Commodity Market Questionnaire
Commodity Market Questionnaire
Commodity Market Questionnaire
A PROJECT REPORT ON
CONTENTS
SL.NO PARTICULARS
1. Executive Summary
2. Research Methodology
3. Company profile
6. Findings
7. Suggestions
8. Conclusion
9. Bibliography
EXECUTIVE SUMMARY
The project was undertaken at KARVY Finapolis Belgaum the first part of the study
is done by collected information through net, journals, textbooks. And second part of the
study is conducted through survey of the derivative investors.
RESEARCH METHODOLOGY
Sample Size
Duration of Project:
a. Pie charts
Primary data has been used to carry out the research successfully. The secondary
data has been collected from NDEX and MCX. For the purpose of gathering primary data
a structure and questionnaire was designed to collect data from the derivative investors.
Method of Communication:
In order to minimize the bias in data collection, the method of personal interview was
adopted.
The study relies to a great extent on primary data and to some extent on secondary data:
Primary Data:
Questionnaire
Observation and interview technique
Secondary Data:
Information is collected through internet
From various text books Journals and magazines
Since the study is based on the convenient sampling it may not depict the accurate
outcome
The findings are based solely on the information provided by the respondents and
there is a possibility of biased results
FINDINGS
• More than 50% of the Traders in are aware about the commodity future
Market
• Most of the investors are not ready to invest in commodity future market they feel it
involve high risk.
• Returns and the Risk of the commodity are the most critical factors, which
Traders will consider while investing in any commodity
• Most of the investors are ready to invest in commodity future market if proper
information is provided
• As commodity future market is new and emerging ,many investors and farmers are
not fully aware of this market .as the market helps to trade transparently without
middlemen and agents
• While finding the reasons why most of the people are not trading in commodity
market I found that many respondents are not interested at all in this trade this is
because of unanawareness & mythical perception about commodity market.
SUGGESTION
• From survey it is found that most of the potential customers are concerned about the
Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage
it will help to attract more and more customers.
• More agents and marketing executives should be appointed to educate the customers
because the customers having many myths in there mind
• Firm should approach people who are already into the business of commodities
.special campaigns / investors meets should be conducted for these people since they
are aware of rate fluctuation ,market trends etc . They have got market idea that
benefits them in price prediction. They will be in high spirits when price risk of them
will be managed.
Company
Overview
And
Information
BABASAB PATIL MBA FINANCE PROJECT REPORT Page 8
Awareness of commodity market with reference Derivative investors
COMPANY PROFILE
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. We started with consulting and financial
accounting automation, and carved inroads into the field of registry and share accounting
by 1985. Since then, we have utilized our experience and superlative expertise to go from
strength to strength…to better our 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 we have made this journey by taking the route of quality service, path
breaking innovations in service, versatility in service and finally totality in services.
Our values and vision of attaining total competence in our servicing has served as
the building block for creating a great financial enterprise, which stands solid on our
fortresses of financial strength - our various companies.
With the experience of years of holistic financial servicing behind us and years of
complete expertise in the industry to look forward to, we have now emerged as a premier
integrated financial services provider.
And today, we 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.
OVERVIEW:
Teamwork
None of us is more important than all of us.Each team member is the face of
Karvy. Together we offer diverse services with speed, accuracy and quality to deliver
only one product: excellence. Transparency, co-operation, invaluable individual
contributions for a collective goal, and respecting individual uniqueness within a
corporate whole, is 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 action
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.
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.
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.
Registered with SEBI as a Category I Merchant Banker and ranked among the top 10
merchant bankers in the country, the company has built a reputation as a professional
advisor in structuring IPO’s take over assignments and buy back exercises.
Karvy Global Services 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.
It is an undisputed fact that the stock market is unpredictable and yet enjoys a
high success rate as a wealth management and wealth accumulation option. The
difference between unpredictability and a safety anchor in the market is provided by in-
depth knowledge of market functioning and changing trends, planning with foresight and
choosing one & rescue’s options with care. This is what we provide in our Stock Broking
services.
We offer services that are beyond just a medium for buying and selling stocks and
shares. Instead we provide services, which are multi dimensional and multi-focused in
their scope. There are several advantages in utilizing our Stock Broking services, which
are the reasons why it is one of the best in the country.
packages that provide daily technical advice on scripts for successful portfolio
management and provide customized advisory services to help you make the right
financial moves that are specifically suited to your portfolio.
Our Stock Broking services are widely networked across India, with the number
of our trading terminals providing retail stock broking facilities. Our services have
increasingly offered customer oriented convenience, which we provide to a spectrum of
investors, high-net worth or otherwise, with equal dedication and competence.
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.
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.
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 a good value addition to your portfolio.
KARVY Advantage:
Trade from anywhere in India Karvy, with its network of branches across the length and
breadth of the country, is always within your reach, no matter where you are. This gives
you the facility to trade from anywhere in India.
Reliable research
Karvy has a dedicated team of research analysts who work round the clock to
provide the best research newsletters and advices. We reach your desk daily, weekly and
monthly.
Personalized Services
Karvy, with its wide array of personalized services from registry to stock broking
takes the pleasure of adding one more service, commodities broking with the same
personal touch
.
State of Infrastructure
The strong IT backbone of Karvy helps us to provide customized direct services
through our back office system, nation-wide connectivity and website.
