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Indian Capital Markets

Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid integration with the world economy increased Indias global competitiveness. No wonder, the global ratings agencies Moodys and Fitch have awarded India with investment grade ratings, indicating comparatively lower sovereign risks. The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was established in 1992 to protect investors and improve the microstructure of capital markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress was made in further strengthening and streamlining risk management, market regulation, and supervision. The securities market is divided into two interdependent segments:

The primary market provides the channel for creation of funds through issuance of new securities by companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial Public Offering (IPO). The secondary market is the financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are traded.

In the recent past, the Indian securities market has seen multi-faceted growth in terms of:

The products traded in the market, viz. equities and bonds issued by the government and companies, futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and futures on interest rate products such as Notional 91-Day T-Bills, 10-Year Notional Zero Coupon Bond, and 6% Notional 10-Year Bond. The amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The profiles of the investors, issuers, and intermediaries.

Broad Constituents in the Indian Capital Markets Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds:

Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc. Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc. Organizations include various entities such as BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL). Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Appellate Authority: The Securities Appellate Tribunal (SAT) Participants in the Securities Market SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment, derivative trading), brokers, corporate brokers, subbrokers, FIIs, portfolio managers, custodians, share transfer agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital funds, foreign venture capital investors, mutual funds, collective investment schemes.

EQUITY MARKET History of the Market With the onset of globalization and the subsequent policy reforms, significant improvements have been made in the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside India and elevated the Indian equity markets to the standards of the major global equity markets. The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry. Equity markets provided the required platform for companies and start-up businesses to raise money through IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a peoples market, flooded with primary issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources for meeting its funding requirements rather than acquiring loans from financial institutions or banks. Derivative Markets The emergence of the market for derivative products such as futures and forwards can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset classes. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. This instrument is used by all sections of businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc. According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives. What are futures contracts? Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of the underlying asset are standardized. Futures contracts are transferable in nature. Three broad categories of participantshedgers, speculators, and arbitragerstrade in the derivatives market.

Hedgers face risk associated with the price of an asset. They belong to the business community dealing with the underlying asset to a future instrument on a regular basis. They use futures or options markets to reduce or eliminate this risk. Speculators have a particular mindset with regard to an asset and bet on future movements in the assets price. Futures and options contracts can give them an extra leverage due to margining system. Arbitragers are in business to take advantage of a discrepancy between prices in two different markets. For example, when they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

Important Distinctions Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct market between two parties who know and trust each other. Most common example for OTC is the forward contract. Forward contracts are directly negotiated, tailor-made for the needs of the parties, and are often not easily reversed. Distinction between Forward and Futures Contracts: Futures Contracts Forward Contracts A forward contract is a contractual Meaning: A futures contract is a agreement between two parties to contractual agreement between two buy or sell an asset at a future date parties to buy or sell a standardized for a predetermined mutually quantity and quality of asset on a agreed price while entering into the specific future date on a futures contract. A forward contract is not exchange. traded on an exchange. Trading place: A futures contract A forward contract is traded in an is traded on the centralized trading OTC market. platform of an exchange. Transparency in contract price: The contract price of a futures The contract price of a forward contract is transparent as it is contract is not transparent, as it is available on the centralized trading not publicly disclosed. screen of the exchange. Valuations of open position and In a forward contract, valuation of margin requirement: In a futures open position is not calculated on a contract, valuation of open position daily basis and there is no is calculated as per the official requirement of MTM on daily basis closing price on a daily basis and since the settlement of contract is mark-to-market (MTM) margin only on the maturity date of the requirement exists. contract.

Liquidity: Liquidity is the measure of frequency of trades that occur in A forward contract is less liquid a particular futures contract. A due to its customized nature. futures contract is more liquid as it is traded on the exchange. Counterparty default risk: In futures contracts, the exchange In forward contracts, counterparty clearinghouse provides trade risk is high due to the customized guarantee. Therefore, counterparty nature of the transaction. risk is almost eliminated. Regulations: A regulatory A forward contract is not regulated authority and the exchange regulate by any exchange. a futures contract. Benefits of Derivatives a. Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its underlying. Suppose, A has bought 100 shares of a real estate company with a bullish view but, unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, A can sell the same quantity of futures of the script for the time period he plans to stay invested in the script. This activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have been mutual funds and other institutional investors. b. Price Discovery: The new information disseminated in the marketplace is interpreted by the market participants and immediately reflected in spot and futures prices by triggering the trading activity in one or both the markets. This process of price adjustment is often termed as price discovery and is one of the major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets. c. Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors like corporates and financial institutions but also for retail investors like high networth individuals. Equity futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact that historically it has been witnessed that there lies an inverse correlation of daily returns in equities as compared to commodities. d. High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It is an instrument that requires only the margin on a contract to be paid in order to commence trading. This is also called leverage buying/selling. e. Transparency: Futures instruments are highly transparent because the underlying product (equity scripts/index) are generally traded across the country or even traded globally. This reduces the chances of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding the day-

to-day activities taking place in the securities markets, taking care of the illegal transactions. f. Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of the price at which a stock or index would be available at a future point of time. EXCHANGE PLATFORM Domestic Exchanges Indian equities are traded on two major exchanges: Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE). Bombay Stock Exchange (BSE) BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange Limited (BSE). BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screen-based order-driven trading system. The exchange opened up for foreign ownership (foreign institutional investment). Allowed Indian companies to raise capital from abroad through ADRs and GDRs. Expanded the product range (equities/derivatives/debt). Introduced the book building process and brought in transparency in IPO issuance. T+2 settlement cycle (payments and settlements). Depositories for share custody (dematerialization of shares). Internet trading (e-broking). Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and internet trading (e-broking).

BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT). Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCG http://www.bseindia.com/ National Stock Exchange (NSE) NSE was recognised as a stock exchange in April 1993 under the Securities Contracts

(Regulation) Act. It commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its operations in November 1994, whereas the derivative segment started in 2000. NSE introduced a fully automated trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing the spreads significantly. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides complete transparency of trading operations. Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures, CNX 100 futures, Bank Nifty futures http://nseindia.com/ International Exchanges Due to increasing globalization, the development at macro and micro levels in international markets is compulsorily incorporated in the performance of domestic indices and individual stock performance, directly or indirectly. Therefore, it is important to keep track of international financial markets for better perspective and intelligent investment. 1. NASDAQ (National Association of Securities Dealers Automated Quotations) NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD). However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC), the regulatory authority for the securities markets in the United States. NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site) being listed. There are four major indices of NASDAQ that are followed closely by the investor class, internationally. i. NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that the total components count of the Index is over 3,000 stocks and it includes stocks of US and non-US companies, which makes it an international index. It is highly followed in the US and is an indicator of performance of technology and growth

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companies. When launched in 1971, the index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in July 1995, it closed above 1,000-mark and in March 2000, it touched 5048.62. The decline from this peak signalled the end of the dotcom stock market bubble. The Index never reached the 2000 level afterwards. It was trading at 1316.12 on November 20, 2008. NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial companies listed on NASDAQ. The component companies weight in the index is based on their market capitalization, with certain rules controlling the influence of the largest components. The index doesnt contain financial companies. However, it includes the companies that are incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500 and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial, technology, biotechnology, healthcare, transportation, media, and service sectors. Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow. He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884, they formed the first index including 11 stocks (two manufacturing companies and nine railroad companies). Today, the index contains 30 blue-chip industrial companies operating in America. The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the prices of all stocks divided by the number of stocks (30). S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit in 1957 to further improve tracking of American stock market performance. In 1968, the US Department of Commerce added S&P 500 to its index of leading economic indicators. S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US by market capitalization (in contrast to the FORTUNE 500, which is the largest 500 companies in terms of sales revenue). The S&P 500 Index comprises about three-fourths of total American capitalization.

http://www.nasdaq.com/ 2. LSE (London Stock Exchange) The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on the exchange. The LSE has four core areas: i. Equity markets: The LSE enables companies from around the world to raise capital. There are four primary markets; Main Market, Alternative Investment Market (AIM), Professional Securities Market (PSM), and Specialist Fund Market (SFM). Trading services: Highly active market for trading in a range of securities, including UK and international equities, debt, covered warrants,

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exchange-traded funds (ETFs), exchange-traded commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary receipts. Market data information: The LSE provides real-time prices, news, and other financial information to the global financial community. Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to bring the cash, equity, and derivatives markets closer together. It combines the strength and liquidity of LSE and equity derivatives technology of NASDAQ OMX group.

The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic, and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and Korea. http://www.londonstockexchange.com/en-gb/ 3. Frankfurt Stock Exchange It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Brse. The Frankfurt Stock Exchange has over 90 percent of turnover in the German market and a big share in the European market. The exchange has a few wellknown trading indices of the exchange, such as DAX, DAXplus, CDAX, DivDAX, LDAX, MDAX, SDAX, TecDAX, VDAX, and EuroStoxx 50. DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt Stock Exchange. http://deutsche-boerse.com/ REGULATORY AUTHORITY There are four main legislations governing the securities market: a. The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulate the securities market. b. The Companies Act, 1956 sets out the code of conduct for the corporate sector in relation to issue, allotment, and transfer of securities, and disclosures to be made in public issues. c. The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities through control over stock exchanges. d. The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat securities. In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and Exchange Board of India).

The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with the law. The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of professions of chartered accountants, company secretaries, and cost accountants in the country. http://www.mca.gov.in/ SEBI protects the interests of investors in securities and promotes the development of the securities market. The board helps in regulating the business of stock exchanges and any other securities market. SEBI is also responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and such other intermediaries who may be associated with securities markets in any manner. The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting and regulating self regulatory organizations. http://www.sebi.gov.in RBI is also known as the bankers bank. The central bank has some very important objectives and functions such as: Objectives

Maintain price stability and ensure adequate flow of credit to productive sectors. Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking services to the public. Facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India. Give the public adequate quantity of supplies of currency notes and coins in good quality.

Functions

Formulate implements and monitor the monetary policy. Prescribe broad parameters of banking operations within which the country's banking and financial system functions. Manage the Foreign Exchange Management Act, 1999. Issue new currency and coins and exchange/destroy currency and coins not fit for circulation.

