Executive Summary Internship Commodity Derivatives

EXECUTIVE SUMMARY
The summer Internship project was done at Bhas Commodities Pvt. Ltd. The objective of the internship was to study the role of commodity futures in Indian commodities market and the trading procedures by members of the exchange and also to have a first hand experience in the field of commodities derivatives. The internship also helped in getting exposed to various functions of the company like capital market services, commodities derivatives and depository participant services, it also helped in having a first hand experience in platform of trading and participate in mock trading which the company contests to improve the efficiency of the employees of the company. The internship also helped in gaining knowledge and experience in the field of sales and marketing of the financial service products offered by the company, it also helped in studying the market by meeting the clients as they are the main market participants and has good knowledge about the market, the internship made available a great opportunity to discusses about the various aspects of commodity market and its working and also to gain relevant, real world experience in the operation and customer services. The internship was about A Study on Commodities Derivatives Market a market survey was conducted to collect data pertaining commodity market and what the customers feels about the market. Project details, findings, suggestions and conclusion are detailed in project report. The organizations background, its infrastructure, set up, i s branches, t hierarchy etc have been researched by discussing with the em ployees of the organization, reading the in house manuals and exchange manuals and visiting, the company website. The various product and services offered by the company is also listed in the project report. A SWOT analysis has also been done for the company to identify the strengths, weaknesses, opportunities and threats of the company compared to its competitors and the industry standards. The balance sheet of the company has been studied and various ratios like Solvency Ratio, Profitability Ratio, Efficiency Ratio, and Liquidity Ratio was conducted to find out the financial standing of the company and its strengths to the company.
Ohio University Christ College Academy For Management Education
The commodity derivative and the futures trading in commodities is a new concept and has ample scope for future studies and also to identify new techniques in the market as the commodities derivatives market is growing daily.
INTRODUCTION
In 2004 an X-NRI Indian Family started Bhas Commodities (P) Ltd, Bhas Securities (P) Ltd and Pulikot Credits and Investment (P) Ltd managed by Mr. Varuthunny.P.I the Chairman of the Group. The Registered and Head office of the company is situated in Sultan Bathery, Wynad, Kerala.
The company provides a wide range of financial services from securities derivative trading, commodity trading, depository services, research and advisory services, consumer secured and unsecured loans against shares and mortgage. The primary objective of the company is to generate medium to long-term capital growth (2-3 years) by identifying undervalued stocks and those with growth opportunities from a select list of well researched stocks. The Secondary objective of the company is to provide a helping hand to the investors and to guide the investors on the right path and to protect the investors from the risks arising as share trading and commodities trading are exposed to more risks. The objective of the company by entering the commodities futures market is to help and save the farmers from price fluctuations and the Manufactures, Exporters and Traders from the scarcity of the commodities they deal with and to help in timely delivery of the products to their customers.
Bhas Securities achieved a tremendous growth in stock broking within a very short span of its journey. The company stared off with a very wider concept of internet trading in Kerala. The experts of the company with a highly potential caliber enable and help the client in taking the most prudential investment portfolio. What the company feels about the prudent investor is that he/she must have the right plan and he/she must trade on active liquid stocks where he/she can recoup high rate of return with minimum risk. For the market, it is the trend that matter and not the price at which he/she enter into.
Profile of the company
Bhas Commodities (P) Ltd The company is a Corporate Member of National Commodity and Derivatives Exchange (NCDEX), Multi Commodity Exchange of India (MCX) and India Pepper and Spice Trade Association (IPSTA). The Regional office is at Kozhikode. The branches of the company are expanding steadily. Besides Kerala, Karnataka and Tamilnadu where the company is now having branches, further expansions are also planned to other parts of India by the company management. Majority of the staff members are NCFM Certified professionals who provide trading strategies suited to the business interests of each individual or business house. Bhas Securities (P) Ltd The Company is a registered broker at the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and a Corporate Member of Cochin Stock Exchange. Share broking is undertaken at all branches where commodity broking is carried out. The service in share broking include on line buying of share/securities through NSE/BSE, Depository Services, Internet Trading and giving proper advices in selecting stocks for short term as well as for long term investment. Pulikot Credits and Investments (P) Ltd The Company is a RBI registered Non Banking Finance Company (NBFC) focusing on vehicle hire purchase, loans on commodity, share, gold and other fully secured loans. The Management is planning expansion of its services in the commodity and equity sectors to other parts of India and abroad. This includes taking membership in Commodity Exchanges outside India.
The profile of NCDEX and MCX Exchanges which the company is a member of and has its trade with: All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India.
National Commodity & Derivatives Exchange Limited (NCDEX): National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.
Multi Commodity Exchange of India Limited (MCX): Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutulised exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country. MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, Pulses Importers Association and Shetkari Sanghatana.
BHAS BRANCHES
1. Bhas Pvt Ltd, Cochin, Kerala. 2. Bhas Pvt Ltd, Calicut, Kerala. 3. Bhas Pvt Ltd, Kalpetta, Kerala. 4. Bhas Pvt Ltd, Meenagady, Kerala. 5. Bhas Pvt Ltd, Mananthavady, Kerala. 6. Bhas Pvt Ltd, Meppady, Kerala. 7. Bhas Pvt Ltd, Gudalur, Tamilnadu. 8. Bhas Pvt Ltd, Ootty, Tamilnadu. 9. Bhas Pvt Ltd, Gonikkoppa, Karnataka.
BHAS FRANCHISES
10. D.J. Systems, Sulthan Bathery, Kerala. 11. Kuriakose Brothers Spices Pvt Ltd, Sulthan Bathery, Kerala. 12. Agro Indus, Cochin, Kerala.
Products and Services
Shares Account opening Depositary participant account opening Demat dematerialization of shares. Convert share certificates to electronic form. This gives the share holders the option to hold share certificates in the demat mode instead of having them in physical paper form. These electronic balances could be easily transferred thereby eliminating the hassles of physical transfer and settlement system, which may involve bad delivery, fake share certificate etc. Platform for trading information about shares, how to trade and which shares to invest.
Commodity Account opening Depositary participant account opening for the purpose of delivery. Demat dematerialization of warehouse receipts. Dematerialization refers to the process of conversion of the physical paper (warehouse receipts) into the electronic balance. Assist in actual delivery buying and selling Pay in, pay out Platform for trading buy or sell for all clients, communicating to clients about the fluctuations in the daily market. Providing information to clients about the market how to trade, factors to be looked in while trading to protect profits and minimize losses.
Credits and Investments Provide credits for vehicle hire purchase, loans on commodity, share, gold and other fully secured loans.
SWOT ANALYSIS
STRENGTHS Bhas Pvt. Ltd being the first of its kind in Wyanad district, it has a more loyal customer base. The company does trading through Leased line MPSL, which is more advanced than VSAT since trading is done through the leased line it is much faster, reduces mistakes and easier to monitor, the company also has the required infrastructure and technological support to handle very large number of clients and investors. The workforce consists of young talented determined people between the age group of 25 35; hence they are more innovative and risk takers while trading.
WEAKNESSES Compared to its competitors Bhas Pvt. Ltd has less brand value. Converting farmers from trading in spot market to future market. e.g.; In the case of gold jewellery people are more comfortable going to a known pawn broker then to a jewellery showroom, even though the quality is better in the showroom. It is the same case in the commodity market.
