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PRESENTED TO:-

RAHUL SIR
à A physical substance, such as food, grains, and
metals, which is interchangeable with another product
of the same type, and which investors buy or sell,
usually through futures contracts.

à More generally, a product which trades on a

commodity exchange; this would also include foreign
currencies and financial instruments and indexes.
à A financial instrument whose characteristics and value
depend upon the characteristics and value of an
underline asset, typically a commodity, bond, equity
or currency.

à Examples of derivatives include futures and options

à Vhe commodity derivatives market is a direct way to
invest in commodities rather than investing in the
companies that trade in those commodities.
à For example, an investor can invest directly in a steel
derivative rather than investing in the shares of Vata
Steel.
A potato producer could purchase potato futures on a
commodity exchange to lock in a price for a sale of a
specified amount of potato at a future date, while at
the same time a speculator could buy and sell potato
futures with the hope of profiting from future changes
in potato prices.
à Vhe NMCE has most
major agricultural
commodities and metals
under its fold,
à Vhe NCDEX, has a large
number of agriculture,
metal and energy
commodities.
à MCX also offers many
commodities for futures
trading (We will see this
exchange in detail at the
end).
à Mndia is among the top-5 producers of most of the
commodities, in addition to being a major consumer
of bullion and energy products.
à Mt is important to understand why commodity
derivatives are required and the role they can play in
risk management
à Vhe possibility of adverse price changes in future
creates risk for businesses.
Vwo important derivatives are futures and options.

à COMMODMV FUVURES CONVRACV

à COMMODMV OPVMONS
CONVRACV
à A futures contract is an
agreement for buying or
selling a commodity for a
predetermined delivery
price at a specific future
time.
à Vhey are Standardized
Contracts
à Vraded in Future
Exchanges (Default is
taken care)
Suppose a farmer is expecting his crop of wheat
to be ready in two months time, but is worried
that the price of wheat may decline in this period.
Mn order to minimize his risk, he can enter into a
futures contract to sell his crop in two months¶
time at a price determined now. Vhis way he is
able to hedge his risk arising from a possible
adverse change in the price of his commodity.
à Êike futures, options are also
financial instruments used for
hedging and speculation.
à Vhe commodity option holder has
the right, but not the obligation, to
buy (or sell) a specific quantity of
a commodity at a specified price
on or before a specified date.
à Vhe option holder will exercise the
option only if it is beneficial to
him; otherwise he will let the
option lapse.
à For example, suppose a farmer buys a put option to sell 100 Quintals of wheat
at a price of $25 per quintal and pays a µpremium¶ of $0.5 per quintal (or a
total of $50). Mf the price of wheat declines to say $20 before expiry, the
farmer will exercise his option and sell his wheat at the agreed price of $25 per
quintal. However, if the market price of wheat increases to say $30 per quintal,
it would be advantageous for the farmer to sell it directly in the open market at
the spot price, rather than exercise his option to sell at $25 per quintal.
à °
 

 (°) is an
independent commodity exchange based in Mndia.
‡ Established in 2003 and Based in Mumbai
‡ Vurnover in 2009 was USD 1.24 trillion
‡ Sixth largest commodity exchange
‡ Mt was established in 2003 and is based in Mumbai.
à °  
‡ bullion, ferrous and non-ferrous metals, energy, and a
number of agricultural commodities (menthol oil,
cardamom, potatoes, palm oil and others).
à Financial Vechnologies (M)
Êtd.,
à State Bank of Mndia and its
associates,
à National Bank for
Agriculture and Rural
Development (NABARD),
à National Stock Exchange
of Mndia Êtd. (NSE),
à Fid Fund (Mauritius) Êtd.
à Corporation Bank,
à Union Bank of Mndia,
à Canara Bank,
à Bank of Mndia,
à Bank of Baroda ,
à HDFC Bank,
à SBM Êife Mnsurance Co.
Êtd.,
à MCMCM ventures,
à MÊ & FS, Merrill Êynch,
and
à New ork Stock Exchange
à National Commodity & Derivatives Exchange
Êimited (NCDEX) is a professionally managed
online multi commodity exchange.
à NCDEX is a public limited company incorporated on
April 23, 2003 under the Companies Act,1956.
à NCDEX is regulated by Forward Market
Commission in respect of futures trading in
commodities.
AGRICULTURAL NON-AGRICULTURAL
PRODUCTS:- PRODUCTS:-

