CHAPTER-I

INTRODUCTION


COMMODITY AND COMMODITIES MARKET
1
INTRODUCTION :
India, a commodity based economy where two-third of the one billion
population depends on agricultural commodities, surprisingly has an under developed
commodity market. Unlike the physical market, futures markets trades in commodity are
largely used as risk management (hedging) mechanism on either physical commodity it self
or open positions in commodity stock. or instance, a !eweler can hedge his inventory against
perceived short-term downturn in gold prices by going short in the future markets.
"he commodities market and how the commodities traded on the e#change. "he
idea is to understand the importance of commodity derivatives and learn about the market
from Indian point of view. In fact it was one of the most vibrant markets till early $%s. Its
development and growth was shunted due to numerous restrictions earlier. &ow, with
most of these restrictions being removed, there is tremendous potential for growth of this
market in the country.
Objectives of the Stu! :
'
1) "o study the nature and structure of the (ommodities )arket in India.
') "o evaluate trading of futures in (ommodities )arket.
*) "o give appropriate suggestions to words investors in (ommodities )arket.
"he main ob!ective is to understand unlike the physical market, a futures market
facilitates offsetting the trades without e#changing physical goods until the e#piry of a
contract.
+s a result, futures market attracts hedger for risk management, and encourages considerable
e#ternal competition from those who posses market information and price !udgment to trade as
traders in these commodities.
,hile hedgers have long-term perspective of the market, the traders or arbitragers prefer an
immediate view of the market. -owever, all these users participate in buying and selling of
commodities based on various domestic and global parameters such as price, demand and
supply, climatic and market related information. "hese factors, together, result in efficient
price discovery, allowing large number of buyers and sellers to trade on the e#change. )(.
is communicating these prices all across the globe to make the market more efficient and to
enhance the utility of this price discovery function.
Objectives " Methoo#o$!
"he commodities market is a market, where commodities are bought and sold. "he
commodity market differs from a regular market by a specific organi/ational from of trading
according to established rules. "he main function of the commodity e#change is assurance
of regular communication between buyers and sellers, when transactions are carried out with
available batches of goods.
*
"he e#change, while developing, started establishing trade customs, (ommodity standards,
standard contracts, performing price 0uotations, resolving dispute, etc. Items of international
trade now are about $%types of goods, having *%1 of the international commodity turnover.
"hey include metals (precious, base, rare), soft products (coffee, (ocoa, sugar, pepper), grain,
seeds, livestock, energy sources (gas, raw materials, oil products).
(ommodities are not present at the e#change, but sold and bought without presentation
and e#amination. "ransactions are concluded on the basis of standard e#change contracts,
strictly regulating 0uality and terms of delivery.
+t the e#change they sell and buy not certain batches of goods, but stock contracts, specifying
amounts of goods of certain sort, type, class, as established by the e#change. "he seller at the
e#change delivers to the buyer not commodities, but a document, confirming the title to goods.
)ost of the international e#change turnover takes place at the futures and options e#change,
where they trade option and futures contracts. "rading volume at such e#change has
increased by several hundred times due to the fact, that almost all transactions are fictitious
(only 1-'1 of transactions end up with delivery of goods, all the rest-with payment of price
difference). 2rices at such e#changes are more volatile in comparison with the stock
e#change and the ma!or risk is associated with the direction of price movement. 3uotation
fluctuations are mainly caused by speculative actions4 that is why it is very difficult to maker
forecasts for such markets. "herefore, beginners are not recommended to trade at commodity
e#changes.
5
Nee fo% the Stu! :
6ery few studies have been conducted on commodities market. &o research has been
made on the functioning of commodities market in 7hare 8han (ompany 2vt 9td. "he present
study attempts to know about the functioning commodities market and it is necessary to a wide
risk with the help of future contracts.
:
Rese&%ch of the Stu! :
"he re0uire data for the study have been collected from the 7econdary 7ources
which are the publications and performance reports of 7hare8han 9td, ;untur. "he lectures
by the super dents. "he 2rimary <ata collected by interviewing with the middle level
managers and persons concern to market operations of 7hare8han 9td. "he data re0uired for
analy/ing can be collected either through
2rimary data collection

7econdary data collection
2rimary <ata:
2rimary <ata is collected from the employees of the organi/ation. "heir
understanding on these instruments is considered through indirect interviews. "he main
resource of primary data collection for this pro!ect is through the research team of the
organi/ation.
7econdary <ata:

7econdary <ata is got from various books on futures and options, through Internet,
from various &ewspapers and from different )aga/ines of both the organi/ation in the market.
=
Sco'e of the Stu! :
"he main aim of the study is to e#amine the changes in the trading and
<emateriali/ation of commodities in 7harekhan 9td. "he study of this pro!ect work is confine
to 'months. -ence in the first phase. "he primary and secondary information was gathered in
the second phase4 the analysis of the data has been carried out.
Si$(ific&(ce of the Stu! :

a) "he study will be helpful for to e#amine the Inter and >#ternal factors affecting the future
price of the company.
b) "he study has to analy/e about forward contract, and put options call options in order to a
wading risk.

c) +nd also the study gives re0uired information to the investors to deside weather to make the
investment is not.

"he irst chapter deals with introduction about (ommodities )arket
"he 7econd chapter refers ?b!ectives @ )ethodology of the study
"he "hird chapter gives the profile of a company
ourth chapter presents analysis and interpretation of the study
ifth chapter refers finding and suggestions.
$
)i*it&tio(s of the Stu! :
"he following are the identified limitations of the studyA
"he time period is not sufficient to obtain total information about the topic
"he period of the pro!ect work only for =%days
"he study is completely based on a valuation of (ommodities )arket.
"he accuracy and transparency have found at low degree in the working
operations of the e#change.

B

CHAPTER-II
INDUSTRY PRO+I)E
"
COMPANY PRO+I)E
C
INDUSTRY PRO+I)E


I(t%ouctio( to Co**oit! M&%,et :
-h&t is .Co**oit!/0
+ny product that can be used for commerce or an article of commerce which is
traded on an authori/ed commodity e#change is known as commodity. "he article should be
movable of value, something which is bought or sold and which is produced or used as the
sub!ect or barter or sale. In short commodity includes all kinds of goods. Indian orward
(ontracts (Degulation) +ct ((D+), 1C:' defines EgoodsF as Eevery kind of movable property
other than actionable claims, money and securitiesF.
In current situation, all goods and products of agricultural (including plantation),
mineral and fossil origin are allowed for commodity trading recogni/ed under the (D+. "he
national commodity e#changes, recogni/ed by the (entral ;overnment, permits commodities
which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and
un-ginned cotton, oilseeds, oils and oilcakes, raw !ute and !ute goods, sugar and gur, potatoes
and onions, coffee and tea, rubber and spices. >tc.
-h&t is & co**oit! e1ch&($e0
+ commodity e#change is an association or a company or any other body corporate
organi/ing futures trading in commodities for which license has been granted by regulating
authority.
-h&t is Co**oit! +utu%es0
+ (ommodity futures is an agreement between two parties to buy or sell a specified
and standardi/ed 0uantity of a commodity at a certain time in future at a price agreed upon at
the time of entering into the contract on the commodity futures e#change or role in affecting
the fortunes of people involved in this industry. "he futures market has evolved to neutrali/e
such risks through a mechanism4 namely hedging.
1%

The objectives of Co**oit! futu%es : -
-edging with the ob!ective of transferring risk related to the possession of physical
assets through any adverse moments in price. 9i0uidity and 2rice discovery to ensure
base minimum volume in trading of a commodity through market information and
demand supply factors that facilitates a regular and authentic price discovery
mechanism.
)aintaining buffer stock and better allocation of resources as it augments reduction in
inventory re0uirement and thus the e#posure to risks related with price fluctuation
declines. Desources can thus be diversified for investments.
2rice stabili/ation along with balancing demand and supply position. utures trading
leads to predictability in assessing the domestic prices, which maintains stability, thus
safeguarding against any short term adverse price movements. 9i0uidity in (ontracts of
the commodities traded also ensures in maintaining the e0uilibrium between demand
and supply.
le#ibility, certainty and transparency in purchasing commodities facilitate bank
financing. 2redictability in prices of commodity would lead to stability, which in turn
would eliminate the risks associated with running the business of trading commodities.
"his would make funding easier and less stringent for banks to commodity market
players.

11
2e(efits of Co**oit! +utu%es M&%,ets :
"he primary ob!ectives of any futures e#change are authentic price discovery and an
efficient price risk management. "he beneficiaries include those who trade in the commodities
being offered in the e#change as well as those who have nothing to do with futures trading. It is
because of price discovery and risk management through the e#istence of futures e#changes
that a lot of businesses and services are able to function smoothly.
34 P%ice Discove%! : Gased on inputs regarding specific market information, the demand
and supply e0uilibrium, weather forecasts, e#pert views and comments, inflation rates,
;overnment policies, market dynamics, hopes and fears, buyers and sellers conduct
trading at futures e#changes. "his transforms in to continuous price discovery
mechanism. "he e#ecution of trade between buyers and sellers leads to assessment of
fair value of a particular commodity that is immediately disseminated on the trading
terminal.
54 P%ice Ris, M&(&$e*e(t : -edging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by
taking an e0ual but opposite position in the futures market. utures markets are used as
a mode by hedgers to protect their business from adverse price change. "his could dent
the profitability of their business. -edging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers, e#porters,
importers etc.
64 I*'o%t- E1'o%t co*'etitive(ess : "he e#porters can hedge their price risk and
improve their competitiveness by making use of futures market. + ma!ority of traders
which are involved in physical trade internationally intend to buy forwards. "he
purchases made from the physical market might e#pose them to the risk of price risk
resulting to losses. "he e#istence of futures market would allow the e#porters to hedge
their proposed purchase by temporarily substituting for actual purchase till the time is
ripe to buy in physical market. In the absence of futures market it will be meticulous,
1'
time consuming and costly physical transactions.
74 P%eict&b#e P%ici($ : "he demand for certain commodities is highly price elastic. "he
manufacturers have to ensure that the prices should be stable in order to protect their
market share with the free entry of imports. utures contracts will enable predictability
in domestic prices. "he manufacturers can, as a result, smooth out the influence of
changes in their input prices very easily. ,ith no futures market, the manufacturer can
be caught between severe short-term price movements of oils and necessity to maintain
price stability, which could only be possible through sufficient financial reserves that
could otherwise be utili/ed for making other profitable investments.
84 2e(efits fo% f&%*e%s9A$%icu#tu%&#ists : 2rice instability has a direct bearing on
farmers in the absence of futures market. "here would be no need to have large reserves
to cover against unfavorable price fluctuations. "his would reduce the risk premiums
associated with the marketing or processing margins enabling more returns on produce.
7toring more and being more active in the markets. "he price information accessible to
the farmers determines the e#tent to which tradersHprocessors increase price to them.
7ince one of the ob!ectives of futures e#change is to make available these prices as far
as possible, it is very likely to benefit the farmers. +lso, due to the time lag between
planning and production, the market-determined price information disseminated by
futures e#changes would be crucial for their production decisions.
:4 C%eit &ccessibi#it! : "he absence of proper risk management tools would attract the
marketing and processing of commodities to high-risk e#posure making it risky
business activity to fund. >ven a small movement in prices can eat up a huge proportion
of capital owned by traders, at times making it virtually impossible to payback the loan.
"here is a high degree of reluctance among banks to fund commodity traders,
especially those who do not manage price risks. If in case they do, the interest rate is
likely to be high and terms and conditions very stringent. "his posses a huge obstacle in
the smooth functioning and competition of commodities market. -edging, which is
possible through futures markets, would cut down the discount rate in commodity
lending.
1*
;4 I*'%ove '%ouct <u&#it! : "he e#istence of warehouses for facilitating delivery with
grading facilities along with other related benefits provides a very strong reason to
upgrade and enhance the 0uality of the commodity to grade that is acceptable by the
e#change. It ensures uniform standardi/ation of commodity trade, including the terms
of 0uality standardA the 0uality certificates that are issued by the e#change-certified
warehouses have the potential to become the norm for physical trade.
Histo%! of Evo#utio( of co**oit! *&%,ets :

(ommodities future trading was evolved from need of assured continuous supply
of seasonal agricultural crops. "he concept of organi/ed trading in commodities evolved in
(hicago, in 1B5B. Gut one can trace its roots in Iapan. In Iapan merchants used to store Dice in
warehouses for future use. "o raise cash warehouse holders sold receipts against the stored rice.
"hese were known as Erice ticketsF. >ventually, these rice tickets become accepted as a kind of
commercial currency. 9atter on rules came in to being, to standardi/e the trading in rice tickets.
In 1C
th
century (hicago in United 7tates had emerged as a ma!or commercial hub. 7o that
wheat producers from )id-west attracted here to sell their produce to dealers @ distributors.
<ue to lack of organi/ed storage facilities, absence of uniform weighing @ grading
mechanisms producers often confined to the mercy of dealers discretion. "hese situations lead
to need of establishing a common meeting place for farmers and dealers to transact in spot
grain to deliver wheat and receive cash in return.
;radually sellers @ buyers started making commitments to e#change the produce for
cash in future and thus contract for Efutures tradingF evolved. ,hereby the producer would
agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this
way producer was aware of what price he would fetch for his produce and dealer would know
about his cost involved, in advance.
"his kind of agreement proved beneficial to both of them. +s if dealer is not interested in
taking delivery of the produce, he could sell his contract to someone who needs the same.
15
7imilarly producer who not intended to deliver his produce to dealer could pass on the same
responsibility to someone else. "he price of such contract would dependent on the price
movements in the wheat market.
9atter on by making some modifications these contracts transformed in to an instrument to
protect involved parties against adverse factors such as une#pected price movements and
unfavorable climatic factors. "his promoted traders entry in futures market, which had no
intentions to buy or sell wheat but would purely speculate on price movements in market to
earn profit.
"rading of wheat in futures became very profitable which encouraged the entry of
other commodities in futures market. "his created a platform for establishment of a body to
regulate and supervise these contracts. "hatJs why (hicago Goard of "rade ((G?") was
established in 1B5B. In 1B$% and 1BB%s the &ew Kork (offee, (otton and 2roduce >#changes
were born. +gricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1B$', a group of )anhattan dairy merchants got
together to bring chaotic condition in &ew Kork market to a system in terms of storage,
pricing, and transfer of agricultural products.
In 1C**, during the ;reat <epression, the (ommodity >#change, Inc. was established in &ew
Kork through the merger of four small e#changes L the &ational )etal >#change, the Dubber
>#change of &ew Kork, the &ational Daw 7ilk >#change, and the &ew Kork -ide >#change.
"he largest commodity e#change in U7+ is (hicago Goard of "rade, "he (hicago
)ercantile >#change, the &ew Kork )ercantile >#change, the &ew Kork (ommodity
>#change and &ew Kork (offee, sugar and cocoa >#change. ,orldwide there are ma!or
futures trading e#changes in over twenty countries including (anada, >ngland, India, rance,
7ingapore, Iapan, +ustralia and &ew Mealand.
1:
I(i& &( the co**oit! *&%,et