OPPORTUNITIES Opening up of Indian economy has provided the company with a very good opportunity to grow. This trend is expected to continue for years to come. With the economy expected to be more liberal in the forthcoming years the company is poised to attain new heights. The company being only two years old and new in the market has more scope to diversify the services it offers in the near future. Wyanad being a commodity dominated market; it can be converted into a potential investors market. Commodities strong performance this year should bode well for currencies and equities associated with the sector, including emerging markets. Banks and Insurance coming in into the commodities market would be a boom to the commodity market.
THREATS Financial Services is open to unstable political scenario, like change in the government, or implementation of new budgets by state and central governments. Unfavorable government policies and levy of new taxes will demoralize the investors from making new investments. As India is becoming an open economy and government policies favoring foreign investments there are chances of foreign investors entering the market and becoming a threat. Fund buying and selling malpractices, because of this many commodities have been banned from trading. There is a huge space for employee retention because they find the work very hectic, and holidays provided by the exchange are only three days, there is no uniformity on holidays between exchanges.
FINANCIAL ANALYSIS
For the financial analysis purposes the Balance Sheet and Profit and loss accounts of Bhas Commodities were taken up for two years 2006 and 2007. The data were analyzed for assessing the financial position and performance of the company in the terms of efficiency, solvency and profitability. The issued, subscribed and paid up capital increased by Rs.9 lakhs compared to the previous year. In 2006 2007 the Profit after Tax has increased from Rs.34401 to Rs.47600. While the current assets have decreased by Rs.3 lakhs, current liabilities have also decreased by Rs.12 lakhs. The unsecured loans and advances have increased from Rs.60 lakhs to Rs.78 lakhs
No dividend has been paid as the Bhas Commodities Pvt. Ltd has utilized the profits to set off losses carried forward from the previous years.
Solvency Ratio For the year ended 31st march 2006: 0.5833 For the year ended 31st march 2007: 0.6666
Ideal ratio is above 1.
Profitability Ratio Return on Shareholders equity capital For the year ended 31st march 2006: 0.0052 For the year ended 31st march 2007: 0.0061
Earnings per share ratio For the year ended 31st march 2006: 0.0521 For the year ended 31st march 2007: 0.0618
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Efficiency Ratio Debt Equity ratio For the year ended 31st march 2006: 0.4090 For the year ended 31st march 2007: 0.7272 Earnings per share For the year ended 31st march 2006: 0.0521 For the year ended 31st march 2007: 0.0618
Liquidity Ratio Current ratio For the year ended 31st march 2006: 0.5833 For the year ended 31st march 2007: 0.6666 Quick ratio For the year ended 31st march 2006: 0.5833 For the year ended 31st march 2007: 0.6666
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Remarks and Comments on the Ratios
Return on capital employed reflects the overall efficiency of how the capital is employed. This ratio is useful in making capital budgeting decisions, higher the ratio higher efficiency. Return on shareholders equity is another measure of profitability. Higher the ratio better is the performance. Proprietary ratio indicates the strength of the company. Debt equity ratio establishes relationship between outside liabilities of a business and the owners equity. Debt equity ratio has increased from 0.409 in 2006 to 0.7272 which shows how much debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of the owners. Earnings per share indicate whether or not the firms earnings power on per share basis has changed over a period. Earnings per share simply show the profitability of the firm on per share basis. Increase in Earnings per share is due issue of additional equity shares. Current ratio is a measure of the firms short term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. The current ratio represents a margin of safety for creditors. Since the value of current ratio is less than one does not mean the company is not doing well, this is because the current ratio is a test of quantity, not quality. Quick ratio establishes a relationship between quick, or liquid, assets and current liabilities. Generally a quick ratio of 1 to 1 is considered to represent a satisfactory current financial condition. Quick ratio is same as the current ratio for the company because there is no inventory. Quick ratio has improved from 0.5833 in 2006 to 0.6666 in 2007 this could be due to the increase in the quick assets.
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A STUDY ON COMMODITY DERIVATIVES
OBJECTIVE
The primary objective is to study the commodities derivatives market. The objective was also to study the role of commodity futures in Indian commodities market and the trading procedures by members of the exchange. A study was also conducted on the investor perception of trading in commodity futures. Different people have different needs and wants, therefore it is important to understand their goals and objectives.
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Figure 1 Trading Structure in a Derivative market
History of Commodity Market
Evolution of commodity market Commodities futures trading have evolved from the need for ensuring continuous supply of seasonal agricultural crops in Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as rice tickets Eventually such rice tickets became accepted as a kind of general commercial currency. Rules came into being, to standardize the trading in rice tickets. The concept of organized trading in commodities evolved in the middle of 19th century, in Chicago, United States. Chicago had emerged as a major commercial hub with railroad and telegraphs lines connecting it with the rest of the world, thereby attracting wheat producers from Mid-West to sell their products to the dealers and distributors. However, lack of organized storage facilities and absence of a uniform weighing/ grading mechanism often confined them to the mercy of dealers discretion. This led to inherent need to establish a common meeting place both for framers and dealers to transact in spot grain-to deliver wheat and receive cash in return. This happened in 1848. Gradually, the framers (sellers) and dealers (buyers) started to make commitments to exchange the produce for cash in future. This is have the contract for futures trading
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evolved whereby the producer would agree to sell his produce (wheat) to the buyer at a future delivery date at an agreed upon price. In this way the framers knew in advance about what he would receive for his produce and the dealer would know about his costs involved. This arrangement was beneficial to both the producer and the trader. These contracts became popular very quickly and started changing hands even before the delivery date of the product. If a dealer is not interested in taking delivery of the product, he would sell his contract to someone who needed the same. Similarly, the framer who did not intend to deliver his crop would pass on the responsibility to another. The price of the contract would depend on the price movements in the wheat market. With some more modification, such contracts gradually transformed into an instrument to protect the parties involved against adverse factors like unexpected price movements, unfavorable climatic factors etc. For example during bad we ather people having contracts to sell wheat would be interested to hold more valuable contracts due to supply shortages. Conversely if there is oversupply the sellers contract value would decline. This prompted the entry of traders in futures market who had no intentions to buy or sell wheat but would purely speculate on price movements in the market to earn profit. Trading in futures as a result became a very profitable mode of activity that encouraged the entry of other commodities in the futures market thereby creating a platform to set up a body that can regulate and supervise these contracts. Thus, during 1848, the Chicago Board of Trade was established. It was initially formed as a common location known both to the buyers and sellers to negotiate forward contracts. In the early 20th century, as communication and transportation became more advanced, centralized warehouses were built in the principal market centers to distribute goods more economically. Agricultural commodities were the most commonly traded, but it let to the fact that a market can flourish for any underlying as long as there is an active pool of buyers and sellers In the 1870s and 1880s the New York Coffee, Cotton and Produce Exchanges were born. The largest commodity exchanges in USA are the Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange. Worldwide
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there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand. The various exchanges are constantly looking for new products in which to trade futures. In USA, futures trading are regulated by an agency of the Department of Agriculture called the Commodity Futures Trading Commission. It regulates the futures exchanges, brokerage firms, money managers and commodity advisors.
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INTRODUCTION TO DERIVATIVES
Derivatives are financial contracts, which derive their value from an underlying asset. The underlying asset can be equity, commodity, foreign exchange, interest rates, real estate or any other asset. Broadly four types of derivatives are traded, namely forwards, futures, options and swaps.
Derivative contracts can be traded either in an exchange or over-the-counter.
