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Smt. P.D. Hinduja Trusts


315, New Charni Road, Mumbai 400 004 Tel.: 022- 40989000 Fax: 2385 93 97. Email: hindujacollege@gmail.com

NAAC Re-Accredited A
Prin. Dr. Minu Madlani (M. Com., Ph. D.)


This is to certify that Mr. AKSHAT JAIN of Bachelor of Management Studies

Semester 5 [2016-2017] has successfully completed the Project on



________________ ________________
Project Guide Co-ordinator

________________ ________________
Internal Examiner External Examiner

________________ ________________
Principal College Seal




The Principal,
K.P.B. Hinduja College of Commerce,

315, New Charni Road,

Mumbai 400 004.

Respected Madam,

I, the undersigned hereby declare that the project report entitled

Investment in commodities is an original work developed and submitted by me
under the guidance of Ms. SHITAL MODY.

The empirical findings in this report are not copied from any report and are true
and best of my knowledge.

DATE: 28/11/16




Signature of Student



I, the undersigned would hereby like to thank University of Mumbai for giving
me an opportunity to present my skills in the form of this project which will not
only prove to be useful for my academic profile but will also prove to be fruitful
for my future for attaining jobs and also will help me to face the growing
competition in the corporate level.

I would also like to thank Prof. Shital Mody for assisting and guiding me in
every possible way she could have to prepare for preparing this wonderful project
or else completion of this project would not be possible.

I would also like to thank K.P.B. Hinduja College of Commerce for timely
availability of books and use of internet which have been an important input into
completion of this project.

Lastly, I would also like to thank my parents for providing all necessary funds
which were required for making of this project.

Place: Mumbai AKSHAT JAIN




My project is based on the Commodity market in India.

Commodities lie at the heart of the global economy. Access to and affordability of commodities
are essential to the wellbeing, growth and competitiveness of our economies, which are highly
dependent on commodity trade. Indeed, access to and affordability of essential food
commodities, such as staple foods, are important elements for the stability of many societies.

Markets are seen as a guarantee to ensure this access and affordability, with the preconditions
that they are transparent and competitive, and that market failures are properly addressed.
Volatile prices and actual or perceived government interference have raised questions over the
efficient functioning of commodities price formation and sparked fears that instability could
wreak havoc on global markets.

The report surveys the functioning and market organisation of eleven different (storable)
commodities markets to ascertain drivers of price formation and highlight potential market
failures. These markets are: crude oil, natural gas, iron ore, aluminium, copper, wheat, corn,
soybean oil, sugar, cocoa and coffee. The commodities can be grouped into four categories:
energy, raw materials and base metals, agricultural, and soft commodities.


Certificate 2
Declaration 3
Acknowledgement 4
Executive Summary 5
(1.4) SCOPE
(3.6) FMC


What is a commodity?
Commodities are products that can be bought, sold or traded in different kinds of markets.
Commodities are the raw materials that are used to create products which are consumed in
everyday life around the world, from food products in India to building new homes in Europe or
to running cars in the US.
There are two main types of commodities:
Soft commodities agricultural products such as corn, wheat, coffee, cocoa, sugar and
soybean; and livestock.
Hard commodities natural resources that need to be mined or processed such as crude
oil, gold, silver and rubber.
Throughout history, commodities have played a major role in shaping the global political
economy and have affected the lives and livelihoods of people. History is replete with examples
of how shortage of critical commodities sparked huge public outcry and social unrest.

Which kinds of commodities are traded in the world?

In the global markets, there are four categories of commodities in which trading takes place:

Energy (e.g., crude oil, heating oil, natural gas and gasoline).
Metals (e.g., precious metals such as gold, silver, platinum and palladium; base metals such as
aluminium, copper, lead, nickel, tin and zinc; and industrial metals such as steel).
Livestock and meat (e.g., lean hogs, pork bellies, live cattle and feeder cattle).
Agricultural (e.g., corn, soybean, wheat, rice, cocoa, coffee, cotton and sugar)

A commodity market is a market that trades in primary economic sector rather than

manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa

and sugar. Hard commodities are mined, such as gold and oil. Investors access about 50 major

commodity markets worldwide with purely financial transactions increasingly outnumbering

physical trades in which goods are delivered. Futures contracts are the oldest way of investing in

commodities. Futures are secured by physical assets. Commodity markets can include physical


trading and derivatives trading using spot prices, forwards, futures, and options on futures.

Farmers have used a simple form of derivative trading in the commodity market for centuries for

price risk management.


The objective of this project study is to enable the researcher:

To understand the concept of Commodity Market

To understand the characteristics and role of Commodity market participants
To know the various derivatives used in the commodity market.


To offer conceptual framework summarizing the distinctive characteristics of commodity

market, its functions and importance.
To report the findings of the survey concerning the problems of commodity market and
strategies they use to overcome them.


The scope of this project extends only up to the study of Commodity market .
It will help to understand the concept of Derivatives
It will help to understand what people understand about commodity market with the help
of a questionnaire with data analysis and its interpretation.


The study of Commodity Market requires technical and conceptual understanding of term
commodities for which a good deal of information need to collected.
Primary Data: The primary data is collected by surveying brokers and getting
first hand data.


Secondary Data are those, which have already been collected by someone else and which
have already been passed through the statistical process. This data is collected from the
following sources :

a) Scribd

b) Journals.

c) Newspapers

d) Internet websites (Google, Wikipedia and other major search engines).



The present paper is an attempt to represent the gist of research literature available on the

topic, which gives a direction for further growth of the research topic. Research has been

done to have a systematic review of both national and international studies done in the

relevant area. There are several studies that examine the market efficiency and price

forecasting, especially in developed countries. However, relatively very few studies exist on

commodity market efficiency in under developed and agriculturally dominant countries like


Chronological review of the existing research works & Literature:

Samuelson (1965) in his research paper Proof that properly anticipated prices fluctuate

randomly analyzed the role of futures prices as predictor of future spot prices for a given

contract and found that it follows a martingale; in other words, todays futures prices are the

best unbiased predictor of tomorrows futures prices. However, J P Danthine and R E Lucas

(1978) both researched on Information, Futures Prices and Stabilizing Speculation Asset

Prices in an Exchange economyand have shown theoretically that periodical failure of the

martingale property to hold is not evidence ofthe market inefficiency. Danthine (1978) first

criticized Samuelsons (1965) argument that spot commodity prices may not follow a sub-

martingale if they vary with such factors as the weather, which may be serially correlated. He

went on to develop possible reasons why the link between amartingale process and efficiency

in commodity markets could be problematic.

G.C.Rausser and C.Carter (1983) in their research examined the efficiency of the soybean,

soybean oil, and soybean meal futures markets using semi strong form test via structurally


based ARIMA models. They emphasized that unless the forecast information from the

models is sufficient to provide profitable trades, then superior forecasting performance in a

statistical sense has no economic significance.

William G.Tomek (1997) in his research paper Futures Trading and Market Information

Some New Evidence stressed that if the futures market is efficient, then it should be able to

forecast an econometric model. The development of co-integration theory by Engle and

Granger (1987)in their study provided a new technique for testing market efficiency. Aulton,

Ennew, and Rayner (1997), Crowder and Hamed (1993), Fortenberry and Zapata (1993),

Chowdhury(1991), Mckenzie and Holt (2002) and many others accepted and used co-

integration theory for testing market efficiency.