Perform a wide range of promotional functions to support national objectives.

http://www.rbi.org.in/home.aspx The DEA is the nodal agency of the Union government to formulate and monitor the country's economic policies and programmes that have a bearing on domestic and international aspects of economic management. Apart from forming the Union Budget every year, it has other important functions like: i. Formulation and monitoring of macro-economic policies, including issues relating to fiscal policy and public finance, inflation, public debt management, and the functioning of capital market, including stock exchanges. In this context, it looks at ways and means to raise internal resources through taxation, market borrowings, and mobilization of small savings. Monitoring and raising of external resources through multilateral and bilateral development assistance, sovereign borrowings abroad, foreign investments, and monitoring foreign exchange resources, including balance of payments. Production of bank notes and coins of various denominations, postal stationery, postal stamps, cadre management, career planning, and training of the Indian Economic Service (IES).

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Commodities Market
What is a market? A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. This consideration is usually money. In an Information Technology-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global financial and commodity markets. What is a commodity? A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed. Commodities are basically the products of the primary sector of an economy. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which serve as basic inputs for the secondary sector of the economy. To qualify as a commodity for futures trading, an article or a product has to meet some basic characteristics: 1. The product must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the product must be in a basic, raw, unprocessed state. There are of course some

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exceptions to this rule. For example, metals, which are refined from metal ores, and sugar, which is processed from sugarcane. The product has to be fairly standardized, which means that there cannot be much differentiation in a product based on its quality. For example, there are different varieties of crude oil. Though these different varieties of crude oil can be treated as different commodities and traded as separate contracts, there can be a standardization of the commodities for futures contract based on the largest traded variety of crude oil. This would ensure a fair representation of the commodity for futures trading. This would also ensure adequate liquidity for the commodity futures being traded, thus ensuring price discovery mechanism. A major consideration while buying the product is its price. Fundamental forces of market demand and supply for the commodity determine the commodity prices. Usually, many competing sellers of the product will be there in the market. Their presence is required to ensure widespread trading activity in the physical commodity market. The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract).

Commodity Market: A Perspective A market where commodities are traded is referred to as a commodity market. These commodities include bullion (gold, silver), non-ferrous (base) metals (copper, zinc, nickel, lead, aluminium, tin), energy (crude oil, natural gas), agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, etc. Existence of a vibrant, active, liquid, and transparent commodity market is normally considered as a sign of development of an economy. It is therefore important to have active commodity markets functioning in a country. Markets have existed for centuries worldwide for selling and buying of goods and services. The concept of market started with agricultural products and hence it is as old as the agricultural products or the business of farming itself. Traditionally, farmers used to bring their products to a central marketplace (called mandi / bazaar) in a town/village where grain merchants/ traders would also come and buy the products and transport, distribute, and sell them to other markets. In a traditional market, agricultural products would be brought and kept in the market and the potential buyers would come and see the quality of the products and negotiate with the farmers directly on the price that they would be willing to pay and the quantity that they would like to buy. Deals were struck once mutual agreement was reached on the price and the quantity to be bought/ sold. In traditional markets, shortage of a commodity in a given season would lead to increase in price for the commodity. On the other hand, oversupply of a commodity on even a single day could result in decline in pricesometimes below the cost of production. Neither farmers nor merchants were happy with this situation since they could not predict

what the prices would be on a given day or in a given season. As a result, farmers often returned from the market with their products since they failed to fetch their expected price and since there were no storage facilities available close to the marketplace. It was in this context that farmers and food grain merchants in Chicago started negotiating for future supplies of grains in exchange of cash at a mutually agreeable price. This type of agreement was acceptable to both parties since the farmer would know how much he would be paid for his products, and the dealer would know his cost of procurement in advance. This effectively started the system of forward contracts, which subsequently led to futures market too. Cash Market Cash transaction results in immediate delivery of a commodity for a particular consideration between the buyer and the seller. A marketplace that facilitates cash transaction is referred to as the cash market and the transaction price is usually referred to as the cash price. Buyers and sellers meet face to face and deals are struck. These are traditional markets. Example of a cash market is a mandi where food grains are sold in bulk. Farmers would bring their products to this market and merchants/traders would immediately purchase the products, and they settle the deal in cash and take or give delivery immediately. Cash markets thus call for immediate delivery of commodities against actual payment. Forwards and Futures Markets In this case, the agreements are normally made to receive the commodities at a later date in future for a pre-determined consideration based on agreed upon terms and conditions. Forwards and Futures reduce the risks by allowing the trader to decide a price today for goods to be delivered on a particular future date. Forwards and Futures markets allow delivery at some time in the future, unlike cash markets that call for immediate delivery. These advance sales help both buyers and sellers with long-term planning. Forward contracts laid the groundwork for futures contracts. The main difference between these two contracts is the way in which they are negotiated. For forward contracts, terms like quantity, quality, delivery date, and price are discussed in person between the buyer and the seller. Each contract is thus unique and not standardized since it takes into account the needs of a particular seller and a particular buyer only. On the other hand, in futures contracts, all terms (quantity, quality, and delivery date) are standardized. The transaction price is discovered through the interaction of supply and demand in a centralized marketplace or exchange. Forward contracts help in arranging long-term transactions between buyers and sellers but could not deal with the financial (credit) risk that occurred with unforeseen price changes resulting from crop failures, inadequate storage or bottlenecks in transportation, factors beyond human control (floods, natural calamities, etc.), or other economic factors that may result in unexpected changes, and hence counterparty default risks for parties involved. This, in turn, led to the development of futures market. As mentioned above, since futures are standardized contracts that are traded through an exchange, they can be used to minimize price risk by means of hedging techniques. Since the exchange