Exchange: Exchange is a central marketplace for buyers & sellers. The contracts are standardized to ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by the members who are acting on behalf of their clients, companies or themselves. This auction provides a readily available, widely accepted reference price for the underlying, a process that is called price discovery. All participants of a futures contract are subject to the same specifications of quality, quantity & delivery terms. The Exchange does not take positions in the market nor can it advise people on what positions to take. The responsibility of the Exchange is to ensure that the market is fair & orderly. All Exchanges are governed by regulatory authority & are aware of the identity of anyone holding a substantial position. Members violating the rules can be subject to fines or other penalties.
Over-the-counter: OTC is an alternative trading platform, linked to a network of dealers who do not physically meet but instead communicate through a network of phones & computers. Trades are usually transacted between financial institutions that can also act as market makers for the commonly traded instruments. All transactions over the telephone are recorded, in case of future disputes that may arise. The buyer & seller to suit their requirements can customize the contracts traded in these markets. Hence, terms of the contract need not be specified as in the case of an Exchange.
There are three types of OTC markets: (a) Traditional dealer market: In this, the dealers act as market makers by maintaining bid
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and offer quotes. The dealers communicate the quotes and the execution prices are negotiated upon over the telephone and sometimes through an electronic bulletin board. It is bilateral trading as only the two ends of a phone observe prices at a given point of time. (b) Electronic Broking Market (EBM): This is similar to the electronic trading platforms used by exchanges. These are considered to be over the counter since the contracts are less standardized. The EBM neither sets the contract design nor c lears the derivative transactions. (c) Proprietary trading platform market: This is a combination of the first two in which a dealer sets up his own proprietary electronic trading platform. The dealer quotes the bids and asks exclusively for the market participants to observe his quotes only and not each other's. In this form of trading the dealer acts as the counter party to every trade so that half of the credit risk in the market is his.
Meaning of Forward, Futures

A forward contract is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing the agreement. Forward contract is not traded on an exchange. The terms and conditions of forward contracts are customized based on negotiations between the counter parties. It is the oldest form of derivative contract. A futures contract is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at a certain time in the future at a price agreed upon at the time of entering into the contract on the futures exchange.
Difference between Spot and Futures markets

Commodities can be transacted in both the spot as well as in the futures markets. Although the two markets are separated, they are interrelated nevertheless. The commodities are physically bought or sold on a negotiated basis in the spot market, which is generally considered as the actual physical market for immediate delivery. Most often, the contract requires for the actual delivery of the commodity traded to be made.
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It may also specify for immediate or forward delivery in the future at a set time. The futures market, however, facilitates buying and selling of standardized contractual agreements (for future delivery) of the underlying asset as the specific commodity and not the physical commodity itself. The formulation of a futures contract is very specific regarding the quality of the commodity, the quantity to be delivered and the date for delivery. However, it does not involve immediate transfer of ownership of the commodity, unless resulting in delivery. Thus, in the futures markets, commodities can be bought or sold irrespective of whether one has possession of the underlying commodity or not. The physical markets for commodities deal in either cash or spot contract for ready delivery and payment within 11 days, or forward (not futures) contracts for delivery of goods and/or payment of price after 11 days. These contracts are essentially party to party contracts, and are fulfilled by the seller giving delivery of goods of a specified variety of a commodity as agreed to between the parties. In case of unforeseen situations which prevent buyers or sellers from receiving or giving deliveries then in such cases contracts may be cash settlement mutually. The futures market, unlike the physical markets, trade in futures contracts primarily for the purpose of risk management that is hedging on commodity stocks or forward buys and sells. Most of these contracts are squared off before maturity and thus rarely end in deliveries. Speculators, who are key players in the futures markets, also use these contracts to benefit from price movements and are hardly interested in taking or giving delivery of commodities. The term Basis refers to the difference in spot and futures prices of a commodity. The spot price is the real price of the physical commodity while the futures price refers to the price of a contract being traded in the futures market. Although, the prices of the spot and futures are different they do have the tendency to parallel each other due to their relationship. Irrespective of the market condition, the futures and spot prices tend to equalize as the maturity date for the contract approaches. A future contract approaching expiration date becomes, in effect, a spot contract.
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Evolution of Commodity futures in India

The history of futures trading in commodities in India is almost as old as that of US. It has, however, passed through a turbulent past. India's first organized futures market was the Bombay Cotton Trade Association Ltd., which was set up in 1875. Futures trading in oilseeds started with the setting up of Gujarati Vyapari Mandali in 1900. Gold futures trading began in Mumbai in 1920. During the first half of the 20th century, there were several commodity futures exchanges trading in jute, pepper, turmeric, potatoes, sugar, etc. However, during the 1940s to 1960s, trading in forwards and futures became difficult as a result of price controls. Major policy decisions taken after Independence, mainly because of the then prevailing scarcity situation, adversely affected the development of futures and forwards markets in the country. In 1952, the Forward Contract Regulation Act was passed which controls all transferable forward and futures contracts. This again put restriction on futures trading. During the 1960s and 70s, the Government of India suspended trading in several commodities like cotton, jute, edible oilseeds, etc. as the government felt that these markets were increasing the prices of commodities. The government's twin policies of offering to buy agricultural produce at a "minimum support price" (MSP) and gaining a monopoly in storage/transportation/distribution of agricultural produce along with a ban on futures and options trading were the major factors that weakened the agro-commodity markets in the country. The government appointed two committees to study this sector i.e. the Dantwala Committee in 1966 and the Khusro Committee in 1980, which recommended the reintroduction of futures trading in major commodities. The government finally brought back forward trading in agricultural commodities in the early 1980's. But, it was done for commodities that did not have a very significant role in the economy - such as castor seed and castor oil, jaggery, jute, pepper, potato and turmeric. Several localized exchanges started trading in the same commodity, each of the with a local m broker/wholesale-merchandiser. But, even after a decade, none of the markets achieved the levels of liquidity that existed prior to the ban on commodity futures trading. Once futures trading became operational, in spite of liberalization, it has been difficult for trade to be transferred from illegal black markets, which have zero tax liability and
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no reporting requirements to the legal authorities as compared to the regulated markets, where taxes & reporting are part of the legal procedures. Further, responding to the need for commodity futures in India, in 1993, a committee was set-up for assessing the scope for forwards and futures trading in comm odities and for recommending steps to be taken for development of futures trading in India. The Committee so instituted was known as the Kabra Committee and much of its recommendations have been implemented. Whereas, with the current initiatives of the regulators, these markets have shown revolutionary changes in the last few years, with the National-level multi commodity exchanges in India showing tremendous potential to tap the commodity derivatives market.
Meaning and objectives of commodity futures

A commodity futures contract is an agreement between two parties to buy or sell a specified and standardized quantity and quality of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risks associated with frequent price volatility. The loss due to price volatility can be attributed to the following two reasons: Consumer Preference: In the short- term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers & wholesalers to adjust their inventory in advance. Changes in Supply: They are abrupt & unpredictable bringing about wild fluctuations in prices. This can be especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse movements in price.
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Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand-supply factors that facilitates a regular and authentic price discovery mechanism.
Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments.
Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against s hort-term adverse price
movements. Liquidity in the contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in the prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.