Gopal Naik and Sudhir Kumar (2002) in their research paper Efficiency and

Unbiasedness of Indian Commodity Futures Markets emphasized that agricultural

commodity futures market has not fully developed as competent mechanism of price

discoveryand risk management. The study found some aspects to blame for deficient market

such as poormanagement, infrastructure and logistics. Dominance of spectators also dejects

hedgers to participate in the market.

Narender L Ahuja (2006) in his research on Commodity Derivatives market in India:

Development, Regulation and Future Prospective, concluded that Indian commodity market

has madeenormous progress since 2003 with increased number of modern commodity

exchanges, transparency and trading activity. The volume and value of commodity trade has

shown unpredicted mark. This had happened due to the role played by market forces and the

active encouragement of Government by changing the policy concerning commodity


derivative. He suggested the promotion of barrier free trading in the future market and

freedom of market forces to determine the price.

K. Lakshmi (2007) in her research paper on Institutional Investors in Indian Commodity

Derivative Market-Prospective for the Futuresdiscussed the implications on the grant of

permission to Foreign Institutional Investors, Mutual Funds and banks in commodity

derivative markets. She found that participation of these institutions may boost the liquidity

and volume of trade in commodity market and they could get more opportunities for their

portfolio diversification.

Mukhopadhyay, Arup Ranjan, Pradhan, Biswabrata, and Gupta, Abhijit(2008) in their

research paper Developing an Index for Trading Through Multi Commodity Exchange in

India, researched to facilitate business development and to create market awareness, and

conducted an index named MCX COMAX for different commodities viz. agricultural, metal

and energy traded on Multi Commodity Exchangein India. By using weighted geometric

mean of the price relatives as the index, weights were selected on the basis of percentage

contribution of contracts and value of physical market. With weighted arithmetic mean of

group indices the combined index had been calculated. It served thepurpose of Multi

Commodity Exchange to make association among between various MCX members and their

associates along with creation of fair competitive environment. Commodity trading market

had considered this index as an ideal investment tool for the protection of risk of both buyers

and sellers.

Swami Prakash Srivastava and Bhawana Saini (2009) in their research paper Commodity

Futures Markets and its Role in Indian Economydiscussed that with the elimination of ban


from commodities, Indian futures market has achieved sizeable growth. Commodity futures

market proves to be the efficient market at the world level in terms of price risk management

and price discovery. Study found a high potential for future growth of Indian commodity

futuresmarket as India is one of the top producers of agricultural commodities.

Gurbandani Kaur and D.N Rao (2010), under the research done by them titled Efficiency

of Indian Commodities Market: A Study of Agricultural Commodity Derivatives Traded on

NCDEX have tested the market efficiency of agricultural commodities traded on National

Commodity Derivative Exchange of India and pointed out that Indian commodity derivative

market has witnessed phenomenal growth in few years by achieving almost 50 time

expansion inmarket. By applying auto correlation and run tests on four commodities namely-

Guar seed, Pepper, Malbar, refined Soya oil and Chana (Gram) the study observed the

random walkhypothesis and tested the week form efficiency of these commodities. Indian

agricultural commodity market is efficient inweek form of efficient market hypothesis.

Dharmbeer and Mr. Barinder Singh (2011) in their research on Indian Commodity

Market: Growth and Prospects summarizes theoretical and empirical research on the growth

and prospects of emerging commodity markets and the resulting implication on policy and

regulation. They foundfrom the previous studies that derivatives markets have supported the

hedging role of emerging derivatives markets.All commodities are globally traded and the

global demand-supply situation is widely known and availableto anyone who reaches out for

it. The commodity markets are nowhere as volatile as stock futures. Since commodity

exchanges promote price transparency, he refuses to buy the story that commodity exchange

fuel inflation.


Meenakshi Malhotra (2012) in her research paper Commodities Derivatives Market in

India: The Road Traveled and Challenges Ahead examine that the commodity price very

critical for the existence and growth of any industry and for the economy as a whole. Our

government has brought about sweeping reforms in the commodities markets so that industry

can efficiently manage the price risk they are faced with. They found the commodity price

will continue to behave unpredictably. Risk management through commodity derivatives will

give stability to the economic activities of the country.



(3.1) Meaning and History

A commodity market is a place where buyers and sellers can trade any
homogenous good in bulk. Grain, precious metals, electricity, oil, beef, orange
juice and natural gas are traditional examples of commodities, but foreign
currencies and certain financial instruments are also part of today's commodit y

To be considered a commodit y, an item must satisfy three conditions: It must be

standardized, and for agricultural and industrial commodities it must be in a
"raw" state; it must be usable (i.e., have a shelf life) upon delivery; and its price
must vary enough to justify creating a market for the item.

Buyers and sellers can trade a commodity either in the spot market (sometimes
called the cash market ), whereby the buyer and seller immediatel y complete
their transaction based on current prices, or in the futures market.

Commodities exchanges do not set the prices of the traded commodities. Rather,
suppl y and demand determines commodities prices. Exchange members, who act
on behalf of their customers or themselves, engage in open -outcry auctions in
pits on the exchange floors. During an open -outcry auction, buyers and sellers
announce their bids and offers. When two parties agree on a price, the trade is
recorded both manuall y and electronically. The exchange then disseminates the
price information to news services and other reporting agencies around t he

Commodities exchanges guarantee each trade using clearing members who are
responsible for managing the payments between buyer and seller. Clearing
members, which are usuall y large banks and financial services companies,
require traders to make good -faith deposits (called margins) in order to ensure
they have sufficient funds to handle potential losses and will not default on the
trade. The risk borne by clearing members lends further support to the strict
qualit y, quantit y and delivery specifications of commodities futures contracts .

Commodities are the raw materials used by virtuall y everyone. The orange juice
on your breakfast table, the gas in your car, the meat on your dinner plate and
the cotton in your shirt a ll probabl y interacted with a commodities exchange at
one point.

Commodities-exchange prices set or at least influence the prices of many goods

used by companies and individuals around the globe. Changes


in commodit y prices can affect entire segments of a n econom y, and these
changes can in turn spur political action (in the form of subsidies, tax changes
or other policy shifts) and social action (in the form of substitution, innovation
or other suppl y-and-demand activit y).

Most buyers and sellers trade com modities on the futures markets because
many commodit y producers, especiall y those of traditional commodities like
grain, bear the risk of potentiall y negative price changes when their products are
finall y ready for the market. Futures contracts, whereby the buyer purchases
the obligation to receive a specific quantit y of the commodit y at a specific date,
therefore offer some price stabilit y to commodit y producers
and commodit y users.

In general, however, the liquidit y and stabilit y of the commodities markets helps
producers, manufacturers, other companies and even entire economies operate
more efficientl y and more competitivel y.

Contrary to popular perception, commodity derivatives are not a new phenom -
enon. They appeared much before financial derivatives in the world. Clay
tablets appeared in Mesopotamia around 2000 BC as contracts for future
delivery of agricultural goods. The sto ry of Thales of Miletus (624 -547 BC) in
Aristotles writings is considered as the first account of an option trade whereb y
the price of the spring olive from the oil presses was negotiated in winter
without an obligation to buy the oil. The idea was to of fset the price risk and
maintain a year -round suppl y of seasonal agricultural crops in the markets.

