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“A STUDY ON THE COMMODITIES TRADING AT KARVY”

A PROJECT REPORT SUBMITTED

ON

PARTIAL FULFILLMENT OF REQUIRED FOR THE AWARD OF DEGREE OF

“MASTER OF BUSINESS ADMINISTRATION”

(DURING THE YEAR 2008-2010)

BY

J.DIVYA

Regd. No. 017-08-146

UNDER THE GUIDANCE OF

Dr.K.MALLIKARJUNARAO

DEPARTMENT OF BUSINESS ADMINISTRATION

PDALA RAMA REDDY COLLEGE OF COMMERCE AND MANAGEMENT

(AFFILIATED TO OSMANIA UNIERSITY)

1
 DECLARATION

I hereby declare that this Project Report titled “A STUDY ON THE

COMMODITIES TRADING AT KARVY” submitted by me to the Department of Business
Management, Padala Rama Reddi College Of Commerce And Management Affiliated to O.U.,
Hyderabad, is a bonafied work undertaken by me and it is not submitted to any other University
or Institution for the award of any degree diploma / certificate or published any time before.

Signature of the Student

J.DIVYA

2
 ACKNOWLEDGEMENT

The completion of this project makes me to recall with gratitude several persons who have
extended their cooperation in one way or the other in this venture.

I am very much thankful to Mr. BRAHMAIAH, Principal, Padala Rama Reddy College, for
permitting me to pursue my project in BSNL.

I am indebted to Mr. M.V.L.N. Murthy (CHANGE THE NAME) Sub-Divisional Engineer

(EP), BSNL, my internal guide for giving his valuable guidance and suggestions in collecting the
data needed for this project.

I express my sincere thanks to Head Of The Department MBA programme Dr.Shekar Sistla,
for his encouragement.

I owe a sense of gratitude to Mr. K.MALLIKARJUNA RAO, my project guide, Padala Rama
Reddy College, for her friendly cooperation at each and every point of my work, for his patience
and immense support for the completion of the project.

Finally, I wish to express my thanks to all the faculty members of Department of MBA for their
suggestions in bringing out my project in most successful manner.

J.DIVYA

CERTIFICATE

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This is to certify that this project report entitled “A STUDY ON THE COMMODITIES
TRADING AT KARVY” is a bonafide work done and submitted by J.Divya of MBA under the
guidance of Mr.K.Mallikarjuna rao Department of Business Administration. Padala Rama
Reddy College Hyderabad, in partial fulfillment of the degree of “Master of Business
Administration”.
The period of this project is 4th of May 2009- 12th of June 2009.

Dr.Shekar Sistla, ,
Mr. K.Mallikarjuna rao

Head of the Department, PROJECT GUIDE

M.B.A

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 INDEX

TABLE OF CONTENTS PAGE NO

Chapter-I
Introduction
Objectives of the study
Scope of the study
Limitations of the study

Chapter -II
Research Methodology

Chapter -III
Literature Review

Chapter -IV
Company Profile

Chapter -V
Analysis and Interpretation

Chapter -VI
Findings
Suggestions
Conclusion

Bibliography
Annexure

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 CHAPTER -I

INTRODUCTION
Trading in derivatives is presently being by large corporations or big fund management
companies. Individuals are scared of getting into the business of trading in derivatives &
products of derivatives like commodity futures. Under this circumstance it becomes ethical
responsibility on our part to try to know about the trading in derivatives & its products like
commodity derivatives.

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OBJECTIVES OF THE STUDY

1. To understand the basics of commodity market and to discover the emerging prospects

in Indian commodity market.

2. To identify the perception of investors in commodities market.

3. To study the risk associated with the commodities trading.

4. To study the hedging practices adopted by Karvy.

SCOPE OF THE STUDY

1. The study mainly focuses on Indian commodity market, its history and latest
developments in the Indian commodity market.
2. A study also keeps a birds-eye view on global commodity market and its development.

3. The study vastly covered the aspects of commodity trading, clearing house and
settlement mechanisms in Indian commodity exchanges.
4. The scope of the study limited to Indian commodity market.

LIMITATIONS OF THE STUDY

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

2. The size of sample was only 50.

3. The investor’s response could have been biased.
4. Time of 6 weeks was constraint for the study.

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 Chapter -II
Research Methodology

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DATA COLLECTIONN TECHNIQUES
Use of both primary and secondary sources of data in the study.
1. Use of primary sources of information by interacting with the clients both existing and

potential through questionnaire.

