contribution in raising awareness about and
catalyzing implementation of policy reforms in the commodity sector.. It was the
Exchange, which showed a way to introduce warehouse receipt system within existing
legal and regulatory framework. It was the first Exchange to complete the contractual
groundwork for dematerialization of the warehouse receipts. Innovation is the way of life
at NMCE.

National Multi Commodity Exchange of India Ltd. (NMCE), promoted by

commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC),
National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat
Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing
Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune
Overseas Limited (NOL). The Punjab National Bank (PNB) took equity of the Exchange
to establish that linkage. Even today, NMCE is the only Exchange in India to have such
investment and technical support from the commodity relevant institutions. These
institutions are represented on the Board of Directors of the Exchange and also on various
committees set up by the Exchange. The experienced and qualified professionals with
impeccable integrity and expertise manage the day-to-day operations of the Exchange.
None of them have any trading interest.

60
Vision
National Multi-Commodity Exchange of India Limited is committed to provide
world class services of on-line screen based Futures Trading of permitted commodities
and efficient Clearing and guaranteed settlement, while complying with Statutory /
Regulatory requirements. We shall strive to ensure continual improvement of customer
services and remain quality leader amongst all commodity exchanges.

Mission
Continuous improvement in Customer Satisfaction.
Improving efficiency of marketing through on-line trading in Dematerialization form.
Minimizing of settlement risks.
Improving efficiency of operations by providing best infrastructure.
Rationalizing the transaction fees to optimum level.
Implementing best quality standards and testing in tune with trade practices.
Improving facilities for structured finance.
Improving quality of services rendered by suppliers.
Promoting awareness about on-line features trading services of NMCE across the length
and breadth of the country.

Turn over of the Indian commodity futures’ market

Turnover on Commodity Futures Markets

(Rs. In Crores)
Exchange 2009-10 2010-11
NCDEX 1490 54011
NBOT 53014 51038
MCX 2456 30695
NMCE 23842 7943
ALL EXCHANGES 129364 170720

NCDEX TRADING SYSTEM

61
 A trading system is a system of rules and guidelines of the whole trading process.
The system includes:
First in the system, the TICKER for each commodity is shown on the trading
terminal. Generally it is standardized for all the exchanges in a country, but nevertheless,
it may differ between the exchanges in same country.

Firstly, the Format for Tickers is like this:

CCCGGGLLL

CCC – three letters for the commodity.

GGG – three letters for the grade.
Wherever there is no particular grade, either STD (standard) or GR1 (grade 1) has been
used.
LLL – three letters for the delivery location.
Eg. SYOREFIND -- SYO: Soy Oil, REF: Refined, IND: Indore

Now let’s have a look at the format of the tickers for all the commodities
that are traded in NCDEX:

GLD100MUM : “Gold”+“100% pure”+“Mumbai”

SLV100DEL : “Silver”+“100% pure”+“Delhi”
SYBGR1IND : “Soy Bean”+“GR1”+“Indore”
SYOREFIND : “Soy Oil”+“Refined”+“Indore”
RMSGR1JPR : “Rape/Mustard”+“GR1”+“Jaipur”
RMOEXPJPR : “Rape/Mustard Oil”+“Expeller”+“Jaipur”
RBDPLNKAK : “RBD”+“Palm Olein”+“Kakinada”
CPOSTDKDL : “Crude Palm Oil”+“STD”+“Kandla”
CTMJ34BTD : “Cotton Medium Staple Length”+“J-34”+“Bhatinda”
CTLS06ABD : “Cotton Long Staple Length”+“S-06”+“Ahmedabad”

“INSTRUMENT TYPE” in NCDEX is to denote whether the ticker is a futures contract

or a spot price being disseminated or an options contract

62
COMDTY – used for commodity spot price dissemination
FUTCOM – used for futures on commodity
OPTCOM – used for options on futures on commodity

CONTRACT EXPIRY:

Contract Expiry for the Futures & Options contract will be written as 20mmmYYYY.
20 -- 20th of every month a contract expires.
mmm – used to denote the month, e.g. DEC, JAN etc
YYYY – used to denote the year e.g. 2003, 2004 etc

For the spot price, no expiry date will be displayed or required as the positions in spot
market are for perpetuity (Spot market not yet started).

WHAT TO QUOTE FOR BUY/SELL

Gold – for buying futures of say 500 gm, you will need to enter “Quantity” as 500, and
price in “Rs/10gm”

Silver – for buying futures of say 25 Kg, you will need to enter “Quantity” as 25 and the
price in “Rs/Kg”

All oils and oilseeds – for buying futures of say 5 MT, you will need to enter “Quantity”
as 5 and
The price for Soy Bean in “Rs/Quintal”
The price for Rapeseed/Mustard Seed in “Rs/20 Kg”
The price for all edible oils in “Rs/10 Kg”

Cotton – for buying futures of say 44 bales, you will need to enter “Quantity” as 44 and
the price in “Rs/Quintal”

63
ORDER TYPES:

There are major, two types of orders, regular lot orders and qualifiers.

Regular lot order

Market Order: It is a type of order where in both the buyer and seller agrees for
a transaction at current market price (CMP).