During the 12th century, merchants began making commitments to buy or sell
goods even before they were physicall y available to reduce the risk of looting
while traveling along dangerous routes.
The central function of these contracts, later called derivatives, was to guaran -
tee a future price and avoid the risks of unexpected higher or lower prices.

In India, the futures market for commodities e volved by the setting up of

theBombay Cotton Trade Association Ltd., in 1875.A separate association by
the name "Bombay Cotton Exchange Ltd was e stablished following widespread
discontent amongst leading cotton mill owners and merchants over the
functioning of the Bombay Cotton Trade Association.

With the setting up of the Gujarati Vyapari Mandali in 1900, the futures
trading in oilseed began. Commodities like Ground nut, castor seed and cotton
etc. began to be exchanged. Raw jute and jute
goods began to be trade d in Calcutta with the establishment of the Calcutta
Hessian Exchange Ltd in 1919. The most notable c enters for existence of


futures market for wheat were the Chamber of Commerce at Hapur, which was
established in 1913.
The Bullion Futures market began in Bombay in 1990.

After the economic reforms in 1991 and the trade lib eralization, the Govt. of
India appointed in June 1993 one more com mittee on Forward Markets under
Chairmanship of Prof. K.N. Kabra. The Com mittee recommended that futures
trading be introduced in basmati rice, cotton, raw jute and jute goods,
groundnut, Rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed,
Seed, copra and soybean, and oils and oilcakes of all of them, rice bran oil,
castor Oil and its oilcake, linseed, silver and onions.

Functions :-
The key functions of the commodit y derivatives exchanges include:

Providing and enforcing rules and regulations for uniform and fair trad ing

Facilitating trading in a transparent manner.

Recording trading transactions, including circulating price movements and

market news, to the participating members.

Ensuring execution of contracts.

Providing a system of protection against default of payment (clearing).

Providing a dispute settlement mechanism.

Designing the standardized co ntract for trading which cannot be modified

by either parties.


(3.2) Structure of Commodity Market

National Commodity & Derivatives Exchange Limited (NCDEX):

NCDEX is a public limited company incorpora ted on April 23, 2003 under the
Companies Act, 1956. It has commenced its operations on December 15, 2003.

National Commodity & Derivatives Exchange Limited (NCDEX) is a

professionall y managed online multi commodit y exchange promo ted by IC IC I
Bank Limited (ICIC I Bank), Life Insurance Corporation of India (LIC), National
Bank for Agriculture and Rural Development (NABARD) and National Stock
Exchange of India Limited (NSE) ,Punjab National Bank (PNB), CR ISIL
Limited, Indian Farmers F ertilizer Cooperative Limited (IFFCO) and Canara
Bank by subscribing to the equit y shares have joined the initial promoters as
shareholders of the Exchange. Started with an authorized capital of Rs. 50
crores, ICIC I BANK, LIC, NABARD and NSE hold the maxi mum share in the
share capital (15% each).

NCDEX is located in Mumbai and offers facilities to its members in more than
390 centers throughout India. The reach will graduall y be expanded to more


NCDEX is the onl y commodit y exchange in the countr y promoted by national
level institutions. NCDEX is a nation -level, technology driven on -line
commodit y exchange with an independent Board of Directo rs and professionals
not having any vested interest in commodit y markets.

NCDEX currentl y facilitates trad ing of thirt y s ix commodities - Cashew, Castor

Seed, Chana, Chilli, Coffee, Cotton, Cotto n Seed Oilcake, Crude Palm Oil,
Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking
bags, Mild Steel Ingot, Mulberry Green Coco ons, Pepper, Rapeseed Mustard
Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds,
Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Ur ad (Black Matpe), Wheat,
Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases
trading in
more commodities would be facilitated.

Currentl y NCDEX has 700 members at 470 lo cations across the country.

Multi Commodity Exchange of India Limited (MCX):

MCX is an independent multi commodity exchange has permanent recognition

from Government of India for facilitating online t rading, clearing and settlement
operations for commodit y futures markets across the country.

It was inaugurated in November 2003 by Mr. Muk esh Ambani. It is

headquartered in Mumbai. The key shareholders of MCX are Finan cial
Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank,
State Bank of Indore, Stat e Bank of Hyderabad, State Bank of Saurashtra, SBI
Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda,
Canara Bank, Corporation B ank.

MCX offers futures trading in the follo wing commodity categories: Agri
Commodities, Bullion, Metals - Ferrous & Non-ferrous, Pulses, Oils & Oilseeds,
Energy, Plantations, Spices and other soft commodities.

Today MCX is offering spectacular growth opp ortunities and advantages to a

large cross section of the participants including Producers / Pr ocessors, Traders,
Corporate, Regional Trading Centers, Importer s, Exporters, Cooperatives, and
Industry Associations.

This new partnership of NSE and NABARD wi th MCX makes MCX consortium
the largest distribution network across the country.
MCX is an ISO 9001:2000 online nationwide m ulti commodity exchange. It has
over 900+ members spread across 500+ center s across the country, with more
than 5,000+ trading termi nals that provide a transparent robust and trustworthy
trading platform in more than 50 commodit y futures contract with a wide r ange
of commodit y baskets which includes metals, energy and agriculture


commodities. Exchange has pioneered major innovations in Indian commodities
market, which has become the industry benchmarks subsequently.
MCX is the onl y Exchange which has got three international tie -ups which is
with Tokyo Commodit y Exchange (TOCOM), the 250 ye ar old Baltic Freight
Exchange, London, Dubai M etals & Commodit y Centre (DMCC) & Dubai Gold
& Commodit y Exchange (DGCX), the strategic initiative of Government of

The trading system of MCX is state -of-the-art, new generation trading platform
that permits extremely cost effective operations at much greater efficiency. The
Exchange Central System is located in Mumb ai, which maintains the Central
Order Book.

Exchange Members located across t he country are connected to the central

s ystem through VSAT or any other mode of communication as may be decided
by the Exchange from time to time. The co ntrols in the system are system driven
requiring minimum human interventi on.

The Exchange Members places orders through the Traders Work Station (T WS)
of the Member linked to the Exchange, which matches on the Central S ystem
and sends a confirmation back
to the Members.

National Multi-Commodity Exchange of India Limited (NMCEIL):

National Multi Commodit y Exchange of India Limited (NMCEIL) is the first

demutualized, Electronic Multi -Commodity Exchange in India. On 25th Jul y,
2001, it was granted approval by the Government to organize trading in the
edible oil complex. It has started operating from November 26, 2002. It is being
supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural
Board and Neptune Overseas Limited. It got its recognition in October 2002.

(3.3) Types of Commodities Traded

Following are the commodities traded in MCX.

Gold, Gold M , Gold HNI, Silver, Silver M , Silver HNI



Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD
Palmolein, Crude Palm Oil ,Groundnut Oil, Mustard Seed, Mustard Seed Oil,
Cottonseed Oilcake, Cottonseed .


Pepper, Red Chilli, Jeera, Turmeric


Steel Long, Steel Flat, Copper, Nickel, Tin


Kapas, Long Staple Cotton, Medium Staple Cotton.

Chana, Urad, Yellow Peas, Tur

Rice, Basmati Rice, Wheat , Maize, Sarbati Rice

Crude Oil

Rubber, Guar Seed , Gur, Guargum Bandhani, Guargum, Cashew Kernel ,
Guarseed Bandhani .