Histo%! of Co**oit! M&%,et i( I(i& :
"he history of organi/ed commodity derivatives in India goes back to the
nineteenth century when (otton "rade +ssociation started futures trading in 1B$:, about a
decade after they started in (hicago. ?ver the time datives market developed in several
commodities in India. ollowing (otton, derivatives trading started in oilseed in Gombay
(1C%%), raw !ute and !ute goods in (alcutta (1C1'), ,heat in -apur (1C1*) and Gullion in
Gombay (1C'%).
-owever many feared that derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the underlying commodities, resulting
in to banning of commodity options trading and cash settlement of commodities futures after
independence in 1C:'. "he parliament passed the orward (ontracts (Degulation) +ct, 1C:',
which regulated contracts in (ommodities all over the India. "he act prohibited options trading
in ;oods along with cash settlement of forward trades, rendering a crushing blow to the
commodity derivatives market. Under the act only those associationsHe#changes, which are
granted reorgani/ation from the ;overnment, are allowed to organi/e forward trading in
regulated commodities. "he act envisages three tire regulationsA (i) >#change which organi/es
forward trading in commodities can regulate trading on day-to-day basis4 (ii) orward )arkets
(ommission provides regulatory oversight under the powers delegated to it by the central
;overnment. (iii) "he (entral ;overnment- <epartment of (onsumer +ffairs, )inistry of
(onsumer +ffairs, ood and 2ublic <istribution- is the ultimate regulatory authority.
"he commodities future market remained dismantled and remained dormant for
about four decades until the new millennium when the ;overnment, in a complete change in a
policy, started actively encouraging commodity market. +fter 9iberali/ation and ;lobali/ation
in 1CC%, the ;overnment set up a committee (1CC*) to e#amine the role of futures trading. "he
(ommittee (headed by 2rof. 8.&. 8abra) recommended allowing futures trading in 1$
commodity groups. It also recommended strengthening orward )arkets (ommission, and
certain amendments to orward (ontracts (Degulation) +ct 1C:', particularly allowing option
trading in goods and registration of brokers with orward )arkets (ommission. "he
;overnment accepted most of these recommendations and futuresJ trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle is
on upswing and the ne#t decade being touched as the decade of (ommodities.
1=
(ommodity e#change in India plays an important role where the prices of any commodity are
not fi#ed, in an organi/ed way. >arlier only the buyer of produce and its seller in the market
!udged upon the prices. ?thers never had a say.
"oday, commodity e#changes are purely speculative in nature. Gefore discovering
the price, they reach to the producers, end-users, and even the retail investors, at a grassroots
level. It brings a price transparency and risk management in the vital market. + big difference
between a typical auction, where a single auctioneer announces the bids and the >#change is
that people are not only competing to buy but also to sell. Gy >#change rules and by law, no
one can bid under a higher bid, and no one can offer to sell higher than someone elseJs lower
offer. "hat keeps the market as efficient as possible, and keeps the traders on their toes to make
sure no one gets the purchase or sale before they do. 7ince '%%', the commodities future
market in India has e#perienced an une#pected boom in terms of modern e#changes, number of
commodities allowed for derivatives trading as well as the value of futures trading in
commodities, which crossed N 1 trillion mark in '%%=. 7ince 1C:' till '%%' commodity datives
market was virtually non- e#istent, e#cept some negligible activities on ?"( basis.
In India there are ': recogni/ed future e#changes, of which there are three
national level multi-commodity e#changes. +fter a gap of almost three decades, ;overnment
of India has allowed forward transactions in commodities through ?nline (ommodity
>#changes, a modification of traditional business known as +dhat and 6ayda 6yapar to
facilitate better risk coverage and delivery of commodities. "he three e#changes areA &ational
(ommodity @ <erivatives >#change 9imited =NCDE>? )umbai, )ulti (ommodity
>#change of India 9imited =MC>? )umbai and &ational )ulti-(ommodity >#change of
India 9imited =NMCEI)? +hmedabad. "here are other regional commodity e#changes situated
in different parts of India.
1$
)e$&# f%&*e@o%, fo% %e$u#&ti($ co**oit! futu%es i( I(i& :
"he commodity futures traded in commodity e#changes are regulated by the
;overnment under the orward (ontracts Degulations +ct, 1C:' and the Dules framed there
under. "he regulator for the commodities trading is the orward )arkets (ommission, situated
at )umbai, which comes under the )inistry of (onsumer +ffairs ood and 2ublic
<istribution.
+o%@&% M&%,ets Co**issio( =+MC? :
It is statutory institution set up in 1C:* under orward (ontracts (Degulation) +ct,
1C:'. (ommission consists of minimum two and ma#imum four members appointed by
(entral ;ovt. ?ut of these members there is one nominated chairman. +ll the e#changes have
been set up under overall control of orward )arket (ommission ()() of ;overnment of
India.
1B
N&tio(&# Co**oities " De%iv&tives E1ch&($e )i*ite =NCDE>? :

&ational (ommodities @ <erivatives >#change 9imited (&(<>.)
promoted by I(I(I Gank 9imited (I(I(I Gank), 9ife Insurance (orporation of India (9I(),
&ational Gank of +griculture and Dural <evelopment (&+G+D<) and &ational 7tock
>#change of India 9imited (&7(). 2un!ab &ational Gank (2&G), (redit Datting Information
7ervice of India 9imited ((DI7I9), Indian armers ertili/er (ooperative 9imited (I(?),
(anara Gank and ;oldman 7achs by subscribing to the e0uity shares have !oined the promoters
as a share holder of e#change. &(<>. is the only (ommodity >#change in the country
promoted by national level institutions.
&(<>. is a public limited company incorporated on '* +pril '%%*. &(<>. is a
national level technology driven on line (ommodity >#change with an independent Goard of
<irectors and professionals not having any vested interest in (ommodity )arkets.
It is committed to provide a world class commodity e#change platform for market participants
to trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
&(<>. is regulated by orward )arkets (ommission ()(). &(<>. is also
sub!ected to the various laws of land like the (ompanies +ct, 7tamp +ct, (ontracts +ct,
orward (ontracts Degulation +ct and various other legislations.
&(<>. is located in )umbai and offers facilities to its members in more than ::%
centers through out India. &(<>. currently facilitates trading of :$ commodities.
1C
Co**oities T%&e &t NCDE> :
2u##io( :-
;old 8;, 7ilver, Grent
Mi(e%&#s :-
>lectrolytic (opper (athode, +luminum Ingot, &ickel
(athode, Minc )etal Ingot, )ild steel Ingots
Oi# &( Oi# sees :-
(otton seed, ?il cake, (rude 2alm ?il, ;roundnut (in shell),
;roundnut e#peller ?il, (otton, )entha oil, DG< 2amolein, D)
seed oil cake, Defined soya oil, Dape seeds, )ustard seeds,
(aster seed, Kellow soybean, )eal
Pu#ses :-
Urad, Kellow peas, (hana, "ur, )asoor,
A%&i( :-
,heat, Indian 2usa Gasmati Dice, Indian parboiled Dice (ID-*=HID-=5),
Indian raw Dice (2armal2D-1%=), Garley, Kellow red mai/e
S'ices :-
Ieera, "urmeric, 2epper
P#&(t&tio( :-
(ashew, (offee +rabica, (offee Dobusta
+ibe%s &( othe% :-
;uar ;um, ;uar seeds, ;uar, Iute sacking bags, Indian 'B mm cotton, Indian
*1mm cotton, 9emon, ;rain Gold, )edium 7taple, )ulberry, ;reen (ottons,
, , 2otato, Daw Iute, )ulberry raw 7ilk, 6-$C$ 8apas, 7ugar, (hilli 9(+**5
E(e%$! :-
(rude ?il, urnace oil.

'%
Mu#ti Co**oit! E1ch&($e of I(i& )i*ite=MC>? :

)ulti (ommodity >#change of India 9imited ()(.) is an independent and
de-mutuli/ed e#change with permanent reorgani/ation from ;overnment of India, having -ead
3uarter in )umbai. 8ey share holders of )(. are inancial "echnologies (India) 9imited,
7tate Gank of India, Union Gank of India, (orporation Gank of India, Gank of India and
(anada Gank. )(. facilitates online trading, clearing and settlement operations for
commodity futures market across the country.
'1
)(. started of trade in &ov '%%* and has built strategic alliance with Gombay Gullion
+ssociation, Gombay )etal >#change, 7olvent >#tractors +ssociation of India, pulses
Importers +ssociation and 7hetkari 7anghatana.
)(. deals wit about 1%% commodities.
Co**oities T%&e &t MC> :
2u##io( :-
;old, 7ilver, 7ilver (oins,
Mi(e%&#s :-
+luminum, (opper, &ickel, IronHsteel, "in, Minc, 9ead
Oi# &( Oi# sees :-
(astor oilHcastor seeds, (rude 2alm oilH DG< 2amolein, ;roundnut oil,
)ustardH Dapeseed oil, 7oy seedsH7oy mealHDefined 7oy ?il, (oconut ?il
(ake, (opra, 7unflower oil, 7unflower ?il cake, "amarind seed oil,
Pu#ses :-
(hana, )asur, "ur, Urad, Kellow peas
A%&i(s :-
DiceH Gasmati Dice, ,heat, )ai/e, Ga!ara, Garley,
S'ices :-
2epper, Ded (hili, Ieera, (ardamom, (innamon, (love, ;inger,
P#&(t&tio( :-
(ashew 8ernel, Dubber, +reca nut, Getel nuts, (oconut, (offee,
+ibe% &( othe%s :-
8apas, 8apas 8halli, (otton (long staple, medium staple, short staple),
(otton (loth, (otton Karn, ;aur seed and ;uargum, ;ur and 7ugar,
8handsari, )entha ?il, 2otato, +rt 7ilk Karn, (hara or Gerseem, Daw Iute,
Iute ;oods, Iute 7acking,
Pet%oche*ic&#s :-
''
-igh <ensity 2olyethylene (-<2>), 2olypropylene (22), 2oly 6inyl
(hloride (26()
E(e%$! :-
Grent (rude ?il, (rude ?il, urnace ?il, )iddle >ast 7our (rude ?il,
&atural ;as
N&tio(&# Mu#ti Co**oit! E1ch&($e of I(i& )i*ite =NMCEI)? :
&ational )ulti (ommodity >#change of India 9imited (&)(>I9) is the first
de-metali/ed >lectronic )ulti (ommodity >#change in India. ?n ':
th
Iuly '%%1 it was granted
approval by ;overnment to organi/e trading in edible oil comple#. It is being supported by
(entral warehousing (orporation 9imited, ;u!arat 7tate +gricultural )arketing Goard and
&eptune ?verseas 9imited. It got reorgani/ation in ?ct '%%'. &)(>I9 -ead 3uarter is at
+hmedabad.
Mo(th#! Tu%(ove% of Co**oit! E1ch&($es
7.&o (ommodity >#change '%1%-11
"urnover
+pr-11
"urnover
)ar-1'
"urnover
+pr-1'
"urnover
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Mu#ti co**oit! e1ch&($e
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"otal (including others) :'5BC:$ **$B15 =%55:C 5BCCB
(1%%) (1%%) (1%%) (1%%)
&oteA "otal includes the monthly turnover of the remaining 1$ commodity e#changes.
igures in brackets denotes percentage share in the total turnover.
7hare khan 9td is one of the leading retail stock broking house of 778I ;roup which is
running successfully since 1C'' in the country. It is the retail broking arm of the )umbai-
based 778I ;roup, which has over eight decades of e#perience in the stock broking business.
7hare khan offers its customers a wide range of e0uity related services including trade
e#ecution on G7>, &7>, <erivatives, depository services, online trading, investment advice
etc. "he firmJs online trading and investment site - www.sharekhan.com L was
'5
launched on eb B, '%%%. "he site gives access to superior content and transaction facility to
retail customers across the country. 8nown for its !argon-free, investor friendly language and
high 0uality research, the site has a registered base of over one lake customers. "he content-
rich and research oriented portal has stood out among its contemporaries because of its
steadfast dedication to offering customers best-of-breed technology and superior market
information. "he ob!ective has been to let customers make informed decisions and to
simplify the process of investing in stocks. ?n +pril 1$, '%%' 7hare khan launched 7peed
"rade, a net-based e#ecutable application that emulates the broker terminals along with host
of other information relevant to the <ay "raders. "his was for the first time that a net based
trading station of this caliber was offered to the traders. In the last si# months 7peed "rade has
become a de facto standard for the <ay "rading community over the net.


