Financial Product

Design Assignment
VIKASH RANJAN- 21020942015
MCX Gold Mini Futures
Features
• Gold is the oldest precious metal known to man, and it has been valued for thousands
of years as a global currency, a commodity, an investment, and simply an object of
beauty.
• Gold, the most valuable precious metal, is purchased all over the world for its beauty,
liquidity, investment qualities, and industrial properties. Gold is commonly regarded as
a financial asset that retains its value and purchasing power during inflationary periods.
• Gold has a long and fascinating history of use in a wide variety of industries and
applications. Gold outperforms in all applications due to its unique properties of being
one of the most malleable and ductile metals with a high melting point and easy
recyclability. Because gold is biocompatible, it is a preferred material in medicine and
dentistry. It has recently emerged as a key nanomaterial. Global gold demand is divided
into four major categories: jewellery, investment, central bank reserves, and
technology.
• Risk management is critical for gold value chain participants such as mining companies,
processors, companies dealing in gold and gold products, jewellers, and even
governments that rely on bullion consumption and trade proceeds. Modern hedging
techniques and strategies, such as market-based risk management financial instruments
like gold futures, can increase efficiencies and strengthen competitiveness.
• Heat and electricity are both conducted by gold. The best conductors are copper and
silver, but gold connections outlast both because they do not tarnish. It is not so much
that gold lasts longer as it is that it remains conductive for a longer period of time.
• Gold is ductile, which means it can be drawn into the thinnest wire. One ounce of gold
can be drawn into 80 kilometres (50 miles) of five microns (five millionths of a metre)
thick gold wire. The diameter of this sample is 0.20 millimetres (0.008 inch).
• Gold reflects a lot of heat and light. The visors of astronauts' space helmets are coated
with a thin layer of gold (0.00005 millimetres, or 0.000002 inch) that is partially
transparent. Even though the astronauts can see through it, the gold film reduces glare
and heat from the sun.
• Gold is valued for its radiance. It is valued by jewellers and metalsmiths as a metal that
can be embossed, hammered, cast, stretched, or twisted.

Application and Uses

• Gold is widely used in the electronics industry for the fabrication of corrosion-resistant
electrical connectors. These electrical connectors are widely used in a variety of
electrical devices, including computers. It is worth noting that the average smartphone
contains approximately 50 milligrammes of gold. It should also be noted that gold is
frequently used as a coating in the connectors used in many important types of wiring,
including USB cords, video cables, and audio cables.
• Gold is also ideal for use in electrical contacts due to its corrosion resistance. Gold is a
good heat conductor, non-toxic, and one of the most ductile metals known to man. As
a result, switch contacts (which are frequently prone to corrosion) are typically made
 of gold. Furthermore, semiconductor devices are frequently linked to their packages via
ultrafine gold wires. Wire bonding refers to the process of connecting devices using
fine gold wires.
• Gold alloys are known to be used in restorative dentistry. For example, gold is
frequently used as one of the components of a crown or a dental bridge in tooth
restoration procedures.
• Suspensions of gold nanoparticles, also known as colloidal gold, are widely used in
medical research as well as materials science and biology research.
• Gold is also used in the immunogold labelling process (also known as immunogold
staining, abbreviated to IGS).
• The gold-198 isotope is known to be used in nuclear medicine to treat certain types of
cancer. However, it should be noted that this gold isotope has a half-life of only 2.7
days.
• Gold is frequently used as a colouring agent in cranberry glass, producing a very deep
and intense red colour.
• Gold is also extremely valuable in the field of photography. Gold is known to be used
in this application to shift the colour of the silver bromide prints toward blue or brown
tones.
• This material is also used in the construction of several artificial satellites. It is used on
the surfaces of artificial satellites because it is known to be an electromagnetic radiation
reflector (including infrared radiation and the radiation that falls under the visible
spectrum).
• In some chemical reactions, gold is also used as a heterogeneous catalyst. Gold is
frequently dispersed into nanoparticles in such applications to increase the effective
surface area.
• Gold is also used in gold compact discs, which are a type of high-end CD with a
reflective layer made of the element.
Global Demand Supply Scenario