Indian commodities market, unlike stock market keeps awake till 11 in the night and
Karvy is all poised to offer round the clock services through its dedicated team of
professionals.
The account opening forms are available at our branch offices and with our business
associates. You are requested to kindly contact a branch nearby your area and complete
the account opening formalities for commodities trading at the branches.
Also you can take a print out and fill out a simple account opening form from our
website and complete the necessary documentation as per the checklist enclosed in the
form. The form after duly filled up may be deposited at the nearest Karvy Branch or
Associate along with a cheque/DD favouring “Karvy Commodities Broking Private
Limited” payable at Hyderabad towards initial margin.Please remember the Member-
Client agreement has to be executed on a non-judicial stamp paper, as per the applicable
by the ‘Stamp Duty Act’ of the relevant state.
DepositInitialMargin:
You need to deposit an initial upfront margin as specified by the exchange (usually
between 5-10% of the contract value).The cheque/DD should be in favour of “Karvy
Commodities Broking Private Limited”
Achievements
Among the top 5 stock brokers in India (4% of NSE volumes)
India's No. 1 Registrar & Securities Transfer Agents
Among the to top 3 Depository Participants
Largest Network of Branches & Business Associates
ISO 9002 certified operations by DNV
Among top 10 Investment bankers
Largest Distributor of Financial Products
Adjudged as one of the top 50 IT uses in India by MIS Asia
Full Fledged IT driven operations
ORGANISATION CHART
Managing Director
Securities Ltd. Stock Broking Ltd Consultants Ltd. Investors Services Ltd.
.
Deputy Deputy Deputy Deputy
General General General General
Manager Manager Manager Manager
Branch Manager
Number of Executives
Introduction to derivatives
The origin of derivatives can be traced back to the need of farmers to protect
themselves against Fluctuations in the price of their crop. From the time it was sown to
the time it was ready for harvest, farmers would face price uncertainty. Through the use
of simple derivative products, it was possible for the farmer to partially or fully transfer
price risks by locking-in asset prices. These were simple contracts developed to meet the
needs of farmers and were basically a means of reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would
receive for his harvest in September. In years of scarcity, he would probably obtain
attractive prices. However, during times of oversupply, he would have to dispose off his
harvest at a very low price. Clearly this meant that the farmer and his family were
exposed to a high risk of price uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would
face a price risk ñ that of having to pay exorbitant prices during dearth, although
favorable prices could be obtained during periods of oversupply. Under such
circumstances, it clearly made sense for the farmer and the merchant to come together
and enter into a contract whereby the price of the grain to be delivered in September
could be decided earlier. What they would then negotiate happened to be a futures-type
contract, which would enable both parties to eliminate the price risk. In 1848, the
Chicago Board of Trade, or CBOT, was established to bring farmers and merchants
together. A group of traders got together and created the `to arrive’ contract that permitted
farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts
proved useful as a device for hedging and speculation on price changes. These were
eventually standardized, and in 1925 the First futures clearing house came into existence.
Today, derivative contracts exist on a variety of commodities such as corn, pepper,
cotton, wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of
Financial underlying like stocks, interest rate, exchange rate, etc.
These raw commodities are traded on regulated exchanges, in which they are bought and
sold in standardized Contracts. Commodity Future is a Derivative instrument where the
underlying asset is a commodity. Commodity future are exchanges traded contracts to sell
or buy standardized futures contract.
Futures: A futures contract is an agreement between two parties to buy or sell the
underlying asset at a future date at today's future price. Futures contracts differ from
forward contracts in the sense that they are standardized and exchange traded.
Options: There are two types of options - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset, at a given price on
or before a given future date. Puts give the buyer the right, but not the obligation to sell a
given quantity of the underlying asset at a given price on or before a given date.
Warrants: Options generally have lives of upto one year, the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer dated options
are called warrants and are generally traded over the counter.
Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a weighted average of a basket of assets. Equity index options are a form
of basket options.
Swaps: Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They 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.
Exchange traded versus OTC derivatives
Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12th century, and may well have
been around before then. These contracts were typically OTC kind of contracts. Over the
counter (OTC) derivatives are privately negotiated contracts. Merchants entered into
contracts with one another for future delivery of specified amount of commodities at
specified price. A primary motivation for pre- arranging a buyer or seller for a stock of
commodities in early forward contracts was to lessen the possibility those large swings
would inhibit marketing the commodity after a harvest Later many of these contracts
were standardized in terms of quantity and delivery dates and began to trade on an
exchange.
The OTC derivatives markets have the following features compared to exchange-
traded derivatives:
The OTC derivatives markets have witnessed rather sharp growth over the last few years,
which has 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. The largest OTC derivative market is the interbank foreign exchange market.
Commodity derivatives the world over are typically exchange traded and not OTC in
nature.
The OTC derivatives markets have the following features compared to exchange-
traded derivatives:
4. There are no formal rules or mechanisms for ensuring market stability and integrity,
and for
Safeguarding the collective interests of market participants.
5. 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.
The OTC derivatives markets have witnessed rather sharp growth over the last
few years, which has 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. The largest OTC derivative market is the interbank
foreign exchange market. Commodity derivatives the world over are typically exchange
traded and not OTC in nature.
Commodities trading
Over the modern age of investing, commodity trading has emerged as an important player
in the way that people invest in and speculate. It was developed as a reaction to the way
that business is conducted, and it continues today in the form of commodities trading
online. Many different people turn their business know how into a profitable venture, and
it is commodities and futures trading that helps them get there. Simply put, commodities
are items like, wheat, corn, gold and silver, and cattle and pork bellies, and crude oil.