7hare khan is the retail broking arm of 778I, an organi/ation with more than eight decades
of trust decades of trust @ credibility in the stock market.
9eading domestic player in Indian institutional business
?ver U7 N : billion of private e0uity deals
+ warded Etop domestic brokerage house four times by >uro )oney @ +sia )oney
+mongst pioneers of investment research in the Indian market
In 1CB5, ventured into institutional broking @ corporate finance.
IndiaJs largest chain of branded retail share shops L 1'%% shops in 5%% towns.
':
Se%vices :
o Groking in e0uities @ derivatives on &7> @ G7>
o <epositary services
o (ommodities trading in )(. @ &(<
o I2? 7ervices
o 2ortfolio )anagement 7ervices
o <istribution services
A@&%s :
Dated among the top '% wired companies along with Deliance, -99, Infosys etc by
Gusiness "oday Ian '%%: edition.
2I?&>>D7 of online trading in India.
+mongst the top * online trading wed sites from India.
)ost preferred financial destination amongst online banking customers.
,inner of Gest inancial ,ebsite +ward
'=
+warded to 7hare 8han at the +waa/ O(onsumer +wards '%%:J in the O7tock
GrokingJ category. Desearch conducted by +( &ielsen-?D; )+D; for +waa/.
Tech(o#o$! :
Dobust platform
2rocessing 1,*%,%%% transactions everyday
7calable at low cost
7hare khanJs ground network includes over 1'%% centers in 5%% cities in India which provide
a host of trading related services. 7hare khan has always believed in investing in technology to
build its business. "he company has used some of the best-known names in the I"
industry, like 7un )icrosystems, ?racle, )icrosoft, (ambridge "echnologies, &e#geni#,
6ignette, 6erisign inancial "echnologies India 9td, 7pider 7oftware 2vt 9td. "o build its
trading engine and content. "he )orakhiya family holds a ma!ority stake in the company.
-7G(, Intel @ (arlyle are the other investors. ,ith a legacy of more than B% years in the stock
markets, the 778I group ventured into institutional broking and corporate finance 1B years
ago.
2resently 778I is one of the leading players in institutional broking and corporate finance
activities. 778I holds a si/eable portion of the market in each of these segments. 778IJs
institutional broking arm accounts for $1 of the market for oreign Institutional portfolio
investment and :1 of all <omestic Institutional portfolio investment in the country. It has
=% institutional clients spread over India, ar >ast, U8 and U7. oreign Institutional Investors
generate about =:1 of the organi/ationJs revenue, with a daily turnover of over U7N
' million. "he (orporate inance section has a list of very prestigious clients and has many
OfirstsJ to its credit, in terms of the si/e of deal, sector tapped etc. "he group has placed over
'$
U7N 1 billion in private e0uity deals. 7ome of the clients include G29 (ellular -olding,
;u!arat 2ipavav, >ssar, -utchison, 2lanetasia, and 7hopperJs 7top. 7hare khan 9imited is a
retail financial services provider with a focus on e0uities, derivatives and commodities
brokerage e#ecution on the &ational 7tock >#change of India 9td. (&7>), Gombay 7tock
>#change 9td. (G7>), &ational (ommodity and <erivatives >#change India (&(<>.) and
)ulti (ommodity >#change of India 9td. ()(.). 7hare khan provides trade e#ecution
services through multiple channels - an Internet platform, telephone and retail outlets and is
present in 5%% cities through a network of 1'%% locations. "he company was awarded the '%%:
)ost 2referred 7tock Groking Grand by +way (onsumer 6ote.
The 2usi(ess Ch&##e($es :
P >asily access customer portfolio information in a secure contact centre environment.
P 7eamlessly integrate with back-end applications and streamline customer data to contact
centre agents.
P >asily manage upgrades and technology issues to accommodate growing customer base.
The So#utio( :
7hare khan selected +spectQ >nsemble from the +spect 7oftware Unified I2 (ontact (enter
product line, a unified contact centre solution delivering advanced multichannel contact
capabilities, because it provided the best total value over other solutions evaluated. It enabled
7hare khan to meet customer service needs for inbound call handling, voice self service,
predictive outbound dialing, call blending, call monitoring and recording, and creating
outbound marketing campaigns, among other capabilities.
'B
The Resu#ts :
P Increased agent efficiency and productivity
P >nabled company to e#ecute proactive customer service calls and e#pand services offered to
(ustomers.
P >nhanced call monitoring for improved service 0uality financial services is a highly
competitive and volume-driven industry which demands high standards of customer service,
effective consultation and 0uick deliverables. "his is something 7hare khan 9imited, a retail
financial services provider based in India, understands. "he company offers several user-
friendly services for customers to manage their stock portfolios, including online capabilities
linked to an information database to help customers confidently invest, and inbound customer
services using voice self-service technology and customer service agents handling telephone
orders from clients.
M&(&$i($ 2usi(ess A%o@th :
,ith a customer base of more than 1%,%%,%%% 7hare khan continues to grow at a fast
pace. "he company re0uired reliable contact centre technology that could handle its growing
customer base and e#panding services portfolio. <owntime in the contact centre, even for a
short period of time, was unacceptable as it could result in financial losses and more
importantly, a decrease in customer loyalty. +s a result, customer satisfaction was a top priority
in 7hare khanJs agenda. Its primary ob!ective was to help and support its customers in
'C
managing their shares portfolio in the best possible manner. In anticipation of market trends,
which estimated that multiple applications, up-selling, and cross-selling among stockbrokers
would grow in the near future, 7hare khan needed a sound solution to manage comple#
customer 0ueries. EUnfortunately, technology turned out to be our biggest nightmare,F said
8etene 2arikh, (hief "echnology ?fficer at 7hare khan. E"he agents and even senior
management spent a copious amount of time resolving routine technical issues and other day-
to-day problems. +s a result, our business growth and e#pansion plans took a back seat. ,e
started losing focus of our business goals and that was detrimental to our business. ,e needed
an effective solution, fast.F
Se&%ch fo% &( Ie&# So#utio( :
7hare khan searched for a vendor who could resolve the technology integration issues in
the contact centre and get the organi/ation back on its growth track with minimal
complications. E+spect 7oftware, boasting a strong brand name and intense market
penetration, was a natural choice,F 2arekh added. E?ur conviction in choosing +spect 7oftware
was further strengthened after meeting with the companyJs team of professionals. "he team
articulately demonstrated the capabilities of the solutions to us and committed themselves to
providing world-class technical support to resolve day-today technical issues.
It was definitely more than we could have asked for.F Impressed with their product offerings,
7hare khan selected +spect 7oftware to implement hundreds of seats of +spectQ >nsemble at
its contact centre in )umbai, India. +spect >nsemble is a complete contact centre solution that
unites inbound, outbound and blended multichannel contact (voice, email, the web and fa#),
while also delivering voice portal, recording and 0uality management, and unified reporting
and administration capabilities. ,ith clear goals in mind, the +spect 7oftware team
implemented the solution and in the process forged a strong relationship with 7hare khan.
E"hrough active counseling and technical support, +spect 7oftware aptly demonstrated its
*%
e#pertise and leadership in contact centre solutions,F 2arikh said. E>ven when our telephony
provider failed to make necessary customi/ations to their e0uipments, +spect 7oftware called
on their telephony e#perts to prepare new binaries and codes to be applied on the +spect
>nsemble. +spect 7oftware engineers also shared industry best practices with us.F "he voice
self-service capabilities in +spect >nsemble seamlessly integrated with 7hare khanJs customer
information database, without any customi/ation. 7upported by +spect >nsemble, 7hare khan
can now effortlessly handle customersJ calls and day-to-day problems 0uickly, and offer a
variety of new services to its customers.
Po@e%e b! As'ect :
"he voice portal capability in +spect >nsemble verifies up every customer call and
prompts the caller for their customer identification and 2I& number. ?nce these are entered on
the phone, +spect >nsemble communicates with the 7hare khanJs backend customer databases
through 739 and ?racle, and re0uests an authori/ation. Upon authori/ation by the 7hare khan
system, +spect >nsemble routes the call to the ne#t available agent along with all of the
customerJs data.
If the callerJs information is incorrect after three attempts, it is not authori/ed by the 7hare
khan system and the call is re!ected. If the caller does not have a customer I<, the caller is
presented the option of being routed to customer service, or being designated as a <epository
2articipant (<2) en0uiry or a new account.
In addition to the inbound capabilities, 7hare khan was able to add fully-automated outbound
call services with +spect >nsemble. "he solution enables 7hare khan to e#ecute proactive
outbound customer service campaigns, using tools such as automated outbound dialing and
information feeds on the top 1% stocks of the market daily to customers. 7imilarly, automated
*1
and personali/ed market feedback and intelligence are regularly provided to 7hare khanJs
portfolio management servicesJ customers through the solutionJs outbound dialing capabilities.
E,ith the automation of processes, our agents have become more productive because their
time is better utili/ed and, of course, the level of customer service has gone up considerably.
"he management team is able to analy/e and monitor the 0uality of customer service and make
business critical decisions more effectively,F 2arikh concluded. )otivated by the success with
+spect 7oftware products at its facility at Daghuwanshi )ill ()umbai), 7hare khan has plans
to set up a disaster recovery site and is working with +spect 7oftware to provide technology
for its second contact centre.
About Sh&%e ,h&(:
7harekhan is IndiaJs leading online retail broking house. 9aunched on ebruary B, '%%%
as an online trading portal, 7harekhan has today a pan-India presence with over 1,:'C outlets
serving C:%,%%% customers across 5:% cities. It also has international presence through its
branches in the U+> and ?man. 7harekhan offers services like portfolio management, trade
e#ecution in e0uities, futures @ options, commodities, and distribution of mutual funds,
insurance and structured products.
"hese services are backed by 0uality investment advice from an e#perienced research team
which offers investment and trading ideas based on fundamental and technical research
respectively, market related news, statistical information on e0uities, commodities, mutual
funds, I2?Js and much more. 7harekhan is a member of the Gombay 7tock >#change, the
&ational 7tock >#change and the countryJs two leading commodity e#changes, the &(<>.
and )(.. 7harekhan is also registered as a depository participant with &ational 7ecurities
<epository and (entral <epository 7ervices. 7harekhan has set category leadership through
pioneering initiatives like "rade "iger, an Internet-based e#ecutable application that emulates a
broker terminal besides providing information and tools relevant to day traders. Its second
*'
initiative, irst 7tep, is targeted at empowering the first-time investors. 7harekhan has also set
its global footprint through the EIndia irstF initiative, a series of seminars conducted by
7harekhan to help the non-resident Indians participate and benefit from the huge investment
opportunities in India.
M%4 T&%u( Sh&h =CEO4Sh&%e,h&(? :
+ 7cience graduate from 7t. .avierJs (ollege, )umbai, and ")r. "arun 7hah
(>?, 7harekhan. + 7cience graduate from 7t. .avierJs (ollege, )umbai, and "arun 7hah
started his professional life in sales and marketing in a chemicals company.
-is hands-on approach and rich e#perience in sales led him to higher challenges that the capital
markets provided. In 1CB$, )r. 7hah !oined 778I, a brokerage firm with over five decades of
legendary service to its credit. "he capital market at that time was undergoing a sea change in
terms of character and 778I under the vision and guidance of 7hripal )orakhia and the
commitment and hard work of )r. 7hah was able to change and adopt the new business
practices to achieve a significant growth in a competitive environment. 7ince then 778I has
achieved growth in each of its businessesA Institutional broking, retail broking and corporate
inance.
7tarting with the retail broking business of 778I in Gombay and developing a sub-broker
network across the country, )r. 7hah was also instrumental in successfully setting up the
Institutional "rading <esk of 778I. +ccepting new challenges is a way of life for )r. 7hah. "o
ensure that 778IJs foray into retail stock broking business through 7harekhan is as successful
as every other venture of 778I, )r. 7hah moved in to spearhead this new effort as the (>? of
7harekhan, the retail broking arm of 778I. +run 7hah started his professional life in sales and
marketing in a chemicals company. -is hands-on approach and rich e#perience in sales led him
to higher challenges that the capital markets provided. In 1CB$, )r. 7hah !oined 778I, a
brokerage firm with over five decades of legendary service to its credit. "he capital market at
**
that time was undergoing a sea change in terms of character and 778I under the vision and
guidance of 7hripal )orakhia and the commitment and hard work of )r. 7hah was able to
change and adopt the new business practices to achieve a significant growth in a competitive
environment. 7ince then 778I has achieved growth in each of its businessesA
Institutional broking, retail broking and corporate inance. 7tarting with the retail broking
business of 778I in Gombay and developing a sub-broker network across the country, )r.
7hah was also instrumental in successfully setting up the Institutional "rading <esk of 778I.
+ccepting new challenges is a way of life for )r. 7hah. "o ensure that 778IJs foray into retail
stock broking business through 7harekhan is as successful as every other venture of 778I, )r.
7hah moved in to spearhead this new effort as the (>? of 7harekhan, the retail broking arm of
778I.
O%$&(iF&tio(&# Ch&%t of Sh&%e,h&( :
*5
CEO
Sh&%e ,h&( CEO : M%4 T&%u( Sh&h
C#uste% He& : M%4 R&jiv Pu%ohit
A%ou' He& : M%4 M4S!&* Ku*&%
C&'it&# he&s
P%ouct he&s
A%ou' he&
2%&(ch M&(&$e%
*:
C#uste% he&
Te%%ito%! M&(&$e% Off-#i(e he&
Assist&(t M&(&$e% De&#e%s-RM
E1ecutives
2%&(ch M&(&$e% : M%4 P4S!&* P%&s&
Re#&tio(shi' M&(&$e% : M%4 S&$&%4
"he turnover of commodity e#changes surged by 5:1 to Ds 5, BC,CBB crore in +pril
over the corresponding month previous year, with the countryRs largest bourse, )ulti
(ommodity >#change ()(.) contributing B*1 of the total turnover. ,hile the total turnover
of three national level commodity e#changes S the )(., the &ational (ommodity @
<erivatives >#change (&(<>.) and the &ational )ulti (ommodity >#change (&)(>) Sand
1C regional bourses decreased by 1C1 in the first month of '%%C-1% against Ds =,%5,5:C crore
recorded in )arch '%%C ("able 1*.1). +fter being dormant for the past several months, futures
trading in agri commodities at '' commodity e#changes showed a sign of pick-up in +pril.
"rade volume and InvestorsR participation in the futures trading in farm commodities had
witnessed a setback due to a ban on potato, chana, rubber and soya oil in '%%B, which was
lifted after si# months.
Co**oit! P%ices As O( 3C9D695D36 =E1ch&($eGMC>?
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5D36

5%
CHAPTER M III
THEORITICA) +RAME -ORK
51

Co**oit! +utu%es i( I(i&
;overnment of India, in '%%'-%*, has demonstrated its commitment to revive the
Indian agriculture sector and commodity futures markets. 2rime )inisterJs Independence <ay
address to the nation on +ugust 1:, '%%', which enlisted nation-building initiatives, included
setting-up of national commodity e#change among the important initiatives. "he year '%%'-%*,
certainly, was an eventful year in terms of regulatory changes and market developments that
could set the agenda for development for the years to come.
COMMODITY :
+ commodity may be defined as an article, a product or material that is bought and
sold. It can be classified as every kind of movable property, e#cept +ctionable (laims,
)oney @ 7ecurities. (ommodities actually offer immense potential to become a
separate asset class for market-savvy investors, arbitrageurs and speculators. Detail
investors, who claim to understand the e0uity markets, may find commodities an
unfathomable market. Gut commodities are easy to understand as far as fundamentals
of demand and supply are concerned. Detail investors should understand the risks and
advantages of trading in commodities futures before taking a leap. -istorically, pricing
in commodities futures has been less volatile compared with e0uity and bonds, thus
providing an efficient portfolio diversification option. In fact, the si/e of the
commodities markets in India is also 0uite significant. ?f the countryRs ;<2 of Ds 1*,
'%,$*% (rore (Ds 1*,'%$.* billion), commodities related (and dependent) industries
constitute about :B per cent. (urrently, the various commodities across the country
clock an annual turnover of Ds 1, 5%,%%% (rore (Ds 1,5%% billion). ,ith the introduction of
futures trading, the si/e of the commodities market grows many folds here on.
5'
Co**oit! M&%,et :
(ommodity market is an important constituent of the financial markets of any country.
It is the market where a wide range of products, vi/., precious metals, base metals, crude oil,
energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a
vibrant, active and li0uid commodity market. "his would help investors hedge their
commodity risk, take speculative positions in commodities and e#ploit arbitrage opportunities
in the market.
Co**oit! De%iv&tives :
<erivatives as a tool for managing risk first originated in the commodities markets.
"hey were then found useful as a hedging tool in financial markets as well. In India,
trading in commodity futures has been in e#istence from the nineteenth century with
organi/ed trading in cotton through the establishment of (otton "rade +ssociation in
1B$:. ?ver a period of time, other commodities were permitted to be traded in futures
e#changes. Degulatory constraints in 1C=%s resulted in virtual dismantling of the
commodity futures market. It is only in the last decade that commodity futures e#changes
have been actively encouraged.
In the commodity futures market, the 0uin0uennium after the set up of national level
e#changes witnessed e#ponential growth in trading with the turnover increasing from :.$1
lakh crores in '%%5-%: to :'.5B lakh crores in '%%B-%C. -owever, the markets have not grown
to significant levels as compared to developed countries. In this chapter, we take a brief
look at the global commodity markets and the commodity markets that e#ist in India.
5*
Evo#utio( Of Co**oit! E1ch&($es :

