MANGAL KESHAV

MK COMMODITY BROKERS LTD.

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Snapshot of Indian Commodity Market

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Two Major Commodities Exchange in India
MCX (Multi Commodity Exchange)

NCDEX (National Commodities & Derivatives Exchange)

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Commodities traded on the exchanges
Agri Products:
Jeera Pepper

Precious Metals:
Gold Silver Platinum

Chilli
Turmeric Guar Seed Guar Gum Soya bean Sugar Maize

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Commodities traded on the exchanges
Base Metals:
Copper Nickel

Energy:
Crude oil Natural Gas

Lead
Zinc Aluminum

Tin

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Other Information
Exchange Timings Agri Products: 10:00 AM To 5:00 PM

Other Commodities: 10:00 AM To 11:30 PM

Instrument Traded: Futures Contract
Expiry of Contracts : Different for different commodities

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What are Commodity futures?
A Financial Contract The underlying commodity is bought or sold at a future date A tool used by Investors, Hedgers, Arbitrageurs, Day Traders

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Why futures trading in Commodities?
Portfolio diversification and risk management
Additional investment opportunity Low cost business No Transportation, storage, insurance, security charges Low Margins High leverage Intrinsic value of the commodity Domain knowledge of industry Hedging/ Arbitrage

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Purpose of Futures Markets
Meet the needs of three groups of future market users
Those who wish to discover information about future prices of commodities (suppliers)
Those who wish to speculate (speculators)

Those who wish to transfer risk to some other party (hedgers) Those who want to take advantage of price difference in different markets (Arbitrageurs)

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Commodity Futures Market Participants
Hedgers

Producers Farmers Consumers Refineries, Food processing companies

Speculators
Institutional proprietary traders Brokerage houses

Spot Commodity traders

Arbitrageurs
Brokerage houses

Investors

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Exchange vs. Bilateral Trading
Exchange Common platform for all traders Price transparency Bilateral trading Restricted access Traded prices unknown to other players High cost and time consuming negotiations

Low transaction costs

Absence of counter party credit risk

Market prices available to wider world

Counter party credit risk

Difficulty in price dissemination

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Risks encountered by industry
Price volatility depends on International market movement Results in higher procurement cost reducing operational margins

No options or tools were available earlier

Directionless market No control measures

Counter party Risk

Credit risk especially during periods of volatile prices Quantity risk during shortages Quality Risk

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Benefits
Investor:
Portfolio diversification and risk management Additional investment opportunity

Physical trader:
Low cost business No Transportation, storage, insurance, security Charges Domain knowledge of industry

Traders:
Low Margins High leverage No balance-Sheet, P&L, EBITDA

Hedging/ Arbitrage

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Hedging
Purpose
Avoid risk of adverse market movements

Rationale
Cash and Futures prices tend to move in tandem Converge at close to expiry

Types of Hedges
Long Hedge, Short Hedge

Advantages
Lock in a price and margin in advance

Disadvantages
Limits opportunities if prices move favorably

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Long Hedge

Types of Hedging

Hedges that involve taking a long position in futures contract Appropriate when a company plans to owns certain asset in the future

Short Hedge
Hedges that involve taking a short position in futures contract Appropriate when the hedger already owns the asset or likely to own the asset and expects to sell it in future

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Short Hedge - Example
Suppose:COPPER producer wants to sell COPPER in future. There is an equal chances of price going up or down. There is a risk if price goes down.
Copper Producer Expecting/having stock Case Stock 50000 Kg (50MT) of Copper

If price goes up by Re. 1

If price goes down by Re. 1

Gain Rs. 50000/Loss Rs. 50000/-

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Short Hedge- Example contd
Date
30th Nov 30th Nov

Spot
Rs. 280/Kgs Buy/Hold

Future
Rs. 295/Kgs Sell

With Hedge (You rule out a loss)

30th Dec
Case 1 Rs. 270/Kgs Case 2 Rs. 305/Kgs Without Hedge Case 1 Rs. 270/Kgs Case 2 Rs. 305/Kgs

Spot
Loss Rs. 10/Kgs Profit Rs. 25/Kgs Loss Rs. 10/Kgs Profit Rs. 25/Kgs

Future
Profit Rs. 25/Kgs Loss Rs. 10/Kgs ---

Net Result
Profit Rs. 15/Kgs Profit Rs. 15/Kgs Loss Rs. 10/Kgs Profit Rs. 25/Kgs

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Long Hedge- Example
Scenario of consumer who wishes to lock input prices
There is an equal chances of price going up or down. There is a risk if price goes up.
Copper Consumer Wants to buy Copper in future Case If price goes up by Re. 1 If price goes down by Re. 1 Loss Rs. 50000/Gain Rs. 50000/Stock 50,000 Kg (50 MT) of copper

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Long Hedge - Example contd
Date 30th Nov Spot Rs. 280/Kgs Future Rs. 295/Kgs

30th Nov
30th Dec Case 1 Rs. 270/Kgs Case 2 Rs. 305/Kgs Without Hedge Case 1 Rs. 270/Kgs Case 2 Rs. 305/Kgs

Wait till Nov

Spot Profit Rs. 10/Kgs Loss Rs. 25/Kgs Profit Rs. 10/Kgs Loss Rs. 25/Kgs

Buy
Future Loss Rs. 25/Kgs Profit Rs. 10/Kgs --Net Result Loss Rs.15/Kgs Loss Rs. 15/Kgs Profit Rs. 10/Kgs Loss Rs. 25/Kgs

With Hedge (You rule out a loss)

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Advantage MK Commodity Brokers
Top Quality Research
Professionally qualified analysts with rich industry experience Research on Precious Metals, Base Metals and Energy Daily outlook report and trading calls on SMS

Online Trading
Single Screen customized market watch for MCX / NCDEX with BSE / NSE Streaming quotes & intra-day trading calls

Pro-active Relationship Management Relationship management desk Educating clients on commodities futures market.

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Advantage for Clients
Round the clock operations in commodities trading
Indian commodities market, unlike stock market is open till 11.30 in the night and MK Commodity Brokers Ltd.is all poised to offer round the clock services through its dedicated team of professionals. Better Trading Facility at one place.

State of Infrastructure
The strong IT backbone of Mangal Keshav helps us to provide customized direct services through our back office system, nation-wide connectivity and website.

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