When farmers take their crop to "market", they are selling commodities. Trading
commodities is the world's one perfect business. The upside potential is unlimited and
you can control the downside. You can trade commodities on a part time basis or a full-
time basis. You can spend as little as an and earn a full time income
contract now and guarantees the price will not go up when it is delivered. This protects
the farmer from price drops and the buyer from price rises.
Speculators and investors also buy and sell the futures contracts to make a profit and
provide liquidity to the system
People have started with a small account and in a short period of time built their account
up to the point that they have been able to quit their jobs and trade commodities full-time
providing themselves with a very comfortable living.
Commodities are raw materials used to create the products consumers buy, from food to
furniture to gasoline. Commodities include agricultural products such as wheat and cattle,
energy products such as oil and gasoline, and metals such as gold, silver and aluminum.
There are also soft commodities, or those that cannot be stored for long periods of time.
Soft commodities are sugar, cotton, cocoa and coffee.
The commodity market has evolved significantly from the days when farmers hauled
bushels of wheat and corn to the local market. In the 1800’s, demand for standardized
contracts for trading agricultural products led to the development of commodity futures
exchanges. Today, futures and options contracts on a huge array of agricultural products,
metals, energy products and soft commodities can be traded on exchanges all over the
world.
Commodities have also evolved as an asset class with the development of commodity
futures indexes and, more recently, the introduction of investment vehicles that track
commodity indexes.
Commodity prices have been driven higher by a number of factors, including increased
demand from China, India and other emerging countries that need oil, steel and other
The potential for attractive returns is probably the most obvious reason for increased
investor interest in commodities, but it isn't the only factor. Commodities may offer
investors other significant benefits, including portfolio diversification and a hedge against
inflation and risk.
Commodities are real assets, unlike stocks and bonds, which are financial assets.
Commodities, therefore, tend to react to changing economic conditions in different ways
than traditional financial assets. For example, commodities are one of the few asset
classes that tend to benefit from rising inflation. As demand for goods and services
increases, the price of those goods and services usually goes up as well, as do the prices
of the
commodities used to produce those goods and services. Because commodity prices
usually rise when inflation is accelerating, investing in commodities may provide
portfolios with a hedge against inflation.
The futures markets are so crucial to the well being of our nation, that the government
BABASAB PATIL MBA FINANCE PROJECT REPORT Page 30
Awareness of commodity market with reference Derivative investors
established the Commodity Futures Trading Commission (CFTC) to oversee the industry.
There is also a self-regulatory body, the National Futures Association (NFA), who
monitor the activities of all futures market professionals to ensure the integrity of the
futures markets.
Commodities also give the investor the ability to participate in virtually all sectors of the
world economy and have the potential to produce returns that tend to be independent of
other markets. In fact portfolios that add commodity investments can actually lower the
overall portfolio risk by diversification.
The person willingly accepting a risk does so because of the opportunity to profit from
price movements, this is known as speculating. The cotton in your shirt, the orange juice,
cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home,
the gas or ethanol that you put in your car all would be priced many times higher without
the participation of speculators in the futures markets. Through supply and demand
market forces, equilibrium prices are reached in an orderly and equitable manner within
the exchanges, and world economies, and you, benefit tremendously from futures trading.
In futures market, speculators play a role in providing liquidity to the markets and
may sometimes benefit from price movements, but do not have a systematic causal
influence on prices. An effective architecture for regulation of trading and for
ensuring transparency as well as timely flow of information to the market
participants would enhance the utility of commodity exchanges in efficient price
discovery and minimize price shocks triggered by unanticipated supply demand
mismatches.
Speculators: Speculators are participants who bet on future movements in the price of
an asset i.e. I commodity to make short term gain from the price movements.
Commodity future s gives theme the leverage so to take risks on nominal margin
payments and thereby increasing for bigger gains or losses. Speculators are some what
like a middle man. They are never interested in actual owing the commodity. They will
just buy from one end and sell it to the other in anticipation of future price movements.
They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include
independent floor traders and investors. They handle trades for their personal clients or
brokerage firms.
Speculators have certain advantages over other investments they are as follows:
If the trader’s judgment is good, he can make more money in the futures market faster
because prices tend, on average, to change more quickly than real estate or stock prices.
Futures are highly leveraged investments. The trader puts up a small fraction of the value
of the underlying contract as margin, yet he can ride on the full value of the contract as it
moves up and down. The money he puts up is not a down payment on the underlying
contract, but a performance bond. The actual value of the contract is only exchanged on
those rare occasions when delivery takes place.
However there is regional commodity exchanges functioning all over the country.
Karvy commodities Broking Pvt.Ltd has got membership of both the premier
commodity exchanges i.e. MCX and NCDEX.
The two exchanges (NCEDX&MCX) have seen tremendous growth in less than two
years . the daily average on these two exchanges put together has now grown to a
healthy Rs.7800 Crores. It has been believed by experts that the volumes on these
exchanges would the stock market in the days to come. Commodity exchanges are
regulated by Forwards Market mission (FMC); Forwards Market Commission works
under the purview of the ministry of Food ,Agriculture and Public Distribution.
At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a holiday
the expiry day will be the previous working day.