)ost of the commodity e#changes, which e#ist today, have their origin in the late 1Cth
and earlier '%th century. "he first central e#change was established in 1B5B in (hicago under
the name (hicago Goard of "rade. "he emergence of the derivatives markets as the effective
risk management tools in 1C$%s and 1CB%s has resulted in the rapid creation of new
commodity e#changes and e#pansion of the e#isting ones. +t present, there are ma!or
commodity e#changes all over the world dealing in different types of commodities.
Co**oit! E1ch&($e :

(ommodity e#changes are defined as centers where futures trade is organi/ed in a wider
sense4 it is taken to include any organi/ed market place where trade is routed through one
mechanism, allowing effective competition among buyers and among sellers. "his would
include auction-type e#changes, but not wholesale markets, where trade is locali/ed, but
effectively takes place through many non-related individual transactions between different
permutations of buyers and sellers.
Ro#e of Co**oit! E1ch&($es :

(ommodity e#changes provide platforms to suit the varied re0uirements of customers.
irstly, they help in price discovery as players get to set future prices which are also made
available to all participants.
55
-ence, a farmer in the southern part of India would be able to know the best price
prevailing in the country which would enable him to take informed decisions. or this to
happen, the concept of commodity e#changes must percolate down to the villages. "oday the
farmers base their choice for ne#t yearRs crop on current yearRs price. Ideally this decision
ought to be based on ne#t yearRs e#pected price. utures prices on the platforms of commodity
e#changes will hopefully move farmers of our country from the current RcobwebR effect where
additional acreage comes under cultivation in the year subse0uent to one when a commodity
had good prices4 conse0uently the ne#t year the commodity price actually falls due to
oversupply. 7econdly, these e#changes enable actual users (farmers, agro processors, industry
where the predominant cost is commodity inputHoutput cost) to hedge their price risk given the
uncertainty of the future - especially in agriculture where there is uncertainty regarding the
monsoon and hence prices. "his holds good also for non-agro products like metals or energy
products as well where global forces could e#ert considerable influence. 2urchasers are also
assured of a fi#ed price which is determined in advance, thereby avoiding surprises to them. It
must be borne in mind that commodity prices in India have always been woven firmly into the
international fabric. "oday, price fluctuations in all ma!or commodities in the country mirror
both national and international factors and not merely national factors. "hirdly, by involving
the group of investors and speculators, commodity e#changes provide li0uidity and buoyancy
to the system.
9astly, the arbitrageurs play an important role in balancing the market as arbitrage
conditions, where they e#ist, are ironed out as arbitrageurs trade with opposite positions
on different platforms and hence generate opposing demand and supply forces which
ultimately narrows down the gaps in prices. It must be pointed out that while the monsoon
conditions affect the prices of agro-based commodities, the phenomenon of globali/ation
has made prices of other products such as metals, energy products, etc., vulnerable to changes
in global politics, policies, growth paradigms, etc.
5:
"his would be strengthened as the world moves closer to the resolution of the ,"? impasse,
which would become a reality shortly. (ommodity e#changes would provide a valuable hedge
through the price discovery process while catering to the different kind of players in the
market.
Co**oities T%&e o( the NCDE> P#&tfo%* :
(ommodities have been defined by the forward contracts (regulation) +ct 1C:' as
E>very kind of movable property other than actionable claims, money and securitiesF. Groadly,
the commodities tradable on commodity e#change in India may be classified into
following categories.
1. 6egetable ?il 7eeds, ?ils and )eals
'. 2ulses
*. 7pices
5. )etals
:. >nergy products
=. 6egetables
$. ibres and manufactures
B. ?thers
Co**oities T%&e o( NCDE> :
&(<>. gives priority to commodities that are most relevant to India, and where the
price discovery process takes place domestically. "he products chosen are based on certain
criteria such as price volatility, share in ;<2, (orrelation with global markets, share in
e#ternal trade, warehousing facilities, traders distribution, geographical spread, varieties
etc. 9ist of commodities offered for futures trading on &(<>. are gives in above tableA
5=
T&b#e fo% Co**oities T%&e :
S'ices Oi# &( Oi#sees P%ecious Met&#s
2epper (astor seed ;old
(hilli 7esame seeds 7ilver
Ieera (otton seed oilcake 2latinum
"urmeric 7oy Gean )etals
(oriander Defined soy oil 7teel
(ereals 7oybean meal (opper
,heat )ustard seed Minc
Garely 8achhi ghani mustard oil +luminium
)ai/e
(yallowHred)
Dapeseed L mustard seed oil cake &ickel
2ulses (rude palm oil >nergy
(hana DG< palmolein (rude oil
)asoor ;roundnut in steel urnace oil
Kellow peas ;roundnut e#peller oil "hermal coal
?thers 2lantation products Grent crude oil
;uar seeds Dubber &atural gas
2otato coffee-robusta cherry +G ibres
)enthe oil (ashew Indian 'B.: mm cotton
;uar gum 2olymers 6 L $C$ 8apas
(>D 2olypropylene )edium staple cotton
;ur 9inear low density polyethylene 8apas
+lmond 2olyvinyl chloride Daw !ute
&oteA (urrently, Dice, 7ugar, Urad and "ur are <e-listed
"he trade timings on the &(<>. ()onday to riday) are from 1%A%% a.m. to :A%% p.m. for
agricultural products and for metal and energy products from 1%.%% a.m. to 11.*% p.m.
-owever,
?n 7aturdayJs trade in all commodities take place from 1%.%% a.m. to '.%% p.m.
)e&i($ +ive Co**oities T%&e O( NCDE> :
5$
'%%=-%$ '%%$-%B '%%B-%C '%%C-1% '%1%-11
;uar 7eeds ;uar 7eeds ;uar 7eeds ;uar 7eeds D) 7eeds
7ilver (hana (hana 2epper ;uar 7eeds
Defined 7oy ?il Urad ;old Defined 7oy ?il 7oybean 7eeds
(hana 7ilver 7ilver (hana "urmeric
;uar ;um ;old 2epper Ieera Ieera
India, a commodity based economy where two-third of the one billion population
depends on agricultural commodities, surprisingly has an under developed commodity
market. Unlike the physical market, futures markets trades in commodity are largely used as
risk management (hedging) mechanism on either physical commodity itself or open
positions in commodity stock. or instance, a !eweler can hedge his inventory against
perceived short-term downturn in gold prices by going short in the future markets.

"he article aims at know how of the commodities market and how the commodities
traded on the e#change. "he idea is to understand the importance of commodity derivatives and
learn about the market from Indian point of view. In fact it was one of the most vibrant markets
till early $%s. Its development and growth was shunted due to numerous restrictions earlier.
&ow, with most of these restrictions being removed, there is tremendous potential for growth
of this market in the country.
COMMODITY :
5B
+ commodity may be defined as an article, a product or material that is bought and
sold. It can be classified as every kind of movable property, e#cept +ctionable (laims,
)oney @ 7ecurities. (ommodities actually offer immense potential to become a separate asset
class for market-savvy investors, arbitrageurs and speculators. Detail investors, who claim to
understand the e0uity markets, may find commodities an unfathomable market. Gut
commodities are easy to understand as far as fundamentals of demand and supply are
concerned. Detail investors should understand the risk and advantages of trading in
commodities futures before taking a leap.
-istorically, pricing in commodities futures has been less volatile compared with e0uity and
bonds, thus providing an efficient portfolio diversification option.
In fact, the si/e of the commodities markets in India is also 0uite significant, of the
countryRs ;<2 of Ds 1*, '%,$*% crore (Ds 1*,'%$.* billion), commodities related (and
dependent) industries constitute about :B per cent. (urrently, the various commodities across
the country clock an annual turnover of Ds 1, 5%,%%% crore (Ds 1,5%% billion).,ith the
introduction of futures trading, the si/e of the commodities market grows many folds here
on.
COMMODITY MARKET :
(ommodity market is an important constituent of the financial markets of any
country. It is the market where a wide range of products, vi/., precious metals, base metals,
crude oil, energy and soft commodities like palm oil, coffee etc. +re traded. It is important to
develop a vibrant, active and li0uid commodity market. "his would help investors hedge
their commodity risk, take speculative positions in commodities and e#ploit arbitrage
opportunities in the market.
5C
T&b#e: 3
Tu%(ove% i( +i(&(ci&# M&%,ets &( Co**oit! M&%,et
(Ds in (rores)
S No4
M&%,et se$*e(ts 5DD:-D; 5DDC-DE 5D3D-33=E?
1 ;overnment 7ecurities )arket 1,:55,*$= (=*) ',:1B,*'' (C1.') ',B'$,B$' (C1)
' ore# )arket =:B,%*: ('$) ',*1B,:*1 (B5) *,B=$,C*= (1'5.5)
* "otal 7tock )arket "urnover (IT II) 1,*$5,5%: (:=) *,$5:,:%$ (1*=) 5,1=%,$%' (1**.B)
I &ational 7tock >#change (aTb) 1,%:$,B:5 (5*) *,'*%,%%' (11$) *,=51,=$' (11$.1)
a)(ash =1$,CBC 1,%CC,:*5 1,15$,%'$
b)<erivatives 5*C,B=: ',1*%,5=B ',5C5,=5:
II Gombay 7tock >#change (aTb) *1=,::1 (1*) :1:,:%: (1B.$) :1C,%*% (1=.$)
a)(ash *15,%$* :%*,%:* 5CC,:%*
b)<erivatives ',5$B 1',5:' 1C,:'$
5 (ommodities )arket &+ 1*%,'1: (5.$) :%%,%%% (1=.1)
&oteA ig. in bracket represents percentage to ;<2 at market prices
Sou%ce: SE2I 2u##eti(
ItNs Evo#utio( i( I(i& :
Gombay (otton "rade +ssociation 9td., set up in 1B$:, was the first organi/ed
futures market. Gombay (otton >#change 9td. It was established in 1BC* following the
:%
widespread discontent amongst leading cotton mill owners and merchants over functioning of
Gombay (otton "rade +ssociation. "he utures trading in oilseeds started in 1C%% with the
establishment of the ;u!arati 6yapari )andali, which carried on futures trading in
groundnut, castor seed and cotton. uturesR trading in wheat was e#istent at several places in
2un!ab and Uttar 2radesh. Gut the most notable futures e#change for wheat was
chamber of commerce at -apur set up in 1C1*. utures trading in bullion began in )umbai
in 1C'%. (alcutta -essian >#change 9td. was established in 1C1C for futures trading in
raw !ute and !ute goods. Gut organi/ed futures trading in raw !ute began only in 1C'$ with
the establishment of >ast Indian Iute +ssociation 9td. "hese two associations amalgamated
in 1C5: to form the >ast India Iute @ -essian 9td. "o conduct organi/ed trading in both Daw
Iute and Iute goods. orward (ontracts (Degulation) +ct was enacted in 1C:' and the
orwards )arkets (ommission ()() was established in 1C:* under the )inistry of
(onsumer +ffairs and 2ublic <istribution. In due course, several other e#changes were created
in the country to trade in diverse commodities.
St%uctu%e of Co**oit! M&%,et :
:1

