In Partial Fulfilment of

                   POST GRADUATE DIPLOMA PROGRAMME

INTERNATIONAL SCHOOL OF BUSINESS & MEDIA, PUNE

SUMMER INTERNSHIP PROJECT

On

ANALYSIS ON COMMODITY & CURRENCY MARKET IN INDIA

Under Guidance of

Prof. Mahesh Rengutwar

Submitted by

Sachi Agarwal

N20222046

Finance & Marketing

Batch 2022-24

1
CERTIFICATE

2
 DECLARATION

This is to certify that Sachi Agarwal bearing Roll no. N20222046 has satisfactory completed
her Summer Internship Program entitled “Analysis on Commodity & Currency Market in
India” under the guidance of Prof. Mahesh within the allotted time period.

This work is original and all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

Name of the Guide & Signature Name of the Student & Signature

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 ACKNOWLEDGEMENT

I am grateful to Anand Rathi Shares and Stock Brokers Limited and my internship supervisor
Mr. Amol Thorat, for providing me with the opportunity to complete my PGDM internship at
their organization. Their support and guidance helped me to understand the business world
and gain valuable experience in my field.

From the moment I started my internship, Mr. Amit Kumavat provided me with clear
direction and expectations, and was always available to answer my questions and provide
valuable feedback. Their expertise and guidance helped me to understand the inner workings
of the company and the industry, and allowed me to make the most of my internship.

I am thankful for Mr. Alauddin Shaikh’s time and effort, and for the invaluable knowledge
and skills I have gained during my internship. I am also grateful to the placement team of
International School of Business & Media for providing me with this opportunity and for
their commitment to my professional development.

Name of the Student & Signature

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 CONTENTS

CERTIFICATE 2

DECLARATION 3

ACKNOWLEDGEMENT 4

EXECUTIVE SUMMARY 5

CHAPTER 1: INTRODUCTION 7

CHAPTER 2: ABOUT COMPANY 14

CHAPTER 3: METHODOLOGY 19

CHAPTER 4: DATA ANALYSIS & DISCUSSION 46

CHAPTER 5: FINDINGS, RECOMMENDATIONS, CONCLUSION & LEARNING

OUTCOMES 53

REFERENCES 55

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 EXECUTIVE SUMMARY

Commodity and Currency markets have seen tremendous growth in India and the world over
the past several years. While equity markets are the most talked about in India, the
significance of commodity and currency markets is often understated. This is in contrast to
global trends where currency and commodity markets see higher trading and turnover
compared to equities. It is important and interesting to understand price behavior of
commodities since they are so closely inter-linked to our daily life. From the petrol that
drives our cars to the food grains we eat, we deal in deal in commodities every day in some
form or the other. We use currencies to transact both locally and globally and therefore the
currency markets are equally important.

When it comes to trading, the dynamics of every asset class differ and therefore it is
imperative to understand the drivers behind price movements. In that sense, both
commodities and currency markets are largely driven by macro-economic factors which drive
demand and supply. Unlike equities which are predominantly driven by stock specific or
sector specific fundamentals, commodities are driven by demand-supply, weather, geo-
politics, trade policies and broader economic fundamentals. Currency markets are largely
driven by macro-economics and geo-politics. Since both these markets are essentially global,
they provide an opportunity for domestic traders and investors to play on global events. For
example, an ordinary domestic investor would have no way to trade elections in France or
participate in the China growth story. But through currency markets, he could take exposure
to the Euro to trade the outcome of the French elections

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CHAPTER 1: INTRODUCTION

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

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Soft Commodities: Coffee, Cocoa, Sugar etc.

Livestock: Live Cattle, Pork Bellies etc.

Energy: Crude Oil, Natural Gas, Gasoline etc.

Precious Metals: Gold, Silver etc.

Other Metals: Nickel, Aluminium, Copper etc.

The foreign exchange market also called forex, FX, or currency market—was one of the
original financial markets formed to bring structure to the burgeoning global economy. In
terms of trading volume, it is, by far, the largest financial market in the world. Aside from
providing a venue for the buying, selling, exchanging, and speculation of currencies, the
forex market also enables currency conversion for international trade settlements and
investments.