Limit Order: An order that can be executed only at a specified price or one
favorable for the investor. Hence for a seller a limit price is above Current Market Price
(CMP) and for a buyer it is below the Current Market Price (CMP)

Qualifier

Stop Loss: An order that is put to curb excess loss to the customer. Hence for a seller
(who already has a buy) a stop-loss order is below CMP and for buyer (who already holds
a sell) a stop-loss order is above CMP.

Futures Spread (SB) – specified difference between two different calendar months in
same commodity. It also called just ‘Spreads betting’.

Immediate or Cancel (IOC)

2L Order (2L) – Opposite positions taken in two different months (arbitraging) e.g.
buying March contract and selling April contract.

3L Order (3L) – Opposite positions taken in two different months and either buy/sell
position taken in other month. E.g. buying March contract and selling April contract and

64
buying in May contract. Hence in this case one position in either of the contracts is not
arbitraged.

TIME VALIDITY OF TRADES

Day-Valid only for that day.

Good Till Date (GTD) – Valid to the date specified (for specified no. of days), Max 7
days.

Good Till Canceled (GTC) – Valid till cancelled, Max 7 days.

SETTLEMENT PROCESS IN COMMODITIES FUTURES

In this Education Series, we shall have a look into how settlement is done in case
of commodities futures. The settlement procedure is more or less same as in case of stock
futures, nevertheless, there are some key differences in the procedure by the virtue of the
underlying asset, which is a commodity.

Now, we will look into key two key issues which affect the settlement process.
First being whether the underlying asset of the future is deliverable (this depends on
exchange) and the other whether the underlying asset is in a physical form or only in
electronic form.
Table.1: Comparison between stock futures and commodity futures.

Instrument Deliverable Electronic Form Physical From

Stock Futures No* Yes No
Commodity Futures Yes Yes Yes

In many developed financial markets like Japan, US, UK, Euro land, stock futures can
account to delivery.

65
 From Table.1 it is clear that the stock futures in India do not end up in delivery,
implying a person who has taken long position cannot ask for delivery of real stock after
the expiry of the contract even if he is willing for taking delivery.

Again since, the delivery is not possible, an investor cannot settle his short
position with the real stock; neither can he take delivery of stocks if he has taken long
position. He has to mark-to-market at the end of future contract settlement.

But in case of commodity futures, delivery of underlying commodity is possible.

The delivery can be taken both in the electronic form and physical form.

In case of electronic form the delivery quantity is transferred to/from the

investor’s DP account.
In case of physical form, the delivery quantity is transferred to/from the stocking
point.

Now, we arrive at an important point, when and how are settlements done?

Daily Settlements are done on mark-to-market basis.

And at the expiry of the contract Final Settlement is done.

Daily Mark to Market (MTM) Settlement is done for each Client:

At the end of every trading day, for all the trades, this is done till the date of the Contract
expiry.

A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all trades.

Final Settlement will be done for each Client:

66
This on expiry of the Contract will handle the FINAL obligation of the Member for all
trades in that contract.

How is Daily MTM done?

Calculating the daily profits and losses for the client/investor does the Daily Settlement.
Profits and Losses are determined on the positions for client/investor, for each client and
for each contract
All trades are marked to the market at the Daily Settlement Price which is equal to
Closing price for the day.
A total Mark to Market Profit or Loss is calculated for the every client/investor.

Table.2 Example of Daily MTM

Branch 1 Branch 2
Client 1 Client 2 Client 3
Contract A Contract B Contract A Contract A Contract B
Buy 400@50 Sell 200@150 Sell 700@48 Buy 200@63 Buy 150@160
Sell 200@55 Sell 150@190 Buy 500@40 ---- Sell 150@170
Closing rate 400 X 8 = 200 X 30 = 700 X 10 = 150 X 20 =
A – 58 3200 (6000) (7000) 200 X 5 = 3000
B – 180 200 X 3 = 150 X 10 = 500 X 18= (1000) 150 X 10 =
(600) 1500 9000 (1500)
PROFIT PROFIT LOSS PROFIT LOSS PROFIT
/(LOSS) 2600 (4500) 2000 (1000) 1500
TOTAL
LOSS (1900) PROFIT 2500
MTM

67
 - 1% / , -
"#
$ %"& &'

%
, -. , "!%
$" ! % /'

% / ,
$ (
'''' ,9*':
2 % /
/ 0
(34

56 6
, !0
0 7
8

( *
*
!
"#

$ %"&
&'

*+
) ( )

68
When is Daily MTM Settlement done?
The information on MTM amount (paid or received) by the Broking Member
(KCBPL) is given thru the Extranet at the end of the day, same information is passed on
to the Broking Member (KCBPL) branches.
Actual payment and receipt of funds will be made by the Client on the next
trading day i.e. T+1. (‘T’ being the trade date)

How does the Transfer of funds happen?

Payment will be done through a designated Clearing bank of the Exchange.
The Broking Member (KCBPL) makes arrangement for funds in his Settlement A/c with
the bank.
The Clearing Corporation (NSCCL) will send instruction to the Bank for
debiting/crediting the Broking Member (KCBPL) account.

What are the other payments to be made?

Besides the MTM, the Broking Member (KCBPL) will make Daily Margin
payments.
Margin files will be downloaded on the Extranet
Broking Member (KCBPL) arranges for funds in the Settlement A/c
The Clearing Corporation debits the funds on the next day after the trading date.

What happens in case of failure?