• Because gold is used in so many different ways, including jewellery, technology, and
by central banks and investors, different sectors of the gold market emerge at different
points in the global economic cycle. The gold market's self-balancing nature and
diversity of demand underpin gold's robust qualities as an investment asset.
• This is a comprehensive time series of gold demand by sector and country, as well as
gold supply by mine production, recycling, and producer hedging.
• The modern gold market exemplifies diversity and growth. Since the early 1970s, the
amount of gold purchased annually has roughly tripled, and gold markets around the
world have thrived.
• Gold has emotional, cultural, and financial value, and people around the world buy it
for a variety of reasons, which are frequently influenced by national socio-cultural
factors, local market conditions, and larger macroeconomic drivers.
• Because gold is used in so many different ways – in jewellery, technology, and by
central banks and investors – different sectors of the gold market emerge at different
points in the global economic cycle. Gold's robust qualities as an investment asset are
supported by the diversity of gold demand and the self-balancing nature of the gold
market.
• Mine production accounts for the majority of global gold supply - 75% on average each
year. Annual demand, however, necessitates more gold than is newly mined, and the
shortfall is made up by recycling.
• Mine output does not respond quickly to price changes. There is usually a long period
of time between the discovery of new gold deposits and the start-up of a mine.
• Because gold is nearly indestructible, nearly all of the gold ever mined is theoretically
still accessible in some form or another and potentially recyclable.
 • Recycling is the source of gold supply that responds most quickly to changes in the
gold price and economic shocks. The majority of recycled gold - at least 90% - comes
from jewellery, with the remainder coming from technology.
• Of course, gold must be processed and refined in order to be of guaranteed quality.

Major Exporter Countries of Gold

(in billion U.S. dollars)

Major Importer Countries of Gold

• Switzerland: US$92.3 billion (23.4% of total gold imports)
• India: $55.8 billion (14.1%)
• United Kingdom: $53.7 billion (13.6%)
• China: $43.7 billion (11.1%)
• Hong Kong: $29.1 billion (7.4%)
• Singapore: $14.5 billion (3.7%)
• United States: $13.9 billion (3.5%)
• Germany: $11 billion (2.8%)
 • United Arab Emirates: $10.6 billion (2.7%)
• Thailand: $8.4 billion (2.1%)
• Italy: $7.5 billion (1.9%)
• Canada: $6.5 billion (1.7%)
• Cambodia: $5.9 billion (1.5%)
• Turkey: $5.5 billion (1.4%)
• Austria: $5.1 billion (1.3%)