Currencies are always traded in pairs, so the "value" of one of the currencies in that pair is
relative to the value of the other. This determines how much of country A's currency country
B can buy, and vice versa. Establishing this relationship (price) for the global markets is the
main function of the foreign exchange market. This also greatly enhances liquidity in all
other financial markets, which is key to overall stability.

The value of a country's currency depends on whether it is a "free float" or "fixed float."
Free-floating currencies are those whose relative value is determined by free-market forces,
such as supply-demand relationships.

A fixed float is where a country's governing body sets its currency's relative value to other
currencies, often by pegging it to some standard. Free-floating currencies include the U.S.
dollar, Japanese yen, and British pound, while examples of fixed floating currencies include
the Panamanian Balboa and the Saudi Riyal.

One of the most unique features of the forex market is that it is comprised of a global network
of financial centres that transact 24 hours a day, closing only on the weekends. As one major
forex hub closes, another hub in a different part of the world remains open for business. This
increases the liquidity available in currency markets, which adds to its appeal as the largest
asset class available to investors. The most liquid trading pairs are, in descending order of
liquidity:

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EUR/USD

USD/JPY

GBP/USD

Commodity markets:

There are currently about 50 major commodity markets worldwide that facilitate investment
trade in approximately 100 primary commodities. While there are a lot of ways to invest in
commodities, the most direct way of investing is by buying into a futures contract. A futures
contract obligates the holder to buy or sell a commodity at a predetermined price on a
delivery date in the future.

There are three different types of players in the commodity markets:

Commercials: The entities involved in the production, processing or merchandising of a

commodity. For example, both a corn farmer and Kellogg’s are commercials. Commercials
account for most of the trading in commodity markets.

Large Speculators: A group of investors that pool their money together to reduce risk and
increase gain. Like mutual funds in the stock market, large speculators have money managers
that make investment decisions for the investors as a whole.

Small Speculators: Individual commodity traders who trade on their own accounts or
through a commodity broker. Both small and large speculators are known for their ability to
shake up the commodities market

Benefits of trading in commodity markets

- Alternative investment opportunity

- Less volatility as compared to equities
- Lucid trends based on macro fundamentals
- Exposure to global markets/commodities
- Longer market hours allow sufficient time to react
- No manipulation in global markets
- Track able seasonal patterns for various commodities
- Higher leverage

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 - Low cost of transactions
- Carry trades

Currency markets:

Foreign exchange markets are made up of banks, commercial companies, central banks,
investment management firms, hedge funds, and retail forex brokers and investors. The forex
market is the largest financial market in the world. A country's currency exchange rate is
typically affected by the supply and demand for the country's currency in the international
foreign exchange market. The demand and supply dynamics are principally influenced by
factors like interest rates, inflation, trade balance and economic & political scenarios in the
country. The level of confidence in the economy of a particular country also influences the
currency of that country.

Hedging: You can protect your foreign exchange exposure in business and hedge potential
losses by taking appropriate positions in the same.

Speculation: You can speculate on the short term movement of the markets by using
Currency Futures.

Arbitrage: You can make profits by taking advantage of the exchange rates of the currency
in different markets and different exchanges.

Leverage: You can trade in the currency derivatives by just paying a % value called the
margin amount instead of the full traded value.

Benefits of trading in currency markets

- Highly Liquid
- No manipulation in global markets
- Open almost 24 Hours a Day, 5 Days a Week
- Leverage
- Diversification
- Hedge Against Political and Event Risk

Trading Procedure on a Stock Exchange

The Trading procedure involves the following steps:

1. Selection of a broker:

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The buying and selling of securities can only be done through SEBI registered brokers who
are members of the Stock Exchange. The broker can be an individual, partnership firms or
corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf
of the investor or speculator.

2. Opening Demat Account with Depository:

Demat (Dematerialized) account refer to an account which an Indian citizen must open with
the depository participant (banks or stock brokers) to trade in listed securities in electronic
form. Second step in trading procedure is to open a Demat account.

The securities are held in the electronic form by a depository. Depository is an institution or
an organization which holds securities (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.)
At present in India there are two depositories: NSDL (National Securities Depository Ltd.)
and CDSL (Central Depository Services Ltd.) There is no direct contact between depository
and investor. Depository interacts with investors through depository participants only.