Pricing commodity futures
The relationship between cash price and futures price can be explained in terms of cost of carry. Cost of carry is an important element in determining pricing relationship between spot and futures prices as well as between prices of futures contracts of different expiry months. According to the cost of carry model, futures prices depend on the spot price of a commodity and the cost of storing the commodity from the date of spot price to the date of delivery of the futures contract. Cost of storage and insurance and cost of financing constitute cost of carry. Estimated cost of futures price is also called "Full carry futures price". Cost of carry model: The cost of carry model can be defined .as:
F=S+C (Where F=Futures price S=Spot price C=Cost of carry)
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Exchange membership
Membership of Exchange is open to any person, association of persons, partnerships, co-operative societies, companies etc. that fulfill the eligibiity criteria set by the l exchange. All the members of the exchange have to register themselves with the competent authority before commencing their operations. Membership categories are different for different exchanges, membership types are explained in detail as under. Trading-cum-Clearing Member (TCM) A TCM is entitled to trade on his own account as well as on account of his clients, and clear and settle trades himself. A sole proprietor, partnership firm, a joint Hindu Undivided Family (HUF), a corporate entity, a cooperative society, a public sector organization, statutory organization or any other Government or non-Government entity can become a TCM. There are two types of Trading-cum-Clearing (TCM) memberships, namely, TCM-1 and TCM-2. TCM-1 refers to transferable non-deposit based membership and TCM-2 refers to non-transferable deposit-based membership. A person desirous of being registered, as a Trading-cum-Clearing-Member is required to submit an application as per the format prescribed under the business rules, along with all enclosures, fee and other documents specified therein. He is required to go through an interview by the Membership Admission Committee and the committee is entitled to accept or reject his application. The Committee is also empowered to frame rules or criteria relating to admission of membership. After taking into account the report of the Membership Admission Committee, the Board takes a final decision relating to selection or rejection of a member. On selection, the member is required to execute and submit an Undertaking called as "Trading-cum-Clearing-Member Undertaking" as data as per format prescribed under the business rules. On selection and after complying with all the requirements stated above and also after payment of admission fee, security deposit, VSAT charges, etc., the member becomes entitled to trade on his own account as well as on account of his clients. If a Trading-cum-Clearing-Member is desirous of clearing, either all or part of his trades through an Institutional Trading-cum-Clearing-Member (ITCM) or a Professional Clearing Member (PCM), he is allowed to do so.
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Institutional Trading-Cum-Clearing Member (ITCM) Only an Institution / Corporate can be admitted by the Exchange as a member, conferring upon them the right to trade and clear through the Clearing House of the Exchange as an Institutional Trading-cum Clearing Member (ITCM). Moreover, the Member may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals. Further the ITCMs can also appoint sub-brokers, authorized persons and Trading Members who would be registered as Trading Members in the exchange at the request of the ITCM. The ITCM will clear and settle trades on behalf of the sub-brokers, authorized persons and such Trading Members who are registered in the exchange at their request, subject to the terms and conditions specified by the exchange. Professional Clearing Member (PCM) A PCM is entitled to clear and settle trades executed by other members of the exchange. A corporate entity and an institution only can apply for PCM. The Member would be allowed to clear and settle trades of such members of the exchange who choose to clear and settle their trades through such PCM.
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Participants in Commodity derivatives Market
Hedgers Futures contracts have been used as financial offsets to cash market risk for more than a century. Futures to reduce or limit the price risk of the physical asset. Hedging is an insurance used to avoid or reduce price risks associated with any kind of futures transaction. The degree of effectiveness of a hedge is determined by the percentage of the actual gain or loss incurred in a futures transaction. Though most hedges reduce risks related to price variations, they do not eliminate them altogether. "Margin" for futures contracts is usually between 5% and 10% of the contract value and is put up in good faith, indicating the buyer or seller's willingness to pay or deliver the entire amount if the contract is held until delivery. Because margin requirements are so low, it is possible to hedge small or large quantities of commodities. In fact, the low margins required for trading in futures contract provide high "leverage" for traders. This is because; the traders can take large exposures even by investing marginal (small) amount of deposit with the exchange.
Speculators When supplies of a commodity are greater than the present demand or need, prices tend to decline. If supplies appear to fall short of demand, prices trend upward. Estimating market supply and demand conditions are the challenges faced by market participants. It is generally accepted that speculators are interested in making fast money by anticipating future price movements. Commodity futures allow speculators to create high leveraged positions. A speculator accepts the risk that hedgers seek to avoid, giving the market the liquidity required to service hedge participants effectively by providing the market with the necessary bids and offers for a continuous flow of transactions. Speculation is the opposite of hedging. A speculator holds no offsetting cash market position and deliberately incurs price risk in order to benefit from price movements. A speculator is an additional buyer of commodities whenever it seems that market prices are lower than they should be. Consumers consider this to be against their best interest.
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Conversely, when it appears that prices are too high, a speculator becomes an active seller. Individual speculators tend to trade a smaller number of contracts than hedgers and hold market positions for a shorter time, so several of them may be needed to offset one large hedge order. The maximum number of contracts that can be held by anyone speculator is limited by exchange rules. The less capital required makes speculating in futures contracts very attractive. If the total value of the contract had to be paid, the rate of return on most commodities would be extremely small. The small margin provides speculators with the necessary leverage to generate a substantial rate of return. On the other side it also generates substantial risk.
Arbitragers Arbitragers are interested in making purchases and sales in different markets at the same time to profit from price discrepancy between the two markets. So arbitragers are interested in locking in a minimum profit by simultaneously entering into transactions in two or more markets. An arbitrager knows the minimum profit potential at the time of entering into transactions. In todays financial markets, most arbitrage opportunities occur either between regions, delivery periods or a combination of these conditions. Arbitrage means locking in a profit by simultaneously entering into transactions in two or more markets. If the relationship between spot prices and futures prices in terms of basis or between prices of two futures contracts in terms of spread changes, it gives rise to arbitrage opportunities. Difference in the equilibrium prices determined by the demand and supply at two different markets also gives opportunities to arbitrage. The futures price must be equal to the spot price plus cost of carrying the commodity to the futures delivery date else arbitrage opportunity arises.
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ADVANCED CONCEPTS IN COMMODITY FUTURES

Hedging Hedging means taking a position in the futures market that is opposite to a position in the physical market with the objective of reducing or limiting risks associated with price changes. Hedging is a two-step process. For instance, if the hedger is going to buy a commodity in the cash market at a future date, he buys the futures contract now and when he buys the commodity in the cash market, the futures contract is squared off to reduce or limit the risk of the purchase price. If the hedger is going to sell a commodity in the cash market in the future, he sells the futures contract now and when he sells the commodity in the cash market, the futures contract is squared off to reduce or limit the risk of the sales price. Buying hedge or Long hedge Buying hedge is also called as Long hedge. Buying hedge means buying a futures contract to hedge a cash position. Buying hedge strategy is used by dealers, consumers, fabricators, etc. who have taken or will be taking an exposure in the physical market. Uses of buying hedge strategy To protect increase in the cost of raw material To replace inventory at a lower prevailing cost To protect uncovered forward sale of finished products
Selling hedge or Short hedge Selling hedge is also called Short hedge. Selling hedge means selling a futures contract to hedge a cash position. Selling hedge strategy is used by dealers, consumers, fabricators, etc. who have taken or will be taking an exposure in the physical market. Uses of selling hedge strategy To protect the price of finished products To protect inventory not covered by forward sales. To protect prices of estimated production of finished products.