Diffe%e(t T!'es of co**oities t%&e :
,orld-over one will find that a market e#its for almost all the commodities known to us. "hese
commodities can be broadly classified into the followingA
2recious )etalsA ;old, 7ilver, 2latinum etc.
?ther )etalsA &ickel, +luminum, (opper etc.
+gro-Gased (ommoditiesA ,heat, (orn, (otton, ?ils, ?ilseeds.
7oft (ommoditiesA (offee, (ocoa, 7ugar etc.
9ive-7tockA 9ive (attle, 2ork Gellies etc.
>nergyA (rude ?il, &atural ;as, ;asoline etc.
Diffe%e(t se$*e(ts i( Co**oities *&%,et :
:'
"he commodities market e#its in two distinct forms namely the ?ver the (ounter (?"()
market and the >#change based market. +lso, as in e0uities, there e#ists the spot and the
derivatives segment. "he spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer,
processor, wholesaler etc. <erivative trading takes place through e#change-based markets with
standardi/ed contracts, settlements etc.
Co**oit! b%o,e% :
+ commodity broker is a firm or individual who e#ecutes orders to buy or sell commodity
contracts on behalf of clients and charges them a commission. + firm or individual who trades
for his own account is called a trader. (ommodity contracts include futures, options, and
similar financial derivatives. (lients who trade commodity contracts are either hedger using
the derivatives markets to manage risk, or speculators who are willing to assume that risk from
hedgers in hopes of a profit.
,hile historically commodity brokers traded grain and livestock futures contracts, today
commodity brokers trade a wide variety of financial derivatives based on not only grain
and livestock, but also derivatives based on foodsHsofts, metals, energy, stock inde#es, e0uities,
bonds, currencies, and an ever growing list of other underlying assets. >ver since the 1CB%s, the
ma!ority of commodity contracts traded are financial derivatives with financial underlying
assets such as stock inde#es and currencies. irms and individuals who are often
collectively called commodity brokers includeA loor GrokerH"raderA an individual who
trades commodity contracts on the floor of a commodity e#change.
:*
,hen e#ecuting trades on behalf of a client in e#change for a commission he is acting in the
role of a broker. ,hen trading on behalf of his own account, or for the account of his
employer, he is acting in the role of a trader. loor trading is conducted in the pits of a
commodity e#change via open outcry.
+utu%es Co**issio( Me%ch&(t =+CM? :
+ irm or individual that solicits or accepts orders for commodity contracts traded
on an e#change and holds client funds to margin, similar to a securities broker-dealer. )ost
individual traders do not work directly with a (), but rather through an IG or ("+.
Introducing Groker (IG)A a firm or individual that solicits or accepts orders for commodity
contracts traded on an e#change. IGs do not actually hold customer funds to margin. (lient
funds to margin are held by a () associated with the IG. (ommodity "rading +dvisor (("+)
U*V
A a firm or individual that, for compensation or profit, advises others, on the trading of
commodity contracts. "hey advise commodity pools and offer managed futures accounts.
9ike an IG, a ("+ does not hold customer funds to margin4 they are held at a (). ("+s
e#ercise discretion over their clientsR accounts, meaning that they have power of attorney to
trade the clients account on his behalf according to the clientRs trading ob!ectives. + ("+ is
generally the commodity e0uivalent to a or mutual fund manager. (ommodity 2ool ?perator
((2?)
U5V
A a firm or individual that operates commodity pools advised by a ("+.
(ommodity pool is essentially the commodity e0uivalent to a mutual fund. Degistered
(ommodity Depresentative (D(D) H
Associ&te Pe%so( =AP?:
+n employee, partner or officer of a (), IG, ("+, or (2?, duly registered and licensed to
conduct the activities of a (), IG,("+, or (2?. "his is the commodity e0uivalent to a
registered representative.
:5
+ single firm or individual may be registered and act in more than one capacity. In the
United 7tates, an individual working in any of the above roles must pass the 7eries *
&ational (ommodity utures >#amination administered by the inancial Industry Degulatory
+uthority (I&D+). ,ith few e#ceptions, most individuals who act as a (), IG, ("+, and
(2?, as well as their D(DH+2s, are re0uired to register with the (ommodity
utures "rading (ommission (("(), and be members of the &ational utures
+ssociation (&+). loor brokersHtraders who are members or employees of a commodity
e#change generally do not need to be members of the &+, as they are regulated by the
e#change.
MEANINA O+ COMMODITIES 2ROKER :
"he commodities broker is a person who buys and sells commodities such as wheat, coffee,
sugar, oil and metals on behalf of producers of goods and buyers. -e also trades in derivatives
(futures and options) ensuing from physical goods. "he commodities broker is paid a fee or
commission for drawing up contracts and effecting sales. "he rate of commission is
usually fi#ed by the ;overnment or the regulatory board that manages the e#change.
"he commodities broker gets his commission regardless of whether the client gains or looses.
-e pays an agreed-upon margin sum to the e#change board. )any commodities brokers
operate their own brokerage firms. "herefore, they not only act as mediators between clients
and e#changes, but also manage their own speculation activities.(ommodities brokers may
attached to commodity broking companies, investment banks and e#changes or clearing
houses.
::
Co**oit! 2%o,e% Iu&#ific&tio(s :
7ince a commodity broker must be conversant with the prevailing economic scenario
and trends, a good college education is a must, particularly in big securities and investment
firms. +ctually, the ma!ority of people taking up this profession are in fact college graduates.
,hile no specific academic grounding is re0uired, programs in economics and finance are
beneficial. 2eople with sales e#perience have an edge over others.
(ommodity brokers must have e#cellent interpersonal and communication skills so as
to bond with clients as well as to build a network of contacts. "hey should also possess good
logical and analytical abilities, keen observation, and confidence to handle negative responses.
"hey must be capable of operating in highly strenuous and fast-paced surroundings. "hey need
to put in long hours, work under pressure, function independently, and be capable of making
clear-cut decisions. (ommodities brokers must fulfill 7tate licensing re0uirements, which
generally consist of clearing a test, and if re0uired, giving a personal bond. )any employers
give on-the-!ob training to enable commodities brokers meet the registration criteria for
certification. ,hen hiring a commodities broker, his credentials need to be verified first, then
all terms, conditions clearly stated, and the contract duly signed.
COMMODITIES 2ROKER ACTIJITIES :
+ commodity broker acts as a liaison between the clients and the commodity e#change.
-e buys and sells stocks, bonds, commodity futures and other securities on behalf of clients.
-e spells out commodity trading terms and practices, provides financial guidance in buying
specific commodities, and helps build a clientJs financial portfolio by providing vital data.
:=
"he broker scans market reports and news and forwards the relevant information to the clients.
-e takes calls and carries out orders placed by the clients. -e handles clientsJ accounts
and constantly checks their position. "he commodity broker ensures that all contract related
paperwork is updated, appropriate signatures affi#ed and deliveries made accordingly. Gacked
by his professional e#perience, he helps ascertain the price of specific commodities. Gy
conveying this valuable information to clients, he helps them determine the best way to
augment
Po#ic! I(iti&tives :
irstly, ;overnment of India, in early '%%*, has given mandate to four entities to set-up
nation-wide multi-commodity e#changes. 7econdly, e#pansion of permitted list of
commodities under the orward (ontracts (Degulation) +ct, 1C:' (((D)+). "his effectively
translates into futures trading in any commodities that can be identified. "hirdly, 11 days
restriction to complete a spot market transaction (ready delivery contract) is being abolished.
ourthly, non-transferable specific delivery (&"7<) contracts are removed from the purview of
the ((D). +bove four policy decisions have the potential to proliferate futures contractsJ
usage in India to manage price risk. &ational level e#changes would make availability of
futures contracts across the nation in the most cost effective manner through technology and at
the same time would improve the risk management systems to improve and maintain financial
integrity of futures markets in the country.
>#pansion of list of commodities would make available risk management mechanism for all
commodities where such a demand e#ists but never made possible in the past. +bolition of the
11 days restriction on spot market transactions, and removal of &"7< contracts from the
purview of ((D)+ would effectively mean unhindered forward contracting among the
constituents of commodity trade value chain.
:$
orward contracting is an important activity for any economy to meet raw material
re0uirements, to facilitate storage as a profitable economic activity and also to manage supply
and demand risk4 forward contracts give rise to price risk, so to the need of price risk
management. utures markets and forward contracts1 compliment each other for effective
price discovery and pricing of forward contracts. 2rice risk in forward contracts can be
managed through futures contracts.
Pe%fo%*&(ce of Co**oit! E1ch&($es :
Kear '%%'-%* witnessed a surge in volumes in the commodity futures markets in India.
"he '% plus commodity e#changes clocked a volume of about Ds. 1%%,%%% crore in volumes
against the volume of *5,:%% crore in '%%1-%' Lremarkable performance for an industry that is
being revivedW "his performance is more remarkable because the commodity e#changes as of
now are more regional and are for few commodities namely soybean comple#, castor seed, few
other edible oilseed comple#, pepper, !ute and gut. Interestingly, commodities in which future
contracts are successful are commodities those are not protected through government policies4
and trade constituents of these commodities are not complaining too. "his should act as an eye-
opener to the policy makers to leave pricing and price risk management to the market forces
rather than to administered mechanisms alone. "he risk for better returns4 if risks are not
compensated with ade0uate or more returns, economic activity will come into a standstill.
,ith the value of IndiaJs commodity economy being around Ds. *%%,%%% crore a year potential
for much greater volumes are evident with the e#pansion of list of commodities and nationwide
availability. ?pening up of the world trade barriers would mean more price risk to be managed.
+ll these factors augur well for the future of futures.
:B
N&tio(&# co**oit! e1ch&($es &( %e$io(&# co**oit! e1ch&($es :
<emutuali/ation has gathered pace around the world and Indian commodity e#changes are also
looking into it. >#isting single and regional commodity e#changes have reali/ed the possible
threat that the national level e#change may pose on their future. ;iven the e#perience of the
regional stock e#changes in India, commodity e#changes are becoming proactive to counter
such a threat. (ommodity e#changes may not face the threat of e#tinction because of the
following reasons.
(1) (ommodity e#changes are trading in futures contracts on those commodities, which have
some regional relevance. It is not going to be as easy as a share of a company to get listed
in a different e#change.
(') <elivery of commodity is a physical activity4 delivery of shares is an electronic activity
(*) (ommodity e#change members are stakeholders in those commodities wherein 7tock
>#change members were never the owners of the stock to control where the stock should
get traded.
(5) Importance of commodity e#changes are linked to the stakeholders of that particular
commodity wherein success of a stock e#change is more on transparency and low
transaction cost. +bove reasons are possibilities4 national level e#changes could woo the
e#isting commodity e#changes and their members to the national stream. 7uch e#changes
and members are of relevance to the. Indian economy as a whole and for the success of
commodity futures in particular.
:C
N&tio(-@ie *u#ti co**oit! e1ch&($es &( %e$u#&to%! ch&##e($es :
orward )arkets (ommission ()() faces the highest challenge with the onset of national
e#changes and electronic trading. + national e#change in commodities would give rise to
commercial pressures from participants in terms of trade practices followed by e#changes,
regulatory measures by the regulator and e#changes and arbitrational aspects pertinent to
difference in governing laws among the states. )( and the e#changes would have to be
e0uipped to deal with such pressures at the shortest possible time so that trade is not distorted.
?ther important aspect the regulator and e#changes should address is the regulatory cost.
Unless the regulatory cost is kept low, thriving parallel markets will never !oin the mainstream
e#changes.
I*'&ct of -TO %e$i*e :
India being a signatory to ,"? may open up the agricultural and other commodity
markets more to the global competition. IndiaJs uni0ueness as a ma!or consumption market is
an invitation to the world to e#plore the Indian market. Indian producers and traders too would
have the opportunity to e#plore the global markets. 2rice risk management and 0uality
consciousness are two important factors to succeed in the global competition. utures and other
derivatives contracts have significant role in price risk management. Indian companies are
allowed to participate in the international commodity e#changes to hedge their price risk
resultant from e#port and import activities of such companies. <ue to the compliance issues
and international e#change rules, C% percent of the commodity traders and producers are not in
a position to participate in the international e#changes. International e#changes have trading
unit si/e, which are prohibitive for many of the Indian traders and producers to participate in
the international e#changes.
=%
+ddressing the risk management re0uirements of the ma!ority is of concern and the way to
address is through on-shore e#changes. In a more liberali/ed environment, Indian e#changes
have significant role to play as vital economic institutions to facilitate risk management and
price discovery4 price discovery would have greater link to global demand and supply which
could assist the producers to decide on what crops they should produce.
-&! Ahe& :
(ommodity e#changes in India are e#pected to contribute significantly in strengthening
Indian economy to face the challenges of globali/ation. Indian markets are poised to witness
further developments in the areas of electronic warehouse receipts (e0uivalent of
demateriali/ed shares), which would facilitate seamless nationwide spot market for
commodities. +mendments to >ssential (ommodities +ct and implementation of 6alue-
+dded-ta# would enable movement of across states and more unified ta# regime, which would
facilitate easier trading in commodities. ?ptions contracts in commodities are being considered
and this would again boost the commodity risk management markets in the country. ,e may
see increased interest from the international players in the Indian commodity markets once
national e#changes become operational. + commodity derivative as an industry is poised to
take-off which may provide the numerous investors in this country with another opportunity to
invest and diversify their portfolio. inally, we may see greater convergence of markets e0uity,
commodities, force and debt L which could enhance the business opportunities for those have
speciali/ed in the above markets. 7uch integration would create speciali/ed treasuries and fund
houses that would offer a gamut of services to provide comprehensive risk management
solutions to IndiaJs corporate and trade community. In short, we are poised to witness the
resurgence of IndiaJs commodity trading which has more than 1%% years of great history.
=1
1 orward contract are bilateral contracts to manage price risk and 0uantity risk to certain
e#tent and would act as a boost for futures markets for the following reasons. orward
contracts to sell at a future date would mean a Elocked in priceF for a future date. "o lock-in
profit the seller of the forward contract has to Elock-inF the price at which he will buy the
commodity to fulfill the future obligation to sell. 7uch a locking-in will re0uire either of the
following actions4
(1) Guy the commodity now, store and deliver when the contract is due
(') >nter into an agreement to buy the commodity in tune with the contract to sell or
(*) >nter into a futures contract in a month which is near to the forward contract date. )ost
likely and economical action is to enter into a futures contract because of the easy availability
of futures contracts and transparent price. Guying and storing commodity may not be a
profitable business operation. orward contracts run the risk of counterparty risk and lack of
li0uidity. "his effectively means futures contracts as the best available option.
Co**oit! +utu%es M&%,et :
(ommodities were traded in the commodities futures market as of <ecember '%%=,
and these included ma!or agricultural commodities(rice, wheat, !ute, gur, cotton, and coffee,
ma!or pulses like Urad, arahar, and chana, edible oilseeds like mustard seed, coconut oil,
groundnut oil and sunflower), spices (pepper, chillies, cumin seed and turmeric),
metals(aluminum, tin, nickel and, copper), bullion(gold and silver), crude oil, natural gas and
polymer, among others. ;old accounted for the largest share (*1 per cent) of trade in terms of
value, followed by silver (1C per cent), guar seed (11 per cent) and chana (1% per cent). +
temporary ban was imposed on futures trading in Urad and tur dal in Ianuary '%%$ to ensure
orderly market conditions. +n efficient and wellorganised commodities futures market is
generally acknowledged to be helpful in price discovery for the traded commodities.
>#changes also accounting for a large share of the number of contracts traded on the
e#changes.
='
Co**oit! +utu%es M&%,et :
+ well-developed and effective commodity futures market, unlike physical market,
facilitates offsetting the transactions without impacting on physical goods until the e#piry of a
contract. utures market attracts hedgers who minimise their risks, and encourages competition
from other traders who possess market information and price !udgment. ,hile hedgers have
long-term perspective of the market, the traders, or arbitragers as they are often called, hold an
immediate view of the market. + large number of different market players participate in buying
and selling activities in the market based on diverse domestic and global information, such as
price, demand and supply, climatic conditions and other market related information. +ll these
factors put together result in efficient price discovery as a result of large number of buyers and
sellers transacting in the futures market. utures market, as observed from the cross-country
e#perience of active commodity futures markets, helps in efficient price discovery of the
respective commodities and does not impair the long-run e0uilibrium price of commodities. +t
times, however, price behaviour of a commodity in the futures market might show some
aberrations reacting to the element of speculation and Obandwagon effectJ inherent in any
=*
market, but it 0uickly reverts to long-run e0uilibrium price, as information flows in, reflecting
fundamentals of the respective commodity.
In futures market, speculators play a role in providing li0uidity to the markets and may
sometimes benefit from price movements, but do not have a systematic causal influence on
prices. +n 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 e#changes in efficient price discovery and minimi/e price shocks triggered by
unanticipated supply demand mismatches.
+ commodity broker is a firm or individual who e#ecutes orders to buy or sell commodity
contracts on behalf of clients and charges them a commission. + firm or individual who trades
for his own account is called a trader. (ommodity contracts include futures, options, and
similar financial derivatives. (lients who trade commodity contracts are either hedger using
the derivatives markets to manage risk, or speculators who are willing to assume that risk from
hedgers in hopes of a profit.
=5
,hile historically commodity brokers traded grain and livestock futures contracts, today
commodity brokers trade a wide variety of financial derivatives based on not only grain and
livestock, but also derivatives based on foodsHsofts, metals, energy, stock inde#es, e0uities,
bonds, currencies, and an ever growing list of other underlying assets. >ver since the 1CB%s, the
ma!ority of commodity contracts traded are financial derivatives with financial underlying
assets such as stock inde#es and currencies. irms and individuals who are often collectively
called commodity brokers includeA loor GrokerH"raderA an individual who trades commodity
contracts on the floor of a commodity e#change. ,hen e#ecuting trades on behalf of a client in
e#change for a commission he is acting in the role of a broker. ,hen trading on behalf of his
own account, or for the account of his employer, he is acting in the role of a trader. loor
trading is conducted in the pits of a commodity e#change via open outcry.
Co**oit! 2%o,e% :
utures (ommission )erchant (())
U1V
A a firm or individual that solicits or accepts
orders for commodity contracts traded on an e#change and holds client funds to margin, similar
to a securities broker-dealer. )ost individual traders do not work directly with a (), but
rather through an IG or ("+. Introducing Groker (IG)
U'V
A a firm or individual that solicits or
accepts orders for commodity contracts traded on an e#change. IGs do not actually hold
customer funds to margin. (lient funds to margin are held by a () associated with the IG.
(ommodity "rading +dvisor (("+)
U*V
A a firm or individual that, for compensation or profit,
advises others, on the trading of commodity contracts. "hey advise commodity pools and offer
managed futures accounts. 9ike an IG, a ("+ does not hold customer funds to margin4 they are
held at a (). ("+s e#ercise discretion over their clientsR accounts, meaning that they have
power of attorney to trade the clients account on his behalf according to the clientRs trading
ob!ectives. + ("+ is generally the commodity e0uivalent to a financial advisor or mutual fund
manager.
=:
(ommodity 2ool ?perator ((2?)
U5V
A a firm or individual that operates commodity
pools advised by a ("+. + commodity pool is essentially the commodity e0uivalent to a
mutual fund. Degistered (ommodity Depresentative (D(D)H+ssociated 2erson (+2)A an
employee, partner or officer of a (), IG, ("+, or (2?, duly registered and licensed to
conduct the activities of a (), IG, ("+, or (2?. "his is the commodity e0uivalent to a
registered representative. + single firm or individual may be registered and act in more than
one capacity. In the United 7tates, an individual working in any of the above roles must pass
the 7eries * &ational (ommodity utures >#amination administered by the inancial Industry
Degulatory +uthority (I&D+). ,ith few e#ceptions, most individuals who act as a (), IG,
("+, and (2?, as well as their D(DH+2s, are re0uired to register with the (ommodity utures
"rading (ommission (("(), and be members of the &ational utures +ssociation (&+).
loor brokersHtraders who are members or employees of a commodity e#change generally do
not need to be members of the &+, as they are regulated by the e#change.
Co**oit! De%iv&tives M&%,et i( I(i& :
<evelopment, Degulation and uture 2rospects ?rgani/ed commodity derivatives
in India started as early as 1B$:, barely about a decade after they started in (hicago. -owever,
many feared that derivatives fuelled unnecessary speculation and were detrimental to the
healthy functioning of the markets for the underlying commodities. +s a result, after
independence, commodity options trading and cash settlement of commodity futures were
banned in 1C:'. + further blow came in 1C=%s when, following several years of severe
draughts that forced many farmers to default on forward contracts (and even caused some
suicides), forward trading was banned in many commodities considered primary or essential.
(onse0uently, the commodities derivative markets dismantled and remained dormant for about
four decades until the new millennium when the ;overnment, in a complete change in policy,
started actively encouraging the commodity derivatives market.
==
7ince '%%', the commodities futures market in India has e#perienced an unprecedented boom
in terms of the number of modern e#changes, number of commodities allowed for derivatives
trading as well as the value of futures trading in commodities, which might cross the N 1
"rillion mark in '%%=.
-owever, there are several impediments to be overcome and issues to be decided for
sustainable development of the market. "his paper attempts to answer 0uestions such asA how
did India pull it off in such a short time since '%%'X Is this progress sustainable and what are
the obstacles that need urgent attention if the market is to reali/e its full potentialX ,hy are
commodity derivatives important and what could other emerging economies learn from the
Indian mistakes and e#perience.