standardizes the quality and quantity parameters and offers complete transparency by using risk management techniques (such as margining system with mark-to-market settlement on a real-time basis with daily settlement), the counterparty default risk has been greatly minimized. Brief History of the Development of Commodity Markets Global Scenario It is widely believed that the futures trade first started about approximately 6,000 years ago in China with rice as the commodity. Futures trade first started in Japan in the 17th century. In ancient Greece, Aristotle described the use of call options by Thales of Miletus on the capacity of olive oil presses. The first organized futures market was the Osaka Rice Exchange, in 1730. Organized trading in futures began in the US in the mid-19th century with maize contracts at the Chicago Board of Trade (CBOT) and a bit later, cotton contracts in New York. In the first few years of CBOT, weeks could go by without any transaction taking place and even the provision of a daily free lunch did not entice exchange members to actually come to the exchange! Trade took off only in 1856, when new management decided that the mere provision of a trading floor was not sufficient and invested in the establishment of grades and standards as well as a nation-wide price information system. CBOT preceded futures exchanges in Europe. In the 1840s, Chicago had become a commercial centre since it had good railroad and telegraph lines connecting it with the East. Around this same time, good agriculture technologies were developed in the area, which led to higher wheat production. Midwest farmers, therefore, used to come to Chicago to sell their wheat to dealers who, in turn, transported it all over the country. Farmers usually brought their wheat to Chicago hoping to sell it at a good price. The city had very limited storage facilities and hence, the farmers were often left at the mercy of the dealers. The situation changed for the better in 1848 when a central marketplace was opened where farmers and dealers could meet to deal in "cash" grainthat is, to exchange cash for immediate delivery of wheat. Farmers (sellers) and dealers (buyers) slowly started entering into contract for forward exchanges of grain for cash at some particular future date so that farmers could avoid taking the trouble of transporting and storing wheat (at very high costs) if the price was not acceptable. This system was suitable to farmers as well as dealers. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs of procurement well in advance. Such forward contracts became common and were even used subsequently as collateral for bank loans. The contracts slowly got standardized on quantity and quality of commodities being traded. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who needed it. Also, if the farmer didn't want to deliver his wheat, he would pass on his contractual obligation to another farmer. The price of the contract would go up and down depending on what was happening in the wheat market. If the weather was bad, supply of

wheat would be less and the people who had contracted to sell wheat would hold on to more valuable contracts expecting to fetch better price; if the harvest was bigger than expected, the seller's contract would become less valuable since the supply of wheat would be more. Slowly, even those individuals who had no intention of ever buying or selling wheat began trading in these contracts expecting to make some profits based on their knowledge of the situation in the market for wheat. They were called speculators. They hoped to buy (long position) contracts at low price and sell them at high price or sell (short position) the contracts in advance for high price and buy later at a low price. This is how the futures market in commodities developed in the US. The hedgers began to efficiently transfer their market risk of holding physical commodity to these speculators by trading in futures exchanges. The history of commodity markets in the US has the following landmarks:

Chicago Board of Trade (CBOT) was established in Chicago in 1848 to bring farmers and merchants together. It started active trading in futures-type of contracts in 1865. The New York Cotton Exchange was started in 1870. Chicago Mercantile Exchange was set up in 1919. A legalized option trading was started in 1934.

Indian Scenario History of trading in commodities in India goes back several centuries. But organized futures market in India emerged in 1875 when the Bombay Cotton Trade Association was established. The futures trading in oilseeds started in 1900 when Gujarati Vyapari Mandali (todays National Multi Commodity Exchange, Ahmedabad) was established. The futures trading in gold began in Mumbai in 1920. During the first half of the 20th century, there were many commodity futures exchanges, including the Calcutta Hessian Exchange Ltd. that was established in 1927. Those exchanges traded in jute, pepper, potatoes, sugar, turmeric, etc. However, Indias history of commodity futures market has been turbulent. Options were banned in cotton in 1939 by the Government of Bombay to curb widespread speculation. In mid-1940s, trading in forwards and futures became difficult as a result of price controls by the government. The Forward Contract Regulation Act was passed in 1952. This put in place the regulatory guidelines on forward trading. In late 1960s, the Government of India suspended forward trading in several commodities like jute, edible oil seeds, cotton, etc. due to fears of increase in commodity prices. However, the government offered to buy agricultural products at Minimum Support Price (MSP) to ensure that the farmer benefited. The government also managed storage, transportation, and distribution of agriculture products. These measures weakened the agricultural commodity markets in India. The government appointed four different committees (Shroff Committee in 1950, Dantwala Committee in 1966, Khusro Committee in 1979, and Kabra Committee in 1993) to go into the regulatory aspects of forward and futures trading in India. In 1996,