Indian Demand Supply Scenario

• India is one of the largest gold markets, and rising affluence is driving up demand.
• Gold plays an important role in the country's culture, serving as a store of value, a
symbol of wealth and status, and an essential component of many rituals. A deep
affinity for gold among the country's rural population goes hand in hand with practical
considerations of the portability and security of jewellery as an investment.
• Gold is thought to be auspicious, especially in Hindu and Jain cultures. Manu, the
ancient lawgiver, commanded that gold ornaments be worn for important ceremonies
and occasions. Aside from Diwali, one of the most important dates in the Indian
calendar, gold is used to celebrate regional festivals across the country: Akshaya
Tritiya, Pongal, Onam, and Ugadi in the south; Durga Puja in the east; Gudi Pavda in
the west; and Baisakhi and Karva Chauth in the north.
• Gold is also important in more personal life events. Gifting gold is a deeply ingrained
part of Indian marriage rituals—weddings account for roughly half of India's annual
gold demand.
• In 2021, the demand for gold in India was estimated to be around 797.3 metric tonnes.
This represented a 78.6 percent increase over the previous year, and the first growth
after four years of continuous annual decline. Nonetheless, the overall decrease in
volume seen in previous years had no effect on the precious metal's value growth.
• Imports account for the majority of gold demand in India. India is one of the leading
importers of gold. The value of India's gold imports was estimated to be more than 3.4
trillion Indian rupees in fiscal year 2022. The import of gold was a significant
contributor to the country's trade deficit. The Modi government changed India's gold
import policy to reduce imports. This was accomplished by imposing a higher import
duty and restricting imports to nominated agencies approved by the Reserve Bank of
India and the Directorate General of Foreign Trade. Local mining provides only a small
portion of the country's gold needs. Since the fiscal year 2013, the volume of gold mined
in India has remained below two metric tonnes, with a small amount also generated by
recycling the precious metal.
• Gold purchases are regarded as a significant source of investment. Weddings and
festivals all over the country result in significant gold sales. Deepavali, the Hindu
festival of lights, accounts for approximately 20% of annual sales. In India, the precious
metal is considered auspicious and is worn on important occasions and ceremonies,
primarily as jewellery. Every year since 2010, the country has consumed more than 500
metric tonnes of gold jewellery.
Factors influencing the market and price of commodity
• Inflation - Due to its nearly constant character in comparison to currency, gold holds
significant value and is used to hedge inflation. This is why gold is preferred by
investors over currency. As a result, when inflation is high, so is demand for gold, and
vice versa. As a result of the high demand from customers, the price of gold will
skyrocket. This holds true for both international and domestic inflation in India.
• Global Price Movement - Any global price movement in gold affects the price of the
yellow metal in India. This is primarily due to the fact that India is one of the largest
importers of gold, and as such, when import prices change due to global price
movements, the same is reflected in domestic gold prices. Because the value of currency
and other financial products may fall during a political upheaval, investors view gold
as a safe haven, and as a result, demand and price of gold rise during political upheavals
as opposed to peaceful times. When consumers' trust in the government and markets
erodes, they become more interested in purchasing gold, and gold is dubbed the crisis
commodity.
• Government Gold Reserves - Most major countries' central banks hold both currency
and gold reserves. The Federal Reserve Bank of the United States and the Reserve Bank
of India are two prime examples of this. When large countries' central banks begin
holding gold reserves and purchasing more gold, the price of gold rises. This is due to
an increase in the flow of cash in the market while the supply of gold decreases.
• Jewellery Market – Indians adore gold jewellery. Gold jewellery has a special place in
Indian households, whether for festivals or birthdays. Gold prices rise during the
wedding season, as well as during festivals such as Diwali, due to increased consumer
demand. Price increases result from a demand-supply mismatch. The demand for gold
is not limited to jewellery purposes. Various electronic companies use the metal in
small quantities to manufacture devices such as televisions, computers, GPS units, and
so on. In India, gold is used for jewellery, as a gifting item, to display wealth, and as a
strong hedge against rising inflation. All of these factors combine to increase domestic
demand for gold to the point where India must import large quantities of the yellow
metal on a regular basis. Industrial demand for gold accounts for 12% of total gold
demand in the country. Another example is medicine.
• Interest rate trends - Interest rates on financial products and services are closely linked
to gold demand. Current gold prices are generally good indicators of any country's
interest rate trends. Customers tend to sell gold to obtain cash when interest rates rise,
so an increased supply of gold leads to lower metal prices. Lower interest rates, on the
other hand, translate to more cash in the hands of customers, resulting in increased
demand for gold and, as a result, an increase in the metal's price.
Price Movement in last five years

• Gold prices rose steadily from 2017 to mid-2020, reaching a high of more than $2,000
per ounce in August 2020. This was primarily due to increased demand for safe-haven
assets during the COVID-19 pandemic and resulting economic uncertainty.
• Gold prices have fluctuated somewhat since reaching this peak, with some declines in
late 2020 and early 2021. Since then, the general trend has been upward, with prices
rising in response to ongoing economic uncertainty and low interest rates.