Following are the commodities traded in NCDEX.

1) Agro Products - Arabica Coffee Cashew, Castor Seed Chana, Chilli Common Raw Rice ,
Common Parboiled Rice, Crude Palm Oil , Cotton Seed , Oilcake Expeller Mustard Oil , Grade
A Parboiled Rice, Grade A Raw Rice
Guar gum , Guar Seeds ,Gur , Jeera , Jute sacking bags , Lemon Tur ,Long Staple Cotton
Maharashtra ,Pepper, Raw Jute ,Coffee , Rubber , Sesame Seeds ,Soya bean.

2) Base Metals Mild Steel Ingots

3) Precious Metals Gold , silver.

(3.4) Market Participants

Broadl y speaking, the commodit y futures market ecosystem has the following
main participants:

1) Scalpers/Day Traders
They are those participants who take positions in futures con tracts for a single
day and liquidate them prior to the close of the same trading day. The scalpers
have the shortest time horizon.
They hold their positions for a few minutes while day traders close their
positions before the end of trading each day. Both the scalpers and the day
traders attempt to make profit out of the intra-day movement in commodit y
futures prices. They do not carry over their position to the next trading day.
These market players provide liquidit y in futures market due to large volumes of
transactions undertaken by them. However, it needs to be acknowledged that
such players can also negativel y affect the price formation and market
functioning due to excessive reliance on speculative trading. A special category
of scalpers is that of high frequency traders who onl y hold contracts for micro-
seconds thanks to the use of superfast computers and algorithms.

2) Hedgers
They are essentiall y players with an exposure to the underl ying commod it y and
associated price risk producers or consumers who wish to transfer the price
risk on to the market. The futures markets exist primaril y for hedgers.


The hedgers simultaneousl y operate in the spot market and the futures market.
They try to reduce or eliminate their risk by taking an opposite position in the
futures market on what they are trying to hedge in the spot market so that both
positions cancel one another.

They operate in the spot market to buy or sell the physical commodit y, and in
the futures market to offset any loss arising out of price fluctuations in the spot

Hedgers are those who protect themselves from the risk associated with the
price of an asset by using derivatives. A person keeps a close watch upon the
prices discovered in trading and when the comfortable price is reflected
according to his wants, he sells futures c ontracts. In this way he gets an assured
fixed price of his

In general, hedgers use futures for protection against adverse future price
movements in the underl ying cash commodit y. Hedgers are often businesses, or
individuals, who at one point or another deal in the underl ying cash commodit y.

Take an example: A Hedger pay more to the farmer or dealer of a produce if its
prices go up. For protection against higher prices of the produce, he hedges the
risk exposure by buying enough future contracts of the produce to cover the
amount of produce he expects to buy. Since cash and futures prices do tend to
move in tandem, the futures position will profit if the price of the produce raise
enough to offset cash loss on the produce.

3) Speculators
They are traders with no genuine commercial business to the underl y ing; they do
not hedge but trade with the objective of making profits from move ments in
The speculators generall y assume higher risk and also expect a higher return on
their investments. They do not have any real need to buy, sell or take delivery
of the actual commodities. They wish to liquidate their positions before the
expiry date of the contract and carry out a purel y financial transac tion. Due to
the margin system, speculators opera te in the futures market with minimum
For instance, upfront initial margin of 5 percent (or less) of the value of the
contract provides speculators with substantial leverage. The speculators may be
professional institutional investors dealing in big contracts or small individual
traders who trade on their own accounts.


The speculators are supposed to provide market liquidit y as the number of those
seeking protection against declining prices is rarel y the same as the number of
those seeking protection against rising prices. In the financial media,
speculators are frequentl y labeled as investors and non -commercial players.

4) Arbitrageurs
They are traders who buy and sell to make money on price differentials across
different markets. They simultaneousl y buy or sell the same commodities in
different markets. Arbitrage keeps the prices in different markets in line with
each other. Usuall y, such transactions are risk -free.

5) Aggregators
They bring liquidit y in the futures market and help farme rs to benefit from price
discovery and price risk management. Aggregators could be farm ers
cooperatives, agricultural institutions like NAFED (National Agricultural Co -
operative Marketing Federation), farmers or producers unions and non -gov-
ernmental organizations that are allowed to collect commodities from farmers
and sell in the futures market.

6) Position Traders
They maintain overnight positions, which may run into weeks or even months, in
the anticipation of favourable movement in the commodit y fu tures prices. They
may hold positions in which they run huge risks and may also earn big profits.

7) Brokers
They are t ypicall y act as intermediaries and facilitate hedgers and speculators.
A commodit y broker is a firm or individual who acts as a go betwe en to buy or
sell commodit y contracts on behalf of clients for a commission.

8) The Exchange
It is a central place (physical or virtual) where market participants trade
standardized futures contracts.


9) Regulator oversees the working of the exchange. The Forward Markets
Commission (FMC) is the regulatory authorit y for the commodit y futures market
in India. It is equivalent of the Securities and Exchange Board of India (SEBI),
which regulates the equities markets in India.

(3.5) Derivatives
Commodities whose value is derived from the price of some underl ying asset
like securities, commodities, bullion, currency, interest level, stock market
index or anything else are known as Derivatives.

In simpler form, derivatives are financial securit y such as an option or future

whose value is derived in part from the value and characteristics of another
securit y, the underl ying asset. It is a generic term for a variety of financial
instruments. Essentiall y, this means you buy a promise to convey ownership of
the asset, rather than the asset itself.

The legal terms of a contract are much more varied and flexible than the terms
of propert y ownership. In fact, its this flexibilit y that appeals to investors.
When a person invests in derivative, the underl ying a sset is usuall y a
commodit y, bond, stock, or currency. He bet that the value derived from the
underl ying asset will
increase or decrease by a certain amount within a certain fixed period of time.

The origin of derivatives can be traced back to the need of farmers to protect
themselves against Fluctuations in the price of their cro p. From the time it was
sown to the time it was ready for harvest, farmers would face pri ce uncertaint y.
Through the use of simple derivative products, it was possible for the farmer to
partiall y or full y transfer
price risks by locking -in asset prices. These were simple contracts developed to
meet the needs of farmers and were basicall y a means of reducing risk.

A farmer who sowed his crop in June faced unce rtaint y over the price he would
receive for his harvest in September. In years of sca rcit y, he would probabl y
obtain attractive prices. However, during times of oversuppl y, h e would have to
dispose off his harvest at a very low price. Clearl y this meant th at the farmer
and his famil y were
exposed to a high risk of price uncer tainty.

On the other hand, a merchant with an ongoing requirement of grains too would
face a price risk that of having to pay exorbitant prices during dearth, although
favorable prices could be obtained during pe riods of oversupply.


Under such circumstances, it clearl y made sense for the farmer an d the merchant
to come together and enter into a contract whereby the price of the grain to be
delivered in September
could be decided ear lier. What they would then negotiat e happened to be a
futures-t ype contract, which would enable both parties to eliminate the price

Today, derivative contracts exist on a varie t y of commodities such as corn,

pepper, cotton, wheat, silver, etc. Besid es commodities, derivativ es contracts
also exist on a lot of Financial underl ying like stocks, int erest rate, exchange
rate, etc. Commodit y Futures are contracts to buy sp ecific quantit y of a
particular commodity at a future date. It is similar to the inde x futures and stock
futures but the
underl ying happens to be commodities instead of stocks and indices. Commodit y
futures market has been in existence in India for centuries.
These raw commodities are traded on regulated exchanges, in which they are
bought and sold in standardized Contracts. Commodit y Future is a Derivative
instrument where the
underl ying asset is a commodit y. Commodit y future are exchanges traded
contracts to sell or buy standardized futures contract.

