ANNEXURE- III

A PROJECT REPORT ON
“A COMPREHENSIVE STUDY OF COMMODITIES MARKET”

Project Report Submitted in Partial

fulfilment of the requirement for the
award of Degree of

BACHELOR OF BUSINESS
ADMINISTRATION (BBA)

Submitted by
IRSHAD ALI SIDDIQUE
Reg No: 1502001715

Under the guidance of

Mr. Amit Bajpai
Guide Reg No: MBAUP0543

SIKKIM MANIPAL UNIVERSITY (SMU)

DIRECTORATE OF DISTANCE EDUCATION
Acknowledgement

It gives me immense pleasure to present the Project on A PROJECT REPORT ON “A

COMPREHENSIVE STUDY OF COMMODITIES MARKET”. It would not have been possible
without the kind support of my guide in charge, Mr. Amit Bajapai, under whose guidance and constant
supervision the project was brought to the present state.

I would also like to express my gratitude towards my parents for their kind co-operation and
encouragement, which helped me in the completion of this project.

I am also thankful to SMUDDE for giving me such an amazing opportunity for making this project,
and giving suitable instructions and guidelines for the project.

Last but not the least; I thank all the people who shared necessary information and useful insights for
preparing my project.

Thanks again to all.

IRSHAD ALI SIDDIQUE
 INDEX
CHAPTER Nos. CHAPTER NAME

1 EXECUTIVE SUMMARY

2 INTRODUCTION

2.1 COMMODITY INDUSTRY

3 COMPANY PROFILE

4 LITERATURE REVIEW

4.1 DATA ANALYSIS AND INTERPRETATION

4.2 ANALYSIS AND INTERPRETATION OF

QUESTIONNAIRE

5 CROSS TABS AND CHI SQUARE TESTS

6 FAQ'S

6.1 FINDINGS

6.2 CONCLUSION

6.3 SUGGESTIONS

6.4 ANNEXURE

6.5 BIBLIOGRAPHY

CHAPTER-1
 INTTRODUCTION

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 “toarrive” 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 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

NEED AND IMPORTANCE 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

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.

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.
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 methodhas
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.

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 representedin 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.

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.
 CHAPTER-II
INDUSTRY PROFILE & COMPANY PROFILE

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 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 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 securitization 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 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.
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
 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.
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

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.

About KARVY Group

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.
KARVY Group companies are:

Karvy Consultants Limited

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.

Karvy Stock Broking Limited

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.

Karvy Investor Services Limited

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.

Karvy Global Services Limited

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.

Karvy Comtrade Limited

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.

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

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.

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.

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,
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.

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.
 CHAPTER-III
LITERATURE REVIEW
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 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.
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.

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.
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 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,
“India will be a major player in the global economy by the end of
this decad”. 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.

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.
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 18 century, while
th

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 to attract some charges.

FUTURES CONTRACT

“Financial futures represent the most significant financial

innovations of the last twenty years. ” - 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.

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 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
Put options

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 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.

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
Speculators
Arbitragers

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.

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 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 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,
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

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

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

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 19 th 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.

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
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.

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.
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.

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.

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.

NCDEX TRADING SYSTEM

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

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”

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 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.

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).

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.

“The Settlement done for Open Buy and Sell positions on the Contract Expiry Date is called
Final Settlement.”

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?
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.

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

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

SETTLEMENT CALENDAR

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

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.

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’

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.
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.

CHAPTER-4
DATA ANALYSIS AND INTERPRETATION
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.
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.

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

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 20 th 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.

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.

3. Percentage of your income you invest?

Options Responds
None 0
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.

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.

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.

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?

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?

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.

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?

Options Responds
Yes 37
No 13
37

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 thebank 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
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?

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.

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

Question 9
Options Male Female
HR/HR 8 0
MR/MR 23 11
LR/LR 4 4

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.
 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, relat ive 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.
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.

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.
 CHAPTER-6
FINDINGS
CONCLUSION
SUGGESTIONS
BIBLIOGRAPHY

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 opportunit ies. 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.
 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.
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 11 th 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.

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.
 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.
 ANNEXURE
COMMODITY AS AN ASSET CLASS

Name

Age

Gender [ ] Male [ ] Female

Education Qualification:

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

2. Annual Income
Less than 5 lakhs
5 lakhs – 10 lakhs
10 lakhs – 15 lakhs
15 lakhs – 20 lakhs
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?

[ ] 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
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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:
www.karvy.com
www.karvycommodities.com
www.ncdex.com
www.mcx.com
www.derivativesindia.com

Thank you