the World Bank in association with United Nations Conference on Trade and Development (UNCTAD) conducted a study of Indian commodities markets. In the postliberalization era of the Indian economy, it was the Kabra Committee and the World BankUNCTAD study that finally assessed the scope for forward and futures trading in commodities markets in India and recommended steps to revitalize futures trading. There are four national-level commodity exchanges and 22 regional commodity exchanges in India. The national-level exchanges are Multi Commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), National Multi Commodity Exchange of India Limited (NMCE), and Indian Commodity Exchange (ICEX). Relevance and Potential of Commodity Markets in India Majority of commodities traded on global commodity exchanges are agri-based. Commodity markets therefore are of great importance and hold a great potential in case of economies like India, where more than 65 percent of the people are dependent on agriculture. There is a huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. Indian commodities market has an excellent growth potential and has created good opportunities for market players. India is the worlds leading producer of more than 15 agricultural commodities and is also the worlds largest consumer of edible oils and gold. It has major markets in regions of urban conglomeration (cities and towns) and nearly 7,500+ Agricultural Produce Marketing Cooperative (APMC) mandis. To add to this, there is a network of over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various commodities. These marketplaces play host to a variety of commodities everyday. The commodity trade segment employs more than five million traders. The potential of the sector has been well identified by the Central government and the state governments and they have invested substantial resources to boost production of agricultural commodities. Many of these commodities would be traded in the futures markets as the food-processing industry grows at a phenomenal pace. Trends indicate that the volume in futures trading tends to be 5-7 times the size of spot trading in the country (internationally, it is much higher at 15 to 20 times). Many nationalized and private sector banks have announced plans to disburse substantial amounts to finance businesses related to commodity trading. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities, approving new exchanges, developing exchanges with modern infrastructure and systems such as online trading, and removing legal hurdles to attract more participants have increased the scope of commodities derivatives trading in India. This has boosted both the spot market and the futures market in India. The trading volumes are increasing as the list of commodities traded on national commodity exchanges also continues to expand. The volumes are likely to surge further as a result of the increased interest from the international participants in Indian commodity markets. If these international participants are allowed

to participate in commodity markets (like in the case of capital markets), the growth in commodity futures can be expected to be phenomenal. It is expected that foreign institutional investors (FIIs), mutual funds, and banks may be able to participate in commodity derivatives markets in the near future. The launch of options trading in commodity exchanges is also expected after the amendments to the Forward Contract Regulation Act (1952). Commodity trading and commodity financing are going to be rapidly growing businesses in the coming years in India. With the liberalization of the Indian economy in 1991, the commodity prices (especially international commodities such as base metals and energy) have been subject to price volatility in international markets, since India is largely a net importer of such commodities. Commodity derivatives exchanges have been established with a view to minimize risks associated with such price volatility. Commodity Markets Ecosystem After studying the importance of commodity markets and trading in commodity futures, it is essential to understand the different components of the commodity markets ecosystem. The commodity markets ecosystem includes the following components: 1. Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers, distributors, farmers co-operatives, APMC mandis, traders, state civil supplies corporations, importers, exporters, merchandisers, oil refining companies, oil producing companies, etc. 2. Logistics Companies: Storage and transport companies/operators, quality testing and certifying companies, valuers, etc. 3. Markets and Exchanges: Spot markets (mandis, bazaars, etc.) and commodity exchanges (national level and regional level) 4. Support agencies: Depositories/de-materializing agencies, central and state warehousing corporations, and private sector warehousing companies 5. Lending Agencies: Banks, financial institutions The users are the producers and consumers of different commodities. They have exposure to the physical commodities markets, exposing themselves to price risk. In turn, they depend on logistics companies for transportation of commodities, warehouses for storage, and quality testing and certification agencies for assessment and evaluation of commodity quality standards. Commodity derivatives exchanges provide a platform for hedging against price risk for these users. Benefits of Trading in Commodity Derivatives Trading in futures provides two important functions of price discovery and price risk management. It is useful to all the segments of the economy, particularly to all the constituents of the commodity market ecosystem. It is important to know how resorting to commodity trading benefits the constituents. Benefits to Investors, Producers, Consumers, Manufacturers:

Price risk management: All participants in the commodity markets ecosystem across the value chain of different commodities are exposed to price risk. These participants buy and sell commodities and the time lag between subsequent transactions result in exposure to price risk. Commodity derivatives markets enable these participants to avoid price risk by utilizing hedging techniques. Price discovery: This is the mechanism by which a fair value price is determined by the large number of participants in the commodities derivatives markets. This is the result of automation and electronic trading systems established on the commodities derivatives exchanges. High financial leverage: This is possible in commodity markets. For example, trading in gold calls for only 4% initial margin. Thus, if one gold futures contract (each gold futures contract lot size is 1 kg) is valued at Rs 900,000, the investor is expected to deposit an initial margin of only Rs 36,000 to be able to trade. If the price of gold goes up by even 2%, the investor would make a profit of Rs 18,000 on a deposit of Rs 36,000 before the expiry of the contract. This is the benefit of leveraged trading transactions. With futures contracts, the investor trades in the expectation of the price at a later date. This is possible with a margin deposit, which is usually between 5% and 10% of the value of the commodity. Correspondingly, the margins required for equity futures contracts are higher, due to higher volatility in equity markets as compared to commodities futures contracts. The reason for higher volatility in equity markets (especially in India) as compared to commodities derivatives transactions is due to the fact that delivery is possible in commodity derivatives transactions. Commodities as an asset class for diversification of portfolio risk: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favours commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Even with a marginal distribution of funds in a portfolio to include commodities, the Sharpe ratio is greatly enhanced, thereby indicating a decrease in risk. Commodity derivatives markets are extremely transparent in the sense that the manipulation of prices of a commodity is extremely difficult due to globalization of economies, thereby providing for prices benchmarked across different countries and continents. For example, gold, silver, crude oil, etc. are international commodities, whose prices in India are indicative of the global situation. An option for high networth investors: With the rapid spread of derivatives trading in commodities, the commodities route too has become an option for high networth investors. Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him. Farmers, for instance, can get assured prices, thereby enabling them to decide on the crop