At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiry
day will be the previous day. The expiry day differs for different commodities in both the
exchanges.
Generally commodity futures require an initial margin between 5-10% of the contract
value. The exchanges levy higher additional margin in case of excess volatility. The
margin amount varies between exchanges and commodities. Therefore they provide great
benefits of leverage in comparison to the stock and index futures trade on the stock
exchanges. The exchange also requires the daily profits and losses to be paid in/out on
open positions (mark to Market or MTM) so that the buyers and sellers do not carry a risk
of not more than one day.
Functions of an Exchange
Agri commodities
Soya bean
Soya oil
Rapeseed/Mustard
Seed Rapeseed/
Mustard Seed Oil
Crude Palm oil
RBD Palmolein
Americas
Mercado a Termino de
MATba Argentina Agricultural
Buenos Aires
Minneapolis Grain
MGEX Minneapolis Agricultural
Exchange
Winnipeg Commodity
WCE Winnipeg Agricultural
Exchange
Asia
Dalian Commodity
DCE China Agricultural, Plastics
Exchange
Kansai Commodities
KANEX Osaka Agricultural
Exchange
National Commodity
Karachi Precious Metals, Agricultural
Exchange Limited
Singapore Commodity
SICOM Singapore Agricultural, Rubber
Exchange
Europe
Oceania
In India commodity markets have been in existence for decades. However in 1975
the Government banned forward contracts on commodities. Later in 2003 the
Government of India again allowed forward contracts in commodities. There have been
over 20 exchanges existing for commodities all over the country. However these
exchanges are commodity specific and have a strong regional focus. The Government, in
order to make the commodities market more transparent and efficient, accorded approval
for setting up of national level multi commodity exchanges. Accordingly three exchanges
are there which deal in a wide variety of commodities and which allow nation-wide
trading. They are
Multi Commodity Exchange (MCX)
National Commodities Derivatives Exchange (NCDEX)
National Multi Commodity Exchange (NMCE)
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 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. Further, personalized service is provided
here by a dedicated team committed to giving hassle-free service while the brokerage
rates offered are extremely competitive.
Our commitment to excel in this sector stems from the immense importance that
commodities broking has to a cross-section of investors farmers, exporters, importers,
manufacturers and the Government of India itself.
India, a commodity based economy where 75% of the one billion populations
depend on agriculture, surprisingly has an underdeveloped commodity market. The
history of commodity markets in India is more than a century old. The institution of
formal commodity market in India is almost as old as the UK and the US.
The first organized commodity market in India was established in the late 19th
century, Bombay Cotton Association Ltd. was set up in 1875 by the Bombay Cotton
Exchange ltd. In 1893, due to widespread discontent amongst leading cotton mill owners
and merchants over functioning of Bombay Cotton Trade Association.
Commodities markets offer immense potential to become a separate asset class for
market savvy investors, arbitrageurs and speculators. Commodities markets are easy to
understand as far as the demand and supply fundamentals are concerned as these are two
things that guide these markets. The investors will have to understand the risks and the
advantages before jumping the band wagon. Commodities futures are less volatile as
compared to equity and bonds. Some of the other advantages linked to commodity futures
are better risk adjusted, good hedge against downfall in equities or bonds as there is no or
very less correlation and also a very effective hedge against inflation.
All contracts settling in cash will be settled on the following day after the
contract expiry date. Commodity trading follows a T + 1 settlement system, where the
settlement date is the next working day after expiry. However, in case of delivery-based
traders, settlement takes place five to seven days after expiry
Commodities like chana, urad, soya bean oil, guar gum, sugar, pepper, wheat,
jeera, gold, silver and crude oil have found fancy with Indian Investors. Expecting the
turnover on the three online commodity exchanges to spurt to more than Rs.15000 crores
per day, banks are keen to tap the commodity trade-financing front. Commercial banks
are chasing the commodity industry with attractive lending rates between 8% and 8.5% as
against the normal lending rate between 11% and 14%.
The commodity market in India comprises of all palpable markets that we come
across in our daily lives. Such markets are social institutions that facilitate exchange of
goods for money. The cost of goods is estimated in terms of domestic currency . India
Commodity Market can be subdivided into the following two categories:
Wholesale Market
Retail Market
Let us now take a look at what the present scenario of each of the above markets is like.
The traditional wholesale market in India dealt with whole sellers who bought
goods from the farmers and manufacturers and then sold them to the retailers after
making a profit in the process. It was the retailers who finally sold the goods to the
consumers. With the passage of time the importance of whole sellers began to fade out
for the following reasons:
The whole sellers in most situations, acted as mere parasites who did not add any
value to the product but raised its price which was eventually faced by the
consumers.
The improvement in transport facilities made the retailers directly interact with
the producers and hence the need for whole sellers was not felt.
In recent years, the extent of the retail market (both organized and unorganized)
has evolved in leaps and bounds. In fact, the success stories of the commodity market of
India in recent years has mainly centered around the growth generated by the Retail
Sector. Almost every commodity under the sun both agricultural and industrial is now
being provided at well distributed retail outlets throughout the country.
Moreover, the retail outlets belong to both the organized as well as the
unorganized sector. The unorganized retail outlets of the yesteryears consist of small
shop owners who are price takers where consumers face a highly competitive price
structure. The organized sector on the other hand is owned by various business houses
like Pantaloons, Reliance, Tata and others. Such markets are usually sell a wide range of
articles both agricultural and manufactured, edible and inedible, perishable and durable.