If the Broking Member (KCBPL) fails to make the payment of MTM or Margin
amount, trading terminal is disabled immediately.
Trading will commence on deposit of funds by the Broking Member (KCBPL).

Where is the information on Daily Settlement available?

All information pertaining to Settlements is available on the Broking Member
(KCBPL) Extranet.
This is available in specific folders for the Broking Member (KCBPL).

69
How do I access the Extranet?
Thru the VSAT / Leased Lines connectivity using FTP protocol
Login using Trading member Id and password during non-trading hours. (Here Trading
Member is KCBPL)

Now let’s have a brief look at the sequence of Events.

!0 0
0 0 / % 0
#0 /6

% / 5 /
, - , % /+ / ,9*6

% 0 ! % #0 /
6

- 0
0 0 6

! " #

From Chart.2 the last event in the sequence of events is the “Final Settlement” of
all the open positions.
“The Settlement done for Open Buy and Sell positions on the Contract Expiry
Date is called Final Settlement.”
By the virtue of commodities futures being deliverable, both in electronic form
(DP A/c) and in physical form, the final settlement in case of commodities futures varies
from stock futures.

70
The futures settlement in case of commodities futures is done in the following ways:
Cash settlement: Most of the open positions end up in cash settlement at the
end/expiry of a contract. In fact about 99% of the positions end up in cash settlement.
Electronic Form: Some positions end up in delivery, the amount /volume of a
commodity that a client marks for delivery is transferred into the clients DP A/c.
Physical Form: Very less, almost negligible delivery happens in the physical
form. (About 0.1-0.5% of total open positions)
How final positions are determined?

* ) >
4
& 4 &
% /* ;<< - ?<< ;<< - )<< =<< -

% /) 1 ;<< - ;<< )<<

% ;<< - ><< 1 ;<< =<< -

"#0 /
& ;<< - 4
4 ><< =<<1 ;<< @ *<<-

Can actual delivery of the commodity be done on Expiry?

A Broking Member (KCBPL) can give and take delivery of commodities for an
investor/client or on proprietary trades done, by completing the Delivery formalities and
giving delivery information to the Exchange

What are procedures required before Delivery?

Opening a Clearing Member (KCBPL) Pool account for the purpose of

settlements.
Beneficiary Demat account for own transactions.
Opening of Client’s Demat account with the empanelled DP.

71
How is the delivery information processed?

The information submitted by the Members is matched at NCDEX at the end of the day
All trades, which are matched, are locked for delivery
A Delivery Request number is generated for all delivery information submitted

- A% 5
"#

% 0
#0 /

% 5 /
2

0 / -
2 % 5 /

2
2
2

% 5 / % 5 /
% 0 /
/ -

How does the matching of delivery information take place?

Validation of delivery information

On Client’s Net Open Position
On Delivery lot for commodity
Excess quantity is rejected and is cash settled.
Matching limited to the total capacity at the Warehouse
Matching is done for the deliveries based on
Commodity
Location

72
SETTLEMENT CALENDAR

! #! $ $#
!% & !%
! " ,9?
! " , 9?
, 9?
, 9?
, 9?
, 9?
, 9*<
, 9*<
, 9)
, 9;

Settlement Pay-in
Pay-in will take place on date as specified in Settlement Calendar.
Commodities:
Seller ensures Demat of commodities prior to pay-in.
Instruction to DP by seller to move commodities to KCBPL Pool A/c.
Pay-in of commodities on Settlement Date thru KCBPL pool A/c.
Funds:
Pay-in of funds – Thru the Clearing bank of the Member on the Pay-in day.

Settlement Pay-out
Pay-out will take place on date as specified in Settlement Calendar.
Commodities
Credit given into the Buyer member KCBPL Pool A/c.
Instruction by KCBPL to transfer from pool A/c to buyer client’s Demat account.
Subsequent Remat of commodities and physical movement handled by buyer.
Fun

73
ADVANTAGES OF TRADING/INVESTING IN COMMODITIES

Benefits to the Industry, Exporters and Importers:

1. Hedging the price risk associated with future contractual commitments. For
instance, let’s take a case of a Soy Bean exporter whose export commitment is
one month now (present market price is Rs.1700 per quintal). As per his analyst’s
recommendations, the prices are expected to rise (to an extant of Rs.1800 per
quintal) after one month, when he has committed for export. Now let’s assume
that his export commitment is 10000 quintals.

Time Export Market Price

Commitment
Today Nil 1700
After one month 10000 1800

Instance 1: With no hedging.

Sale Price: Rs. 1850.

Cost Price: Rs. 1800.

So, net profit/ quintal = Rs.50.

Net Profit of deal=Rs.50x10000=Rs.5, 00,000.

Instance 2: With Hedging:

Sale Price: Rs.1850.

Cost Price: Rs.1700. (where in the exporter goes long (buys) today)

So, net profit/ quintal=Rs.150.

Net Profit of deal=Rs.150x10000=15, 00,000.

An increase of 200% net profit.

74
2. Efficient price discovery:

With the starting of national wide commodities markets, regional price

differences in commodities prices are controlled. Hence, now the cost of a commodity is
almost same throughout the country. Prior to this there was lot of price differences of
commodities at various places. Example, the price of Gold in Hyderabad was different
from price of Gold in Mumbai, but now this disparity is curbed to an extant, though some
price still exists between the exchanges.