2. Secondary data collection by visiting libraries and by use of business journals, articles,

books etc.,

3. Analysis of data.

4. Tabulation of relevant data according to parameters.

5. Editing of data.

6. Making recommendations for improvements.

Analysis and interpretation

Simple table analysis method is used for analyzing the data pertaining to different issues of client
survey. Simple statistical tools like percentages are using in the interpretation of data pertaining
to the survey. The results are illustrated by means of simple tables.

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 Chapter -III
Literature Review

INTRODUCTION TO COMMODITIES
India has a long history of commodity futures trading, extending over 125 years. Still, such
trading was interrupted suddenly since the mid-seventies in the fond hope of ushering in an
elusive socialistic pattern of society. Now the central government has taken what are………..

Firstly, what is a commodity?

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. At present, all goods
and products of agricultural (including plantation), mineral and fossil origin are allowed for
futures trading under the auspices of the commodity exchanges reorganized under the FCRA.

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The national commodity exchanges have been recognized by the central government for
organizing trading in all permissible commodities which includes precious (gold &silver) and
non ferrous metals; cereals and pulses; ginned and unginned cotton; oilseeds, oils and oilcakes;
raw jute and goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices, etc.

Next, what is a commodity futures contract?

A commodity futures contract is essentially a financial instrument.

FCRA defines forward contract as "a contract for the delivery of goods and which not a ready
delivery contract is". In market parlance, the ready delivery contracts are commonly known as
"spot" or "cash" contracts.

Following the absence of futures trading in commodities for nearly four decades, there new
generation of commodity producers, processors, market functionaries, financial organizations,
broking agencies and investors at large are, unfortunately, unaware at present of the economic
utility, the techniques and financial advantages of such trading.

Then comes what is a commodity exchange?

A commodity exchange is an association, or a company or any other body corporate organizing
futures trading in commodities.

The national commodity &derivatives exchange of India limited (NCDEX) AND Multi
commodity exchange of India (MCX) the premier exchanges of India become operational from
December 15th of 2003 in national level.

Afterwards more important why invest in commodities, i.e., what are the
advantages of investing?
There are two major reasons for the investor:

FIRSTLY, the price movements are 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 extant market price risk is reduced.

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SECONDLY, the markets are working virtually round the clock,(NCDEX works from 10:00 AM
to 4:00 PM and next session from 7;00PM to 11;00 PM) so any drastic news is digested. In case
of other markets this provisions is not there, just think of September 11th episode, next day equity

markets opened far down and the investors are left hanging.

FIGURE1

Structure of the commodity

market.

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The major commodities trading exchanges globally are:
1. Chicago Board Of Trade (COBOT). U.S.A.

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

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 3. London Metal Exchange (LME). United Kingdom.

4. Tokyo Commodity Exchange (TOCOM). Japan

5. International Petroleum Exchange (IPE).

6. London Metal Exchange (LME). United Kingdom

7. Sydney Futures Exchange (SFE). Australia

8. Brazilian Futures Exchange (BBF). Brazil

9. Winnipeg Commodity Exchange (WCE). Canada

10. Marche a Terme International de France (MATIF). France

11. Hong Kong Futures Exchange (HKFE). Hong Kong

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

13. Russian Commodity and Raw Materials Exchange. Russia

14. Singapore International Monetary Exchange (SIMEX). Singapore

15. South African Futures Exchange (SAFEX). South Africa

16. Dalian Commodity Exchange. China

INDIAN PERSPECTIVE
There are three major exchanges for the commodity trading in India. They are:
1. The National Commodities and Derivatives Exchange Ltd. (NCDEX)

2. Multi Commodities Exchange of India Ltd. (MCX)

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 3. National Multi-Commodity Exchange Ltd. (NMCE)

1. National Commodity & Derivatives Exchange

Limited (NCDEX)

Nation al 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-mutual 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.

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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.