Modern marketing strategies and other techniques of sales promotion enable such
markets to draw customers from every section of the society. However the growth of such
markets has still centered on the urban areas primarily due to infrastructural limitations.
Considering the present growth rate, the total valuation of the Indian Retail
Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for
commodities is likely to become four times by 2010 than what it presently is.
High Leverage – The margins in the commodity futures market are less than the
F&O section of the equity market.
Less Manipulations - Commodities markets, as they are governed by international
price movements are less prone to rigging or price manipulations.
Diversification – The returns from commodities market are free from the direct
influence of the equity and debt market, which means that they are capable of being used
as effective hedging instruments providing better diversification.
If you are an importer or an exporter, commodities futures can help you in the following
ways…
Hedge against price fluctuations – Wide fluctuations in the prices of import or
export products can directly affect your bottom-line as the price at which you
import/export is fixed before-hand. Commodity futures help you to procure or sell the
commodities at a price decided months before the actual transaction, thereby ironing out
any change in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
Lock-in the price for your produce – If you are a farmer, there is every chance that
the price of your produce may come down drastically at the time of harvest. By taking
positions in commodity futures you can effectively lock-in the price at which you wish to
sell your produce
Assured demand – Any glut in the market can make you wait unendingly for a
buyer. Selling commodity futures contract can give you assured demand at the time of
harvest.
If you are a large scale consumer of a product, here is how this market can help you:
Control your cost – If you are an industrialist, the raw material cost dictates the final
price of your output. Any sudden rise in the price of raw materials can compel you to pass
on the hike to your customers and make your products unattractive in the market. By
buying commodity futures, you can fix the price of your raw material.
Ensure continuous supply – Any shortfall in the supply of raw materials can stall
your production and make you default on your sale obligations. You can avoid this risk
by buying a commodity futures contract by which you are assured of supply of a fixed
quantity of materials at a pre-decided price at the appointed time.
When the MCX Gold Contract entered into settlement period the Open Interest in
Gold was 670 Kgs after reducing from over 4000 Kgs few days ago. This open interest
resulted in 152 Kgs of gold getting delivered and the balance gold, which entered into the
delivery period, was squared up. The total volume in MCX Gold December futures
contract was 230233 Kgs valuing around Rs. 14577 crores.
On the same pattern Open Interest in Silver was 16,740 Kgs after reducing from over
1,60,000 Kgs few days back. However, the actual delivery in Silver was 12,698 kgs and
the balance Silver that entered into the delivery period was squared up. The total volume
in MCX Silver December futures contract was 22950 M. Tons valuing around Rs. 25024
crores.
In all the previous settlements also MCX platform has always seen appropriate
percentage of open interest position resulting in physical delivery. Gold has seen a
cumulative physical delivery of 245 Kgs and Silver 2190 Kgs across all the settlements
completed before the current settlement.
Gold & silver futures contracts are getting recognized as the most reliable &
dependable investment options that are today available to traders and investors who are
looking to widen their portfolio beyond equity instruments. This is because of the
credibility that these commodities have enjoyed globally and the technical & fundamental
analysis that has gone in arriving at various trading strategies.
India is the largest importer for Gold in the world, around 800 tons per year, realizing this
potential of Gold, Government of India has set up a committee to examine the regulatory
structure of the gold industry to make India a gold trading hub. This committee is
constituted under the Chairmanship of Secretary, Department of Commerce, and Ministry
of Commerce & Industry. MCX is a member of the committee and looks forward to
contributing suggestions on the role that Futures market can play in making India a global
gold trading hub.
The first meeting for the Gold Committee is being held under the Chairmanship
of Commerce Secretary on 10th December 2004.
7. There are no uniform contract specifications for the same commodity traded on
various exchanges. As a result, there is no proper mechanism to assess price of the
same commodity across various exchanges, as price depends on the contract
specification.
8. Online trading at the national level is mandatory only in respect of National level
multi commodity exchanges, while such a compulsion is not applicable to the
regional ones. Hence transparency suffers.
10. Residents in India, engaged in import and export trade, may hedge the price risk
of commodities in the international commodity exchanges/markets. Applications for
commodity hedging are to be forwarded to RBI. A one-time approval will be given
by RBI along with the guidelines for undertaking this activity. The Reserve Bank of
India, which is considering a proposal to grant blanket approval to Indian companies
that have an exposure to commodities to freely hedge in the international exchanges,
must also ensure that they use the products available in the Indian commodity
derivatives markets.
11. Options trading in commodities are prohibited as of now which puts constraints
on the markets. Introduction of options trading in commodities is a necessary
condition for institutional investors to trade in commodity derivatives trading, as this
would make it easier for the institutional investors to convert the commodity
derivatives products as financial products.
If the institutional investors, like banks and mutual funds, whose presence as of now is
only in capital markets need to start operating in commodity derivatives markets as well
then these additional issues are also required to be addressed.
12. Convergence of the regulators of capital markets and commodity markets is a pre-
requisite for free flow of funds between markets.
13. The players in capital markets must acquire the required expertise for trading in
commodity markets and vice versa to have an integrated view of all markets.