3. Benefits to the Banks:

Now the producer and consumer of the commodity can go for ‘Hedging’ their
positions hence, the loaner of funds (Bank) is clear of the receivables. Thus, ‘Hedged’
positions of producers and consumers would reduce the risk of default faced by the
banks.
Lending for agricultural sector would go up with greater transparency in pricing
and storage.

4. Benefits to the clients:

The commodity prices move with strong broad based fundamentals. Hence, the
commodity prices do not move in an erratic fashion.
The price movements are also due to Global price movements of a particular commodity
hence, things like insider trading, and price manipulations do not exist in commodities
markets.
A commodity is always tradable. And also never a commodity price can be ‘zero’. In
case of stocks, a company may be de-listed, hence, it may go non tradable or the virtual
price being ‘zero’

75
FACTORS EFFECTING COMMODITIES MARKET
Before starting this section let’s divide commodities into different classes:

Precious Metals: Gold, Silver.

Base Metals: Steel, Aluminum*, High Grade Copper, Nickel, Zinc, Tin.
Agricultural:
Grains: Soy, Soy Oil, Rice, and Rice Oil*.
Softs: Cotton, Coffee*, Sugar.
Energy: Crude Oil, Natural Gas. **

Factors affecting the prices of commodities:

The factors affecting the prices of various commodities can be divided into two:

Generic Factors:

These are the factors affecting all the commodity prices in general.
Demand and Supply.
Indian Rupee Vs other currencies.
Export/Import parity.
Political environment.
Specific Factors:

These are the factors affecting a particular commodity or a class of commodities.

Precious Metals:

Stock market dynamics.

Geo-political tensions.
US dollar Vs other major currencies.
Global macroeconomics.
Miner’s reports.
Agricultural:

Climatic conditions.
Crop production.
Government regulations.
Export rejection/orders.

76
Softs:

Climatic conditions.
Crop production.
Import duty.

Industrial Metals:

Industrial demand.
Substitute metals supply.
Government regulations.
Infrastructure projects.

Energy:

Production.
New excavations.
Geo-political tensions.

77
 CHAPTER-4
DATA ANALYSIS AND INTERPRETATION

Multi Commodities Exchange of India Ltd (MCX) Gold Price

78
 !

79
 FUTURE MARKET

BUYER SELLER
07/01/2012(Buying) 27764.00 27755.00
07/01/2012(Cl., period) 1287.00 1287.00
Profit 9.80 Loss 57.00

Loss 500 x9.80=4900, Profit 500 x9.800=4900

Because buyer future price will increase so, he can get profit. Seller future price also
increase so, profit decrease, Incase seller future will decrease, and he can get profit.
The closing price of Gold Metal at the end of the contract period is 1287.00 and this is
considered as settlement price.

Multi Commodities Exchange of India Ltd (MCX) Silver Price

80
 !

81
 FUTURE MARKET

BUYER SELLER
07/01/2012(Buying) 51789.00 51868.00
07/01/2012(Cl., period) 2339.00 2339.00
Profit 23.69 Loss 68.27

Loss 500 x68.27=34135, Profit 500 x23.69=11845

Because buyer future price will increase so, he can get profit. Seller future price also
increase so, profit decrease, Incase seller future will decrease, and he can get profit.
The closing price of Silver Metal at the end of the contract period is 2339.00 and this is
considered as settlement price.

82
4.1 Analysis & Interpretation of the Questionnaire

All the questions are analyzed question wise for easier understanding and
proper interrelation after the analysis is done.

These are the analysis of a sample of 50 people who include people from all
walks of life like businessmen, students, investors, traders, employees etc.

Each question is detailed with the no, of people who have marked that as
the answer, provided with the graph for making it easy to understand and
interpret.
1. Occupation

Options Responds
Salaries 17
Self Employed 25
Retired 0
Others (If so, specify___________) 8

83
As per the chart we can identify that most of the individuals are self employed
and probably run there own business. With the boom of IT and finance sector
in the early 20th century the number of jobs in both the sectors have increased
a lot and resulted in employment in different areas which has helped the
country in many ways.

84
2. Annual Income

Options Responds
Less than 5 lakhs 17
5 lakhs – 10 lakhs 4
10 lakhs – 15 lakhs 13
15 lakhs – 20 lakhs 4
Above 20 lakhs 12

Depending on the age of the individuals are well as other factors, the chart
highlights that most of the investors are from a young age group and have a
salary of less than 5 lakhs per annum. On the other hand the we have lots of guys
with income over 20 lakhs signifying the facts that the investors are either rich
people who want to increase there assets or young ones who are trying to come
up with various methods to reach the top notch.

85
3. Percentage of your income you invest?

Options Responds
None
Under 5% 17
5 to 10% 13
10 to 15% 12
Above 15 % 8

From the sample who took the questionnaire, a large chunk of individuals tend to
invest less than 5% of their income which is understandable in a growing country like
India where so many people are below the poverty line and struggle to make ends
meet. The chart highlights the fact that only 8% of the people invest 15% of there
income in various commodities or policies. May be if more of the investors or higher
income group were in the sample, the charts would give a different picture.