Rolling over the Hedge Positions If the time period required for a hedge position is later than the expiration date of the current futures contracts, the hedger can roll over the hedge position. Rolling over the
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hedge position means closing out the existing position in one futures contract and simultaneously taking a new position in a futures contract with a later expiration date. If a person wants to reduce or limit the risk due to fall in prices of the finished material to be sold after 6 months and if futures contracts up to 2 months are liquid, then he can roll over the short hedge position three times till the date when the actual physical sale takes place. Every time the hedge position is rolled over, there is a possibility of basis risk but at the same time it limits or reduces the price risk.
Advantages & Limitations of Hedging
Advantages: 1. Hedging reduces or limits the price risk associated with the physical commodity. 2. Hedging is used to protect the price risk of a commodity for long periods by rolling over contracts. 3. Hedging makes business planning more flexible without interfering with routine business operations. 4. Hedging can facilitate low cost financing
Limitations: 1. Hedging cannot eliminate the price risk associated with the physical commodity in totality due to the standardized nature of futures contract. 2. Because of basis risk, hedging may not provide full protection against adverse price changes. 3. Hedging involves transaction costs. 4. Hedging may require closing out a futures position before it enters into the delivery period.
Speculation Speculation means anticipating future price movements to make profits from it. The main objective of speculation in a commodity futures market is to take risks & profit from anticipated price changes in the futures price of an asset. A speculator will buy futures contracts (long position) if he anticipates an increase in the price of the
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commodity in future and he will sell futures contracts (short position) if he anticipates a fall in the price of the commodity in future. Long position in futures Long position in a commodity futures contract without any exposure in the cash market is called a speculative transaction. Long position in futures for speculative purpose means buying a futures contract in anticipation of increase in the price before expiry of contract. If the price of the futures contract increases before the expiry of the contract then the trader makes profit on squaring off the position and if the prices of the futures contract decrease then the trader makes losses. Speculators can also be classified into two categories; long and short speculators. Long speculators are those who expect the price to rise above the current level and assume risks by buying futures contracts. Short position in futures Short position in a commodity futures contract without any exposure in the cash market of the commodity means a speculative transaction. Short position in futures for speculative purposes means selling a futures contract in anticipation of decrease in the price before expiry of the contract. If prices of the futures contract decrease before expiry of the contract then the trader makes profits on squaring off the position and if prices of the futures contract increase then the trader makes losses. Short speculators are those who expect the price to fall and consequently sell futures contracts. In futures market, the total short selling position, made up of short hedgers and short speculators, and the total long buying position, made up of long hedgers and long speculators, must always be equal. Any excess of short over long hedging must be balanced by an equal amount of long over short speculation.
The role of speculation in Futures Markets One of the prominent concerns about the functioning of the commodity futures markets and its effect on the distribution of manpower is speculation. Speculation provides the depth and flow that is key to the functioning of a futures market. There will be very high illiquidity in the futures market if firms after entering a trade to buy or sell have to wait till a suitable bid or offer arose since the availability of commodities in physical may not always necessarily match with the firm's decision to buy or sell commodities.
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There are also misconceptions rife about speculation being similar to gambling. Although the intention of both the speculators and gamblers is to profit by taking risks, the gambler creates risk when none exist, the speculator on the other hand takes risk that is already prevalent in the market and as a result plays an economically significant role. A proper and accurate assessment and interpretation of the fundamental factors that drive the market forces determines the extent of success in speculating in the futures markets while in gambling it is only a matter of chance. In fact, the important function of price discovery in the futures markets is a direct outcome of the exercise of information gathering in the underlying commodities being done by the speculators. Speculation is also not similar to manipulation. A manipulator tries to push prices in the reverse direction of the market equilibrium while the speculator forecasts the movement in prices and this effort would eventually bring the prices closer to the market equilibrium. If the futures markets do not adhere to the relevant risk management requirements of growers, manufacturers, traders and processors, they would not survive since their correlation with the underlying physical market would be nonexistent.
Meaning of spread trading
Spread refers to difference in prices of two futures contracts. An understanding of spread relationship in terms of fair spread is essential to earn speculative profit. Considerable knowledge of a particular commodity is also necessary to enable the trader to use spread trading strategy. When actual spread between two futures contracts of the same commodity widens, buy the near month contract because it is under- priced and sell the far month contract because it is overpriced. When actual spread between two futures contracts of the same commodity narrows, sell near month contract because it is overpriced and buy far month contract because it is under priced. A calendar spread is a spread between the same variable at two points in time. A calendar spread for the price of an agricultural product prior to and after a harvest might be of interest, as might be the calendar spread between the price of natural gas in summer and winter. An intra-commodity spread consists of one long future and one short. Both have the same underlying, but different maturities.
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An inter-commodity spread is a long-short position in futures on different underlying commodities. Both typically have the same maturity Spreads can also be constructed with futures traded on different exchanges. Typically this is done using futures on the same underlying, either to earn arbitrage profits or, in the case of the underlying commodity, to create an exposure to price spreads between two geographically separate delivery points. Buying a spread Buying a spread is an intra-commodity spread strategy. It means buying a near month contract and simultaneously selling a far month contract. This strategy is adopted when the near month contract is under priced or the far month contract is overpriced. A trader of the above strategy buys the near month contract and sells the far month contract when the spread is not fair and squares off the positions when the spread corrects and the contracts are traded at fair spread. Selling a spread Selling a spread is also an intra commodity spread strategy. It means selling a near month contract and simultaneously buying a far month contract. This strategy is adopted when the near month contract is overpriced or the far month contract is under priced. A trader of the above strategy sells near the month contract and buys the far month contract when the spread is not fair and squares off the positions when the spread corrects and the contracts are traded at fair spread.
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Clearing, Settlement and Delivery Mechanism

Clearing and Settlement procedure Exchange to Regulate: The Exchange has specified the processes, procedures, and operations that every Clearing member shall be required to follow for participation in the clearing and settlement activities and operating their bank accounts with the Clearing Banks appointed by the Exchange. Functions of the Clearing Bank: The Exchange appoints few Clearing Banks viz. SBI, HDFC Bank, Induslnd Bank, UTI Bank, Citibank, Union bank of India, Bank of India, and Corporation Bank, ICICI etc. for transfer of funds between clearing members and the Exchange. Members to have accounts with the Clearing Bank: Every Member of the Exchange shall have designated bank accounts with any of such branches of the designated Clearing Bank, which has electronic funds transfer facility. Members shall operate the Settlement account only for the purpose of settlement of deals entered through the Exchange for the payment of margin money and for any other purpose as may be specified by the Exchange. Every member of the Exchange is required to open the following accounts with any of the clearing banks stated above: Settlement Account or Clearing account- in which the member will not have cheque book facility for issuing cheques to any outsiders. He can only issue cheques from this account for transfer of money from this account to his Client Account. Apart from any such transfer, only the Exchange will have the power to withdraw money from this account by way of direct debit instructions. In respect of all pay in, margins, charges and other dues payable to the Exchange, the Exchange will send direct debit instructions to the bank advising them to debit the settlement account of the respective member by such payable amount. Client Account- in which the member can deposit all cheques, cash, etc. received from clients and from this account members can issue cheques to their clients towards their receivables. The member has cheque book facility for this account and he will also be entitled to issue transfer instructions to the bank for transferring money from this account to the Settlement account to meet his pay
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in or margin obligations. The Clearing Banks act as per the instructions of the Exchange: Exchange shall instruct the Clearing Banks as to the debits and credits to be carried out for settlement of funds between members. For this purpose, members of the Exchange will be required to submit a letter to the bank, as per the format given in the business rules for authorizing the Exchange to issue such debit and credit instructions. The Clearing Bank shall act as per the instructions received from the Exchange for the movement of funds. Instructions of the Exchange as to the debits and credits to a member's account shall be deemed to be irrevocable, confirmed and binding. In order to enable the Exchange to issue such instructions for debiting their account and also to authorize the Exchange in respect of freezing the account or to hold further debits, every member will be required to submit a written undertaking addressed to the bank to such effect. This undertaking will also authorize the bank to sweep the Client account of the respective member for any shortfall in the settlement account. Besides, the Exchange will also have the power to freeze various accounts of the member maintained with the Clearing bank, in case of any default or shortfall in pay in or margin account.