It is unfortunate that the policies of FMC during the most of 1950s to 1980s
suppressed the very markets it was supposed to encourage and nurture to grow with times. It
was a mistake other emerging economies of the world would want to avoid. However, it is
not in India alone that derivatives were suspected of creating too much speculation that
would be to the detriment of the healthy growth of the markets and the farmers. Such
suspicions might normally arise due to a misunderstanding of the characteristics and role of
derivative product.
It is important to understand why commodity derivatives are required and the role they
can play in risk management. It is common knowledge that prices of commodities, metals,
shares and currencies fluctuate over time. The possibility of adverse price changes in future
creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from
unforeseen price changes. A derivative is a financial contract whose price depends on, or is
derived from, the price of another asset.
The option holder will exercise the option only if it is beneficial to him; otherwise
he will let the option lapse. For example, suppose a farmer buys a put option to sell 100
Quintals of wheat at a price of $25 per quintal and pays a ‘premium’ of $0.5 per quintal (or a
total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise
his option and sell his wheat at the agreed price of $25 per quintal. However, if the market
price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to
sell it directly in the open market at the spot price, rather than exercise his option to sell at
$25 per quintal
a. Commodity Options:
Trading in commodity options contracts has been banned since 1952. The market
for commodity derivatives cannot be called complete without the presence of this
important derivative. Both futures and options are necessary for the healthy growth of the
market. While futures contracts help a participant (say a farmer) to hedge against
downside price movements, it does not allow him to reap the benefits of an increase in
prices. No doubt there is an immediate need to bring about the necessary legal and
regulatory changes to introduce commodity options trading in the country. The matter is
said to be under the active consideration of the Government and the options trading may
be introduced in the near future.
before maturity. There is a need to modify the law to bring it closer to the widespread
practice and save the participants from unnecessary hassles.
d. The Regulator:
As the market activity pick-up and the volumes rise, the market will definitely
need a strong and independent regular, similar to the Securities and Exchange Board of
India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent
body, the Forwards Markets Commission (FMC) is under the Department of Consumer
Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it
for funds. It is imperative that the Government should grant more powers to the FMC to
ensure an orderly development of the commodity markets. The SEBI and FMC also need
to work closely with each other due to the inter-relationship between the two markets.
India, Forward Markets commission, the Securities and Exchange Board of India, and the
Department of Company affairs etc.
Consumer
Wholesaler
BABASAB PATIL MBA FINANCE PROJECT REPORT Page 57
Awareness of commodity market with reference Derivative investors
Village level
Consolidation
Small & Marginal
Farmers
The emergence of organized sector retail chain stores and a rise in competition is likely to
be a catalyst for bringing about much needed reform in the agriculture-related supply
chain. The large players in the retail sector and fast moving consumer goods are also
influencing the government to liberalize the regulations, which hitherto have constricted
the operational environment. In addition, political pressure is rising, invoking a response
from the government to change the regulations so as to enable farmers to operate more
productively.
First, instead of using the current chain, which results in large mark-ups due to a
multiple number of intermediaries, the farmers are beginning to transact directly
with the large corporate, reducing inefficiencies.
Second, some of the large retail players will start contract manufacturing with
farmers, providing them with the right quality inputs (fertilizers and seeds),
capital support and signals on the mix of output they need to produce to earn
maximum returns.
Third, an increase in direct sourcing by large players will also encourage the
private sector to invest in the logistics and infrastructure needed to improve the
productivity and efficiency of the supply chain.
The trading system on the NCDEX provides a fully automated screen based trading for
futures on commodities on a nationwide basis as well as an online monitoring and
surveillance mechanism. It supports an order driven market and provides complete
transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to
4.00 p.m. After hours trading has also been proposed for implementation at a later stage.
The NCDEX system supports an order driven market, where orders match automatically.
Order matching is essentially on the basis of commodity, its price, time and quantity. All
quantity Fields are in units and price in rupees. The exchange specifies the unit of trading
and the delivery unit for futures contracts on various commodities. The exchange notifies
the regular lot size and tick size for each of the contracts traded from time to time. When
any order enters the trading system, it is an active order. It tries to find a match on the
other side of the book. If it finds a match, a trade is generated. If it does not find a match,
the order becomes passive and gets queued in the respective outstanding order book in
the system. Time stamping is done for each trade and provides the possibility for a
complete audit trail if required.
NCDEX trades commodity futures contracts having one month, two month and three
Month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a
January expiration contract would expire on the 20th of January and a February expiry
contract would cease trading on the 20th of February. If the 20th of the expiry month is a
trading holiday, the contracts shall expire on the previous trading day. New contracts will
be introduced on the trading day following the expiry of the near month contract.
Contract cycle
The following figure shows the contract cycle for futures contracts on NCDEX. As can
be seen, at any given point of time, three contracts are available for trading ñ a near-
month, a middle-month and a far-month. As the January contract expires on the 20th of
the month, a new three month contract starts trading from the following day, once more
making available three index futures contracts for trading.
India is the world's largest pulse producer, consumer and importer accounting for 27% of
the global pulse production. However, stagnant production has led to declining per capita
consumption over the past 20 years. The per capita availability has progressively declined
from 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led the
Government of India to ease the norms related to importing of pulses.
In India, pulses are grown on 22-23 million hectares area with an annual production of
13-15 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19%
of the gross cropped area and less than 8% of the total food grain production of the
country. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas
(Gram or Desi Chana). Their share in the total pulses production is about 20% and 33%
respectively. Important Pulse Markets in India are Mumbai, Delhi, Chennai, Indore,
Kanpur, Bikaner, Hapur, Hyderabad, Jaipur, Jalandhar, Ludiana, and Sangrur.