Depository participant will maintain securities account balances of investor and intimate
investor about the status of their holdings from time to time.

3. Placing the Order:

After opening the Demat Account, the investor can place the order. The order can be placed
to the broker either (DP) personally or through phone, email, etc.

Investor must place the order very clearly specifying the range of price at which securities
can be bought or sold. e.g. “Buy 100 equity shares of Reliance for not more than Rs 500 per
share.”

4. Executing the Order:

As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the
securities. Broker prepares a contract note for the order executed. The contract note contains
the name and the price of securities, name of parties and brokerage (commission) charged by
him. Contract note is signed by the broker.

5. Settlement:

This means actual transfer of securities. This is the last stage in the trading of securities done
by the broker on behalf of their clients. There can be two types of settlement.

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 NEED AND IMPORTENCE OF STUDY

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

SCOPE OF THE STUDY

The study mainly focuses on Indian commodity & currency market, its history and latest
developments in the country in commodities market (Gold & Silver) & currency market
(USDINR & EURINR). 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.

13
CHAPTER 2: ABOUT COMPANY

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The Anand Rathi group came into existence close on the heels of economic liberalisation.
With an aim to channelize the new found hope and financial optimism in to tangible results,
Mr. Anand Rathi and Mr. Pradeep Kumar Gupta laid the foundation of the Anand Rathi
Group in 1994. From setting up are search desk in 1995 to starting a capital market lending
business in 2019, we have always kept the client at the centre of our plans. With roots over 25
years deep, we have carved a niche in the financial services sector. The Anand Rathi Group
offers a wide spectrum of services ranging from Investment services across Asset classes to
Private Wealth, Institutional Equities, Investment Banking, Insurance Broking and NBFC.
Powered by integrity and an entrepreneurial spirit, we have been able to provide a peer less
experience to our clients. We believe every client needs a unique financial solution. A
customer first approach coupled with digital innovation is our answer, which helps us
contribute to the client’s financial wellbeing.

List of Associate Companies of Anand Rathi Share and Stock Brokers Limited
as per definitions of 'Associate' under SEBI (Intermediaries) Regulations, 2008 and of 'Group'
under Competition Act
1. Anand Rathi Financial Services Limited
2. Anand Rathi Global Finance Limited
3. Anand Rathi Advisors Limited
4. Anand Rathi Commodities Limited
5. Anand Rathi Insurance Brokers Limited
6. Anand Rathi International Ventures (IFSC) Private Limited
7. Anand Rathi Wealth Services Limited
8. A R Wealth Management Private Limited
9. Freedom Wealth Solutions Private Limited
10. Freedom Intermediary Infrastructure Private Limited
11. Anand Rathi Housing Finance Limited

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 Figure 1. ORGANIZATIONAL STRUCTURE

Regional Officer

Branch Manager

RMS IT RM HR Back Office

B2B B2C

Relationship
Unit Manager
Manager

Business
Realtionship
Development
Executive
Manager

HEAD OF DEPARTMENTS OF ANAND RATHI

I. Naveen Mathur (Director- Commodity)

II. Deepak Kedia (Senior VP- Compliance)
III. Devrang Mehta (Head- Marketing)
IV. Gautam Agarwal (Sen. VP- Business Development)
V. Jinesh Jasapara (Executive VP- Retail Product)
VI. Jiten Shah (VP- MTF & LAS)
VII. Manavi Prabhu (VP- Debt)
VIII. Mitali Bharati (Sen. VP- NRI)
IX. Mayur Shah (VP. Portfolio Management)
X. Niteen Dongare (Sen. VP- GIFT City)

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 XI. Roshan Moondra (Executive VP- Operations & IT)
XII. Rakesh Taparia (Associate Director- Business Partner)
XIII. Rajesh Jain (Associate Director- PCG Equites)
XIV. Siddharth Sedani (Executive VP- Equity Sales)
XV. Thomas Stephen (Associate Director- Preferred)
XVI. Tarak Shah (CFO)