Hedging mechanism with examples

Hedging is a risk management technique that is used to protect against potential investment
losses. There are several hedging techniques that can be used in the context of gold as a
commodity:

• Contracts for futures: A futures contract is a standardised agreement to buy or sell an

underlying asset in the future at a predetermined price and delivery date. Investors can
hedge against price movements in the underlying asset, such as gold, by entering into
a futures contract.
• Options contracts provide the holder with the right, but not the obligation, to purchase
or sell an underlying asset at a predetermined price. An investor can protect against a
drop in gold prices by purchasing a put option, which gives the holder the right to sell
gold at a specific price.
 • ETFs (exchange-traded funds): ETFs give investors exposure to a variety of assets,
including gold. Investors can hedge against potential price movements in the
underlying asset by investing in an ETF that tracks the price of gold.
• Physical gold, such as coins or bullion, can also be used as a hedge against potential
price fluctuations. Investors can gain direct exposure to the underlying asset and
reduce the impact of price movements on their portfolios by holding physical gold.

Example: An investor believes that the price of gold will rise in the near future. They could
buy a 6-month call option with a strike price of $1,500 per ounce. The option could cost up to
$50 per ounce.
If the gold price rises to $1,600 per ounce, the investor can exercise the option and buy gold
at the strike price of $1,500 per ounce. They could then sell the gold for $1,600 per ounce,
making a profit of $100 per ounce ($1,600 - $1,500). After deducting the option cost ($50 per
ounce), the net profit from the hedge is $50 per ounce.
However, if the price of gold does not rise or falls, the investor will simply let the option
expire without exercising it, and the maximum loss will be limited to the option's cost ($50
per ounce).

Comment on the assigned commodity

• Gold is widely regarded as a safe-haven asset and, as such, is frequently used as a
hedge against economic and geopolitical risk. A variety of factors influence gold
prices, including interest rates, inflation expectations, currency fluctuations, and
geopolitical tensions.
• Hedging gold can be an effective tool for investors seeking to mitigate the impact of
price movements on their portfolios. Investors can protect against potential losses and
potentially generate profits by using hedging strategies such as futures contracts,
options contracts, exchange-traded funds (ETFs), or physical gold.
MCX Kapas
Features
• Cotton cultivation began in India, Pakistan, Peru, and Mexico 5,000 years ago. Cotton
has enormous influence on the global economy due to its universality.
• Kapas, also known as seed cotton, is unginned cotton that is a white fibrous substance
(lint) that covers the cotton plant's seed. Ginning is the process of separating lint
(1/3rd weight) from seed (2/3rd weight). Lint, also known as Rui in Hindi, is a raw
material used in the production of cotton yarn or thread, which is then woven into
fabrics.
• Cotton is primarily grown for its fibre, which is used to make textiles all over the world.
Cotton fibre is one of the most important textile fibres, accounting for approximately
35% of total textile fibre used worldwide. Cotton's strength, absorbency, and ability to
be washed and dyed make it a versatile raw material for the production of a wide range
of textile products.
• Cotton seed is crushed to produce cottonseed cake, which is used in livestock feed, and
cottonseed oil, which is the world's fifth most consumed edible oil.
• It is a Kharif crop; the sowing season begins in June-July, the picking/harvesting season
begins in October, and the marketing year begins in October and ends in September.

Application and Uses

• Lint (fibrous part) and cotton seed are found in Kapas bolls. Raw cotton typically
contains 34-35% fibre and 63.5% seed by weight. Raw cotton is measured and stored
in bags weighing 20 kg. Kapas or seed cotton are not directly used. Lint (fibre) and
cotton seed are produced by ginning kapas. Fiber is used in the production of yarn,
which is then used in the production of textiles. Lint from Kapas is primarily used in
the production of cotton. Cotton is regarded as a critical crop because it is the world's
primary source of clothing. Cotton is used in a variety of industrial applications in
addition to this. As a result, it is one of the most cultivated and traded commodities on
the planet. Cotton and its various by-products are traded in the market and regarded as
valuable investments.
• Cotton seed is crushed further to produce cotton seed oilcake and cotton seed oil. Cotton
seed oil cake is used as cattle feed, and cotton seed oil is consumed by humans.