Indian pulse market is very price sensitive market. There is a great deal of substitutability
between pulse crops. If pigeon peas are high priced, more yellow peas will be consumed.
If desi chickpeas are low priced, more chickpeas will be consumed. This dynamic pulse
consumption pattern combined with the large, and sometimes variable, domestic
production makes Indian market demand difficult to predict on a year-to-year basis.
Global pulse trade has expanded rapidly in the last twenty years. However, the trade
history is somewhat volatile due to supply and demand variability. Trade patterns have
also shifted during this time period. Former exporters (like Chile as a lentil exporter) 12
have disappeared and new exporters have developed. The next twenty-year period is
likely to see these types of changes continue as Canada puts pressure on the supply side.
The prices in the domestic market fluctuate according to the domestic and
international demand and supply scenario. Generally, the prices drop when the new crop
comes in the market. The analysis of five years price trend of gram at Indore reveal that
the prices are on an increasing trend from June to September, while it starts falling from
November, with the lowest prices being reported in March and April, when the new crop
arrives in the market.
occupation
Cumulative
Frequency Percent Valid Percent Percent
Valid business 24 24.0 24.0 24.0
profession 13 13.0 13.0 37.0
govt service 37 37.0 37.0 74.0
private service 25 25.0 25.0 99.0
others 1 1.0 1.0 100.0
Total 100 100.0 100.0
occupation
others
1.0%
business
private service
24.0%
25.0%
profession
13.0%
govt service
37.0%
Interpretation: the above graph depicts that 37% of the respondents are government
employees ,25% are from private service,1% are from others like agriculturist , 24% are
businessmen & 13% are private service
Inference: most of the respondents are were from government service & business men
Annual income
Cumulative
Frequency Percent Valid Percent Percent
Valid below 50000 6 6.0 6.0 6.0
5000-100000 37 37.0 37.0 43.0
10001-200000 38 38.0 38.0 81.0
200001-400000 14 14.0 14.0 95.0
more than 400001 5 5.0 5.0 100.0
Total 100 100.0 100.0
Aannual income
14.0%
50000-100000
37.0%
10001-200000
38.0%
Interpretation: above graph depicts that most of the investors income lies between
10001-200000 followed by 38%,37% investors income lies between 50000-100000,14%
of the investors lies between 20001-400000,6% of the investors lies below 50000 & 5%
of the investors lies more than 400000
Cumulative
Frequency Percent Valid Percent Percent
Valid Bank deposit 10 10.0 10.0 10.0
Real estate 4 4.0 4.0 14.0
stocks 32 32.0 32.0 46.0
commodity future market 7 7.0 7.0 53.0
mutual fund 5 5.0 5.0 58.0
life insurance 8 8.0 8.0 66.0
derivitive market 32 32.0 32.0 98.0
bonds 2 2.0 2.0 100.0
Total 100 100.0 100.0
stocks
32.0%
life insurance
8.0%
commodity future mar
mutual fund
7.0%
5.0%
Interpretation: From this chart it is known that 32% of the respondents prefer to invest
in derivative and stocks, 10% of the respondents in bank deposit, 8% & 7% in life
insurance & commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds
Cumulative
Frequency Percent Valid Percent Percent
Valid yes 100 100.0 100.0 100.0
yes
100.0%
Cumulative
Frequency Percent Valid Percent Percent
Valid yes 100 100.0 100.0 100.0
yes
100.0%
Cumulative
Frequency Percent Valid Percent Percent
Valid price 9 9.0 9.0 9.0
risk 39 39.0 39.0 48.0
return 45 45.0 45.0 93.0
demand & supply 7 7.0 7.0 100.0
Total 100 100.0 100.0
risk
return
39.0%
45.0%
Awareness level
Awreness of of commodity
commodity market
market
Cumulative
Frequency Percent Valid Percent Percent
Valid yes 64 64.0 64.0 64.0
no 36 36.0 36.0 100.0
Total 100 100.0 100.0
yes
64.0%
Interpretation: The above pie chart depicts that 64% of the trader aware about the
Commodity Future market and 36% of them are not aware about Commodity Future
Market. So there is a need to create awareness about the commodity future market and its
benefits. There is a lot of potential is there to create customer and influence them to
invest in Commodity Future market
Cumulative
Frequency Percent Valid Percent Percent
Valid yes 39 39.0 39.0 39.0
no 61 61.0 61.0 100.0
Total 100 100.0 100.0
yes
39.0%
no
61.0%
Interpretation: From the above diagram we can say that out of 100 traders only 39%
have invested in commodity market 61% have not invested in commodity market so even
though the most of the traders are aware about Commodity Future market they are not
trading in Future market traders feel there is a high risk involved in the future market.
Cumulative
Frequency Percent Valid Percent Percent
Valid not attempted 61 61.0 61.0 61.0
frnds/colleauges 12 12.0 12.0 73.0
bill boards/advt/brochure 9 9.0 9.0 82.0
agents 18 18.0 18.0 100.0
Total 100 100.0 100.0
agents
18.0%
bill boards/advt/bro
9.0%
not attempted
frnds/colleauges
61.0%
12.0%
Interpretation: most of the investors came to know about the commodity by agents the
respondents who have invested in commodity market from them 18% of the people came
to know by agents ,9% from the bill boards /advertisement/brochure &12% people came
to know by there friends and colleagues. Here not attempted indicates the people who
have not invested in commodity market have not attempted this question.