86
4. Where do you invest?
Options Responds
Mutual Funds 7
Equities/ Derivatives 19
Insurance (Includes ULIP) 12
Commodity futures 12
Others (If so, specify___________) 0

Equity investment generally refers to the buying and holding of shares of stock in the
market by individuals and funds in anticipation of income from dividends and capital
gain as the value of the stock rises. Equities along with insurance policies like ULIP
which have long term benefits are what customers opt for. As the chart highlights a
spare few go for mutual funds and commodities future as it is high risk.

87
5. Why do you invest in trading?

Options Responds
Awareness 29
Peer Influence 8
Conservatism 0
Looking for assistance 13

In this tech savvy world of computers and numbers, everyone is in a rat race to outdo
each other. Trading is a way to increase the capital of one’s company or business with
the hope that the business would be able to generate more profit than the interest
charges. Most of the youngsters in todays world invest in some sort of trading. Some
of it is due to peers influence as well. There is a large variety of population who are
not aware on how to trade and need guidance. Various online sites have been setup
with step-step procedures explaining the same.

88
6. How do you rate your risk taking apatite?

Options Responds
Risk Seeker 13
Risk Averse 17
Moderate 20
No Answer 0

Majority of the people in this world would thinks twice before investing there
savings. Every individual wants to increase his savings and have a lavish
lifestyle. As the chart show there are very few guys who take big time risks
related to there savings and investments. Most of them are risk averse and about
50% of them come into the moderate category. The moderate ones do a detailed
investigation before investing and trading there savings.

7. What would you use commodities for?

89
 Options Responds
Trading 21
Reasonable Returns 8
Investing 21
No Answer 0

Trading is a direct exchange of goods and services. Trading can also refer to the
action performed by traders and other market agents in the financial markets.
Commodities are most often used in trading and in investment of products.

Investing is the active redirection of resources: from being consumed today, to

creating benefits in the future; the use of assets to earn income or profits. The
use of commodities in trading and investment can result in huge profits in the
long term.

8. How would you prefer when trading in commodities?

90
 Options Responds
Trading 0
Mid Term (1-3 months) 4
Short Term (upto 1 month) 17
Long Term (3-12 month) 29

A commodity is some good for which there demand is, but which is supplied
without qualitative differentiation across a market. It is a product that is the same
no matter who produces it, such as petroleum, notebook paper, or milk. In other
words, copper is copper. The price of copper is universal, and fluctuates daily
based on global supply and demand.

91
9. You prefer to invest in commodities (futures) that have?

Options Responds
High Risk, High Return 9
Medium Risk, Medium Return 33
Low Risk, Low Return 8

People always want to invest in commodities where they have more than 50%
chance of getting a profit. Keeping the future in mind customers tend to invest in
commodities which have medium risk and medium return, rather than investing
in high risk ones as it is a huge gamble. It might pay off once in a while but it
might result in ending all your saving as well.

10. Do you know investment in commodities can be classed as an Asset?

92
 Options Responds
Yes 37
No 13

Commodities speculation is about the riskiest place to deploy your savings: it's
really in a different category than investing. Commodities exchanges arc really
supercharged belting parlors made up of a series of hyperactive markets
where you can bet on the price movements of a variety of products. The
list includes precious metals, raw materials, grains and meal, ail and gas —
even financial products like Treasury bills.

Though they carry big risks for individual investors, commodities markets
were originally set up lo help spread the risk of price changes among a large
pool of players. Using futures contracts, for example, a Tanner can sell a crop
before it’s planted, even though he might get a better price in the future (which
is where the name comes from.) If a boom in demand drives up prices by
harvest time, the buyer of the futures contract wins.

But if a bumper crop floods the market and prices plunge, our speculator could
lose everything. No matter what happens, the farmer has enough money in the

93
 bank to buy the for next year's crop, Hence commodities can be classified us
an asset.

11. In which of the following types of Commodities do you prefer to invest?

Options Responds

94
 Bullions (Gold and Silver) 17
Metals (Copper, Lead, Nickle etc) 10
Agri 7
Energy 10
Mixed 6

A new survey from New York-based hedge fund Ospraie Management LLC had
shown that gold is among the five best commodity-investment.

Experts say rising costs are hindering the exploration by gold producers such as
Barrick Gold Corp, the world’s largest gold mining company.

The past decade has seen a dramatic transformation in the energy sector with a
gradual, but steady movement from a state-owned, monopolistic industry to a
more open and competitive sector based on free-market principles. The bullions
like Gold and silver always has an edge in the market but commodities like
energy and metals are picking up But precious metals will always have their
stand when it comes to people’s sentiments of investing their money in Gold n
Silver.

12. If you trade in commodities, how do you rate it when compared to Equities on a scale
of 5?
95
 Options Responds
1 11
2 0
3 29
4 0
5 10

More than half of the sample trusts both commodities and equities for putting their
money in it. Though commodities has started decades after which equity trading
started, its growth is tremendous with its turn over almost equal or more than equity
tune over in today scenario.

Others have their own opinion of their investments and prefer more of equities or
more of commodities according to their past experience, performance, liking, comfort
zone.