Clearing Banks inform exchange in case of default in funds settlement: If there is any funds default arising out of the instructions received from the Exchange, the Clearing Bank shall inform the Exchange immediately.
Clearing Account(s) of Exchange in the Clearing Bank: The Exchange maintains its Settlement account with the Clearing bank and all money received from the members towards pay in or margin, shall be used appropriately for settlement.
Operational Procedure: The operational procedure related to the settlement account, pay in and payout activities and the exact time schedule in order to maintain financial discipline shall be adhered to by members of the Exchange. The operational procedure, are: After the end of the trading session every day, a file can be downloaded to the TWS of the members through FTP (file transfer protocol), which will contain details
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of all transactions executed by the member on that day, positions carried forward from the previous day, closing position of the day including net obligation of the member. The net obligation report will further provide the amount of margin deposit, margin utilized, available deposit / margin required, pay in / payout amount, transaction fee payable / receivable, etc. The net obligation report is available and can be downloaded terminal wise. It is also consolidated at the member's level in terms of net obligation payable / receivable. On the basis of this file, the Exchange will generate an automated statement for debit and credit of settlement accounts of the respective members by the amount payable / receivable by them. This file will be sent electronically to the bank the next day in the morning at 9:00 AM. The process of the files being processed by the bank is as follows:
The pay-in files are processed Then the pay-out files are processed The margin deficit files are then processed Throughout the day, shortage files (information containing details of deficit payment) are processed.
The member must have sufficient clear balance in his settlement account so as to affect such debits. In case the amount of margin is payable, the member is not allowed to trade until he deposits the required margin along with additional deposits to enable him to create fresh positions. For collection of such required margin amount, the bank will run the margin file at 10 am and report to the Exchange electronically the successful debits. However, to pay an additional amount towards margin, the member has to send a fax to Exchange specifying the amount he is interested in paying towards additional deposit / margin. On the basis of this written request, the Exchange will forward individual debit instructions to the bank for debiting the respective settlement account and crediting the Exchange settlement account. As soon as the Exchange gets such confirmation, the limits are accordingly increased. Thereafter, at 10.30 am, the bank will run the debit files in respect of pay-in. The
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member must have sufficient balance in his account to meet h pay in is obligation. By 10.45 am, the Exchange will receive confirmation about the successful and failed instructions. In respect of failed instructions, the member is immediately suspended from trading. He is allowed to trade only when he deposits the pay in obligation. In this process, trading permission is allowed to only those members who settle their margin as well as pay in obligation before 11 am. In case a member fails to meet the pay in obligation by 11 am on T +1, the Exchange may commence the process of squaring off his positions after 11 am, depending on the magnitude of the problem.
Role of clearing house Regulation of the clearing house: The Exchange Clearing House monitors and performs all activities related to delivery, funds settlement, margining, managing the settlement guarantee fund, etc.
Functions of the Clearinghouse: The Clearing House will collect margins from the members, effect pay in and payout and monitor delivery and settlement process. For carrying out such activities, it may appoint various agencies as its agents and may delegate such activities and responsibilities to such agencies, as it may desire.
Clearing House to deliver: The Clearing House will allocate deliveries, which it has received from the selling member to the buyer and the same shall be binding on the buyer.
Lien on Member's deposits and deliveries: When a member is declared a defaulter, all deposits, margins, delivery documents and other assets of the defaulting member lying with the Exchange shall be under lien and first charge of the Exchange, irrespective of the fact whether such assets or deposits belong to the member or his clients. No client or any other person can claim any charge or right on any such deposit, margin or delivery documents under any circumstances.
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Clearing Assistants for the Clearing House: In respect of delivery of precious metals (gold and silver), a Clearing Member may nominate Clearing Assistants (not more than two for each delivery center), who shall be competent to sign on behalf of such a member all clearing forms, vouchers, claim notes, receipts and other documents and transact on his behalf all such business as is necessary to be transacted in all matters connected with the operations of the Clearing House. Each Clearing Assistant shall be issued an Identity Card by the Exchange, which shall be displayed by him on his person during his presence at the Clearing House premises. The member may apply for a clearing assistant. A Clearing Member who has to give or take delivery of precious metals or any other tender / delivery documents shall either be present personally in the Clearing House or be represented by his Clearing Assistant at the appropriate time.
Clearing Code and Clearing Forms: A member shall be allotted a Clearing Code, which must appear on all forms used by the member connected with the operations of the Clearing House. The member or his Clearing Assistant shall sign all Clearing Forms.
Specimen Signatures: A member shall file with the Clearing House specimens of his own signature and of the signatures of his Clearing Assistants.
Delivery and payment through Custodians and Clearing Members: The Clearing House maintains a register of Custodians, Banks, Trust Companies and other firms approved by the Executive Comm ittee which may act for member and their s constituents in giving and taking delivery of precious metals.
Notices and Directions: All Clearing Members shall comply with the instructions, resolutions, orders, notices, directions and decisions of the Executive Committee in all matters connected with the operations of the Clearing House. Liability of the Clearing House: The Clearing House shall not be deemed to guarantee the title, ownership, genuineness, regularity or validity of any delivery passing through the Clearing House and the only obligation of the Clearing House in this matter shall be to facilitate the delivery and payment in respect of delivery.
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Liability of the Exchange: No liability shall attach either to the Exchange, its officials, or to the Executive Committee or any member of the Executive Committee by reason of anything done or omitted to be done by the Clearing House in the course of its operations, nor shall the Exchange, its officials, or the Executive Committee or any member of the Executive Committee be liable to answer in any way for the title, ownership, genuineness, quality, quantity or validity of any delivery or any other documents passing through the Clearing House, nor shall any liability be attached to the Exchange, its officials, the Executive Committee or any Member of the Executive Committee in any way in respect of such delivery and any other documents.
False or misleading statements: The Exchange may fine, suspend or expel a clearing member who makes any false or misleading statement in the Clearing Forms required to be submitted in conformity with these Regulations or any resolutions, orders, notices, directions and decisions of the Clearing House.
