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TRADING
COMMODITY
They are things of value, of uniform quality, that are produced in large quantities
by many different producers; the items from each different producer are
considered equivalent.
GLOBAL CLASSIFICATION OF
COMMODITIES
Precious Metals
Other Metals
Agro-Based Commodities
Soft Commodities
Petrochemicals
Energy
COMMODITIES AN ALTERNATE ASSET
CLASS
Returns are independent of other asset classes
Low correlation with other asset classes
Its returns cannot be replicated with combination of other asset classes
Positively correlated with inflation whereas bonds & equities are negatively
correlated.
Have independent risk/return profile.
CORRELATION BETWEEN BSE SENSEX AND
COMMODITIES
Negative to low correlation between commodities and bse Sensex.
Good for diversification as it reduces portfolio risk.
COMMODITY MARKET
Agri products : 10 am to 5 pm
Other commodities : 10 am to 11.30 pm
COMMODITY EXCHANGE
Bullion
Spices
Fiber
Cereals
Plantations
pulses
Oil & Oil Seeds
Energy
Petrochemicals
Metals
MAJOR ACTORS IN COMMODITY MARKET
Speculator
A trader who enters the futures market in pursuit of profit, accepting risk in the
endeavor.
Hedger
A Trader who enters the futures market to reduce some pre-existing risk
exposure.
Broker
An Individual or firm acting as an intermediary by conveying customers trade
instructions. Account executives or floor brokers are examples of brokers.
COMMODITY TRADING
Spot trading
Spot trading is any transaction where delivery either takes place immediately, or
if there is a minimum lag, due to technical constraints, between the trade and
delivery. Commodities constitute the only spot markets which have existed nearly
throughout the history of humankind.
spot trading are also known as over the counter which have been
decreasing over the years due to risks.
EXAMPLES OF SPOT TRADING
Lets assume that Priyanka is a oil trader and buys the oil at a price of 50$ per
barrel and the oil will be delivered in due time at a future date say 15 to 30 days.
Another example of spot trading which includes over the counter will be two
parties trading in a contract which is non standard as pratiksha and sriram enter
into a gold contract whereby the price will be fixed on the spot and details of the
contract will be within the 2 parties including the price whereas earlier in the oil
contract price was open in the market.
FORWARD CONTRACT
Lets assume that aarti is a corn farmer who enters into a contract with ashwathi
who is the owner of ash flakes (brand name of her cornflakes) and she is selling
the corn to ashwathis firm at 50rs/kg in November if the price of corn is more than
50 rs/kg aarti is in profit while if the price of corn is less than 50rs/ kg then ashwathi
is in profit.
FUTURE CONTRACTS
Involves taking a long position in the Involves taking a shot position in the
market. future market.
Good when somebody plans to buy Good when somebody owns the asset
something in the future. and plans to sell in the future.
EXAMPLE OF SHORT TERM HEDGE
Lets assume that sharath expects to sell 10,000 kg of sugar in November and the
current spot price is 20rs/kg while the future price is 25rs/kg , so he will lock the
future price at 25rs/kg thereby mitigating the price fluctuation in sugar will be
nullified as if the price in November falls below 25rs he doesnt have to worry
about the fall in prices and he can go and party till he crashes.
EXAMPLE OF LONG TERM HEDGE
Lets assume that Arjun is a copper trader and requires copper in 2 months time
but has an inventory holding capacity of 1month. The current spot price is
200rs/kg and future price is 180rs/kg. so he will lock the price of copper at 180
rs/kg to be bought after 2months and if the price of copper by that time is 190 rs
he will be in profit of 10rs/kg and will sleep for next 2 days happily.
FUTURE CONTRACTS
All the commodities are not suitable for futures trading and for conducting futures
trading. For being suitable for futures trading the market for commodity should
be competitive, i.e., there should be large demand for and supply of the
commodity. The commodity should have long shelf-life and be capable of
standardization and gradation.
Price discovery is done through two popular methods. The fundamental analysis is
concerned with basic supply and demand information, such as, weather patterns,
carryover supplies, relevant policies of the Government and agricultural reports.
Technical analysis includes analysis of movement of prices in the past.
FORWARD VS FUTURES
Dilip furniture's private limited is the owner of mnc in India while vasu sushi
corporation is the owner of mnc in japan and both of these companies want to
increase there business in each other countries and they need to take a loan while
loan in India for foreign companies is at 20% while in japan is at 19%.
so in order to counter interest rates dilip and vasu will take loan for
each other at 10% and 9% respectively and then they will swap the loan at
yen/rupee rate equivalently, thereby giving both companies advantage.
EXCHANGE TRADED COMMODITIES
Commodities are a distinct asset class with returns that are largely independent of
bond and equity returns.
Taking broad commodity exposure can help in portfolio and risk diversification.
Long term fundamentals of commodity companies appears bright given the
supply demand mismatch rapid industrialization of emerging economies ,
emphasis on infrastructure development in many developing economies.