Futures of Commodity market in India

Presented by:Neeraj kumar RS1903A52 10907209

Derivative
Derivatives are financial contracts of predetermined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities

Features of derivatives
y Derivatives are contracts that have no independent

value
y They derive their value from their underlying assets y They are used as ´ risk shiftingµ or hedging

instruments

Players in the derivative market
Hedgers: Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators : They are people who wish to bet on future movements in the price of the asset. Future and Options contracts can give them an extra leverage; that is, they can increase both the potential gains and losses in a speculative venture.

Cont«.
Arbitrageurs: Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. For eg. If they see the futures price 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.

Kinds of derivatives
y On the basis of underlying assets
y Financial derivatives y Commodity derivatives = my topic y Index derivatives

Common financial derivatives
y forward contracts y Futures y Options y swaps

Derivatives in India
y The futures contract at NSE is based on S&P

CNX Nifty # Index.
y It has a maximum of 3-month expiration cycle. y Three contracts are available for trading I.e. with

1 month, 2 months and 3 months expiry.

Commodity Markets - Overview
y Four licenses recently issued by Govt. of India to set-up

y y y y y y

National Online Multi Commodity Exchanges ² to ensure a transparent price discovery and risk management mechanism List of commodities for futures trade ² increased from 11 in 1990 to over 100 in 2003 Reforms with regard to sale, storage and movement of commodities initiated Shift from administered pricing to free market pricing ² WTO regime Overseas hedging has been allowed in metals Petro-products marketing companies have been allowed to hedge prices Institutionalization of agriculture

About MCX
National Level Online Multi Commodity Futures Exchange Key Promoters ²
y Financial Technologies (India) Ltd, State Bank of India,

Union Bank
y Corporation Bank, Bank of India, Canara Bank, y State Bank of Indore ,Bank of Baroda

Operations from 300 cities with over 775 members & 3000TWS First Indian Exchange to enter into an agreement with an International Exchange (TOCOM) Facilitating Cost effective and economic technology.

Commodity Ecosystem

MCX Business Associates
y Statutory Auditor y Internal Auditory Network services -

M/s. Deloitte, Haskins & Sells M/s V.Shankar Aiyer & Company HCL Comnet Ltd.(VSAT)S VSNL (Internet) Tata Tele (Leased line) Reliance gateway ( Wireless )

y Clearing Banks -

BOI, HDFC, IndusInd, UBI & UTI y Quality Certification SGS, Geochem , Dr. Amin Lab., Agencies Rubber Board y Warehouses ² CWC, Gujarat, Kerala, Tamilnadu and UP y Bullion Logistics ² Group 4 and Brinks Arya

Participants in Commodity Futures
Farmers/ Producers Merchandisers/ Traders Importers Exporters Consumers/ Industry Commodity Financers Agriculture Credit providing agencies Corporate having price risk exposure in commodities

India·s Place in World Market

COMMODITY RICE (PADDY) WHEAT PULSES GROUNDNUT RAPESEED SUGARCANE TEA COFFEE(GREEN) JUTE AND JUTE FIBERS COTTON (LINT)

INDIA 240 74 13 6 6 315 0.75 0.28 1.74 2.06

WORLD 2049 599 55 35 40 1278 2.99 7.28 4.02 18.84

SHARE 11.71 12.35 23.64 17.14 15.00 24.65 25.08 3.85 43.30 10.09

RANK THIRD SECO D FIRST SECOND THIRD SECOND FIRST EIGTH SECOND THIRD

Business Potential
Size of Physical Market (Rs. Crore) Rs. 43000 cr Rs. 30000 cr Rs.11000 cr Rs. 84,000 cr Conservative Multiplier (Rs. Crore) ( In 3 years) 20 Times Rs. 8,30,000 cr 10 Times Rs. 3,00,000 cr 10 Times Rs. 1,10,000 cr Rs. 12,40,000cr Global Multiplier (Rs. Crore) (In 3 ± 5 Years) 50 Times Rs. 21,50,000 cr 20 Times Rs. 6,00,000 cr 20 Times Rs. 2,20,000 cr Rs. 29,70,000cr

Commodities

Gold & Silver Edible Oils Metals Total

Uses of commodity market in future
y Price discovery for commodity players
y A farmer can plan his crop by looking at prices prevailing in the futures

market

y Hedging against price risk
y A farmers can sell in futures to ensure remunerative prices y A processor/ manufacturing firm can buy in futures to hedge against

volatile raw material costs
y An exporter can commit to a price to his foreign clients

y Easy availability of finance
Based on hedged positions commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks

Future of Commodity Market
y India - Largest Consumer - Producer - Exporter y y y y y y y

Importer Large size intermediaries penetrate commodities market Banks to Finance commodities ² Futures a secured route RBI permits Banks to hedge their bullion risk through Futures Exchange ² Other commodities to follow Using Exchange Network for various products & Services BPO & Trade Interest will attract International players Hub for value added services & food processing New class of commodity Traders & Value Investors

Futures of commodity market

India to become Hub of Global Trading in Commodities y It is a US $ 600 billion Opportunity

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