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Delivery Procedure
Delivery Period: Each Futures Contract for specified delivery month shall be deemed to have entered the delivery period from such date of its expiry month, as specified by the Exchange in the relevant contract. The futures contract can result in delive of the underlying ry commodity within this period on designated tender days fixed by the Exchange. Provided that the Exchange will have the right to fix, alter, extend or postpone such delivery period, if it is expedient to do so. Designated Tender Days: The tendering of deliveries shall be permitted only on specific tender days during the delivery period. The Exchange notifies such tender days in advance. Delivery Logic Delivery logic refers to the type of choices available to the buyers and sellers having open positions during tender / delivery period, for delivery of the commodity. The different delivery option's are "seller's option", "both option" and "compulsory delivery" Seller's option: In the "seller's option", the seller having an open position of a contract during the tender / delivery period will have the option to give delivery. In this case, it is obligatory for the buyer, who has been marked, to accept delivery or pay penalty. In a "seller's option", the short position holders who communicate their intention for giving delivery are matched with the corresponding intentions of the long position holders for taking delivery, Any short position holder having an "open position" on the tender / delivery date shall have the option to tender for delivery of his short position and the long position holder will be obligated to accept delivery. If there are no sufficient long position holders who have given their intention, then the delivery will be marked on a random basis to open long position holders (buyers of the contract) and it is obligatory for them to take delivery. In case the long position holders fails to lift the delivery, penalty will be imposed for failure and the open position of the seller and the buyer will be closed out at the due date rate. Compulsory Delivery In case of "compulsory delivery", both buyers and sellers with open positions during the
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tender/delivery (T/P D/P) period, if marked for delivery, or upon the expiry of the contract, are obligated to take / give delivery of the commodity. Both Option In the case of "both option", the delivery will be executed only when both buyers and sellers agree to take / give delivery. If they do not give intention for delivery, such open positions are cash settled at the due date rate. Delivery Orders: All deliveries tendered by Members on designated tender days shall be in the form of "Delivery Orders" issued in favor of the buyers, as per instructions of Exchange. The Delivery Orders shall be filled up in the prescribed form and shall clearly state the contract particulars including quantity, quality and the delivery center, along with full postal address of the place where goods are stored. The Delivery Orders must be received by Exchange by 3 pm (or the time specified in the contract specification) on the specified delivery days; otherwise it is treated as valid only for the subsequent delivery day.
Each delivery order issued shall be in multiples of minimum deliverable lots and shall be designated for only one delivery center and one location in such center. The tenderer of delivery order shall also clearly disclose the identity of the Member/Registered NonMember, if any, who shall be performing the delivery. The seller shall not issue delivery order at a place where there is a restriction against movement of goods from such place by any person or Government authority or local authority at the time of issuing such delivery order. The seller shall, at his cost, give permit to the buyer wherever such permit is necessary for movement of goods. If the seller is unable to supply such permit to the buyer, it will be treated as no delivery and he shall be liable to pay such penalty as may be applicable for failure to tender delivery. Delivery Order once submitted cannot be withdrawn or cancelled or changed, unless so agreed by the exchange in writing. Delivery Lot: The Contracts traded at Exchange are deliverable in such lots as may be specified for respective commodities. Members with short open positions opting to tender deliveries shall be permitted to issue Delivery Orders only in such lots. Any member with an open position of such number of contracts that is not convertible into multiples of deliverable
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lots shall be required to square-up such outstanding "odd lots" before expiry of the contract so as to make the total deliverable quantity a deliverable lot. Incase any member fails to square-up the outstanding odd lots before the contract expires resulting in odd lot positions at the end of the contract expiry day, delivery up to the nearest completed delivery lot will take place in the usual manner, while the residual odd lot will be settled as specified in the contract specification. Provided further that the place of delivery, which may be opted by the respective seller and buyer above shall be permitted only at the delivery centers approved by the Exchange for that commodity. Permissible limits for the Delivered commodity The delivery shall be deemed to have been provisionally completed for each delivery order whenever the seller has delivered the quantity for that delivery order within the tolerance limit as may be specified from time to time. The delivery is considered as fully complete only after the buyer lifts delivery and confirms receipt of delivery with the same quantity and quality. Provided that if no confirmation or objection is received from the buyer within such time, as may be notified by the Exchan ge for a specific commodity, delivery is considered as complete without any further recourse available to the buyer. Delivery Grades Members tendering delivery will have the option of deliverin such grades of g Commodities as permitted by Exchange. The buyer will not have any option to select a particular grade and the delivery offered by the seller and allocated by the Exchange shall be binding on him. The Member tendering delivery will clearly specify the grade to be delivered in the Delivery Order. Once the delivery grade is specified, it cannot be changed for the same Delivery Order. Such delivery grade shall be in conformity with the surveyor's certificate accompanied by the tender document. Delivery Centers: Delivery centers shall be such centers as may be notified by the Exchange for respective commodities. Members are obliged to tender delivery orders only at such centers as may be required by the Exchange. Freight Adjustment factor I Discount I Premium on up country delivery: The Exchange notifies the Discount/Premium for delivery of Specified commodities at
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various delivery centers. Pricing of Delivery Orders The basis price for a Delivery Order shall be the settlement price of the concerned contract on the day (which shall be a designated tender day) on which the delivery is tendered. The basis price arrived at as above will have to be adjusted by applying Freight adjustment factor / Discount / Premium on up country delivery and the discount / premium in respect of quality. Taxes, Duties, Cess and other Levies: All taxes, duties, cess, or other levies shall be on account of the Member taking delivery as a buyer. All sellers tendering goods shall have the necessary Sales Tax registration and obtain other licenses, if any, required by them. In case the selling member does not have a Sales Tax Registration number then he can appoint an Agent/Nominee who has the required Sales Tax Registration and deliver the goods through him. The Member giving delivery and the Member taking delivery will exchange appropriate tax forms as provided in law and as customary, and neither of the parties will unreasonably refuse to do so. In case any of the members or their clients fail to provide necessary forms in respect of sales tax resulting into pecuniary loss to either of the party, the Exchange will impose a charge on the party in default and after collection thereof, will pass on the same to the member, who or whose client has suffered such loss. In addition to the above, the Exchange can impose additional penalty on the party in default. Allocation of Delivery Orders Exchange shall allocate all Delivery Orders received on tender days/ expiry day from Members holding short open positions to Members holding long open positions before 5 p.m. on the same day, when the tender document is received. The allocation of Delivery Orders shall be done in a fair and equitable manner by Exchange. The decision of the Exchange shall be final and binding. Delivery Procedure: The Member or his client or final endorsee in possession of a Delivery Order shall be obliged to take delivery within such period, as may be specified by the Exchange for a specific commodity. He is also entitled to lift delivery on various days during such defined period, provided that on each day he has to lift at least 1/1Oth of his total allocated delivery. In the event that the Member or his client in possession of a Delivery
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Order is unable to lift the material within the prescribed days after the receipt of the Delivery Order, the seller shall claim and receive compensation at such rate, as may be decided by the Exchange for that specific commodity in respect of warehouse charges, insurance charges, etc. In the same manner if the seller fails to give delivery on the scheduled date or if the seller's representatives are not available to affect delivery, the buyer shall claim and receive compensation at such rate, as may be specified by the Exchange for that specific commodity. The Buyer has to intimate to the seller the schedule for taking delivery of the tendered goods in advance, with a copy to the Exchange. The Seller has to confirm and intimate in writing to the buyer with a copy to Exchange in advance about his confirmation to deliver as scheduled or change in the delivery schedule. Brokerage: The Exchange may specify the maximum and minimum brokerage rates, which shall be adhered to by members of the Exchange while dealing with their clients. Such brokerage rates may be in terms of commodity specific absolute figure or in terms of percentage on the value of a contract irrespective of the class of a commodity. Such brokerage amount must be shown separately in the contract notes to be issued by the members to their clients. The maximum brokerage rate for the time being is 1 % in case of nondelivery transactions and 2% (plus expenses incurred for delivery, etc.) in case of transactions resulting into delivery.