A derivative contract is an enforceab le agreement between two parties where the

value of the contract is based or derived from the value of an underl ying as set.
The underl ying asset can be a commodit y, stock, precious metal, currency, bond,
interest rate, index, etc.
Some of the widel y used derivative contracts are as following:

1) Forwards:
A forward contract is a non -standardized or customized contract be tween two
parties to undertake an exchange of the underl ying asset at a specific future
date at a pre-determined price. It is a bilateral agreement whose terms are
negotiated and agreed upon between two parties. It is transacted over -the-
counter and is not traded on an exchange. The contract is executed by both
parties on the due date by delivery of asset by the seller and payment by the

2) Futures:
Commodit y futures contracts are agreements made on a futures ex change
to buy or sell a commodit y at a pre -determined price in the future. The
futures contracts are traded on regulated exchanges and the terms of the
contract are standardized by the exchange. What is negotiated by the coun -
terparties (buyer and seller of a futures contract) is onl y the price.


The price is discovered through the offers and bids process. As explained in the
previous chapter, all contracts are settle d by cash or physical delivery of the
underl ying commodity on the expiry date of the contract. In Indian exchanges,
almost all commodity futures contracts are cash -settled.
The futures contracts available on a wide spectrum of commodities like Gold,
Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, provide excellent
opportunities for hedging the risks of the farmers, importer s, exporters, traders
and large scale consumers. They also make open an avenue for qualit y
investments in precious
metals. The commodities market, as the movements of the stock market or debt
market do not affect it provides tremendous opportunities for better
diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this

3) Options:
Commodit y options are contracts that give the owner the right, but not the
obligation, to buy or sell an agreed amount of a commodity on or before a
specified future date.
There are two t ypes of options - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantit y of the underl ying asset, at a given
price on or before a given future date. Puts give the buyer the right, but not the
obligation to sell a given quantit y of the underl ying asset at a given price on or
before a given date.

Like futures, options are also financial instruments used for hedging and
speculation. The commodit y option holder has the right, but not the obligation,
to buy (or sell) a specific quantit y of a commodit y at a specified price on or
before a specified date.

Option contracts involve two parties 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.

There are two t ypes of commodit y options: a call opt ion gives the holder a
right to buy a commodit y at an agreed price, while a put option gives the
holder a right to sell a commodit y at an agreed price on or before a specified
date (called expiry date). The option holder will exercise the option onl y if it is
beneficial to him; otherwise he will let the option lapse.

For example, suppose a farmer buys a put option to sell 100

kg of wheat at a price of 1 5 per kg and pays a premiumof 0.5 per kg (or a total
of 50). If the price of wheat declines to say Rs 13 before expiry, the farmer will
exercise his option and sell his wheat at the agreed price of 1 5 per kg. However,


if the market price of wheat increases to say 20 per kg , it would be
advantageous for the farmer to sell it directl y in the open market at the spot
price, rather than exercise his option to sell at15 per kg .

4) Swaps:
A commodit y swap is an agreement between two parties to exchange cash
(flows) on or before a specified future date based on the underl ying value of
commodit y, currency, stock or other assets. Unlike futures, swaps are not
exchange-traded instruments. Swaps are usuall y designed by banks and finan cial
institutions that also arrange the trading of these bilateral contracts.

The two commonl y used swaps are :

Interest rate swaps: These entail swapping onl y the interest related cash flows
between the parties in the same currency .

Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different curren cy than
those in the opposite direction.

5) Warrants:

Options generall y have lives of upto one year, the majorit y of options traded on
options exchanges having a maximum maturit y of nine months. Longer dated
options are called warrants and are generall y tr aded over the counter.

6) Baskets:

Basket options are options on portfolios of un derl ying assets. The underl ying
asset is usuall y a weighted average of a basket of assets. Equity index options
are a form of basket options.

What are exchange-traded derivatives?

Broadl y speaking, there are two groups of derivative contracts exchange-

traded and over -the-counter (OTC) based on the manner in which they are
traded in the market.
Exchange-traded derivatives are those instruments (such as futures and options)
that are traded on derivatives exchanges. The last decade has witnessed
tremendous growth in this segment.


In terms of number of traded contracts, the commodit y derivative markets have
experienced a rapid increase due to heightened activit y of financial players in
these markets, and a robust rise in volumes in mainland Chinese exchanges,
which accounted for 41 percent of global volumes in 2012.
The commodit y derivatives markets are onl y a small part of global derivatives
trading that is based o n underl ying assets such as currencies, interest rates,
stocks and other financial instruments. According to statistics provided by the
Bank for International Settlements (BIS) on derivatives traded on organized ex -
changes, the total notional amount of all the outstanding positions at the end of
September 2014 stood at $77.9 trillion1. The combined turnover in the worlds
derivatives exchanges totaled $520 trillion during the second quarter of 20132
and $1,416 trillion by the end of 2013.3

What are over-the-counter (OTC) derivatives?

OTC derivatives are contracts that are privatel y negotiated and traded between
two parties, without going through an exchange. The market players trade with
one another through telephone, email, and proprietary electronic tr adingsystems.
The most common products traded in OTC derivative market are swaps, exotic
options and forward rate agreements.
The OTC derivative market is mainl y dominated by banks, hedge funds and oth -
er highl y sophisticated financial players. However, O TC commodit y derivatives
are used for non -standardized contracts that can meet specific demands of the
contracting parties.

The OTC derivative market is the largest market in the world of which the
commodit y OTC derivatives are the smallest part and the i nterest rate and
foreign exchange derivatives contracts are the most significant.

Since OTC derivatives contracts are privatel y negotiated and traded without any
supervision of an exchange, there is always the risk of a counterpart y
defaulting. The counterpart y risk has gained particular importance following the
collapse of major financial institutions such as Lehman Brothers in 2008 and has
been addressed in the post -crisis regulatory reform programmes.

The OTC markets, which began in the 1980s, are stil l opaque and subject to
fewer regulations. Post -crisis, several initiatives have been launched to move
the OTC contracts to regulated central counterparties (CCPs) in a bid to reduce
counterpart y risk among derivatives market participants.


Nevertheless, movement of OTC con tracts to a large CCP may not be the best
solution because a CCP may also fail due to various reasons including a default
of one or more members and losses on investment of collateral.



Forward Markets Commission (FMC) acts as a r egulatory authorit y, which is a

statutory body set up under the Forward Contracts (Regulation) Act 1952 (FC(R)

FMC operates under the administrative authorit y of the Ministry of

Finance, Department of Economic Affairs, Gove rnment of India.
The Commission monitors and maintains the commodit y futures mar kets well

Immoderate measures like skipping trading in certain deliveries of th e contract,

closing the m arkets for a determined period and even ruling out the contract to
overcome exigency conditions are assumed during shortages.

The Commission adopts pro-active steps to ensure that there is no misuse of the
market and that the prices po ndered on the Exchange platform are governed by
the demand and supply factors in the physical markets for which the regulator
calls for dail y reports from the Exchanges.