National Commodities and Derivatives Exchange,

NCDEX
TABLE 1

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COMMODITY UNIT OF UNIT OF YIELD/Re. TIC YIELD/TIC TRADING
PRICE TRADING MOVEMENT SIZE or TIC SESSION
QUOTATION or VALUE
TIC
PRECIOUS METALS
GOLD 10gm 100gm 10.00 1.00 10.00 10:00AM-
11: 30PM
KILO GOLD 10gm 1000gm 100.00 1.00 100.00 10:00AM-
11: 30PM
SILVER 1KG 5KG 5.00 1.00 5.00 10:00AM-
11: 30PM
MEGA SILVER 1KG 30KG 30.00 1.00 30.00 10:00AM-
11: 30PM
AGRICULTURAL PRODUCTS
SOYA 1QT 10QT 10.00 0.05 0.50 10:00AM-
5:00PM
SOYA OIL 10KG 10000KG 1000.00 0.10 100.00 10:00AM-
5:00PM
COTTON-M 1QT 11 bales 18.70 0.05 0.935 10:00AM-
5:00PM
COTTON-L 1QT 11 bales 18.70 0.05 0.935 10:00AM-
5:00PM
MUSTARD 10KG 1000KG 100.00 0.05 5.00 10:00AM-
5:00PM
MUSTARD OIL 20KG 1000KG 50.00 0.05 2.50 10:00AM-
5:00PM
PALMOLEIN 10KG 1000KG 100.00 0.05 5.00 10:00AM-
OIL CRUDE 5:00PM
PALMOLEIN 10KG 1000KG 100.00 0.05 5.00 10:00AM-
OIL RBD 5:00PM
PEPPER 1QT 1000KG 10.00 1.00 10.00 10:00AM-
5:00PM
CHANA 1QT 10000KG 100.00 1.00 100.00 10:00AM-
5:00PM
GAUR SEEDS 1QT 10000KG 100.00 1.00 100.00 10:00AM-
5:00PM
INDUSTRIAL PRODUCT
RUBBER 1QT 1000KG 10.00 1.00 10.00 10:00AM-
5:00PM
2. Multi Commodities Exchange of India Ltd (MCX)

MCX an independent and de-metalized 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

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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.

TABLE 2

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

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

Aluminum, Copper, Nickel, Sponge Iron, Steel Flat,

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

Basmati Rice, Maize, Rice, Sarbati Rice, Wheat

Brent Crude Oil, Crude Oil, Furnace Oil

Cashew Kernel, Rubber

High Density Polyethylene (HDPE), Polypropylene

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

Multi-Commodity Exchange, MCX TABLE3

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 UNIT OF YIELD/TIC
UNIT OF YIELD/Re. TRADING
COMMODITY PRICE or TIC
TRADING MOVEMENT SESSION
QUOTATION VALUE

PRECIOUS METALS

10:00AM-
GOLD-M 10gm 100gm 10.00 1.00 10.00
11:30PM

10:00AM-
GOLD 10gm 1000gm 100.00 1.00 100.00
11:30PM

10:00AM-
SILVER-M 1KG 5KG 5.00 1.00 5.00
11:30PM

10:00AM-
SILVER 1KG 30KG 30.00 1.00 30.00
11:30PM

AGRICULTURAL PRODUCTS

10:00AM-
SOYA 1QT 10QT 10.00 0.05 0.50
5:00PM &

10:00AM-
SOYA OIL 10KG 1000KG 100.00 0.05 5.00
5:00PM &

PALMOLEIN 10:00AM-
10KG 1000KG 100.00 0.05 5.00
OIL CRUDE 5:00PM &

PALMOLEIN 10:00AM-
10KG 1000KG 100.00 0.05 5.00
OIL RBD 5:00PM &

10:00AM-
CASTOR 100KG 1MT 10.00 0.25 2.50
5:00PM &

10:00AM-
CASTOR OIL 10KG 1MT 100.00 0.10 10.00
5:00PM &

GROUND NUT 10:00AM-

10KG 1MT 100.00 0.10 10.00
OIL 5:00PM &

10:00AM-
GAUR SEED 100KG 5MT 50.00 1.00 50.00
5:00PM &

BLACK 10:00AM-
100KG 1MT 10.00 1.00 10.00
PEPPER 5:00PM &
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 3. 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.

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Mission
Continuous improvement in Customer Satisfaction.

Improving efficiency of marketing through on-line trading in Dematerialization form.

Minimizing of settlement risks.

Improving efficiency of operations by providing best infrastructure.

Rationalizing the transaction fees to optimum level.

Implementing best quality standards and testing in tune with trade practices.

Improving facilities for structured finance.

Improving quality of services rendered by suppliers.

Promoting awareness about on-line features trading services of NMCE across the length and
breadth of the country.

Turn over of the Indian commodity futures’ market

TABLE4
Turnover on Commodity Futures Markets
(Rs. In Crores)
Exchange 2006-07 2007-08
NCDEX 1490 54011
NBOT 53014 51038
MCX 2456 30695
NMCE 23842 7943
ALL EXCHANGES 129364 170720

Volumes in Commodity Derivatives Worldwide

NCDEX TRADING SYSTEM

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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.

E.g. 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”+“Ahmadabad”

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“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.

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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.

