Commodity Markets

Made by:
Prateek Jain
Radhika Sethi
Divya Kaushik
Kanika Agarwal
Ravi Mohan Jangra

Classification based on
Underlying Asset

Commodities
Currencies
Interest Rates
Equity Shares
Indices
Credit: eg: credit default swaps
Weather

INTRODUCTION
Commodity market is an important constituent of the financial markets of
any country.
In India, trading in commodity futures has been in existence from the
nineteenth century with organized trading in cotton through the
establishment of Cotton Trade Association in 1875.
Regulatory Body
The commodity futures traded in commodity exchanges are regulated
by the Government under the Forward Contracts Regulations Act,
1952 and the Rules framed there under. The regulator for the
commodities trading is the Forward Markets Commission, situated at
Mumbai, which comes under the Ministry of Consumer Affairs Food
and Public Distribution.
Forward Markets Commission (FMC):- It is statutory institution set up
in 1953 under Forward Contracts (Regulation) Act, 1952. Commission
consists of minimum two and maximum four members appointed by
Central Govt. Out of these members there is one nominated chairman

ticipants in commodity Derivative Market

Participants
Participants

Hedgers
Hedgers

Arbitragers
Arbitragers

Producer
Producer

User
User

Importer
Importer

Exporter
Exporter

Gain
Gainfrom
fromprice
price
differentials
differentials

Investors
Investors

Individuals
Individuals
Actively
ActivelyManaged
ManagedFunds
Funds

NCDEX

Promoters

Expiry

Actively
traded
commodities

MCX

Financial Technologies
ICICI Bank,LIC,
(India) Ltd., SBI, HDFC
NABARD,NSE,PNB,CRISIL, Bank, Union Bank of India,
B O I, BOB, Canara Bank,
Canara Bank,IFFCO
Corp. Bank and more.
20th of contract month for
most of the commodities or
as specified

Different for each

commodity

Pulses,Sugar,
Wheat,Spices, Steel

Gold, Silver, Crude Oil

,Natural gas

How to make minimum profits on mcx.

example;:if gold price has increased by 12 rs, then you come up with
minimum profits.

Trading unit=1 kilogram=1000grams ,brokerage=.03%

Quotation/base value=10 grams.

Lot size =1000grams/10grams=100.

Bought price=18400,sold price=18412,

Minimum price=12

Profit=(18412-18400) * 100)-(18400*100*.0003)+
(18412*100*.0003)=95.64

Calculation of commodity prices on

MCX/NCDEX.

MCX / NCDEX commodities like gold , silver , aluminum , copper etc

prices are dependent on their corresponding international prices , USD to
INR rate conversion and supply/demand etc.

Example:

When US dollar to INR conversion is at 50INR and crude oil price is 80$
in international market , mcx price will be 4000 INR.

Cost involved
The commodities market has two basic types of trades physical
commodities and non-physical financial contracts. Physical commodities
that underlie a futures contract or are traded in the physical market are
known as actuals. Since non-physical financial contracts, such as swaps,
can involve extra liquidity risk, traders should know the difference
between the two different types of assets before trading them.
Initial Margin
Margin is a necessary component of futures trading, as it wouldnt be very
cost effective to purchase entire contracts in cash. Initial margin refers to
the amount of money that must be put up to buy or sell a futures contract as
a percentage.

Cost involved in cost of carry:

1.

Insurance cost

2.

Warehouse cost

3.

Finance cost

Contango:
Contango is the opposite of backwardation and occurs when near month future
contracts are cheaper than those expiring further into the future, creating an
upward sloping curve for future prices over time. For non-perishable
commodities that have a cost of carry, contango is normal, as the commodity
holder must pay for these costs above and beyond the cost of the commodity
itself. Example: Natural Gas.

Risks faced by Commodity

Users and Producers
Commodity enterprises faces two types of Risks
PRICE RISK
QUANTITY RISK(eg from weather)
HEDGING REDUCES PRICE RISK

Price Volatility
- Prices of commodities volatile
due to

850
830

Price / Qtl

- Demand Supply mismatch

Wheat

870

810

12%
Rise

13%
Fall

790
770
750
730

- Erratic Monsoon

Date

- Import Export restrictions

- Spoilage during storage
- Substitute demand etc.

23.66 %
Rise

Major International Exchanges

Goldman Sachs Commodity Index
Fertilizer.Dairy,etc
Agricultural: corn, soybean, oats, wheat etc
Metals :gold,silver

COMMEX

Gold,Silver

Precious Metals and Energy

Base Metals,Plastics

Shanghai Future Exchange

The Shanghai Futures Exchange (SHFE) is one of the
largest commodities markets in China. The exchange lists contracts in
steel, copper, aluminum, natural rubber, fuel oil, zinc and gold.
The Shanghai Futures Exchange (SHFE) was formed from the
amalgamation of the Shanghai Metal Exchange, Shanghai Foodstuffs
Commodity Exchange, and the Shanghai Commodity Exchange in
December 1999.
It is a non-profit-seeking incorporated body regulated by the China
Securities Regulatory Commission.
It currently trades futures contracts in copper, aluminium, zinc,
natural rubber, fuel oil, and gold.

Benefits of commodity Future Markets.

Price Discovery:-Based on inputs regarding specific market information, the

demand and supply equilibrium, weather forecasts, expert views and comments,
inflation rates, Government policies, market dynamics, hopes and fears, buyers and
sellers conduct trading at futures exchanges. This transforms in to continuous price
discovery mechanism.

Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by
taking an equal but opposite position in the futures market. Futures markets are used
as a mode by hedgers to protect their business from adverse price change. This
could dent the profitability of their business. Hedging benefits who are involved in
trading of commodities like farmers, processors, merchandisers, manufacturers,
exporters, importers etc.

 Import- Export competitiveness: - The exporters

can hedge their price risk and improve their
competitiveness by making use of futures market. A
majority of traders which are involved in physical trade
internationally intend to buy forwards. The purchases
made from the physical market might expose them to
the risk of price risk resulting to losses.
Benefits for farmers/Agriculturalists: - Price
instability has a direct bearing on farmers in the
absence of futures market. There would be no need to
have large reserves to cover against unfavorable price
fluctuations. This would reduce the risk premiums
associated with the marketing or processing margins
enabling more returns on produce. Since one of the
objectives of futures exchange is to make available
these prices as far as possible, it is very likely to
benefit the farmers.

CONCLUSION

India is one of the top producers of a large number of commodities, and also has
a long history of trading in commodities and related derivatives. The
commodities derivatives market has seen ups and downs, but seem to have
finally arrived now.

The market has made enormous progress in terms of technology, transparency

and the trading activity. Interestingly, this has happened only after the
Government protection was removed from a number of commodities, and
market forces were allowed to play their role.

This should act as a major lesson for the policy makers in developing countries,
that pricing and price risk management should be left to the market forces rather
than trying to achieve these through administered price mechanisms.