Forward Contracts are the exchangeable contrac ts where the quantit y, qualit y,
date of maturit y and place of delivery are all standardiz ed. The parties to the
contract onl y decide upon the price and the number of units to b e traded.
Through the commodit y Exchanges, the futures contracts are entered which are
governed by the provisions of th e
FC (R) Act.


The role of FMC in the forward market is substantiated in this section w ith a
description of its functions in detail.

a) The FMC advises the Central Government i n respect of the recognition or

withdrawal of acknowledgement from any association . It advises the government
about the issue originating out of the administration of this act.

b) The FMC comprises the task of continuing forward markets under observation
and take required actions, which should be according to controls given to the
commission by the Forward Contract Regulation Act .

c) The FMC accumulates information regarding the t rading conditions in respect

of goods including information concerning suppl y, demand and prices and
publishes essential information.

It also executes the tas k of submitting to the Central Government periodical

reports on the functioning of this Act and on the working of forward markets
associating to such goods.

d) The FMC makes recommendations broadl y with a view of ameliorating the

organization and working of forward markets.

e) The FMC undertakes the examination of the acco unts and other documents of
the registered association or any member of such association.

f) The FMC performs such determined duties and exercise assigned powers by
theForward Contract R egulation Act.



Throughout the past decade the commodity futures market in India and abroad
has witnessed a significant growth in terms of both network and volume.
In general, thecommodities market survives in two distinguishable forms the
over-the-counter (OTC)
market and the exchange based market. There exists the spot and the derivatives
segments as in equities. Spot markets are essentiall y OTC markets .
Participation is limited to people who are necessitated with that commodit y,
such as the farmer, processor, wholesal er, etc.

Through the exchange-based markets with standardized contracts, settlements,

etc. majorit y of the derivatives trading takes place
The exchange-based markets are fundamentall y derivative markets and are like
equit y derivatives in function. A pers on can purchase a contract by paying onl y
a percentage of the contract value and everything is standardized.

Even though there is a provision for delivery, many contracts are squared -off
before expiry and are settled in cash. There are 23
exchanges operating in India and carrying out futures trading activities in as
many as 146 commodit y item .

The Government of India recognized the National Multi Commodit y

Exchange (NMCE), Ahmadabad; Multi Commodit y Exchange (MCX) and
National Commodit y and Derivative Ex change (NCDEX), Mumbai, as
nationwide multi -commodit y
exchanges as per the recommendation of the FMC. In November 2003, MCX
commenced trading and NMCE in November 2002 and NCDEX in December

A total of 94 commodities was traded in December 2006 in t he commodit y

futures market, as compared to 59 commodities in January 2005. These
commodities comprised major agricultural commodities such as rice, wheat,
jute, cotton, coffee, major pulses, edible oilseeds, spices, metals, bullion, crude
oil, natural gas and pol ymers, among others.

In price discovery for trading commodities, an efficient and well -organized

futures market is generall y acknowledged to be helpful



Major developments have occurred in commodit y futures markets in India in the

last few decades. It is ascertained that though derivatives trading commenced in
the securities market in June 2000, and it has been growing at an accelerated

The commodit y market that is mentioned today pe rtains to the derivative market
in the country for various commodities that are controlled by the commodit y

The difference between futures price and spot prices is known as the cost of
carry. This comprises of interest rate, cost of transport, and warehousing.
Preferabl y, as the interest cost becomes negligible for say three months, the
futures prices should come closer to the spot price at the time of delivery. In
India, there is a weak linkage between
the spot and futures markets.

A financial contract whose value is derived from the value of a stock price, a
commodit y price, an exchange rate, an interest rate, or even an index of prices
is known as the derivative securit y. There are various reasons for a commodities
derivatives to be traded in a market.

A trader is enabled to hedge some pre -existing risk by taking positions

in derivatives markets that offset potential losses in t he underl ying or spot
market by using the derivative. since c ommodit y derivatives arrived in India,
barel y about a d ecade after they arrived in C hicago, the commodities futures
market in India has gone through an unprecedented flo urish in terms of the
number of modern exchanges, the number of commodities reserved for
derivatives trading and the
value of futures trading in commodities.

There are several obstructions to be dealt with and consequences to be decided

for a confirmed development of the Indian market.
Several researchers examined how India pulled it off in such a short time span.

FitchRatings (2004) found th at most of the derivatives traders in India describe

themselves as hedgers and Indian laws generall y r equire that derivatives be used
primaril y for hedging purposes.

Nair (2005) examined the commodit y derivatives, futures

market in India and found that th e market was in a state o f hibernation for the
past four decades, which was characterized by suspicion on the benefits of
futures trading. This is partl y a response to the predominant role being assigned
to the market forces in price determination and the consequent need for
providing market -based derisking tools.


Growth Of Commodity Futures Trading Volume In India

From the Table it could be realized that the com modit y futures markets in India
have gained a significant growth over the year s. The most prominent commodit y
exchange in India is the Multi Commodity Exchang e of India (MCX), which
found a steady increase from Rs.0.63 million to Rs.14.88 million during the
period 2005-2012.

There are market fluctuations in the volume of tradi ng in other exchanges in

India.The National Commodit y and Derivatives Exchange Lim ited (NCDEX) has
experienced a double fold increase from Rs.0.88 million to Rs.1.59 million
during the period 2005 -2012.

The National Multi Commodit y Exchange of India Ltd (NM CE) has witnessed a
growth from Rs.12 crores to Rs. 176 crores during the period 2005 -2012. There
has been an optimal growth in the others ex changes during the study period
(Source: Ministry of Consumer Affairs, Economic Survey) Rs in crores

Exchanges 2005 2006 2007 2008 2009 2010 2011 2012

MCX 633,324 2,025,663 2,730,415 4,284,653 5,956,656 7,895,404 15,597,095 14,881,057

NCDEX 883,209 1,243,327 774,965 628,074 805,720 973,217 1,810,210 1,598,425

NMCE 12107 111462 25,056 37,272 195,907 180,738 268350 176570

Others 108705 104033 124051 83885 132173 445366 450446 390785

Total 1637345 3484485 3654487 5033884 7090456 9494725 18126101 17046837



The non-agricultural commodities selected for the present study are as follows:

1) Brent Crude oil

Brent crude oil is a global benchmark from North Sea, which is a light sweet
crude oil. Brent crude oil is broadly applied to influence crude oil prices in Europe and in other
parts of the world.

India ranks among the top 10 largest oil-consuming countries , which accounts for about 30 per
cent of India's total energy consumption. India faces a large supply shortfall, as domestic oil
production is unconvincing to keep pace with

India's approximate production is only 0.8 million barrels per day.

The oil reserves of the country (about 5.4 billion barrels) are located primarily in
Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins. India had a total
of 2.1 million barrels per day in refining capacity.
Government has permitted foreign participation in oil exploration, an activity
restricted earlier to state owned entities.

2) Crude oil
Crude oil describes for 35 percent of the world's primary energy consumption.
Crude oil is a complex mixture of various hydrocarbons found in the upper layers of the earth's
crust, which is often attributed as the Mother of all Commodities because of its importance in
the manufacturing of a wide variety of materials. Global proven oil reserves in 2011 were around
1652.6 thousand million barrels in which the OPEC had
1196.3 thousand million barrels. Global oil demand was found to be at 88.3 million
barrels per day (mmb/d) in 2011, an increase of around 0.7% from the previous year(2010).