KEY STRENGTHS OF ANAND RATHI

o Strong Brand Image

- Holds Strong Brand Image in Financial Services Segment
o Human Capital with high vintage
- CEO in the business for more than 25 years
- Employees in Leadership role carry vintage of 8 years
- Employees senior role carry vintage of 7 years
- Junior members in the organization carry vintage of 4 years
o Relationship based Business
- Every Client holds Relationship Manager
o Strong Research
- Holding Strong Research wing
- Data backed Recommendations
- Basket of research products
o Multiple Product Offerings
- Broking: Equity & Derivatives | Commodities | Currency Futures | Forex
Advisory
- Distribution: MF -SIP & Lumpsum, Deposits, Bonds, IPO’s, Loans etc.
- Fixed Income Investment Products
- Portfolio Management Services
- Funding Services: Margin Trade Finance Facility
- Equity Unicron-Investment in Unlisted entities

17
 SWOT ANALYSIS OF INDUSTRY

SWOT Analysis focuses on four important factors while evaluating the quality of a company.
Here’s what SWOT Analysis for stocks looks at:

Figure 4

 S—> Strength
 W—> Weakness
 O—> Opportunity
 T—> Threat

A few reasons why SWOT analysis for

commodity & currency market is beneficial:
 SWOT analysis is one of the simplest yet effective approaches for the qualitative
study of a stock.
 It helps in identifying weak points that may become an issue in the future.
 It helps in finding the durable advantage.

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CHAPTER 3: METHODOLOGY

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

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

SOURCES OF DATA

Primary data

Data was collected in systematic manner by meeting the existing investors in commodity/
currency market & other individuals. Primary and secondary data were utilized for the
purpose of the study by the researcher.

The research is aimed to obtain the data mainly through primary sources. Survey method has
been used to obtain information.

Secondary data

Secondary data was collected from companies and from commodities (Gold and Silver)
trading websites.

TYPE OF RESEARCH

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

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 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 represented in alphabets). The
alphabets were used to denote the option and no ranking order was used. The coded data was
entered into the data sheet. Frequencies were found out for each option and thus giving us the
percentage of the option usage, etc.

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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.

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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. This morning I woke to find gold and silver had tumbled. This doesn't surprise me
anymore because gold and silver have become hotter markets, and there will be more
speculation in them. As I wrote in Mr. Market Speaks: Flight to Safety, the market is slowing
moving away from long term debt, looking for safety of principal and inflation protection.
Gold and silver markets have benefited from this movement. Gold has steadily been moving
relatively sideways the last two days, as seen in the following Kitco chart. But also notice the
sharp drop off on Jan 20th at approximately 8am. Silver looked exactly the same. The sharp
downward move happened about the same time.

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

23
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

24
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 worldwide, 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.

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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
forward’s 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 th century,
while the establishment of the CHICAGO BOARD OF TRADE (CBOT) in 1848 led to the
start of a formal commodities exchange in the USA. Forward contracts are very useful in
HEDGING and SPECULATION. The essential idea of entering into the forward contract is
to Hedge the price thereto avoid the price risk. By entering into a forward contract one is
assured of the price at which the goods/assets are bought and sold. The classic Hedging
example would be that of an exporter who expects to receive payment in foreign currency
after three months. As he is exposed to greater amount of risk in the fluctuations in the
exchange rates, he can, with the use of forwards, lock-in the rate today and reduce the
uncertainty. Similarly, if a speculator has the information of an upswing in the prices of the
asset, he can go long on the forward market instead of the cash market and book the profit
when the target price is achieved.

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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
DELIVERY 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 forward’s contract are:

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

ii. Every contract is unique and is custom designed in the terms of: expiration date and
the asset type and quality.
iii. The contract price is not available in the public domain.
iv. On the expiration, the contract is to be settled by the delivery of the asset.
v. Of the party wishes to reverse the contract, he has to go to the same counter-party,
which may result of attract some charges.

FUTURES CONTRACT

As quoted by MERTON MILLER, a noble lauret’ 1999.

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

The futures market was designed to solve the problems, existing in the forwards market. A
financial future is an agreement between two parties to buy or sell a standard quantity of a
specified good/asset on a future date at an agreed price. Accordingly, future contracts are
promises: the person who initially sells the contract promises to deliver a specified
underlying asset to a designated delivery point during a certain month, called delivery month.
The underlying asset could, we’ll 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.

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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 honouring

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.

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 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 year’s
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 are basically of two types.

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

Put options: A put option gives 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.