96
 4.2 CROSS TABS

Question 3

Options Male Female

None 0 0
Under 5% 9 8
5-10% 13 0
10-15% 9 4
Above 15% 4 3

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Question 9

Options Male Female

HR/HR 8 0
MR/MR 23 11
LR/LR 4 4

98
 CHI-SQUARE TESTS

1. Chi square analysis between questions 2 and question 3.

HO: Annual income is not related to the % of income you invest in commodities.
H1: Annual income is related to the % of income you invest in commodities.
TABLES
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
Annual income % of
income invested 62 100.0% 0 .0% 62 100.0%

Annual income * % of income invested Crosstabulation

Count
% of income invested
Under 5% 5 to 10 to 15% Above Total
10% 15%
Annual 12 0 0 0 0 0
income
Less than 5 0 9 0 1 7 17
lakhs
5 to 10 lakhs 0 4 0 0 0 4
10 to 15 lakhs 0 4 9 0 0 13
15 to 20 lakhs 0 0 4 0 0 4
Above 20 0 0 0 12 0 12
lakhs
Total 12 17 13 13 7 62

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 Chi-Square Tests
Value Dt. Asymp. Sig.(2-
sided)
Pearson Chi-Square 1.683E2a 20 .000
Likelihood Ratio 149.593 20 .000
N of Valid Cases 62

a. 30 cells (100.0%) have expected countless than 5. The minimum expected

count is 45.

Comments:

From the analysis we can see that the Pearson chi-square is < 0.05 therefore we accept H1.

Therefore Annual income is related to the % of income you invest in commodities.

100
 2. Chi quare analysis between questions 1 and question 4.

HO: Occupation is not related to where we invest.

H1: Occupation is related to where we invest.

TABLES:

Case Processing Summary

Cases
Valid Missing Total
N Percent N Percent N Percent
Occupation * place
of investment 62 100.0% 0 .0% 62 100.0%

Occupation * Where you Invest Cross tabulation

Count
Place of invested
Equity Commodity Bank Mutual Insurance Total
- future funds
Occupation 2 0 0 0 0 0 2
Rental income 3 0 0 0 0 0 3
Horse race 1 0 0 0 0 0 1
Lottery 1 0 0 0 0 0 1
Bank interest 2 0 0 0 0 0 2
Capital Gains 1 0 0 0 0 0 1
Retired 2 0 0 0 0 0 2

Salaried 0 9 0 0 8 0 17

Self employed 0 8 4 1 0 12 25
Others 0 0 8 0 0 0 8

Total 12 17 12 1 8 12 62

101
 Chi-Square Tests
Value Dt. Asymp. Sig.(2-
sided)
Pearson Chi-Square 1.328E2a 45 .000
Likelihood Ratio 122.798 45 .000
N of Valid Cases 62

a. 59 cells (98.3%) have expected count less than 5. The minimum expected
count is 02.
Comments:

From the analysis we can see that the Pearson chi-square value is < 0.05 therefore we
accept H1.
Therefore occupation is related to where we invest.

3. Chi square analysis between questions 2 and question 6.

102
 HO: Annual income is not related to the risk taking apatite.
H1: Annual income is related to the risk taking apatite.
TABLES:
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
Annual income % of
risk taking apitite 62 100.0% 0 .0% 62 100.0%

Annual income * Risk taking apatite. Crosstabulation

Count
Risk taking apitite
Risk Risk Moderate Total
seeker averse
Annual income 12 0 0 0 12
Less than 5 lakhs 0 13 4 0 17
5 to 10 lakhs 0 0 4 0 4
10 to 15 lakhs 0 0 8 5 13
15 to 20 lakhs 0 0 0 4 4
Above 20 lakhs 0 0 0 12 12
Total 12 13 16 21 62

Chi-Square Tests

103
 Value Dt. Asymp. Sig.(2-
sided)
Pearson Chi-Square 1.386E2a 15 .000
Likelihood Ratio 132.972 15 .000
N of Valid Cases 62

a. 23 cells (95.8%) have expected countless than 5. The minimum expected

count is 77.

Comments:

From the analysis we can see that the Pearson chi-square is < 0.05 therefore we accept
H1.
Therefore Annual income is related to the risk taking apatite.

4. Chi square analysis between questions 6 and question 11.

104
 HO: risk taking apatite is not related to the type of commodities you prefer to invest.
H1: risk taking apatite is related to the type of commodities you prefer to invest.
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
risk taking apatite *
type of commodities 62 100.0% 0 .0% 62 100.0%

Risk taking apetite * Type of commodities Cross tabulation

Count
Investment preference
Bullions Metals Agri Energy Mixed Total
Risk taking 12 0 0 0 0 0 12
apatite
Risk seeker 0 6 1 1 4 1 13
Risk averse 0 4 3 6 3 0 16
Moderate 0 7 7 0 3 4 21
Total 12 17 11 7 10 5 62

Chi-Square Tests

105
 Value Dt. Asymp. Sig.(2-
sided)
Pearson Chi-Square 83.799a 15 .000
Likelihood Ratio 80.907 15 .000
N of Valid Cases 62

a. 23 cells (95.8%) have expected count less than 5. The minimum expected
count is 97.
Comments:

From the analysis we can see that the Pearson chi-square value is < 0.05 therefore we
accept H1.

Therefore risk taking apatite is related to the type of commodities you prefer to invest

106
CHAPTER 5
FAQ's About Commodities
Matt is the President of Optimus Trading Group, which is a futures brokerage firm
that specializes in online futures trading and managed futures accounts. Matt has
been involved in the futures industry for more than a decade and he understands the
needs and struggles of the commodity trader in this ever expanding and changing
environment,

Q. Many readers out here are new to the commodities markets and are wondering
the best way to get involved in commodities. Some guidance from markets
experiences?