Crude oil production during the period April-March 2012 was 38.19 million
metric tonnes (MMT), as equated with 37.71 MMT during the representative period last year.
The total oil consumption in 2010 was approximately 3.34 mmb/d. India is the 4th largest
consumer of oil and imports more than 70% of its crude oil requirement.

3) Natural Gas

A vital component of the world's supply of energy is the Natural gas, which is one
of the cleanest, safest, and most useful of all energy sources .
Given the growing resource base and relatively low carbon emissions when compared to other
fossil fuels, natural gas is potential to play a greater role in the world energy mix. The worlds
natural gas reserves are figured to be 7,360.9 trillion cubic feet (tcf).


The Middle East holds 38.4% of the worlds reserves, while an additional 21.4% is located in the
former Soviet Union, with only 9% held in the OECD countries. In 2011, the global natural gas
production was 3,276.2 billion cubic metre (bcm), up 3.1% from 3,178.2 bcm in 2010, and
consumption was 3,222.9 bcm, compared with 3,153.1 bcm in the previous year.

The share of natural gas in India's primary energy mix decreased to 9.8% in 2011 from11% in
2010. However, this share is quite low compared to the global average (24%), primarily due to
the supply-side constraints. The natural gas (including CBM) production in 2011 was 46.1 bcm,
which is 12.8% higher than the actual production of 50.8 bcm in 2010. India's consumption of
natural gas was around 61.1 bcm in 2011, which accounts for only 1.9% of the world natural gas

4) Aluminium

The third most abundant element present in the earth's crust is Aluminium, which
exists in a very stable combination with other materials particularly silicates and oxides.

As aluminium is known for its durability and high resale value, it is resistant to common
atmospheric gases and a wide range of liquids. In 2012, global primary aluminium production
was 40.974 million metric tonnes (MMT), up from 39.930 MMT in 2011.

Global primary aluminium consumption rose to 48.075 MMT in 2012, compared with 44.594
MMT in 2011. As a result of starting new smelters and restarting smelters that had been shut
down in 2008 and early 2009, world's primary aluminum production increased in 2012 compared
to the production in 2011. Germany, Russia and Canada are the major aluminium exporting
countries, while major aluminium importing countries are USA, Germany and China. India is the
fifth largest producer of aluminium in the world with an average annual production of 171,3924

5) Copper

A malleable and ductile metallic element that is an excellent conductor of heat

and electricity is Copper, which is also corrosion resistant and antimicrobial and stands at the
third place after steel and aluminium, in the context of consumption.

It an important contributor to the national economies of mature, newly developed and developing
countries. One of the most recycled of all metals and the ability to recycle metals over and over
again that makes Copper a material of choice.

In 2011, worlds copper mine production continued to underperform with respect to capacity,
and remained at the 2010 level of 16.005 million metric tonnes (MMT). The global refined
copper production was 19.630 MMT in 2011, which is up from 18.998 MMT in 2010. The
global refined copper consumption was 19.988 MMT in 2011, compared with 19.375 MMT in
the previous year. Growth in elaborated copper usage has been particularly strong in Asia, where


demand has expanded more than fivefold in less than 30 years. India's production of refined
copper in 2012 is around 4% of the total world production at 689,312 MT.

6) Lead

A very corrosion-resistant, ductile, and malleable blue-grey metal that has been in
use for at least 5,000 years is Lead, which is usually found in association with zinc,
silver, as well as copper ores.
Lead can be recycled indefinitely, without loss of its physical or chemical properties that is more
than 60% of the total lead production.The lead production process consumes less energy as
compared to the production of any other metal.

The global lead mine production increased by 11.5% in 2012 over that of 2011.
Global refined lead production increased by 0.22% from 10.594 million metric tonnes (MMT) in
2011 to 10.617 MMT in 2012. The worlds refined lead consumption rose to 10.553 MMT in
2012, up from 10.418 MMT in 2011. The refined lead production in India was around 169,301
MT in 2012.

7) Nickel
A metal with a bright future, the main alloying metal needed in the production of
certain types of stainless steel, is Nickel. The world production of primary Nickel during 2011
was 1.612 million metric tonnes (MMT), which is up by 11.53% as compared with 1.446 MMT
in 2010.

The world's consumption during 2011 was at 1.608 MMT and in 2010 was at 1.465 MMT in
2010 that was up by 9.76%. The world's largest nickel exporters accounting for almost 49% of
world exports are Russia, Canada and Norway. China, USA and Germany are the world's largest
nickel importers accounting for around 48% of world imports. The Nickel market in India is
totally dependent on imports. The annual demand for nickel in India is around 40,000 MT.

8) Gold

Gold, being the oldest precious metal known to man, is primarily a monetary asset
and partly a commodity and the world's oldest international currency.

An important element of global monetary reserves, with regard to the investment value, more
than two-thirds of total accumulated holdings, the world investment in gold has amounted to
1614 MT in 2012, broadly flat year-on-year, but the approximate value of this demand reached a
new record of almost $87 billion. The gold mine production increased from 12 MT to 2848 MT
in 2012 and the combined demand for bars & coins dropped from 1515 MT to 1256 MT. India is
the worlds largest market for gold jewellery and a key driver of the global gold demand. The
rural parts demand two thirds of the Indian demand for gold.


9) Silver
A brilliant grey-white metal that is soft and malleable is Silver, which has unique
properties including its strength, malleability, ductility, electrical and thermal
conductivity, sensitivity, high reflectance of light, and reactivity.

Lead ore is the main source of silver, though it can also be found associated with copper, zinc
and gold and produced as a by-product of base metal mining activities. The worldwide silver
fabrication demand was 876.6 million ounces (Moz) in 2011 - down by 1.5% from the value in
2010, but still reaching its second highest level since 2000.

Globally, in 2011, the physical silver bar investment grew by 67% to 95.7 Moz, while fabrication
of coins and medals rose by almost 19% to an all-time high of 118.2 Moz. Silver is
preponderantly traded on the London Bullion Market Association (LBMA) and COMEX in New
York. LBMA is the metals main physical market that the global hub of over-thecounter trading
in silver. About 2500 Metric tonnes (MT) per year is the average annual demand for silver in
India. The countrys production was around 342.13 MT in 2011.



A Hypothesis is a statement without a proof, it is to be proved. There are two types

of hypothesis : null hypothesis and alternative hypothesis. A hypothesis may be
proved correct and wrong.

A commodity market is a market that trades in primary economic sector rather than
manufactured products. Soft commodities are agricultural products such as wheat,
coffee, cocoa and sugar.

To know whether there is awareness amongst the public about the

commodity market , and their willingness to invest .


Analysis & Interpretation
Q.1) What is your Occupation ?


Frequency Percent Valid Percent Percent
Valid business 24 24.0 24.0 24.0
profes sion 13 13.0 13.0 37.0
govt service 37 37.0 37.0 74.0
private service 25 25.0 25.0 99.0
others 1 1.0 1.0 100.0
Total 100 100.0 100.0


private service



govt service

Interpretation: the above graph depicts that 37% of the respondents are government employees
,25% are from private service,1% are from others like agriculturist , 24% are businessmen &
13% are private service

Inference: most of the respondents are were from government service & business men .