29
The swaps market originated in the late 1970’s, when simultaneous loans were arranging
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

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.

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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.

PRICE

FUTURES PRICE

BASIS

SPOT PRICE

EXPIRY DATE TIME

SPECULATORS

A speculator is a one who accepts the risk that hedgers wish to transfer. A speculator takes
positions on expectations of futures price movements and in order to make a profit. In
general, a speculator buys futures contracts when he expects 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. Infect, 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 being 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

31
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

32
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.

33
 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

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.

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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-mutualized 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 centres
throughout India. The reach will gradually be expanded to more centres. 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-mutualised 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

35
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 Centres, 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 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 enrol participation of high net-worth corporate securities brokers in commodity derivatives
market. NMCE has also made immense contribution in raising awareness about and
catalysing 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

36
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.

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. Turnover of the Indian commodity futures’ market
Turnover on Commodity Futures Markets (Rs. In Crores)

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.

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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” + “Kendal”

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. 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
is for perpetuity (Spot market not yet started).

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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 favourable 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)

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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 Cancelled (GTC) – Valid till cancelled, Max 7 days.

SETTLEMENT PROCESS IN COMMODITIES FUTURES

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

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

Table.1: Comparison between stock futures and commodity futures.

Instrument Deliverable Electronic Form Physical Form

Stock Futures No Yes No
Commodity Futures Yes Yes Yes

In many developed financial markets like Japan, US, UK, Euro land, stock futures can
account to delivery. Deliverable Electronic Form Physical from Table.1 it is clear that the
stock futures in India do not end up in delivery, implying a person who has taken long
position cannot ask for delivery of real stock after the expiry of the contract even if he is
willing for taking delivery.

40
Again since, the delivery is not possible, an investor cannot settle his short position with the
real stock; neither can he take delivery of stocks if he has taken long position. He has to
mark-to-market at the end of future contract settlement.

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

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

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

In case of physical form, the delivery quantity is transferred to/from the stocking point. Now,
we arrive at an important point, when and how are settlements done? Daily Settlements are
done on mark-to-market basis. And at the expiry of the contract Final Settlement is done.

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

At the end of every trading day, for all the trades, this is done till the date of the Contract
expiry. A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all
trades.

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?

41
Opening a Clearing Member (KCBPL) Pool account for the purpose of settlements.
Beneficiary Demit account for own transactions. Opening of Client’s Demit 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 Commodity Location

CURRENCY MARKET

Use of Currency Derivatives by Various Firms

Currency derivatives are used by various firms to reduce their exposure of variety of risk. It is
used by mostly those firms who has growth opportunities. Cost and benefits characteristics of
firms helps in making decision regarding use of currency derivatives or not and also
regarding particular choice among various currency derivatives instruments. Hedging through
use of currency derivatives helps in reduction of under investment costs (Geczy et al. 1997).
Similarly, Howton and Perfect (1998) investigated the currency derivatives and interest rate
derivatives use by US firms. By using interest rate coverage and leverage it was indicated that
those firms which has high risk exposure they are more likely to use derivatives. Foreign
currency derivatives also used for speculation purpose along with hedging purpose, but firms
should use them for hedging rather than speculation (Allayannis and Ofek, 2001). Which
hedging instrument the firm should use it totally depends upon structure of a firm (Srivastva,
2013). Firms market value affected by making decision regarding use of currency derivatives
or not. There is a positive relation between firm’s market value and use of currency
derivatives (Allayannis and Weston, 2001). Firms in the situation of greater growth
opportunities and tighter financial constraints are more likely to use currency derivatives
(Gambhir and Goel, 2003). Forex derivatives market affected by many factors like market
liquidity, investors behaviour, regulatory structure and tax laws. In a study, Wong (2003)