"he Indian economy is witnessing a mini revolution in commodity derivatives and risk
management. (ommodity options trading and cash settlement of commodity futures had been
banned since 1C:' and until '%%' commodity derivatives market was virtually non-e#istent,
e#cept some negligible activity on an ?"( basis. &ow in 7eptember '%%:, the country has *
national level electronic e#changes and '1 regional e#changes for trading commodity
derivatives. +s many as eighty (B%) commodities have been allowed for derivatives trading.
"he value of trading has been booming and is likely to cross the N 1 "rillion mark in '%%= and,
if all goes well, seems to be set to touch N: "rillion in a few years. "his paper analyses
0uestions such asA how did India pull it off in such a short time since '%%'X Is this progress
sustainable and what are the obstacles that need urgent attention if the market is to reali/e its
full potentialX ,hy are commodity derivatives important and what could other emerging
economies learn from the Indian mistakes and e#perience.
=$
Che<u%e Histo%! :
"he history of organi/ed commodity derivatives in India goes back to the nineteenth
century when the (otton "rade +ssociation started futures trading in 1B$:, barely about a
decade after the commodity derivatives started in (hicago. ?ver time the derivatives market
developed in several other commodities in India. ollowing cotton, derivatives trading started
in oilseeds in Gombay (1C%%), raw !ute and !ute goods in (alcutta (1C1'), wheat in -apur
(1C1*) and in Gullion in Gombay (1C'%).
-owever, many feared that derivatives fuelled unnecessary speculation in essential
commodities, and were detrimental to the healthy functioning of the markets for the underlying
commodities, and hence to the farmers. ,ith a view to restricting speculative activity in cotton
market, the ;overnment of Gombay prohibited options business in cotton in 1C*C. 9ater in
1C5*, forward trading was prohibited in oilseeds and some other commodities including food-
grains, spices, vegetable oils, sugar and cloth. +fter Independence, the 2arliament passed
orward (ontracts (Degulation) +ct, 1C:' which regulated forward contracts in commodities
all over India. "he +ct applies to goods, which are defined as any movable property other than
security, currency and actionable claims. "he +ct prohibited options trading in goods along
with cash settlements of forward trades, rendering a crushing blow to the commodity
derivatives market. Under the +ct, only those associationsHe#changes, which are granted
recognition by the ;overnment, are allowed to organi/e forward trading in regulated
commodities. "he +ct envisages three-tier regulationA
=B
(i) "he >#change which organi/es forward trading in commodities can regulate trading
on a day-to-day basis4
(ii) "he orward )arkets (ommission provides regulatory oversight under the powers
delegated to it by the central ;overnment, and
(iii) "he (entral ;overnment - <epartment of (onsumer +ffairs, )inistry of (onsumer
+ffairs, and
ood and 2ublic <istribution - is the ultimate regulatory authority. "he already shaken
commodity derivatives market got a crushing blow when in 1C=%s, following several years of
severe draughts that forced many farmers to default on forward contracts (and even caused
some suicides), forward trading was banned in many commodities considered primary or
essential.
+s a result, commodities derivative markets dismantled and went underground where to some
e#tent they continued as ?"( contracts at negligible volumes. )uch later, in 1C$%s and 1CB%s
the ;overnment rela#ed forward trading rules for some commodities, but the market could
never regain the lost volumes.
Ch&($e i( Aove%(*e(t Po#ic! :
+fter the Indian economy embarked upon the process of liberali/ation and globali/ation
in 1CC%, the ;overnment set up a (ommittee in 1CC* to e#amine the role of futures trading.
"he (ommittee (-eaded by 2rof. 8.&. 8abra) recommended allowing futures trading in 1$
commodity groups. It also recommended strengthening of the orward )arkets (ommission,
and certain amendments to orward (ontracts (Degulation) +ct 1C:', particularly allowing
options trading in goods and registration of brokers with orward )arkets (ommission. "he
;overnment accepted most of these recommendations and futures trading were permitted in all
recommended commodities.
=C
(ommodity futures trading in India remained in a state of hibernation for nearly four decades,
mainly due to doubts about the benefits of derivatives. inally a reali/ation that derivatives do
perform a role in risk management led the government to change its stance. "he policy changes
favoring commodity derivatives were also facilitated by the enhanced role assigned to free
market forces under the new liberali/ation policy of the ;overnment. Indeed, it was a timely
decision too, since internationally the commodity cycle is on the upswing and the ne#t decade
is being touted as the decade of commodities.
Co**oit! De%iv&tives Re<ui%e :
India is among the top-: producers of most of the commodities, in addition to being a
ma!or consumer of bullion and energy products. +griculture contributes about ''1 to the ;<2
of the Indian economy. It employees around :$1 of the labor force on a total of 1=* million
hectares of land. +griculture sector is an important factor in achieving a ;<2 growth of B-
1%1.
+ll this indicates that India can be promoted as a ma!or center for trading of commodity
derivatives. It is unfortunate that the policies of )( during the most of 1C:%s to 1CB%s
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. -owever, 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. 7uch 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 re0uired and the role they can
play in risk management. It is common knowledge that prices of commodities, metals, shares
and currencies fluctuate over time. "he possibility of adverse price changes in future creates
risk for businesses. <erivatives are used to reduce or eliminate price risk arising from
unforeseen price changes. + derivative is a financial contract whose price depends on, or is
derived from, the price of another asset. "wo important derivatives are futures and options.
$%
Co**oit! +utu%es Co(t%&cts :
+ futures contract is an agreement for buying or selling a commodity for a
predetermined delivery price at a specific future time. utures are standardi/ed contracts
that are traded on organi/ed futures e#changes that ensure performance of the contracts and
thus remove the default risk. "he commodity future shave e#isted since the (hicago Goard
of "rade ((G?", www.cbot.com) was established in 1B5B to bring farmers and merchants
together. "he ma!or function of futures markets is to transfer price risk from hedgers to
speculators. or e#ample, suppose a farmer is e#pecting his crop of wheat to be ready in
two months time, but is worried that the price of wheat may decline in this period. In order
to minimi/e his risk, he can enter into a futures contract to sell his crop in two monthsJ time
at a price determined now. "his way he is able to hedge his risk arising from a possible
adverse change in the price of his commodity.
Co**oit! O'tio(s co(t%&cts :
9ike futures, options are also financial instruments used for hedging and
speculation. "he commodity option holder has the right, but not the obligation, to buy (or sell)
a specific 0uantity of a commodity at a specified price on or before a specified date. ?ption
contracts involve two parties L the seller of the option writes the option in favour of the buyer
(holder) who pays a certain premium to the seller as a price for the option. "here are two types
of commodity optionsA a OcallJ option gives the holder a right to buy a commodity at an agreed
price, while a OputJ option gives the holder a right to sell a commodity at an agreed price on or
before a specified date (called e#piry date). "he option holder will e#ercise the option only if it
is beneficial to him4 otherwise he will let the option lapse. or e#ample, suppose a farmer buys
a put option to sell 1%% 3uintals of wheat at a price of N': per 0uintal and pays a OpremiumJ of
N%.: per 0uintal (or a total of N:%).
$1
If the price of wheat declines to say N'% before e#piry, the farmer will e#ercise his option and
sell his wheat at the agreed price of N': per 0uintal. -owever, if the market price of wheat
increases to say N*% per 0uintal, it would be advantageous for the farmer to sell it directly in
the open market at the spot price, rather than e#ercise his option to sell at N': per 0uintal.
utures and options trading therefore helps in hedging the price risk and also provide
investment opportunity to speculators who are willing to assume risk for a possible return.
urther, futures trading and the ensuing discovery of price can help farmers in deciding which
crops to grow. "hey can also help in building a competitive edge and enable businesses to
smoothen their earnings because no hedging of the risk would increase the volatility of their
0uarterly earnings. "hus futures and options markets perform important functions that can not
be ignored in modern business environment. +t the same time, it is true that too much
speculative activity in essential commodities would destabili/e the markets and therefore, these
markets are normally regulated as per the laws of the country.
Moe%( Co**oit! E1ch&($es :
"o make up for the loss of growth and development during the four decades of
restrictive government policies, )( and the ;overnment encouraged setting up of the
commodity e#changes using the most modern systems and practices in the world. 7ome of the
main regulatory measures imposed by the )( include daily mark to market system of
margins, creation of trade guarantee fund, back-office computeri/ation for the e#isting single
commodity >#changes, online trading for the new >#changes, demutuali/ation for the new
>#changes, and one-third representation of independent <irectors on the Goards of e#isting
>#changes etc. Desponding positively to the favourable policy changes, several &ation-wide
)ulti-(ommodity >#changes (&)(>) have been set up since '%%', using modern practices
such as electronic trading and clearing.
$'
7elected Information about the two most important commodity e#changes in India U)ulti-
(ommodity >#change of India 9imited ()(.), and &ational )ulti-(ommodity @ <erivatives
>#change of India 9imited (&(<>.)V.
N&tio(&# Co**oit! " De%iv&tives E1ch&($e )i*ite =NCDE>? :
&ational (ommodity @ <erivatives >#change 9imited (&(<>.) is a professionally
managed online multi commodity e#change promoted by I(I(I Gank 9imited (I(I(I Gank),
9ife Insurance (orporation of India (9I(), &ational Gank for +griculture and Dural
<evelopment (&+G+D<) and &ational 7tock >#change of India 9imited (&7>). 2un!ab
&ational Gank (2&G), (DI7I9 9imited (formerly the (redit Dating Information 7ervices of
India 9imited), Indian armers ertiliser (ooperative 9imited (I(?) and (anara Gank by
subscribing to the e0uity shares have !oined the initial promoters as shareholders of the
>#change. &(<>. is the only commodity e#change in the country promoted by national level
institutions.
"his uni0ue parentage enables it to offer a bou0uet of benefits, which are currently in short
supply in the commodity markets. "he institutional promoters of &(<>. are prominent
players in their respective fields and bring with them institutional building e#perience, trust,
nationwide reach, technology and risk management skills. &(<>. is a public limited
company incorporated on +pril '*, '%%* under the (ompanies +ct, 1C:=. It obtained its
(ertificate for (ommencement of Gusiness on )ay C, '%%*. It has commenced its operations
on <ecember 1:, '%%*. &(<>. is a nation-level, technology driven de-mutuali/ed on-line
commodity e#change with an independent Goard of <irectors and professionals not having any
vested interest in commodity markets. It is committed to provide a world-class commodity
e#change platform for market participants to trade in a wide spectrum of commodity
derivatives driven by best global practices, professionalism and transparency. &(<>. is
regulated by orward )arket (ommission in respect of futures trading in commodities.
$*
Gesides, &(<>. is sub!ected to various laws of the land like the (ompanies +ct, 7tamp +ct,
(ontracts +ct, orward (ommission (Degulation) +ct and various other legislations, which
impinge on its working. &(<>. is located in )umbai and offers facilities to its members in
more than *C% centers throughout India. "he reach will gradually be e#panded to more centers.
&(<>. currently facilitates trading of thirty si# commodities - (ashew, (astor 7eed, (hana,
(hili, (offee, (otton, (otton 7eed ?ilcake, (rude 2alm ?il, >#peller )ustard ?il, ;old, ;uar
gum, ;uar 7eeds, ;ur, Ieer, Iute sacking bags, )ild 7teel Ingot, )ulberry ;reen (ocoons,
2epper, Dapeseed - )ustard 7eed ,Daw Iute, DG< 2almolein, Defined 7oy ?il, Dice, Dubber,
7esame 7eeds, 7ilk, 7ilver, 7oy Gean, 7ugar, "ur, "urmeric, Urad (Glack )atpe), ,heat,
Kellow 2eas, Kellow Ded )ai/e @ Kellow 7oybean )eal. +t subse0uent phases trading in
more commodities would be facilitated.
$5
To' 3D Co**oities :
"aking together the turnover in commodities futures seen at the above three multi-commodity
e#changes during the two-week period 1:-%C-'%%: to *%-%C-'%%:, the following emerge as the
top-1% commodities in terms of value of futures trading done.
(ommodity "urnover in N )illions
;uar seed 55*'.$1
;old 5%B'.1:
7ilver *B=C.*=
(rude oil **B%.1*
(hana (chick peas) '1%%.1:
Urad (Glack 9egume) ='5.$1
7oy oil 5$B.'B
;ur (Iaggery A cane sugar) *=C.$'
;uar ;um *5:.%B
"ur (9entils) *'C.*:
Note: "he local currency values were translated into U7< using the monthly average e#change
rate I&D :5.$: per U7< prevailing in +pril '%1*. "he above does indicate that the commodity
derivatives market has a bright future in India.