that they want to grow. Since there is transparency in prices, the farmer can decide when and where to sell, so as to maximize his profits. Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts. Predictable pricing and transparency is an added advantage. Corporate entities can benefit by hedging their risks if they are using some of the commodities as their raw materials. They can hedge the risk even if the commodity traded does not meet their requirements of exact quality/technical specifications. Useful to exporters: Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Improved product quality: Since the contracts for commodities are standardized, it becomes essential for the producers/sellers to ensure that the quality of the commodity is as specified in the contract. The advent of commodities futures markets has also enabled defining quality standards of different commodities. Credit accessibility: Buyers and sellers can avail of the bank finances for trading in commodities. Nationalized banks and private sector banks have come forward to offer credit facilities for commodity trading.

Benefits to Indian Economy As the constituents of the commodity market ecosystem get benefited, the Indian economy is also benefited. Growth in the organized commodity markets and their constituents implies that there would be tremendous advantages and benefits accrued to the Indian economy in terms of business generation and growth in employment opportunities. As India imports bulk of raw material (especially in base metals and energy), there is scope for minimizing price risk for international commodities. With the consumption of commodities increasing rapidly, especially in developing countries such as China and India, the prices of commodities are volatile, emphasizing the need for organized commodity derivatives exchanges.

Currencies Market
Introduction Currency Futures is the latest product introduced in Indian securities markets. It will lead to further maturity and deepening of the financial markets in India. Worldwide, trading in currency futures is a huge market and, given the rapid growth of economy and finance in India, it is poised to assume a significant role in the growth of Indian securities markets. The dawn of currency futures is perhaps a momentous development in the foreign exchange market of India. It represents a massive stride ahead in the continuing

globalization of the country's financial markets. The currency derivatives segment will enable importers, exporters, investors, corporations, and banks to hedge their currency risks at low transaction costs and with greater transparency. Understanding the meaning of foreign exchange is important to know more about currency futures market. Foreign exchange refers to money denominated in the currency of another nation or a group of nations. Any person who exchanges money denominated in his ownnations currency for money denominated in anothernations currency acquires foreign exchange. This holds true whether the amountof the transaction is equal to a few rupees or to billions of rupees. A foreign exchange transaction is a shift of funds or short-term financial claims from one country and currency to another. Thus, within India, any money denominated in any currency other than the Indian rupee (INR) is, broadly speaking, foreign exchange. Foreign exchange can be cash, bank deposit, or a shortterm negotiable financial claim denominated in a currency other than INR. Almost every nation has its own national currency or monetary unit used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for foreign exchange transactions: exchanges of one currency for another. For all such transactions there is an exchange rate. The exchange rate is a price: the number of units of one nations currency that must be surrendered in order to acquire one unit of another nations currency. There are scores of exchange rates for INR and other currencies, say the US dollar. In the spot market, there is an exchange rate for every other national currency traded in that market. A market price is determined by the interaction of buyers and sellers in that market, and a market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange market. The market participation is made up of individuals, non-financial firms, banks, official bodies, and other private institutions from all over the world that are buying and selling currencies at that particular time. MCX Stock Exchange Limited (MCX-SX), an associate of FT Knowledge Management Company, is a new generation stock exchange that offers a platform for trading in currency futures. The currency derivatives segment at MCX-SX operates under the regulatory control of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). With a large number of banks, corporates, and brokerage houses as trading members, MCX-SX has been providing the desired liquidity and depth for all categories of users. Further, MCX-SX guarantees settlement of all transactions that will enhance safety by eliminating counterparty risk.