42
examined the hedgable exchange rate risk and non hedgable price risk of a competitive
exporting firm by using currency options. Hedging role of currency futures is because of two
distinct sources of non-linearity. First is the multiplicative nature of price and exchange rate
risk. Second is the marginal utility function of the firm. Currency derivatives are also used by
firms for hedging transaction, translation and economic exposure as they affect firms in a
different way (Srivastva, 2013). Currency derivatives used by firms for hedging committed
transaction exposure to increase firm value by reducing indirect cost of financial distress or
alleviating the underinvestment problem (Hagelin, 2003). Cross hedging also used by firms to
analyse the foreign exchange rate risk exposure to a foreign currency cash flow of various
multinational firms where direct opportunities are not available. A scenario was analysed in a
study where currency derivatives market does not exist between domestic and foreign
currencies, then cross currency derivatives used by firms (Chang and Wong, 2003). In some
studies, hedging of financial risks by using various alternatives available to Indian corporates
was analysed. Researchers reported that forward and option contracts are mostly used
contracts for hedging followed by swaps (Sivakumar and Sarkar, 2008; Bhagawan and
Lukose, 2017).

Currency derivatives and Foreign exchange rate volatility

The FX is the most important financial market in the world. It facilitates trade, investment
and risk sharing across borders. A key assumption in the concept of foreign exchange risk is
that exchange rate changes are not predictable and this is determined by how efficient the
markets for foreign exchange are.

Currency Futures

There is high volatility in FX market and introduction of currency futures affect the volatility
of EURINR (Gupta, 2017). As, Pukthuanthong et al. (2007) analysed the case of floating
exchange rate, which states that purchasing future contracts on currencies market priced at a
discount and selling future contracts priced at a premium resulted into a profitable trading
strategy. It explains the case of random walk theory. Though, the study of the volatility and
impact of currency futures and options volumes on exchange rates becomes even more
important in context of India given the emerging status of the economy and also the Indian

43
market is not as operationally efficient as other developed nations’ markets are. Pandey
(2011) analysed that in terms of contracts traded and open interest at NSE and MCX currency
futures were developed at rapid phase because it was proved as a good deal to hedge the risk.

Similarly, Sarang (2012) analysed growth and evolution of currency futures in India. The
study concluded that volatility increased substantially in 2011-12 to June 2012 due to issues
coming out of global market.

In a study it was examined that volatility, trading volume and market depth are related with
each other in currency futures market. By using granger causality test, variance
decomposition and impulse response function it was concluded that Return volatility and
Trading volume were reversely affected to each other because of sequential information
hypothesis that explains the relationship between return volatility and trading volume. Return
volatility possesses some predictive power with trading volume, but not with open interest
(Fung and Patterson, 1999). Similarly, Guru (2010) considered that there is no causal relation
between currency future volume and spot market volatility or between currency futures open
interest and spot market

In a study, it was found that hedging effectiveness of currency futures is lower than that of
OTC forward (Mohanraju, 2014). When there are no directly available currencies in the
market then cross hedging also used by various firms.

Currency Options

Currency options can also be used for reducing exchange rate risk as well as for speculation
purpose. Put call parity condition can be used with interest rate parity theory and with short
and long position in forward exchange market (Giddy 1983). Similarly, in a study put call
parity conditions for USDINR was analysed and it was found that there was violation of put
call parity in USDINR currency option market and various arbitrage opportunities (Bhat and
Arekar,2015). In the currency option market, implied volatility has more information content
than measures based only on information in historical price data. The study also suggested
that to make decisions about future realised volatility, implied volatility cannot be taken as an
unbiased predictor even it shows data too high or too low compared to actual volatility
(Kazantzis and Tessaromatis2001). Efficiency of currency options market was analysed by
Hoque et al. (2008) by using four currencies British Pound, Swiss franc and Japanese Yen vis
some vis the U.S. dollar. With regarding to calls and put options results showed that calls are
overpriced relative to put. In another study, it was found that Foreign Exchange rate

44
fluctuations are affected by international monetary market which have impact on interbank
trading also.

Currency futures and options both tools are effective for hedging but when it is about a
comparative study currency future provides more effective hedge for covered position as well
as currency option are effective for uncovered position. Uncovered position means company
should choose the effective tool of hedging on the basis of flexibility, cost, effectiveness,
liquidity (Demaskey, 1995; Maurer and Valiani, 2007). While Shastri et al. (1996) analysed
that Currency Options market introduction resulted in less volatility of underlying securities
vis-àvis improvement in price stability for the British pound, Canadian dollar, German mark,
Japanese yen and Swiss franc.