A. Yes; choose a market that does not carry a lot of leverage, relative to your
account size, place a trade on one contract and see how you react emotionally to the
fluctuations. If you are comfortable with the ups and downs it means that you have
the right temperament for these markets.

Here is what you should do prior to placing the first trade to become even more
comfortable: track 10 commodities and familiarize yourself with their leverage,
their daily fluctuations and then choose a future contract that you feel comfortable
with.

Of course, this is only the beginning. The key is in developing a long-term

methodology, i.e.: a reason to buy and/or sell contracts. Money management (risk)
is an essential component in developing EI successful methodology,

Q. Best Service recommended: the use of a full service commodity broker or an online
discount commodity broker?

A, Always believe that in the long run trading online should be the trader's ultimate
goal.

107
Beginning traders should seek the assistance of a professional lo minimize errors and
to develop confidence in order placement, margin requirements and even the
trading platforms available. Brokers should be able to provide technology along
with advice to beginner traders. In The long run, believe Thai clients should Learn to
become independent and self-reliant lo trade according lo their own risk tolerance,
lime constraints or availability and lo develop discipline.

Q. What mistakes do commonly traders make in the commodities markets?

A. In general terms, it's the lack of planning and preparation, Tlie mistakes could
range from misunderstanding the volatility, lo lack of money management or just not
having a methodology. However, part of trading is making mistakes, and hopefully
learning from these mistakes.

Learning the contract sizes, the various exchange orders and developing some
technical analysis skills could help tremendously.

Q. Do traders receive any type of help if they trade online or are they left to
completely fend for themselves?

A. Part of any good brokerage is giving customers technical support for the platform
they've chosen. Guidance is given as lo the functionality of the trading platform,
order status and/or other issues that might arise for self-direct traders.

Customers should always shop for brokers that give them timely and extensive
support.

Q. is there a minimum balance that that is recommended for opening an account to

trade commodities?

A. Yes. Rs.25,000 is something that customers should consider. The ability to

withstand fluctuations, having sufficient margins is the key to survival in this
market. Smaller accounts can be successful, but the leverage could cause higher
fluctuations in their accounts. Never over trade and don't over leverage your account.
108
Q. Some investors feel they don’t have the time or knowledge to trade commodities. Can
managed futures might work for them?

A. Lack of time is a big consideration and can prevent a trader from taking profits (or
cutting losses) in & timely fashion. Some traders can be very knowledgeable about
commodities but applying their methodology and developing the emotional make up
necessary to trade is another matter

If the above conditions apply to someone who wants to participate in the commodities
markets, managed futures could be a very good solution.

Q. What should investors examine about a managed futures fund to decide if they should Invest
in it?

A. Here are the factors to consider;

Track record
Monthly and intraday drawdown ( measures of volatility)
Money Under management
Type of contracts traded and me risk associated with them
Liquidity of die contracts Traded

Q. What financial requirements does someone have to meet in order to trade

commodities or open a managed futures account?

A. Typically, managed futures accounts require higher levels of capital. They can start
from Rs,25,000 and higher However, regardless of the amount required, funds invested in
this type of investment should be risk capital. Keep in mind that managed accounts can and
do go through draw downs and volatility.

Recommended is having a minimum net worth of Rs.2,50,000/- and risk capital of

Rs.50,000/- also as a minimum requirement.

109
 CHAPTER-6

FINDINGS
CONCLUSION
SUGGESTIONS
BIBLIOGRAPHY

110
FINDINGS

After almost two years that commodity trading is finding favor with Indian
investors and is been seen as a separate asset class with good growth
opportunities. For diversification of portfolio beyond shares, fixed deposits and
mutual funds, commodity trading offers a good option for long-term investors and
arbitrageurs and speculators. And, now, with daily global volumes in commodity
trading touching three limes that of equities, trading in commodities cannot be
ignored by Indian investors.

From all the information given above, we underhand the importance of trading in
commodity market. The booming economy of India Is pushing the growth of
commodity trading for various types of investors of higher level where people
have another opportunity to invest their money in one of the other best
diversifying sector Commodities.

The questionnaire answered all the required questions of from a general point of
view that investors consider commodities is Important as equities though it is not
very new to all the people investing their money in the exchanges. The turnover that
commodity is having is quiet an example that we have accepted commodities as
another investing zone for our investments.

Further, we have understood that Commodity can be used as an asset building tool for
a long term process with the example of Gold by paying less than that is normally
required by the person buying it physically. Hence “COMMODITY CAN BE USED
AS AN ASSET CLASS”

• Due to the increasing of inflation in the country the Gold and silver got very much
importance and it was increased and the commodities market.

• It shown that the more of the given share is known as commodities i.e. 67% and
other got very less as compared to commodities.

111
• Majority of the Investor’s trade in the Commodities Market but few Done & Left
due to Losses & Settlement Problems.

• Investors purchased commodities from karvy because of the company’s policies

and information availability.

• Most of the investors feel that commodity trading id very good and remaining
says good for investing

• Trading in Commodities Futures is More Beneficial & More Leveraging got more
percentage.

• Due to the increase in the services in the country the Services they prefer from a
Financial Advisory Institution is telephone.

• Most of the investors preferring Karvy for investing in the commodity market.