Residual risk, trading costs, and commodity futures risk premia

By Anderson Graduate School of Management, University of California At
Los Angeles, CA 90024, USA

25
Trading costs, in the form either of explicit charges or of the costs of becoming informed, limit
the participation of some classes of traders in commodity future markets. When speculators face
a fixed cost of participating in a futures market that is used by commodity producers to hedge
their stochastic revenues, the futures risk premium deviates from the perfect market prediction.
The deviation rises in absolute value with the square root of the trading cost and with the
standard deviation of residual returns, and it is unrelated to the covariance of the futures price
with producers' nonmarketable wealth. The residual-risk premium depends not on the total
magnitude of the risk that producers hedge (i.e., aggregate revenue variance), but on the
variability of their revenue relative to its mean (i.e., the coefficient of variation). Hence, even a
commodity that constitutes a minor fraction of aggregate consumption may have a large
premium for residual risk if the revenue derived from it has a large coefficient of variation.

Futures Trading Activity and Commodity Cash Price Volatility

By Jain Yang, R Brian Balyest and David J. leatham
This paper examines the lead‐lag relationship between futures trading activity (volume and open
interest) and cash price volatility for major agricultural commodities. Granger causality tests and
generalized forecast error variance decompositions show that an unexpected increase in futures
trading volume unidirectional causes an increase in cash price volatility for most commodities.
Likewise, there is a weak causal feedback between open interest and cash price volatility. These
findings are generally consistent with the destabilizing effect of futures trading on agricultural
commodity markets.

A Benchmark for Commodity Trading Advisor Performance

By Richard Spurgin

This article describes a passive index that can be used as a benchmark for creating commodity
trading advisors (CTAs). The index is designed to benchmark the performance of diversified
trend-followers. Diversified CTAs trade in number of derivatives market, including commodity,
currency, interest rate, and equity derivatives markets. Trend followers follow momentum
strategies that are designed to capture longer-term trends in asset prices. The index uses a
momentum trading strategy that takes hypothetical long and short positions in a number of
commodity, currency, and fixed income futures contracts. Results indicate that the passive index

26
has returns that are highly correlated with the return of the average CTA. As such, this index can
be useful in performance measurement and attribution as well as in the creation of multi-manager
CTAportfolios.

The Nature of Commodity Index Return

by Robert J. Greer
The idea of diversifying a portfolio by adding an unleveraged, long-only commodity index has
been around for a long time. But only in the last few years have institutions actually started to
take advantage of this asset class. Returns have historically been comparable to equities in
magnitude and volatility, but with more positive skew. Those returns have been negatively
correlated with stock and bond returns. If there were fundamental reasons to expect this pattern
of returns to continue, then this asset class obviously could expand the efficient frontierofa
portfolio

ADVANTAGES OF TRADING/INVESTING IN COMMODITIES

Benefits to the Industry, Exporters and Importers

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

Time Export Commitment Market Price

Today Nil 1700
After one month 10000 1800

Instance 1: With no hedging.

Sale Price: Rs. 1850.

27
Cost Price: Rs. 1800.
So, net profit/ quintal = Rs.50.
Net Profit of deal=Rs.50x10000=Rs.5, 00,000.
Instance 2: With Hedging:
Sale Price: Rs.1850.
Cost Price: Rs.1700. (where in the exporter goes long (buys) today)
So, net profit/ quintal=Rs.150.
Net Profit of deal=Rs.150x10000=15, 00,000. An increase of 200% net profit.

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.

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.

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’

28
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.

a. Demand and Supply.

b. Indian Rupee Vs other currencies.

c. Export/Import parity.

d. Political environment.

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

Precious Metals:
a. Stock market dynamics.
b. Geo-political tensions.
c. US dollar Vs other major currencies.
d. Global macroeconomics.
e. Miner’s reports.

29
Agricultural:
a. Climatic conditions.
b. Crop production.
c. Government regulations.
d. Export rejection/orders.
Softs:
a. Climatic conditions.
b. Crop production.
c. Import duty.
Industrial Metals:
a. Industrial demand.
b. Substitute metals supply.
c. Government regulations.
d. Infrastructure projects.
Energy:
a. Production.
b. New excavations.
c. Geo-political tensions.
d. New project

30
 Chapter -IV
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

31
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
1. Among the top 5 stock brokers in India (4% of NSE volumes)
2. India's No. 1 Registrar & Securities Transfer Agents
3. Among the to top 3 Depository Participants
4. Largest Network of Branches & Business Associates
5. ISO 9002 certified operations by DNV
6. Among top 10 Investment bankers
7. Largest Distributor of Financial Products
8. Adjudged as one of the top 50 IT uses in India by MIS Asia
9. Fully Fledged IT driven operations
32
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:
1. Build in-house processes that will ensure transparent and harmonious relationships with
its clients and investors to provide high quality of services.

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

3. 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

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

5. 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.

6. 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.

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

and regulatory authorities) proud and satisfied.