What Is Foreign Exchange? Foreign exchange refers to money denominated in the currency of another nation or a group of nations. Any person who exchanges money denominated in his ownnations currency for money denominated in anothernations currency acquires foreign exchange. This holds true whether the amountof the transaction is equal to a few rupees or to billions of rupees; whether the person involvedis a tourist cashing a travellers cheque in a restaurant abroad or an investor exchanging hundreds of millions of rupees for the acquisition of a foreign company; and whether the form of moneybeing acquired is foreign currency notes, foreign currency-denominated bank deposits, or other short-term claims denominated in foreign currency. A foreign exchange transaction is still a shift of funds or short-term financial claims from one country and currency to another. Thus, within India, any money denominated in any currency other than the Indian rupee (INR) is, broadly speaking, foreign exchange. Foreign exchange can be cash, funds available on credit cards and debit cards, travellers cheques, bank deposits, or other short-term claims. It is still foreign exchange if it is a short-term negotiable financial claim denominated in a currency other than INR. Why Do You Need Foreign Exchange? Almost every nation has its own national currency or monetary unitits rupee, its dollar, its pesoused for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for foreign exchange transactionsexchanges of one currency for another. Role of the Exchange Rate The exchange rate is a pricethe number of units of one nations currency that must be surrendered in order to acquire one unit of another nations currency. There are scores of exchange rates for INR and other currencies, say the US dollar. In the spot market, there is an exchange rate for every other national currency traded in that market, as well as for various composite currencies or constructed monetary units such as the euro or the International Monetary Funds Special Drawing Rights (SDRs). There are also various trade-weighted or effective rates designed to show a currencys movements against an average of various other currencies (for example, the US dollar index, which is a weighted index against worlds major currencies like euro, pound sterling, yen, and the Canadian dollar). Quite apart from the spot rates, there are additional exchange rates for other delivery dates in the forward markets. A market price is determined by the interaction of buyers and sellers in that market, and a market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange market. For a currency with an exchange rate that is fixed, or set by the monetary authorities, the central bank or another official body is a key participant in the market, standing ready to buy or sell the currency

as necessary to maintain the authorized pegged rate or range. But in countries like the United States, which follows a complete free floating regime, the authorities do not intervene in the foreign exchange market on a continuous basis to influence the exchange rate. The market participation is made up of individuals, non-financial firms, banks, official bodies, and other private institutions from all over the world that are buying and selling US dollars at that particular time. The participants in the foreign exchange market are thus a heterogeneous group. The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years. But, whatever is the constitution of participants, and whether their motive is investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the market price at that instant. Given the diverse views, interests, and time frames of the participants, predicting the future course of exchange rates is a particularly complex and uncertain business. At the same time, since the exchange rate influences such a vast array of participants and business decisions, it is a pervasive and singularly important price in an open economy, influencing consumer prices, investment decisions, interest rates, economic growth, the location of industry, and much else. The role of the foreign exchange market in the determination of that price is critically important. Its a 24-Hour Market During the past quarter century, the concept of a 24-hour market has become a reality. Somewhere on the planet, financial centres are open for business, and banks and other institutions are trading the dollar and other currencies every hour of the day and night, except for possible minor gaps on weekends. In financial centres around the world, business hours overlap; as some centres close, others open and begin to trade. The foreign exchange market follows the sun around the earth. Business is heavy when both the US markets and the major European markets are open that is, when it is morning in New York and afternoon in London. In the New York market, nearly two-thirds of the days activity typically takes place in the morning hours. Activity normally becomes very slow in New York in the mid- to late afternoon, after European markets have closed and before the Tokyo, Hong Kong, and Singapore markets have opened. Given this uneven flow of business around the clock, market participants often will respond less aggressively to an exchange rate development that occurs at a relatively inactive time of day, and will wait to see whether the development is confirmed when the major markets open. Some institutions pay little attention to developments in less active markets. Nonetheless, the 24-hour market does provide a continuous real-time market assessment of the ebb and flow of influences and attitudes with respect to the traded currencies, and an opportunity for a quick judgment of unexpected events. With many traders carrying pocket monitors, it has become relatively easy to stay in touch with market developments at all times.

International Markets Are Made Up of an International Network of Dealers The market consists of a limited number of major dealer institutions that are particularly active in foreign exchange, trading with customers and (more often) with each other. Most of these institutions, but not all, are commercial banks and investment banks. These institutions are geographically dispersed, located in numerous financial centres around the world. Wherever they are located, these institutions are in close communication with each other; linked to each other through telephones, computers, and other electronic means. Each nations market has its own infrastructure. For foreign exchange market operations as well as for other matters, each country enforces its own laws, banking regulations, accounting rules, and tax code, and, as noted above, it operates its own payment and settlement systems. Thus, even in a global foreign exchange market with currencies traded on essentially the same terms simultaneously in many financial centres, there are different national financial systems and infrastructures through which transactions are executed, and within which currencies are held. With access to all of the foreign exchange markets generally open to participants from all countries, and with vast amounts of market information transmitted simultaneously and almost instantly to dealers throughout the world, there is an enormous amount of crossborder foreign exchange trading among dealers as well as between dealers and their customers. At any moment, the exchange rates of major currencies tend to be virtually identical in all of the financial centres where there is active trading. Rarely are there such substantial price differences among major centres as to provide major opportunities for arbitrage. In pricing, the various financial centres that are open for business and active at any one time are effectively integrated into a single market. The Markets Most Widely Traded Currency Is the Dollar The dollar is by far the most widely traded currency. In part, the widespread use of the dollar reflects its substantial international role as investment currency in many capital markets, reserve currency held by many central banks, transaction currency in many international commodity markets, invoice currency in many contracts, and intervention currency employed by monetary authorities in market operations to influence their own exchange rates. In addition, the widespread trading of the dollar reflects its use as a vehicle currency in foreign exchange transactions, a use that reinforces, and is reinforced by, its international role in trade and finance. For most pairs of currencies, the market practice is to trade each of the two currencies against a common third currency as a vehicle, rather than to trade the two currencies directly against each other. The vehicle currency used most often is the dollar, although very recently euro also has become an important vehicle. Thus, a trader wanting to shift funds from one currency to another, say from INR to Philippine pesos, will probably sell INR for US dollars and then sell the US dollars for pesos. Although this approach results in two transactions rather than one, it may be the preferred way, since the dollar/INR market, and the dollar/Philippine peso market are