Q.2) What is your annual income ?
Aannual income

Frequency Percent Valid Percent Percent
Valid below 50000 6 6.0 6.0 6.0
5000-100000 37 37.0 37.0 43.0
10001-200000 38 38.0 38.0 81.0
200001-400000 14 14.0 14.0 95.0
more than 400001 5 5.0 5.0 100.0
Total 100 100.0 100.0
Aannual income

more than 400001

below 50000





Interpretation: above graph depicts that most of the investors income lies between 10001-
200000 followed by 38%,37% investors income lies between 50000-100000,14% of the
investors lies between 20001-400000,6% of the investors lies below 50000 & 5% of the
investors lies more than 400000 .


Q.3) What is your preferred Investment Criteria ?

Investment creteria they prefer ot invest

Frequency Percent Valid Percent Percent
Valid Bank deposit 10 10.0 10.0 10.0
Real estate 4 4.0 4.0 14.0
stocks 32 32.0 32.0 46.0
commodity future market 7 7.0 7.0 53.0
mutual fund 5 5.0 5.0 58.0
life ins urance 8 8.0 8.0 66.0
derivitive market 32 32.0 32.0 98.0
bonds 2 2.0 2.0 100.0
Total 100 100.0 100.0

Investment creteria they prefer ot invest

Bank deposit
Real estate
derivitive market



life insurance
commodity future mar
mutual fund

Interpretation: From this chart it is known that 32% of the respondents prefer to invest in
derivative and stocks, 10% of the respondents in bank deposit, 8% & 7% in life insurance &
commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds


Q.4 ) Have you ever invested in futures and options ?

Have you invested in future & options

Frequency Percent Valid Percent Percent
Valid yes 100 100.0 100.0 100.0

Have you invested in future & options


Interpretation: As my targeted customer is derivative investors, the above diagram depicts

about the investment level of the derivative investors is 100% that is respondents are purely from
derivative market .


Q.5 ) Factors taken into Consideration before investing in derivatives ?

factors considered while investing in derivitive market

Frequency Percent Valid Percent Percent
Valid price 9 9.0 9.0 9.0
ris k 39 39.0 39.0 48.0
return 45 45.0 45.0 93.0
demand & supply 7 7.0 7.0 100.0
Total 100 100.0 100.0

factors considered while investing in derivitive market

demand & supply price

7.0% 9.0%


Interpretation: The no. of people considering return as the most important factor before
investing is 45% , which is almost half of the total target population .The second most driving
factor was the rate of risk at 39% , the least considered factors for investing as per the analysis
would be demand & suppy and price of the underlying at 7% and 9% respectively .


Q.6 ) how did you come to know about commodity market ?

how do you came to know about commodity market

Frequency Percent Valid Percent Percent
Valid not attempted 61 61.0 61.0 61.0
frnds/colleauges 12 12.0 12.0 73.0
bill boards /advt/brochure 9 9.0 9.0 82.0
agents 18 18.0 18.0 100.0
Total 100 100.0 100.0

how do you came to know about commodity market


bill boards/advt/bro

not attempted

Interpretation: most of the investors came to know about the commodity by agents the
respondents who have invested in commodity market from them 18% of the people came to
know by agents ,9% from the bill boards /advertisement/brochure &12% people camee to know
by there friends and colleagues. Here not attempted indicates the people who have not invested
in commodity market have not attempted this question.


Q.7 ) Commodity preferred for trading ?

commodity you prefer for trading

Frequency Percent Valid Percent Percent
Valid not attempted 64 64.0 64.0 64.0
Agro products 10 10.0 10.0 74.0
Base metals 5 5.0 5.0 79.0
Precious metals 16 16.0 16.0 95.0
Energy products 5 5.0 5.0 100.0
Total 100 100.0 100.0

commodity you prefer for trading

Energy products
Precious metals

Base metals


Agro products not attempted


Interpretation: among the persons who have invested in commodity in them 10% prefer to trade
in agro products, 5% in base metals, 16% in precious metals & 5 % in energy products .here not
attempted indicates the people who have not invested in commodity market have not attempted
this question.


Q.8 ) Was the investment in commodities beneficial ?

commodity future mkt provides benefit

Frequency Percent Valid Percent Percent
Valid not attemted 62 62.0 62.0 62.0
strongly agree 9 9.0 9.0 71.0
agree 10 10.0 10.0 81.0
neutral 18 18.0 18.0 99.0
dis agree 1 1.0 1.0 100.0
Total 100 100.0 100.0

commodity future mkt provides benefit




not attemted
strongly agree 62.0%

Interpretation: Most of the investors say it is in neutral position at 18% , people who have
benefitted from the investors chose agree & strongly agree option which were 9% and 10%
respectively . Percentage of disagree is very less among invested people at 1% as most of the
target people chose to leave the question .


Q.9) Reasons for not investing regularly in commodities ?

Reasons why they have not invested in commodity mkt

Frequency Percent Valid Percent Percent
Valid those who hv inves ted 39 39.0 39.0 39.0
Not intersted 5 5.0 5.0 44.0
Info non availability 10 10.0 10.0 54.0
high investment 7 7.0 7.0 61.0
complex understanding 33 33.0 33.0 94.0
high risk 6 6.0 6.0 100.0
Total 100 100.0 100.0

Reasons why they have not invested in commodity mkt

high risk


those who hv investe

complex understandin 39.0%

high investment Not intersted

7.0% 5.0%

Info non availabilit


Interpretation: The above pie chart shows that most of the traders are not interested to invest in
Commodity Future Market due to complex understanding involved in it around 33% of the
traders are given this reason and 5% of them are not interested in investing in this market, 6 &
7% think that it involves high risk and high investment So there is great need to create awareness
about Commodity Future market by telling its advantages. However 39% of the investors do
invest regularly in commodity markets .



More than 50% of the Traders in are aware about the commodity future Market

Hardly 30% traders are invested in the commodity future market

Most of the investors are not ready to invest in commodity future market as they believe it is
very complex and very less information is available to the public to make decisions on
investment .

Returns and the Risk of the commodity are the most critical factors, which Traders will
consider while investing in any commodities in which commodities with high probability of
return is preferred and commodity with low rate of risk is preferred .

Most of the investors are ready to invest in commodity future market if proper information is

As commodity future market is new and emerging ,many investors and farmers are not fully
aware of this market .as the market helps to trade transparently without middlemen and

While finding the reasons why most of the people are not trading in commodity market I
found that many respondents are not interested at all in this trade this is because of
unawareness & mythical perception about commodity market.

Most of the respondents were from government service & business sector and



Commodity futures markets are new and emerging market. The awareness of the market is very less
among the investors who can use this trade to sell there products without the middlemen or agents it also
help the actual buyers too. Here trader also can transfer his risk to some other who can handle it or can
appetite the risk through hedging techniques

Compared to capital market commodity market is less risky in volatility context here the prices do not
change within a fraction of second .significantly, minimum margin ready physical possession, no
manipulation & fraud, maximum profitability is available over here since the commodity market helps all
such as farmers, industries and individuals investors it is growing at a faster rate in global outlook.



News Papers;

Business Line
Economic times
Times of India

Web site


Text books

Futures & Options second addition by Vohra & Bagri

CDM Text book TYBMS Rishabh