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à Commodity derivatives, which were traditionally
developed for risk management purposes.
à Vhey just speculate on the direction of the price of
these commodities, hoping to make money if the price
moves in their favour.
à Vhe commodity derivatives market is a direct way to
invest in commodities rather than investing in the
companies that trade in those commodities.
Suppose an importer imports 6000tonnes of chana @ spot price Rs
2000/ tonne in January. so hw can we hedge our risk?
Mn futures exchange the price of chana in January Rs 2050/tonne. Vhe
importer book his profit for the futures contract for February.
Mf in February the spot price of chana rises to rs2100/tonne then he will
have profit in physical market but he would have loss in futures
exchanges.
Suppose the spot price of chana in February decreases to rs 1950/
tonne. Vhen he will have the loss in physical market but we would
have profit in the future market.
Whatever the case may be the prices of chana increases or decreases
the importer hedges his risk and book the profits of rs 50/tonne.
à Supposedly, the cost of gold is Rs 6000 per 10 grams, with an investment of
Rs 6 lacs; one can buy 1kg of gold.
à Now, suppose, three months later, when the price of gold is Rs 6,500 per 10
grams, the person decides by selling the gold makes a gross profit of Rs
50,000.
à Vo arrive at the net profit, one would have to deduct; the cost of storage in a
bank, the cost of financing and transaction costs, including the sales taxes.
à Vo trade in gold futures, an individual has to go to a brokerage house and
open a trading account. An initial deposit of Rs 50,000 to Rs 1 lacs is paid.
à One can gain from a futures market even by having a view on the price of
gold.
 Êet us assume that an investor buys a tonne of soybean for Rs 8,700 in anticipation that the prices
will rise to Rs 9,000 by June 30, 2005. He will be able to make a profit of Rs 300 on his investment,
which is 3.4%. Compare this to the scenario if the investor had decided to buy soybean futures
instead.
 Before we look into how investment in a derivative contract works, we must familiarize ourselves
with the buyer and the seller of a derivative contract. A buyer of a derivative contract is a person who
pays an initial margin to buy the right to buy or sell a commodity at a certain price and a certain date
in the future.
 On the other hand, the seller accepts the margin and agrees to fulfil the agreed terms of the contract
by buying or selling the commodity at the agreed price on the maturity date of the contract.
 Now let us say the investor buys soybean futures contract to buy one tonne of soybean for Rs 8,700
(exercise price) on June 30, 2005. Vhe contract is available by paying an initial margin of 10%, i.e.
Rs 870. Note that the investor needs to invest only Rs 870 here.
 On June 30, 2005, the price of soybean in the market is, say, Rs 9,000 (known as Spot Price -- Spot
Price is the current market price of the commodity at any point in time)., is to take care of possible
problems of default by the other party involved by standardizing and simplifying transaction
processing between participants and Vhe investor can take the delivery of one tonne of soybean at Rs
8,700 and immediately sell it in the market for Rs 9,000, making a profit of Rs 300. So the return on
the investment of Rs 870 is 34.5%. On the contrary, if the price of soybean drops to Rs 8,400 the
investor will end up making a loss of 34.5%.
à Mf the investor wants, instead of taking the delivery of the commodity upon maturity
of the contract, an option to settle the contract in cash also exists. Cash settlement
comprises exchange of the difference in the spot price of the commodity and the
exercise price as per the futures contract.
à At present, the option of cash settlement lies only with the seller of the contract. Mf
the seller decides to make or take delivery upon maturity, the buyer of the contract
has to fulfil his obligation by either taking or making delivery of the commodity,
depending on the specifications of the contract.
à Mn the above example, if the seller decides to go for cash settlement, the contract can
be settled by the seller paying Rs 300 to the buyer, which is the difference in the
spot price of the commodity and the exercise price. Once again, the return on the
investment of Rs 870 is 34.5%.
à Vhe above example shows that with very little investment, the commodity futures
market offers scope to make big bucks. However, trading in derivatives is highly
risky because just as there are high returns to be earned if prices move in favour of
the investors, an unfavourable move results in huge losses.
à Vhe most critical function in a commodity derivatives exchange is the settlement
and clearing of trades. Commodity derivatives can involve the exchange of funds
and goods. Vhe exchanges have a separate body to handle all the settlements, known
as the clearing house.
à For example, the seller of a futures contract to buy soybean might choose to take
delivery of soyabean rather than closing his position before maturity. Vhe function
of the clearing house or clearing organisation, in such a case
à Mn spite of the surge in the turnover of the commodity exchanges in recent years, a
lot of work in terms of policy liberalisation, setting up the right legal system,
creating the necessary infrastructure, large-scale training programs, et cetera still
needs to be done in order to catch up with the developed commodity derivative
markets.
à Also, trading in commodity options is prohibited in Mndia. Vhe regulators should
look towards introducing new contracts in the Mndian market in order to provide the
investors with choice, plus provide the farmers and commodity traders with more
tools to hedge their risks.