112
CONCLUSION

Commodities market, contrary to the beliefs of many people has been in existence in
India through the ages. However the recent attempt by the Government to permit
Multi-commodity National levels exchanges has indeed given it, a shot in the arm.
Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of
movable property other than actionable claims, money and securities”. Futures
trading are organized in such goods or commodities as are permitted by the Central
Government. Firstly, the price movements are more predictable, purely based on
demand and supply of that commodity, unlike in other markets where price
manipulations are very much possible, hence the investor is fixed.

To that extent market price risk is reduced. Secondly, the markets are working
virtually round the clock,(NCDEX works from 10:00 AM to 4:00 PM and next
session from 7:00 PM to 11:00PM)so any drastic news is digested. In case of other
markets this provision is not there, just think of September 11th episode, next day
equity markets opened far down and the Investors are left hanging. The future
contracts available on a wide spectrum of commodities like Gold, Silver, Cotton,
Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent
opportunities for hedging the risks of the formers ,importers, exporters, traders and
large scale consumer. Karvy Commodities Broking Private Limited is another venture
of the prestigious karvy group. With our well establish presence in the multifarious
facets of the modern financial services industry from Stock Broking to registry
services.

113
SUGGESTIONS

• Investing in commodities as an asset is always good for long term.

• Invest with at least double the margin money that is required for a particular
commodity.

Ex: If investing in copper, margin is Rs.20,000 and price of copper in January is

Rs.150/- with a target of Rs.250/- in 6-8 months, keep Rs.40,000/- extra in case of
further fall in the prices (if it falls below 150/-) to be on a safer side.

• It's a good instrument diversification,

• Commodity Mutual Funds can be increased.

• Commodity market presently deals with FUTURES contract and most probably
OPTIONS are provided, it would be convenient to the investors.

• As the fund managers take decisions with mutual fund investment, it would be
another option for him to invest through mutual funds in commodity market.

• If Government takes this commodity market into awareness for the farmers, it
would be better for them to take their own decisions for commodity which they
want to trade.

• As there is an option for the trader to take the physical delivery, it would be better
if the Government cuts the tax rate for the physical delivery of goods.

• Avoid buying shares of the company which are not traded on your stock
exchange.

• Investor must show interest in steady and fast growth shares only.

114
• Avoid buying Turn rounds (making loss continuously), Cyclical (cycles of good
and bad performance), Dog shares (very inactive or passive).

• Avoid companies with low PIE ratio relative to the market as always.

• If the investor is confident of EPS moving up and expects PIE to increase as well
stick to the shares and be patients.

115
 ANNEXURE
COMMODITY AS AN ASSET CLASS

Name

Age

Gender [ ] Male [ ] Female

Education Qualification:

1. Occupation:
ο Salaried
ο Self Employed
ο Retired
ο Others (If so, specify ___________________)

2. Annual Income
ο Less than 5 lakhs
ο 5 lakhs – 10 lakhs
ο 10 lakhs – 15 lakhs
ο 15 lakhs – 20 lakhs
ο Above 20 lakhs

3. Percentage of your income you invest?

[ ] None [ ] Under 5% [ ] 5 to 10% [ ] 10 to 15% [ ] Above 15%

4. Where do you invest?

[ ] Equities/ Derivatives [ ] Mutual Funds
[ ] Commodity Futures [ ] Insurance (Includes ULIP)
[ ] Others (If so, specify ________________________)

5. Why do you invest in trading?

116
 [ ] Awareness [ ] Conservatism
[ ] Peer Influence [ ] Looking for assistance

6. How do you rate your risk taking apatite?

[ ] Risk seeking [ ] Moderate [ ] Risk Averse [ ] No Answer

7. What would you use commodities for?

[ ] Trading [ ] Investing
[ ] Reasonable Returns [ ] No Answer

8. How would you prefer when trading in commodities?

[ ] Trading [ ] Short Term (Upto 1 month)
[ ] Mid Term (1-3 months [ ] Long Term (3-12 months)

9. You prefer to invest in commodities (futures) that have?

[ ] High Risk, High Return [ ] Medium Risk, Medium Return
[ ] Low Risk, Low Return

10. Do you know investment in commodities can be classed as an Asset?

[ ] Yes [ ] No

11. In which of the following types of Commodities do you prefer to invest?

[ ] Bullions (Gold and Silver) [ ] Metals (Copper, Lead, Nickle etc.)
[ ] Agri [ ] Energy
[ ] Mixed

12. If you trade in commodities, how do you rate it when compared to Equities on a
scale of 5?
1 2 3 4 5
Less Better

--------------------------------------------------------------------------------------------------------

117
 BIBLIOGRAPHY

1. Donald E. Fisher, Ronald J. Jordan, Securities Analysis and

Portfolio Management,, 1999, sixth edition, futures and options
Page no: 404-435,489,493. Prentice hall of India

2. Sharpe W.F. Alexander J. Bailey, investments, 1998, 5th edition, Derivatives,

Prentice Hall of India,.

3. SCHAUM"S out lines, investments,2nd edition, new chapters on future

And options.

Karvy finapolies, Monthly editions, Broachers of karvy com trade.

WEBSITES:

KARVY LEARNING CENTRE

www.karvy.com

www.karvycommodities.com

www.ncdex.com

www.mcx.com

www.derivativesindia.com

Thank you

118