$:
"he volume and value of trade in commodity derivatives could in fact take a 0uantum
!ump as bullion, crude oil and other high value commodities being added with each passing
day get more actively traded in the coming months. It is also being speculated by market
operators that finally the commodity derivatives market would out-pace and overtake the
market for stock derivatives.
U(%eso#ve Issues A( +utu%e P%os'ects :
>ven though the commodity derivatives market has made good progress in the last
few years, the real issues facing the future of the market have not been resolved. +greed, the
number of commodities allowed for derivative trading have increased, the volume and the
value of business has /oomed, but the ob!ectives of setting up commodity derivative e#changes
may not be achieved and the growth rates witnessed may not be sustainable unless these real
issues are sorted out as soon as possible. 7ome of the main unresolved issues are discussed
below.
Co**oit! O'tio(s :
"rading in commodity options contracts has been banned since 1C:'. "he market
for commodity derivatives cannot be called complete without the presence of this important
derivative. Goth futures and options are necessary for the healthy growth of the market. ,hile
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. &o doubt there is an
immediate need to bring about the necessary legal and regulatory changes to introduce
commodity options trading in the country. "he matter is said to be under the active
consideration of the ;overnment and the options trading may be introduced in the near future.
$=
The -&%ehousi($ &( St&(&%iF&tio( :
or commodity derivatives market to work efficiently, it is necessary to have a
sophisticated, cost-effective, reliable and convenient warehousing system in the country. "he
-abibullah ('%%*) task force admitted, E+ sophisticated warehousing industry has yet to come
aboutF. urther, independent labs or 0uality testing centers should be set up in each region to
certify the 0uality, grade and 0uantity of commodities so that they are appropriately
standardi/ed and there are no shocks waiting for the ultimate buyer who takes the physical
delivery. ,arehouses also need to be conveniently located. (entral ,arehousing (orporation
of India ((,(A www.fieo.com) is operating :%% ,arehouses across the country with a storage
capacity of 1%.5 million tones. "his is obviously not ade0uate for a vast country. "o resolve the
problem, a ;ramin Ghandaran Ko!ana (Dural ,arehousing 2lan) has been introduced to
construct new and e#pand the e#isting rural go downs. 9arge scale privati/ation of state
warehouses is also being e#amined.
C&sh Je%sus Ph!sic&# Sett#e*e(t :
It is probably due to the inefficiencies in the present warehousing system that
only about 11 to :1 of the total commodity derivatives trade in the country are settled
in physical delivery. "herefore the warehousing problem obviously has to be handled
on a war footing, as a good delivery system is the backbone of any commodity trade. +
particularly difficult problem in cash settlement of commodity derivative contracts is
that at present, under the orward (ontracts (Degulation) +ct 1C:', cash settlement of
outstanding contracts at maturity is not allowed. In other words, all outstanding
contracts at maturity should be settled in physical delivery. "o avoid this, participants
s0uare off their positions before maturity. 7o, in practice, most contracts are settled in
$$
cash but before maturity. "here is a need to modify the law to bring it closer to the
widespread practice and save the participants from unnecessary hassles.
The Re$u#&to% :
+s the market activity pick-up and the volumes rise, the market will definitely
need a strong and independent regular4 similar to the 7ecurities and >#change Goard of India
(7>GI) that regulates the securities markets. Unlike 7>GI which is an independent body, the
orwards )arkets (ommission ()() is under the <epartment of (onsumer +ffairs ()inistry
of (onsumer +ffairs, ood and 2ublic <istribution) and depends on it for funds.
It is imperative that the ;overnment should grant more powers to the )( to ensure an
orderly development of the commodity markets. "he 7>GI and )( also need to work closely
with each other due to the inter-relationship between the two markets.
)&c, of Eco(o*! of Sc&#e :
"here are too many (* national level and '1 regional) commodity e#changes.
"hough over B% commodities are allowed for derivatives trading, in practice derivatives
are popular for only a few commodities. +gain, most of the trade takes place only on a
few e#changes. +ll this splits volumes and makes some e#changes unviable. "his
problem can possibly be addressed by consolidating some e#changes. +lso, the
0uestion of convergence of securities and commodities derivatives markets has been
debated for a long time now. "he ;overnment of India has announced its intention to
integrate the two markets. It is felt that convergence of these derivative markets would
bring in economies of scale and scope without having to duplicate the efforts, thereby
giving a boost to the growth of commodity derivatives market. It would also help in
resolving some of the issues concerning regulation of the derivative markets. -owever,
this would necessitate complete coordination among various regulating authorities such
$B
as Deserve Gank of India, orward )arkets commission, the 7ecurities and >#change
Goard of India, and the <epartment of (ompany affairs etc.
T&1 &( )e$&# bott#e(ec,s :
"here are at present restrictions on the movement of certain goods from one state
to another. "hese need to be removed so that a truly national market could develop for
commodities and derivatives. +lso, regulatory changes are re0uired to bring about uniformity
in octopi and sales ta#es etc. 6+" has been introduced in the country in '%%:, but has not yet
been uniformly implemented by all states.

"he coefficient on the interest rate is more significant across markets in the second period,
although with different signs. "his supports the view that the si/e and character of financial
$C
investor activity differ considerably across markets. "he negative sign for the gold and the
copper markets, where the shares of non-commercial positions are three to four times larger
than the share for crude oil markets (;raph *), might indicate that the interest rate variable
reflects opportunity costs of financial investors with a shorter time hori/on.
In energy markets, the positive coefficient might capture a trend increase in net long positions
resulting from passive tracking of commodity indices, which tend to place a high weight on
energy commodities. or e#ample, oil had an average weight of '$1 in the second subperiod
in the 7(I inde#. -owever, no separate role could be found in the regression for the 7(I
commodity weights.
"he second observation is that the share of non-commercial net long positions appears to have
been less influenced by perceived diversification benefits than in the past. In the earlier sub
period, before prices started to accelerate, there is a negative relationship between investor
activity and the correlation between returns on commodities and world e0uities in most cases.
In the second sub period, this relationship is either statistically insignificant, or has a perverse
sign. ?ne possible alternative e#planation for this outcome is that short-term strategies have
been more important than before and dominate the variation in the data. +nother possibility is
that the correlation variable does not capture the full range of assets which have been relevant
for the assessment of diversification benefits in the recent period, although including the
correlation between commodity returns and other asset classes such as high-yield credit does
not change the result. (ommodity investment might also have been motivated by long-term
historical correlations that are not apparent in the relatively short span of the second subperiod.
"he relationship between the share of non-commercial long positions and e#pected inflation is
generally positive, although not always significant, consistent with commodities being
purchased as a hedge against future inflation. inancial investors and market dynamics
(hanges in the scale and character of involvement of financial investors incommodity
derivatives markets may have affected the price dynamics of these markets. "he first 0uestion
B%
in this regard is whether the e#ploitation of perceived profit opportunities by financial
investors has fundamentally changed the relationship between prices and the physical
characteristics of commodity markets. "he second issue is whether the broadening of the
investor base hassled to significant market deepening and hence affected features such as short
term price fluctuation.
The %e#&tio(shi' @ith 'h!sic&# co**oit! *&%,ets :
Intuitively, one might e#pect large inflows of funds into commodity markets to cause
prices to rise sharply, possibly to higher levels than are !ustified by economic fundamentals.
"he prima facie evidence seems to support this view as financial activity has broadly increased
in parallel with prices during the past four years. -owever, the results of empirical work on the
impact of the growing presence of financial investors on commodity prices are less clear-cut.
7everal recent studies, which e#plore the relationship between investor activity and commodity
prices, indicate that price changes have led to changes in investor interest rather than the other
way around (-eight et al ('%1%), I) ('%11))."his section uses the physical characteristics of
specific commodities as a rough benchmark for assessing whether the increased presence of
financial investors has altered price dynamics. (onstraints on supply and storability affect the
prices of commodity derivatives. In the longer run, production can be changed and the
elasticity of commodity supply depends on the marginal costs of production. In the short run,
supply from production is relatively inelastic and depends more on above-ground stocks. ,ith
the e#ception of gold, aboveground commodity stocks are small relative to demand. or
e#ample, it is usual for four to si# weeks of demand to be held in inventories for base metals.
or gold, in contrast, stocks either available for production or for lease represent close to 5:
yearsJ worth of demand, depending on how this is measured(?J(onnell ('%%:)).In efficient
markets, the e#pected marginal costs of commodity production should act as an anchor for
longer-run futures prices. (onsistent with this, the long ends of oil and copper futures curves
have overall tended to fluctuate much less than spot and short-dated futures prices (;raph 5).
B1
"he tenors that are affected by this EanchoringF may vary, depending on the time needed to
ad!ust production. or instance, from 1CCB to '%%', a period of ample spare capacity, marginal
costs were steady and production could be e#panded at relatively short notice.
Indeed, futures prices at tenors from about one year were 0uite closely aligned with estimates
of marginal costs of production both oil and copper markets over this period. 7ince '%%*,
however, long-dated futures prices have increasingly diverged from estimates of current
marginal costs. In '%%=, prices for two-year oil futures were on average about '%1 higher than
the measure of marginal costs shown in ;raph 5. In the case of copper, the deviation was much
larger.
7everal factors related to economic fundamentals could cause such deviation. or e#ample, a
sharp increase in e#pected marginal costs owing to buoyant demand growth and uncertainty
about the costs of further e#pansion of production in the face of capacity constraints may have
been a factor in the oil market. )oreover, the need to e#plore and develop new sources has
probably lengthened the time re0uired to e#tend production. In addition, futures prices are
likely to embody risk premier, not least because long-dated futures markets are typically
relatively thinly traded. Deluctance by producers to forgo upside opportunities through hedging
in an environment of rising prices might have further reduced li0uidity. In contrast, there is
some tentative evidence that the si/e of the risk premium in oil futures markets is positively
related to the share of net non-commercial long positions in the oil market, controlling for
other factors ()icu ('%%:)). &otwithstanding all these factors, it still appears difficult to
reconcile the increases in futures prices until mid-'%%= with economic fundamentals,
especially in the case of copper. + second physical anchor is inventories, which link current
and future supply and conse0uently connect the spot price and e#pected spot prices in the
future (;orton and Douwenhorst ('%%5)). It is not clear that growing investor activity can have
a systematic direct effect on inventory decisionsA the convenience that producers derive from
B'
holding stock importantly depends on factors related to real activity such as production
smoothing. Indeed, the strong historical relationship between the slope of the futures curve for
non-gold commodities and the level of physical inventories has remained intact.
It is more likely that financial investors could indirectly affect inventory decisions through
futures prices. "o the e#tent that taking long positions in futures markets increases futures
prices, the value of holding inventories for future delivery increases. "he effect on the slope of
the yield curve remains open, depending on how spot prices respond to possible inventory
decisions.
M&%,et De'th :
"he second 0uestion is whether the increase in the si/e and diversity of financial
investors has increased market depth. ;reater market depth would imply that transactions of a
given si/e cause smaller fluctuations and, other things e0ual, that short-term price volatility
should decline. "he prima facie evidence on changes in commodity price volatility is
mi#ed. 2rice volatility has declined in the oil market, especially in the shorter maturities of
futures contracts where trading is particularly active (;raph =). In contrast, it has increased in
the copper market.=+nother approach is to look at the interaction of the trading behavior of
commercial and non-commercial traders. &on-commercial traders will add to market depth if
they contribute to a two-sided market. "his is the case if they act as counterparties to
commercial tradersJ hedging transactions or if they take positions offsetting other financial
investors. "he pattern of changes in the open positions of commercial and noncommercial
traders supports the view that financial investors have, overall contributed to deeper markets.$
irst, a higher correlation between changes in &on-commercial long and commercial short
position has been associated with lower volatility in oil markets (;raph $, left-hand panel).
-owever, the correlation has not significantly increased since '%%', suggesting that growing
presence of financial investors may have accommodated increased hedging needs, but not
fundamentally altered the character of the market. 7econd, there is also evidence that non-
B*
commercial traders have, as a group, increasingly taken positions on both sides of commodity
markets.
2rior to '%%', changes in long and short positions of non-commercial traders were highly
negatively correlated for copper, oil and natural gasA an increase in long positions typically
went hand in hand with a reduction of short positions and vice versa. "here is also some
evidence that ))"s tended to act on the same side of the market at similar times in the past
(("( (1CC=)). In the past few years, however, the correlation between changes in long and
short positions of non-commercial traders has increased and become positive.
>vidence that non-commercial players are increasingly trading between each other is also
provided by the growing share of spread positions, which arise when a trader takes long and
short positions in the same commodity at different tenors of the futures curve. "he emergence
of trading among financial investors in commodity markets on a substantial scale suggests that
the determinants of market li0uidity may become more similar to those in traditional financial
markets. "hese determinants include the amount of risk capital that financial investors allocate
to commodities trading and the heterogeneity of opinions of market participants. ?ne key risk
in both regards is a high concentration of trading activity. "he demise of +maranth, which led
to a sharp deterioration in li0uidity conditions in those tenors of the natural gas futures market
where the firm held e#tensive positions, provides a clear indication of these challenges.Itive to
short-term price fluctuations.
B5
CHAPTER-IJ
DATA ANA)YSIS
"
INTERPRETATION
B:
Pepper: Triangle:
"he fall from the top appears to be a three wave fall and 2epper has being consolidating in a
triangular pattern. ?n the lower side wave > is e#pected which will take it to ''1'* and on the
higher the resistance e#ist at '*'%%. -owever, if '*'%% is taken off then the bearish alternate
will be ruled out and the fresh leg on the upside will start. 7ince wave ' was a /ig/ag, wave 5
looks to be a triangle which will meet the guideline of alternation. -ence, we continue to
maintain our bias down for the target of ''1'* and a reversal above '*'%%.
B=