Price discovery in Currency derivatives market

Currency derivatives also play an important role in the price discovery and preventing the
risk. Somehow managing the risk (Singhvi and Pandya, 2016; Tse et al., 2006). Spot foreign
exchange market are more informative for price discovery than prices in futures market
(Cabrera et al. 2009; Chen and Gau, 2010). By applying Johannsen & VECM and Garch-
BEKK model Sehgal et al. (2015) found that in between futures market and spot market&
futures markets long run equilibrium relationship was there. While in the case of volatility
spill over it moves from futures to spot in short run and spot to futures in long run. Similarly,
Sakthivel et al. (2017b) found unidirectional causal relationship from currency spot to futures
prices of JPY/INR, GBP/INR and EUR/INR and bidirectional between currency spot and
future prices of USDINR.Kumar (2018) analysed the price discovery process in currency
market and lead lag relationship between spot and futures prices in foreign exchange market.
It was found that prices in the Indian and south African currency (ZAR), spSot market are
more informative than the currency futures market and in the Brazilian currency (BRL)
futures market leads the spot market.

LIMITATIONS OF THE STUDY

 The survey was confirmed to the surroundings of twin cities Hyderabad &
Secunderabad.
 The size of sample was only 50.

45
 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.

46
 CHAPTER 4: DATA ANALYSIS &
DISCUSSION

Analysis & Interpretation of the Questionnaire

All the questions are analysed 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

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 Others 8

Responds

Salaries
16%
Self Employed
34% Retired
Others

50%

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

2. Annual Income

Options Responds
Less than 5 lacs 17
5-10 lacs 4
10-15 lacs 13
15-20 lacs 4
20 lacs & above 12

Responds

less than 5 lacs

5-10 lacs
24%
34% 10-15 lacs
15-20 lacs
8% 20 lacs & above

8% 48
26%
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 their 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
Under 5% 17
5-10% 13
10-15% 12
Above 15% 8

Responds

16% Under 5%
5-10%
34%
10-15%
Above 15%
24%

26% 49
From the sample who took the questionnaire, a large chunk of individuals tends 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 their 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. Percentage of your income you invest?

Options Responds
Mutual Funds 7
Equities/ Derivatives 19
Insurance 11
Commodity Futures 6
Currency Futures 5
Others 2

Responds

Mutual Funds
10% Equities/ Derivatives
14%
4% Insurance
Commodity Futures
12%
Currency Futures
Others
38%
22% 50
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

Responds

26%
Awareness
Peer Influence
Conservatism
Looking for assistance

16%

58%
51
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 today’s world invest in some sort of trading. Some of it is due to peer’s
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.

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 CHAPTER 5: FINDINGS,
RECOMMENDATIONS, CONCLUSION &
LEARNING OUTCOMES

FINDINGS

 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 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

53
 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

Currency market, has no geographical location, it is electronically linked network and is open
24 hours a day. The value for which one currency is exchanged for another or the value of
one currency in terms of another currency is called exchange rate. For example, US dollar
can be bought for 63 INR rupees. This is the exchange rate for Indian rupees in US dollars.
The foreign exchange market in India started when in 1978 the government allowed banks to
trade foreign exchange with one another. Foreign Exchange Market in India operates under
the Central Government of India and executes wide powers to control transactions in foreign
exchange.

SUGGESTIONS

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

 Investing in currencies is good for long term as on basis of accessibility
 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.

LEARNING OUTCOMES

1. Positive approach: I experienced the working culture and worked for certain hour
which was quite difficult as I was new to this thing.
2. Experienced positive complexity: There was a healthy competition between my
colleagues.

54
3. Great assistance: The mentor helped a lot in their work, he gave us proper suggestion,
knowledge, and taught us how the process work.
4. Drawback: Travelling was a bit of a task due to heavy traffic in the peak hours.

Learnings:
1. Overview of commodity & currency market, theoretically and practically.
2. It helped me gain patience.
3. It helped me made more comfortable with my colleagues.
4. It enhanced my communication skills.
5. Experienced customer interaction.
6. Had a hand on experience in negotiating with customers.
7. Learnt handling objections.

REFERENCES
 https://www.rathi.com/grp/index.php
 https://anandrathi.com/
 https://en.wikipedia.org/wiki/Wikipedia
 https://www.investopedia.com/terms/d/derivative.asp

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