33
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

The 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.

34
 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 Computer share Private Limited

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

35
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.

MILE STONES.

FIGURE2

36
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.

37
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.

38
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.

Team work.
None of us is more important than all of us.

39
 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.

40
SETTLEMENT PROCESS IN COMMODITIES FUTURES
In this Education Series, we shall have a look into how settlement is done in case of commodities
futures. The settlement procedure is more or less same as in case of stock futures, nevertheless,
there are some key differences in the procedure by the virtue of the underlying asset, which is a
commodity.

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

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

Instrument Deliverable Electronic Form Physical From

Stock Futures No* Yes No
Commodity Futures Yes Yes Yes

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

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

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

But in case of commodity futures, delivery of underlying commodity is possible. The delivery
can be taken both in the electronic form and physical form.

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

In case of physical form, the delivery quantity is transferred to/from the stocking point.

Now, we arrive at an important point, when and how are settlements done?
Daily Settlements are done on mark-to-market basis.

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

41
Daily Mark to Market (MTM) Settlement is done for each Client:
At the end of every trading day, for all the trades, this is done till the date of the Contract expiry.

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

Final Settlement will be done for each Client:

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

How is Daily MTM done?

Calculating the daily profits and losses for the client/investor does the Daily Settlement.

Profits and Losses are determined on the positions for client/investor, for each client and for each
contract

All trades are marked to the market at the Daily Settlement Price which is equal to Closing price
for the day.

A total Mark to Market Profit or Loss is calculated for the every client/investor.

Table.2 Example of Daily MTM

TABLE5

Branch 1 Branch 2
Client 1 Client 2 Client 3
Contract A Contract B Contract A Contract A Contract B
Buy 400@50 Sell Sell 700@48 Buy Buy
200@150 200@63 150@160

42
 Sell 200@55 Sell Buy ---- Sell 150@170
150@190 500@40
Closing rate 400 X 8 = 200 X 30 = 700 X 10 = 200 X 5 = 150 X 20 =

A – 58 3200 (6000) (7000) (1000) 3000

B – 180 200 X 3 = 150 X 10 = 500 X 18= 150 X 10 =

(600) 1500 9000 (1500)
PROFIT / PROFIT LOSS PROFIT LOSS PROFIT
(LOSS) 2600 (4500) 2000 (1000) 1500
TOTAL MTM LOSS (1900) PROFIT 2500

FIGURE3

43
 Margins
Initial
Daily
Daily
Exchange
TWS* Margin Clearinghouse
Profit/Loss
KARVY
MTM for
Download
(Collection/Refun
Call Settlements of Procedure - Daily MTM
settlement
Commodities
Positions(NCDEX/MCX)
closed
Margin
dMargin
))))on
Any
Broking
out
and
special MTM
T+1)& Settlement
Pvt. Ltd.
files
MTMat ofEOD
Open(End
“Of the Day)
Clearing
positions
Bank A/c”
at Closing
Price

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.

44
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
isKCBPL)

45
FIGURE: 4

Opening new positions and During the period of contract till date
Closing of open positions by of expiry.
Member

Calculated at the end of every

Daily
Trading Day, Payments on T+1.
MTM Settlement and
Margins
On the Date of expiry after the
trading hours.
Determination of positions
for each Member

Final Settlement of all open As per settlement calendar for each

positions contract.

Chart.2 Settlements - Sequence of events

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

46
From Chart.2 the last event in the sequence of events is the “Final Settlement” of all the open
positions.

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

By the virtue of commodities futures being deliverable, both in electronic form (DP A/c) and in
physical form, the final settlement in case of commodities futures varies from stock futures.

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?

Broking
Contr
4
-3
Date
500
200
400
700
Day
Client
Contract
00
Client
Client
2
1
Sof 31Y
B Member
act X
Expiry
S
B
2
Member
Y A TABLE6
B

Open Contract X 400 S Contract Y

Positions
Contract Y 300 B 500- 400 = 100S

Can actual delivery of the commodity be done on Expiry?

47
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.

The List of DPs empanelled so far

ICICI Bank, UTI Bank, Canara Bank, Global Trust Bank, Infrastructure leasing &
Financial Services (ILFS). More to come…

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

FIGURE5

48
 KCBPL
Delivery
Matching
Submission
Exchange
Delivery
Matched
Counterof
Direct
Download of KCBPL
Workflow
delivery
net
Informati
Clearinghou
Information
Information
party
thru
Settlements
of positions on
– Deliveries
Between
on
Information
Depository
Delivery
se expiry
Buyers and
information
Sellers
and
matching of

Informatio
n

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

Branch

49
Quantity

TABLE7

SETTLEMENT CALENDAR
Commodit
Long
Physical
Crude
Soya Staple
Rapeseed
Medium
Refined
Silver
TGold
RBD
TT+7
+10
+2
+4
+7
bean
Palm
Settlement
Cotton
Soya
Palmolein
Mustard
Staple
oil
ybean
schedule for
Seed
Cotton
Seed
oil Oil
Pay-in/Pay-outs

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.