Global Demand Supply Scenario

• Cotton production and area are estimated to be around 30-31 million hectares and 20
million tonnes, respectively.
• America, India, China, Egypt, Pakistan, Sudan, and Eastern Europe are the largest
cotton cultivators, with China, the United States, and India producing the most cotton.
 • The United States accounts for a sizable portion of global exports. India and China both
have insufficient domestic resources and are net importers.
• China leads the way among consumers, followed by India, Pakistan, the United States,
and Turkey. Global production is expected to fall by 300,000 bales to 115.4 million,
owing primarily to lower yields in India. Consumption is expected to fall as a result of
lower use in India, Indonesia, and Vietnam. The current projected level of global
consumption is the second lowest in 9 years, marking the eighth consecutive monthly
decline. Global trade is down 600,000 bales, with China and Indonesia leading the way.
In comparison to the previous month, the US balance sheet shows higher production
and ending stocks. Exports are expected to fall this month, and the projected season-
average farm price in the United States has been reduced by 2 cents to 83 cents per
pound.

Indian Demand Supply Scenario

• Maharashtra accounts for approximately 34% of total Kapas sowing acreage in India.
Gujarat has 22%, Andhra Pradesh and Telangana have 20%, Karnataka has 5.54%,
Madhya Pradesh has 4.3%, Haryana has 4.50%, Rajasthan has 3.3%, Punjab has 3.73%,
Tamil Nadu has 1.27%, and Odisha has 1.19%.
• Gujarat produces approximately 25% of India's cotton, Maharashtra 22%, Telangana
15%, and the remaining states 5.54%, Karnataka 4.86%, Madhya Pradesh.4.86%,
Rajasthan 5.95%, Haryana 6%, Punjab 3.12%, Tamil Nadu 1.49%, and other states
0.54%.

Factors influencing the market and price of commodity

• The domestic demand-supply scenario, inter-crop price parity, cost of production, price
in international markets, and other factors all have a significant impact on Kapas prices
in the domestic market.
 • Weather, pests, diseases, and other agricultural crop risk factors all have an impact on
Kapas production.
• Government policies on foreign trade and the Minimum Support Price have a
significant impact on the price of Kapas in the local market.
• Cotton yarn prices in both the domestic and international markets have an impact on
Kapas prices. Yarn prices have a more than 90% correlation with Kapas prices. Because
only one-third of the area is irrigated, cotton output varies significantly from year to
year in response to weather and pest attacks.
• Every year, more than 80% of the cotton produced is sold out by March 31, and the
price begins to firm up in April and begins to ease only in September, when the new
crop begins to arrive in the market.
• The Cotton Corporation of India and the Maharashtra State Co-operative Cotton
Growers' Marketing Federation purchase cotton at the Minimum Support Price set by
the Government of India. This initially establishes the price trend. However, the
industry has a large number of players, and market forces determine the price quickly.
• Cotton imports and exports into and out of the country.

Price Movement in last five years

Hedging mechanism with examples

• Futures contracts can be used to hedge kapas (also known as raw cotton). Futures
contracts are agreements between a buyer and a seller to buy or sell a specific amount
of a commodity at a future date and price.
 • A cotton farmer, for example, may sell kapas futures contracts to lock in a specific price
for their crops before they are harvested. This reduces the risk of price fluctuations and
ensures that farmers receive a consistent price for their crops regardless of market
fluctuations. The buyer of the futures contract assumes the price risk and profits from
any price movements that are favourable.
• Futures contracts, in this way, serve as a hedge against price risk and provide stability
to both the buyer and seller.

Comment on the assigned commodity

• Kapas is a raw cotton commodity that is widely traded in global commodity markets.
Trading in kapas can benefit both cotton producers and cotton consumers.
• Trading in kapas futures contracts can provide price certainty and risk management for
cotton producers. Producers can protect themselves from price fluctuations and ensure
a consistent income by securing a price for their crops before they are harvested.
• Trading in kapas futures contracts can help cotton product consumers manage price risk
and provide price transparency. Consumers can make informed purchasing decisions
and hedge against price increases if they have visibility into the price of kapas.
• Finally, trading in kapas can be a useful tool for both producers and consumers of cotton
products for managing price risk and improving market efficiency.