B$



BB
Day Trader's Hit List for 2-5-2013(Morning Session)

Contract Instrument Support Levels LTP Resistance Levels Action
S2 S1 R1 R2
May Chana 3337 34 3432 344! 3" #uy A$ove R1 % Sell #elo& S1
May Cottonsee' (il Ca)e 13*2 14+ 14! 1417 142! Sell #elo& S1
May ,eera 127" 12!42 12!!7-" 12+4" 12+! Sell #elo& S1
May In'- RM See' 3414- 3442- 34"3- 34!"- 3"- Sell #elo& S1
May Pepper 3"21 3"442 3""*- 3"** 3"747 Sell #elo& S1
May Soya (il 7+-4 717- 71+-3 723- 727- Sell #elo& S1
May Soy$ean 3!3- 3!!- 3+32 3+7- 413- Sell #elo& S1
May Turmeric *2!- *33- *414- *4""- *"- Sell #elo& S1
May Mentha (il +34- +4+- +""-4 +*+- +7"- Sell #elo& S1
May Aluminium +"- +7- +7-2 +!- ++-" Sell #elo& S1
May .inc +*-3 +7-* +!- ++- ++-" Sell #elo& S1
May Lea' 14- 1"-2 1"-4" 1*-2 17- Sell #elo& S1
,une Copper 3"+- 3**-3" 3*7-+" 37-2 372- Sell #elo& S1
,une God 2**2 2*3*" 2*"4 2**- 2*!*- Sell #elo& S1
May Si!er 42!14 43"4 44"2 441!! 44*27 Sell #elo& S1
Apr Cr"de 47+ 4!41 4!72- 4+" 4+3! #uy A$ove R1 % Sell #elo& S1
May #at Gas 23- 232- 233-* 23"- 23!- Sell #elo& S1
May #i$%e 7!"- 7+2-4 7+4-" !4- !1- Sell #elo& S1


Constit"ents LT& C'ange
Chana 237* -4
Cotton See' (ilca)e 11!* /-!
0uarsee' 277! -
0ur +++-" -"
,eer 1"743 /-12
Pepper 24!4 -4
Mustar' see' 2**" /-1"
Soy #ean 232 /-4
Turmeric +"! /-2
1heat 2e& 114-2 /-11
BC
5DDD-5D36



3EE5-5D35
C%
)ost commodity traders incorporate technical analysis into their trading plan. "echnical
analysis differs from fundamental analysis in the sense that it utili/es prior price action to
predict future price moves. undamental analysis basically focuses on supply and demand
e#pectations of commodities to predict future price action. )ost commodity traders claim to
either be a technical trader or a fundamental trader.
In fact, most commodity traders utili/e both methods. I mostly trade off the charts but I keep
up on the fundamental picture to look for trades and to screen some marginal trades if they
conflict with my charts.
"o utili/e technical analysis when trading commodities, you will want to start by
looking at a price chart of the commodity you are interested in trading. "here are many free
sources on the Internet where you can find futures 0uotes and charts. ollowing the trend is
one of the golden rules of trading so you will want to look for a chart that is steadily moving
higher or lower. "ypically with technical trading, you will want to either buy an up-trending
commodity when it is breaking out to new highs or it has corrected from the highs. "his is a
matter of preference to your individual trading style. I normally like to buy entrancements
within a trend unless a market is e#tremely strong. If so, I fell comfortable buying new highs.
"he good thing about technical analysis is that it applies to all charts, whether they are :-
minute charts for day trading futures or daily charts for longer term trading. "he first thing you
want to do is learn how to read charts and get a basic understanding of what types of patterns
and indicators might setup market moves. rom there, you can move on to more advanced
commodity trading strategies with technical analysis. It is important to understand that
technical analysis is no an e#act science. It is more of an art. "he same goes for fundamental
analysis. Kou will never be right every time when you trade commodities. "hink of it as
playing percentages. If you are right more often than you are wrong, you will come out ahead
if your average loss is the same as your average gain.
C1
"echnical analysis is the art of e#amining stock or commodity charts to identify potential
trading signals. It may appear intimidating to new investors, but it is 0uite easy to study and
understand. (ommodities and stocks traded on the stock e#changes often e#hibit some patterns
in their trading action. "echnical analysts use such signals to enter or e#it their positions in
those trading instruments. 7uch patterns, as double bottom, double top, bull flags, or moving
averages are e#am "echnical analysis is a method of stock or commodity analysis through the
use of charts to predict future trends in that stock or commodity. "hese trading actions are
recorded over time, and could be used to forecast future direction in that stock or commodity.
)any patterns formed on charts often repeat over time. "he following are some e#amples of
technical analysis formations used in trading either stocks or commodities.
(rude +chieved "he irst +waited "arget or "he -armonic "echnical 2attern Depresented In
*B.'1 (orrection ?f "he (d 9eg +round 1%*.'%, ,here + Gullish -ammer (andlestick ,as
ormed 7een ?n "he )inor Image +bove. "his (andlestick Is +ble "o 2ush (rude "o Detest
9evels +round 1%5.*% +nd 2ossibly >#tend Upwards "o Deach 1%5.B%4 -owever, ,e >#pect "hat
"he -armonic 2attern "o Demain Intact, ,here "he (rab 2attern Is 7till +ffecting It +nd "hus
7tability In "rading Is Gelow 1%=.::. -ence, ,e -old ?nto ?ur ?verall &egative >#pectations
,ithout ailing "o &ote "he Gullish (orrection "hat Is orecasted or "oday4 )acd 2roves "hat
,e -ave 7tarted "o >nter &egative +reas +nd "hus "he 7econd "arget (ould Ge &oted +t =1.B1
(orrection or "he (d 9eg +round N1%1.%:."he "rading Dange or "oday Is +mong "he 8ey
7upport +round 1%1.%: +nd "he 8ey Desistance +round 1%=.::. "he 7hort "erm "rend Is
>#pected "owards "he Upside +s 9ong +s "he <aily (losing Is +bove CB.%% ,ith "argets +t
11*.*:.
C'
7upportA 1%*.'%, 1%'.$:, 1%'.'%, 1%1.B%, 1%1.%:
DesistanceA 1%5.*%, 1%5.B%, 1%:.':, 1%:.B:, 1%=.%%
Decommendation Gased ?n "he (harts +nd >#planations +bove ?ur ?pinion Is 7elling (rude
+round 1%5.B% "argeting 1%1.%: +nd 7top 9oss ,ith + our -our (losing +bove 1%=.*%, )ight
Ge +ppropriate.
Disc#&i*e% : "he (ontent ?f >cpulse.(om +nd +ny 2age In "he ,ebsite (ontain Information or
InvestorsH"raders +nd Is &ot + Decommendation "o Guy ?r 7ell (urrencies, 7tocks, ;old, 7ilver
@ >nergies, &or +n ?ffer "o Guy ?r 7ell (urrencies, 7tocks, ;old, 7ilver @ >nergies.
"he Information 2rovided Deflects "he ,ritersR ?pinions "hat <eemed Deliable Gut Is &ot
;uaranteed +s "o +ccuracy ?r (ompleteness. >cpulse Is &ot 9iable or +ny 9osses ?r <amages,
C*
)onetary ?r ?therwise "hat Desult. I Decommend "hat +nyone "rades (urrencies, 7tocks, ;old,
7ilver @ >nergies 7hould <o 7o ,ith (aution +nd (onsult ,ith + Groker Gefore <oing 7o. 2rior
2erformance )ay &ot Ge Indicative ?f uture 2erformance. (urrencies, 7tocks ;old, 7ilver
@>nergies 2resented 7hould Ge (onsidered 7peculative ,ith + -igh <egree ?f 6olatility +nd
Disk.
U4S4So!be&( M&%,et St&tistics =i( bi##o( bushe#s?
Ye&%
e(i($
5DD8 5DD: 5DD; 5DDC 5DDE 5D3D 5D33 5D35
P%ouctio( 54;: 54CE 54;: 5478 6435 64D: 643E 645C
Tot&# Use 54CD 54E6 54;E 5485 54EE 54C; 64D6 64D:
E(i($
Stoc,
D457C D45DC D43;C 4335 D458: D477E D4:38 D4:3D
"he &ational Giodiesel Goard states E>ven low blends of biodiesel are highly
effective at enhancing the lubricity of diesel fuel. "he typical blend used for lubricity
enhancement is ' percent biodiesel mi#ed with CB percent diesel.F ?ther diesel fuel lubricating
additives are readily available, but are e#pensive if added at the manufacturers recommended
rates.
C5
TA2)E-3
INTEREST IN TRADINA OR INJESTINA
PARTICU)AS NO4O+ RESPONDENTS OO+ RESPONDENTS
K>7 == :B
&? :5 5'

"otal 1'% 1%%
A(&#!sis:
rom the above it is observe that
:B1 of the consumers are interest in doing trading.
5'1of the consumers are interested in investing.

C:
TA2)E-5
I(te%est i( I(vesti($ o% T%&i($ If P%ovie P%o'e% Aui&(ce
PARTICU)AS NO4O+ RESPONDENTS OO+ RESPONDENTS
Yes ;8 :6
No 78 6;
Tot&# 35D 3DD
A(&#!sis:
rom the above table it is known thatA
=*1 of the consumers are interested in investing if the company provides proper
guidance.
*$1 of the consumers are interested in trading if the company provides proper guidance.
C=
No4 of Res'o(e(ts
TA2)E M 6
C$
CONSUMER 2EHAJIOR -HI)E INJESTINA OR TRADINA
ANA)YSIS:
rom the above table it is observed thatA
,hile investing H trading '11 of the consumers are interested in taking risk.
,here as 5*1 of the consumers are avoiding to take risk in investing H trading.
1%1 of consumers are both risk taker and risk averter.
,here as '$1 of consumers cannot say.
CB
CC
TA2)E-7
PRIORITY O+ CONSUMERS -HI)E INJESTINA
ANA)YSIS:
1C1 of the consumers are interested in investing in mutual funds and as well as e0uities
where as 1B1 are preferring derivatives.
1%1 of the consumers responded that they prefer 2)7 as well as Initial 2ublic ?ffer.
)ost of the consumer that is '51 is interested in (ommodities while investing.
1%%
1%1

TA2)E-8
CONSUMERS PRE+ER INJESTMENTS USUA))Y
A(&#!sisA
rom the above table it is observed that
,hile investing =11 of the consumer usually prefer long term.
'C1 of the consumers prefer shot term.
,hile only 1%1 of the consumer prefer medium term.
1%'
1%*
TA2)E-:
CONSUMERS RATINA ATTITUDE -HI)E INJESTINA
ANA)YSISA
)ost of the consumers that is '$1 prefer e0uities because they have more security
+s well as '51 of the consumers are prefer derivatives
,here as 1C1 prefer )utual funds
1:1 prefer commodities
1%1 prefer 2ort olio )anagement 7ystems
:1 of the consumer prefer Initial 2ublic ?ffer
1%5
1%:
TA2)E-;
CONSUMER PRE+ERS DEMAT ACCOUNT
ANA)YSISA
rom the above table it is known thatA
1. $%1 of the consumers have <>)+" +((?U&"
'. ,here as *%1 do not have <>)+" +((?U&"
1%=
1%$
CHAPTER M J
+INDINA " SUAAESTIONSB
CONC)USION

+INDINAS
1%B
"he commodities market is increased to a great e#tended at present position. It is on an
average e0ual to the stock market.
It is found the commodities market was newly started in India and the control of
inance )inister regulatory authority.
It is also found that in the commodities market the investor can en!oy unlimited profits
by baring limited losses.
In cash market the profit H loss of the investor depends on the current market price, i.e.
the investor may get unlimited profits at the same time he may get unlimited losses.
+t present scenario the commodities market is increased to a great position.
+ppro#imately its daily turnover reaches to the e0ual stage of production market as
well as stock markets.
It in the international market there should be options in investments, but in Indian
commodity market there should not have any options in investment.
1%C
SUAAESTIONS
It is suggested that there is need of increase in the awareness in the minds of the
investors.
It may be suggest that, identification of problems by the regulatory authorities as early
as possible for the development of commodities trading system.
)ake IndiaJs economy more competitive open effective through adoption of
appropriate macroeconomic policies and financial standards which conform to
international best practices.
In order to increase the commodities market in India the inance )inistry and
regulatory authority should revise some of their regulations like contract si/e,
participation of II in the commodities market.
(ontract si/e should be minimi/ing because small investor cannot afford this much of
huge premiums.
+nd government also takes initiation to implement options in commodity market.
11%
CONC)USION
India is one of the top producers of a large number of commodities, and also has a long history
of trading in commodities and related derivatives. "he commodities derivatives market has
seen ups and downs, but seem to have finally arrived now. "he market has made enormous
progress in terms of technology, transparency and the trading activity. Interestingly, this has
happened only after the ;overnment protection was removed from a number of commodities,
and market forces were allowed to play their role. "his should act as a ma!or lesson for the
policy makers in developing countries, that pricing and price risk management should be left to
the market forces rather than trying to achieve these through administered price mechanisms.
"he management of price risk is going to assume even greater importance in future with the
promotion of free trade and removal of trade barriers in the world. +ll this augurs well for the
commodity derivatives markets.
111
2I2)IOARAPHY
,,,.)c#india.com
,,,.&cde#.com
,,,.(ommodityindia.com
,,,.7ebi.gov.in
,,,.;old.org
,,,.mc.gov.in
2OOKS :
utures, options and swaps by Dobert ,. 8olb.
<erivative markets in India '%%* edited by 7usan "homas.
?ptions, futures and other derivatives by Iohn -ull.
"homas 7usan('%%*) A+gricultural (ommodity )arkets in India4 2olicy Issues for
;rowth, Indira ;andhi Institute for <evelopment Desearch, )umbai.
11'
11*