50
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.

Trading Strategies of different types of clients.

• If any business there is a transaction or a deal happens between the service/product
producer (the seller) and the services/product consumer (the buyer). This involves
money flow from the buyer to the seller.

• Today financial services industry is evolving into a more service oriented industry; from
just selling of the financial services, be It core finance or infrastructure finance or
industry finance, for that matter of fact any financial services.

There are various strategies that can be adopted based on client requirements like ‘hedging’,
‘investment (portfolio) diversification’ or ‘Investment Avenue’.

Hedging* mechanisms

Short Hedge:
A hedger* knows it is due to sell a particular commodity at a particular time in future can hedge
by taking short futures* position. This is called a short hedge.

Scenario 1: Price of commodity goes down.

The hedger does not fare well on the sale of the commodity in the spot/cash market* but makes a
gain on the short futures position.

SPOT FUTURES
Date 1 200 200
Date X 180 180
(20) 20

Scenario 2: Price of commodity goes up.

51
The hedger gains by selling the commodity in the spot/cash market but looses in short futures
position.

Spot Futures
Date 1 360 360
Date X 400 400
40 (40)

In either of the cases the hedger is safe from uncertainty of price movements.

Long Hedge: A hedger knows it is due to buy a particular commodity at a particular time in
future can hedge by taking long futures* position. This is called a long hedge.

Scenario 1: Price of the commodity goes down

The company fares well buying in the cash/spot market but looses on long futures positions

Spot Futures
Date 1 500 500
Date X 400 400
100 (110)

In either of the cases the hedger is safe from uncertainty of price movements.

But there are three main reasons why a perfect hedge is not possible in real practice.
• The hedged commodity is not exactly same as the commodity
future;

Example:

Steel future are available in Multi-Commodity Exchange (MCX), but a hedger may be engaged
in different grade of steel like high chromium steel or high grade steel or high carbon steel or any
of other types of steels.

So, there involves some miss-match in hedging.

We can over come this buy matching the quantity of futures that can be taken;

Or= Gh x Qh

52
 Gr (1)

Quantity of Futures (can be converted into number of contracts/lots): Or

Quantity of Hedged Commodity. : Qh

Grade of Futures Commodity. : Gr

Grade of Hedged Commodity. : Gh

Example:

Let’s say a client is engaged in 0.995 pure gold, and ti an extant of 60 kg of 60000 gm. And in
NCDEX the gold contract traded is of 0.9999 purity. Hence, the amount of gold to be hedged in
NCDEX is:
Or = 0.995 x 60000 (from equation 1 )

=0.9999

=59705.9 grams.

=59700

=597 x 100√

But in NCDEX there are 100 grams gold contracts. Hence, the number of contracts that need to
be hedged are 597 contracts.
The correlation between the cash/spot market and the futures market may not be same, hence,
when the hedger wants to settle the position there may be difference in futures and spot price,
basis risk*.

Short Hedge:

A hedger knows it is due to sell a particular commodity at a particular time in future can hedge
by taking short futures position. This is called a sort hedge.
Scenario 1: Price of commodity goes down.

The hedger does not fare well on the sale of the commodity in the spot/cash market but, makes a
gain on the short futures position.

Spot Futures
Day 1 Month 1 200 200
Date 20 Month 3 180 182

53
 (20) 18

Basis risk = (F2-F1) – (S2-S1)

= (2)

Hence, the client makes loss due to basis risk. Basis risk is one of the major risk that can not be
minimized to near zero. Nevertheless, it can e reduced to about 2-3% by matching the quantity as
given below.
Qh = P x σs/σf

Where σs are the ‘Sigma’ of cash/spot market price, σf is sigma of futures market prices and P is
the correlation between cash/spot and futures markets.

• Next, the futures contract expiry and the actual delivery of the hedger may not match.

For example, the exporter who exports soy beans (buyer) enters into a long hedge during the start
of the 3months futures contracts. But the export commitment is due only two months now. He
has to cover the futures position, one month ahead. Hence, this may involve some basis risk.

Futures Duration: _____________1____________2___________3 ← (Expiry Date of Futures)

Export Duration: ____________1___________ 2← (Export Commitment date)

We use the equation 2 to reduce this risk.