Cumulative
Frequency Percent Valid Percent Percent
Valid not attempted 64 64.0 64.0 64.0
Agro products 10 10.0 10.0 74.0
Base metals 5 5.0 5.0 79.0
Precious metals 16 16.0 16.0 95.0
Energy products 5 5.0 5.0 100.0
Total 100 100.0 100.0
Energy products
5.0%
Precious metals
16.0%
Base metals
5.0%
Interpretation: among the persons who have invested in commodity in them 10% prefer
to trade in agro products, 5% in base metals, 16% in precious metals & 5 % in energy
products .here not attempted indicates the people who have not invested in commodity
market have not attempted this question.
Cumulative
Frequency Percent Valid Percent Percent
Valid not attempted 65 65.0 65.0 65.0
price 3 3.0 3.0 68.0
season 8 8.0 8.0 76.0
risk 13 13.0 13.0 89.0
return 11 11.0 11.0 100.0
Total 100 100.0 100.0
return
11.0%
risk
13.0%
season
8.0%
not attempted
price
65.0%
3.0%
Cumulative
Frequency Percent Valid Percent Percent
Valid not attemted 62 62.0 62.0 62.0
strongly agree 9 9.0 9.0 71.0
agree 10 10.0 10.0 81.0
neutral 18 18.0 18.0 99.0
disagree 1 1.0 1.0 100.0
Total 100 100.0 100.0
neutral
18.0%
agree
10.0%
not attemted
strongly agree 62.0%
9.0%
Interpretation: most of the investors say it is in neutral position & some who are
benefited lot they will go for factors like agree & strongly agree & percentage of
disagree is very less among invested people
Cumulative
Frequency Percent Valid Percent Percent
Valid those who hv invested 39 39.0 39.0 39.0
Not intersted 5 5.0 5.0 44.0
Info non availability 10 10.0 10.0 54.0
high investment 7 7.0 7.0 61.0
complex understanding 33 33.0 33.0 94.0
high risk 6 6.0 6.0 100.0
Total 100 100.0 100.0
6.0%
33.0%
7.0% 5.0%
Interpretation: The above pie chart shows that most of the traders are not interested to
invest in Commodity Future Market due to complex understanding involved in it around
33% of the traders are given this reason and 5% of them are not interested in investing in
this market, 6 & 7% think that it involves high risk and high investment So there is great
need to create awareness about Commodity Future market by telling its advantages.
Cumulative
Frequency Percent Valid Percent Percent
Valid yes 67 67.0 67.0 67.0
no 33 33.0 33.0 100.0
Total 100 100.0 100.0
33.0%
yes
67.0%
Interpretation: From the above graph we conclude that most of the traders are interested
to invest in Commodity Future Market if proper awareness is created among them and
other 33% are not interested to invest .These 67% of traders are the potential customers
for the company.
Findings
• More than 50% of the Traders in are aware about the commodity future
Market
• Most of the investors are not ready to invest in commodity future market they feel it
involve high risk.
• Returns and the Risk of the commodity are the most critical factors, which
Traders will consider while investing in any commodity
• Most of the investors are ready to invest in commodity future market if proper
information is provided
• As commodity future market is new and emerging ,many investors and farmers are
not fully aware of this market .as the market helps to trade transparently without
middlemen and agents
• While finding the reasons why most of the people are not trading in commodity
market I found that many respondents are not interested at all in this trade this is
because of unawareness & mythical perception about commodity market.
• Most of the respondents are were from government service & business men
Suggestion
• From survey it is found that most of the potential customers are concerned about the
Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage
it will help to attract more and more customers.
• More agents and marketing executives should be appointed to educate the customers
because the customers having many myths in there mind
• Firm should approach people who are already into the business of commodities
.special campaigns / investors meets should be conducted for these people since they
are aware of rate fluctuation ,market trends etc . They have got market idea that
benefits them in price prediction. They will be in high spirits when price risk of them
will be managed.
CONCLUSION
Commodity futures markets are new and emerging market. The awareness of the market
is very less among the investors who can use this trade to sell there products without the
middlemen or agents it also help the actual buyers too. Here trader also can transfer his
risk to some other who can handle it or can appetite the risk through hedging techniques
Compared to capital market commodity market is less risky in
volatility context here the prices do not change within a fraction of second .significantly,
minimum margin ready physical possession, no manipulation & fraud, maximum
profitability is available over here since the commodity market helps all such as farmers,
industries and individuals investors it is growing at a faster rate in global outlook.
BIBLOGRAPHY
News Papers;
Business Line
Economic times
Times of India
Web site
www.moneycontrol.com
www.google.com
www.MCX.com
www.NCDEX.com
Text books
QUESTIONNAIRE
NAME : __________________________________
AGE : __________________________________
ADDRESS : __________________________________
CONTACT NO: __________________________________
Yes No
Yes No
Yes No
Yes No
11) Which factor do you normally consider while trading in commodity market?
14) Are you planning for investing &trading in commodity future market in future?
BABASAB PATIL MBA FINANCE PROJECT REPORT Page 86
Awareness of commodity market with reference Derivative investors
Yes No
Respondent signature
Thank you
.