much more active and liquid and have much better information than a bilateral market for the two currencies directly against each other. By using the dollar or some other currency as a vehicle, banks and other foreign exchange market participants can limit more of their working balances to the vehicle currency, rather than holding and managing many currencies, and can concentrate their research and information sources on the vehicle. Use of a vehicle currency greatly reduces the number of exchange rates that must be dealt with in a multilateral system. In a system of 10 currencies, if one currency is selected as vehicle currency and used for all transactions, there would be a total of ninecurrency pairs or exchange rates to be dealt with (i.e., one exchange rate for the vehicle currency against each of the others), whereas if no vehicle currency were used, there would be 45exchange rates to be dealt with. In a system of 100 currencies with no vehicle currencies, potentially there would be 4,950 currency pairs or exchange rates [the formula is: n(n-1)/2]. Thus, using a vehicle currency can yield the advantages of fewer, larger, and more liquid markets with fewer currency balances, reduced informational needs, and simpler operations. The US dollar took on a major vehicle currency role with the introduction of the Bretton Woods par value system, in which most nations met their IMF exchange rate obligations by buying and selling US dollars to maintain a par value relationship for their own currency against the US dollar. The dollar was a convenient vehicle because of its central role in the exchange rate system and its widespread use as a reserve currency. The dollars vehicle currency role was also due to the presence of large and liquid dollar money and other financial markets, and, in time, the euro-dollar markets, where the dollars needed for (or resulting from) foreign exchange transactions could conveniently be borrowed (or placed). Other Major Currencies The Euro The euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the US dollar, the euro has a strong international presence and over the years has emerged as a premier currency, second only to the US dollar. The Japanese Yen The Japanese yen is the third most traded currency in the world. It has a much smaller international presence than the US dollar or the euro. The yen is very liquid around the world, practically around the clock. The British Pound Until the end of World War II, the pound was the currency of reference. The nickname cable is derived from the telegrams used to update the GBP/USD rates across the Atlantic. The currency is heavily traded against the euro and the US dollar, but it has a spotty presence against other currencies. The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British pound, as it generally had to follow the Deutsche mark's fluctuations, but the crisis conditions that

precipitated the pound's withdrawal from the ERM had a psychological effect on the currency. The Swiss Franc The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. Demat Account Definition Demat refers to a dematerialised account. Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode. If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application. It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen. Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.

Meaning and Explanation of Short Sell and Short Sell Technique


Short Sell is a very interesting and surprising topic in the share market.It has got good advantage for the day traders who expect one particular share will reduce on that day. Many Intraday Traders book profit by using this technique. This technique not only having advantages but also having disadvantage. you will understand the disadvantage of short sell technique after learning what is Short sell? I hope you already know how to buy and sell shares? well, the total process I explained in that post is of general procedure of buying and selling shares. I didn't add any Short Sell related topic in that post. when coming to the point, in general procedure you should buy shares first then wait for that scrip value to raise, then you have to sell in order to book profits. But in the short Sell Technique you can sell the shares at market price with out buying them first. Yes what you read is correct. you can sell shares even if you don't have those shares in your portfolio. and you can buy shares later but on the same day

when the price of that particular scrip reduced. It is just reverse procedure to the general procedure which I explained previously. Here in short Sell you sell shares first with out having them and buy later on the same day at low price. The difference between the selling and buying price is your profit. for better understanding with example see the below picture.

For example take Tata Motors Scrip from the above Picture. Its LTP(Latest Trading price) Price was 319 when I captured and High Price was 340. It means Tata motors was gone to 340 before I captured the pic. In this case assume that I am not having any of tata Motor shares in my portfolio and sold 100 Tata Motors shares at 340. and later you can see that Tata Motors LTP was 319.70. So assume that I bought those 100 shares back at 319.70. So the profit for one share is 20.3. So total profit for 100 shares is 100* 20.3 = 2030. So the total profit that you could book on that day on the Tata Motors Scrip is 2030 rupees. This is the advantage of the short Sell Technique. There is also disadvantage in Short Sell. After you sell shares in short sell some times if the price of that scrip increases then you would be booking losses. The main disadvantage of this method is that you can not carry this transaction to the next day. You should close the transaction on the same day. Means if you Short Sell, then you should buy those shares back on the same day, you can not hold it to buy it on the next day. If you don't buy then the online system would automatically buy at closing price with out bothering about your loss. So use Short Sell Technique only if you are very confident about particular scrip that it's value will be reduced on the same day. If you are not confident then don't Short Sell. One more point I forgot to say you which may leads you to the confusion. In Short Sell you can sell shares even if you don't have those shares. In that case you should have the money in your trading account equivalent to the Trade value. for example if you want to sell 100 shares of a scrip which is 100 rupees in market price then you should have 10,000 rupees in your trading account. I hope you understood well about Short Sell. If you don't understand or if you have any doubts ask me in the comments section. I will answer you the same in the comments section so that it will be useful for others who is having same doubts.

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