“Investment (portfolio) diversification or as Investment Avenue.”

Investment in commodities is simple just buy/sell a commodity future contract (lot) and make
profit on the price fluctuation.

Gold Commodity Futures (Yield per rupee=10)

Day 1 Sell 1 lot may Gold futures @ 6200 (NCDEX)
Day 2 Buy 1 lot May Gold futures @ 6182 (NCDEX)
Profit 18x10=180

54
Now les now, how each of our client may take his position in the commodity markets.

Type of client Buyer Seller

1 Commodity producer √
2 Commodity consumer √
3 Exporter √ √
4 Importer √ √
5 Trader (intermediary) √ √
6 Investor √ √

Commodity producer is the first producer of the commodity, i.e., it is the raw material
producer.
Grains: Farmers.

Soft (coffee, sugar): Farmers.

Fibers: cotton farmers.

Industrial metals: mining companies, steel/nickel/copper manufacturers.

Precious metals: mining companies.

Commodity consumer is the consumer if the commodity, i.e. it is the raw material
consumer.
Grains: milling companies

Soft: sugar mills, coffee bean processors.

Fibers: cotton mills

Industrial metals: users of the metals.

Precious metals: user of the metals

Exporter/ Importer can take both the shape of commodity producers and commodity seller it
depends on the export/import commitment.

Trader is an entity which is an intermediary between the producer and consumer.

Investor is a normal trader who uses commodities markets for diversifying his portfolio or as an
investment avenue.

GLOSSARY

55
1. Hedging is an activity where in an entity (individual/ company) minimizes the effect of
price fluctuations of an asset.

2. Hedger an entity (individual/ company) which takes part in hedging activity.

3. Short position or shorting is selling the asset without possessing the asset (with an
intention of buying later).

4. Long position is buying the asset (with an intention of selling later).

5. Basis risk is the difference between the futures prices and spot price (F –s) at an instance
of time.

6. Portfolio Diversification is an activity where in the investor invests in various

instruments in various markets with the aim if reducing risk and increasing return.

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 Chapter –V

Analysis and Interpretation

TABLE NO: 1 what type of business you carry?

Jewelers 10 20%
Kirana merchant 20 40%
Manufacturing unit 5 10%
Others 15 30%
TOTAL 50 100%

CHART NO: 1

57
INTERPRETRATION
Out of 50 Investors, there are 10 Jewelers, 20 Kirana Merchants, 5 Manufacturing units & 15
other group of people which includes Businessman & Professionals. With this researcher has
analyzed that in Commodities Market the major share is of Kirana Merchants.

TABLE NO: 2 Do you invest in any of these Investments?

EQUITIES 6 12%
COMMODITIES 28 56%
MUTUAL FUND 0 0%
IPO’S 3 6%
FD’S 0 0%
EQUITIES & COMMODITIES 6 12%
EQUITIES & MUTUALFUND 2 4%
EQUITIES & IPO’S 3 6%
EQUITIES,COMMODITIES,IPO’S 2 4%
TOTAL 50 100%

CHART NO.2

TABLE NO 3. Do You Know About Commodity Market?

YES 46 92%
NO 4 8%
TOTAL 50 100%

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 CHARTNO:3

INTERPRETATION
Out of 50 Investors, 92% know about Commodities Market were as 8% do not know what is
Commodities Market, which is very less which can be ignored. Out of 50 investors 46 investors
know about Commodities market. And remaining 4 investors don’t have knowledge about
commodities market which can be ignored.

TABLE NO 4. Do you carry out Trading in Commodities Market?

YES 36 72%
NO 6 12%
Done & left 5 10%
Planning to do in Future 3 6%
TOTAL 50 100%

40
35
30
25
20 Series1
15
10
5
0
YES NO Done & Planning
left to do in
Future

CHART NO: 4

INTERPRETATION

59
72% of Investors does trading in Commodities Market were as 6% Investors are Planning to do
in Future. And 10% of investors done & left from commodities market. Out of 50 investors 36
investors carry trading in commodities market, 5 investors done & left, 3 investors planning to
do in future in commodities market.

4.3.5 TABLE Due to Losses 3 6%

NO 5. If Done Settlement
& Left why?
Problem 1 2%
Company’s
services 1 2%
Other Reasons 2 4%
NA 43 86%
TOTAL 50 100%

CHART NO: 5

INTREPRETATION
Majority of the Investor’s trade in the Commodities Market but few Done & Left due to Losses
& Settlement Problems. 3% of investors left due to losses and 1% due to settlement problems.
Out of 50 investors 3 left due to losses, and others left due to non availability of funds.

TABLE NO 6. Which Company you Trade with?

Karvy 13 26%
Kotak 3 6%

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 India bulls 5 10%
Anagram 7 14%
PCS 5 10%
Others 3 6%
NA 14 28%
TOTAL 50 100%

Karvy
Kotak
India bulls
Anagram
PCS
Others
NA

CHART NO: 6

INTREPRETATION
Out of 50 Investors, 13 Investors does their trading from Karvy Commodities Broking Ltd, 7
from Anagram, 5 from India Bulls, 5 from PCS Broking, 3 from Other Private Security & 14
Investors do not deal in Commodities Market. The majority of the investors trade with Karvy
Stock Broking Ltd.

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TABLE NO 7. In which type of Commodities do you invest?

Bullion 6 12%
Oil & Oil Seeds 8 16%
Spices 2 4%
Metals 2 4%
Fiber 1 2%
Pulses 4 8%
Cereals 5 10%
Energy 7 14%
Others 5 10%
Na 14 28%
TOTAL 50 100%

CHART NO: 7

INTREPRETATION
The above chart shows that different Group of People Invest in different type of Products.16% of
investors invest in Oil & Oil seeds, 14% invest in Energy, 12% invest in Bullion, 10% in Cereals
and others invest in other commodities.

TABLE NO: 8. How do you feel about this market?

VERY GOOD 1 2%
GOOD 28 56%
AVERAGE 10 20%
BAD 8 16%
NA 3 6%

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 TOTAL 50 100%

CHARTNO:8

INTREPRETATION
Majority of the Investors says that Commodities Market is good. 2% feel that commodities
market is very good, 56% of investors says that commodities market is good and 16% of
investors says that commodities market is bad which can be ignored.

TABLE NO: 9. Do you know that trading in Commodities Futures is More

Beneficial & More Leveraging?

YES 43 86%
NO 4 8%
NA 3 6%
TOTAL 50 100%

CHART NO: 9

INTREPRETATION
86% of Investors knows that Trading in Commodities Future is More Beneficial & More
Leveraging. Investing in commodities is more beneficial because the prices of commodities are
more stable as compared to other financial instruments.

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TABLE NO: 10 which type of following Services do you prefer from a Financial
Advisory Institution?

TELEPHONE SERVICES 15 30%

POSTAL SERVICES 6 12%
ONLINE SERVICES 0 0%
PERSONAL SERVICES 6 12%
TELEPHONE& PERSONAL SERVICES 17 34%
TELEPHONE& POSTAL SERVICES 5 10%
POSTAL& PERSONAL SERVICES 1 2%
TOTAL 50 100%

CHART NO: 10

INTREPRETATION

Majority of Investors Believe in Telephone & Personal Services. Out of 50 investors 15

investors prefer Telephone serves 17 investors prefer personal services 5 investors prefer postal
services. Most of the investors prefer Telephone and Personal services.

TABLE NO: 11 How often you need Research Report on Commodities?

DAILY 12 24%
Weekly 13 26%
MONTHLY 11 22%
QUARTERLY 0 0%
HALF YEARLY 0 0%

64
 ANNUAL 0 0%
NA 14 28%
TOTAL 50 100%

CHARTNO:11

INTREPRETATION
Investors prefer for Daily & Weekly Reports on Commodities Research. 24% of investors need
daily, 26% of investors need weekly and 22% need monthly report.

TABLE NO: 12Are you interested in Opening Account with KARVY?

YES 7 14%
NO 27 54%
EXISTING CLIENT 16 32%
TOTAL 50 100%

CHART NO: 12

INTREPRETATION

65
As Investors are trading from different Service Providing Company’s they do not want to change
their Brokers.

Chapter –VI
Findings
Suggestions
Conclusion

66
FINDINGS

1. The investment in this for short period of time and most of the trading is intra-day in
nature i.e., Buy and Sell on same day to make profits. Here daily volumes and trends are
considered.

2. There is no scope for better and huge profits especially in commodities market for
investing when compared to investing in Equity market.

3. There is no physical delivery of most of the trades in case of commodities unlike other
areas of investments, supporting the large volume based market.

4. Investments in commodities market is less riskier, science the prices of commodities are
more stable than that of other instruments of capital market.

5. Though both Futures and Options contracts are available in world commodity market,
but in India Options have not been permitted by government.

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SUGGESTIONS

1. 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.

2. 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.

3. 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.

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

CONCLUSIONS

1. 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.

68
 2. 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.

3. 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.

4. 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.

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.

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

WEBSITES:
KARVY LEARNING CENTRE
http://www.karvy.com/
www.karvycommodities.com
www.ncdex.com
www.mcx.com
www.derivativesindia.com

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