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Regulatory Framework
Forward Contracts Regulation Act, 1952 The Constitution of India brought the subject of STOCK EXCHANGES AND FUTURES MARKET in Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Government of India. The Commodity Exchanges in India are governed and regulated under the Forward Contracts (Regulation) Act, 1952 and Rules framed there under. It provides for a 3 tier regulatory system, namely: . An association recognized by the Government of India on recommendation of Forward Markets Commission (FMC) . The Forward Markets Commission (it was set up in Sept 1953) and . The Central Government Forward Markets Commission The Forward Markets Commission, under the Ministry of Consumer Affairs, Food and Public Distribution, Government of India is the regulating authority for all Commodity Futures Exchanges in India. Functions of the Forward Markets Commission - Statutory (a) To advise the Central Government in respect of the recognition of or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of this Act; (b) To keep forward markets under observation and to take such action in relation to them as it may consider necessary, in exercise of the powers assigned to it by or under this Act; (c) To collect and whenever the Commission thinks it necessary, publish information regarding the trading conditions in respect of goods to which any of the provisions of this Act is made applicable, including information regarding supply, demand and prices and to submit to the Central Government periodical reports on the operation of this Act and on the working of forward markets relating to such goods; (d) To make recommendations generally with a view to improving the organization and working of forward markets; (e) To undertake the inspection of accounts and other documents of any recognized association or registered association or any member of such association whenever it
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considers it necessary; and (f) To perform such other duties and exercise such other powers as may be assigned to the Commission by or under this Act, or as may be prescribed. Principal Features of the FC(R) Act, 1952 are: The act enables the regulating authority to take such action as may be considered desirable in respect of specif ied commodities and specified area without automatically applying the entire provisions of the act to all commodities in all areas in sec 15 The act prohibits option trading in all commodities The act ordinarily exempted non transferable specific delivery contracts from regulation sec 18(1) The act ordinarily covers transferable specific delivery contract as well as hedge contracts The act empowers the Government to prohibit forward contracts in particular commodity by a notification sec 17 The act provides for grant of recognition to associations concerned with forward trading sec 6 The act provides that the regulation of forward markets should ordinarily take place through the governing bodies of recognized associations sec 11 The act empowers the Central Government to appoint not more than four members on the governing bodies of recognized associations sec 6(2b) It provides for a machinery for the supervision and regulation of the governing bodies from the point of public interest this machinery is the forward markets commission
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Commodity Futures Market: The economic perspective

Authentic price discovery and an efficient price risk management are the primary objectives for any futures exchange. The beneficiaries include not only those who trade in the commodities being offered in the exchange but also those who have nothing to do with futures trading. It is due to the price discovery and risk management through the existence of the futures exchanges that a lot of businesses and services are able to function smoothly. Economic Benefits of Commodity Futures Markets 1) Price Discovery: The buyers and sellers at the futures exchange conduct trading based on their assessment of inputs regarding specific market information, expert views and comments, the demand and supply equilibrium, government policies, inflation rates, weather forecasts, market dynamics, hopes and fears which tr ansforms into a continuous price discovery mechanism. The execution of trades between buyers and sellers leads to assessment of the fair value of a particula commodity that is r immediately disseminated on the trading terminal. Futures exchanges do not act as a mode for setting the prices of commodities. These are free markets that act as a platform to bring together, in open auction, all forces that influence the pricing of the commodity. When these markets keep on assimilating and absorbing new information on a continuous basis throughout the trading day, this information gets transformed into a single benchmark figure. This figure is the market price agreed upon by both the buyer and seller. It is for this reason that rational market participants and commodity traders view futures as a leading price indicator. 2) Price-Risk Management: Hedging is the most common met hod of price risk management. It is the strategy of offsetting price risk that is inherent in a 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 businesses from adverse price changes, which could dent the profitability of their business. Hedging benefits participants who are involved in trading of commodiies t like farmers, processors, merchandisers,
manufacturers, exporters, importers, etc. 3) Import Export competitiveness: By using futures market, the exporters can hedge their price risk and improve their competitiveness. A majority of buyers intend to buy
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forwards if they are involved in physical trade internationally. The existence of a futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for an actual purchase till the time is ripe to buy in the physical market. Without futures market, this can only be possible by a meticulous, time consuming and costly timing of their physical transaction. 4) Predictable pricing: The demand for certain commodities like edible oils is highly price-elastic. The manufacturers thus have to ensure that the prices are stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and the necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for maki g other profitable n investments. 5) Benefits for farmers/agriculturalists: The existence of futures markets would be beneficial for the farmers as well as to those who do not use them directly. 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 the produce, storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase prices to them. Since one of the objectives of futures exchanges is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the marketdetermined price information disseminated by the futures exchanges would be crucial for their production decisions. 6) Credit accessibility: The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it a risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be
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high and the terms and conditions very stringent. This poses a huge obstacle in the smooth functioning and competition of the commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending. 7) Improved product quality: The existence of warehouses for facilitating delivery with grading facilities along with other delivery related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to a grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchangecertified warehouses have the potential to become the norm for physical trade.
47
RESEARCH METHODOLOGY
Methodology is the back bone of the project work. It involves the ways and means by which the researcher selects his sample, sample size, Methods of data collection.
Population of the study : Traders, Farmers, Students and general public.
Sample Size
: 80 Respondents.
Sampling Technique
: Non Probability Convenience Sampling.
Research Instrument
: Structured Questionnaires.
48
Investor Perception of Trading In Commodity Futures

Data Analysis & Interpretation
1) Age group of respondents
Age Group of Respondents

45 40 35 30 25 20 15 10 5 0 <30 Years 30-40 Years 40-50 Years >50 Years 0 21.25 Respondents 36.25 42.5
Graph 1 Age Group of Respondents
This analysis is based on different age groups and their current behavioral responses and preferences. Total number of respondents: 80 Respondents < 30 years 30 40 years 40 - 50 years Above 50 years : 29 : 34 : 17 : nil
49
2) Would you invest in commodity futures
Number of investors in commodity market

100 80 60 No of respondents 40
N o ft r e s p o n d s
92.5
20 0 Yes Particulars
7.5
No
Graph 2 Number of Investors in commodity Market
92 % of the respondents were of the opinion that they would in invest in commodity futures. Whereas only 7.5 % said they would not invest in commodity futures.
3) Investors of different commodities based on age group a) Pepper
Investors in Pepper futures

45 40 35 30 25 20 15 10 5 0 42.5 36.25
21.25
No of respondents
N o ft r e s p o n d s
< 30
30-40 Age Group
40-50
Graph 3.1 Investors in Pepper futures
50
b) Coffee
Investors of Coffee
50 45 40 35 30 25 20 15 10 5 0 44 47
Series1
< 30
30-40
40-50
Graph 3.2 Investors in Coffee
c) Chilli
Investors in Chilli
60 50 50 40 30 20 10 0 < 30 30-40 age group 40-50 14 36 Series1
Graph 3.3 Investors in Chilli
51
d) jeera
Investors in jeera
60 50 40 30 20 10 0 < 30 30-40 age group 40-50 11 37 Series1 52
Graph 3.4 Investors in jeera
e) Gold
investors in gold
70 60 50 40 30 20 10 0 < 30 30-40 age group 40-50 7 30 Series1 63
Graph 3.5 Investors in Gold
52
f) Silver
investors in silver
80 70 60 50 40 30 20 10 0 < 30 age group 30-40 25 Series1 75
Graph 3.6 Investors in Silver
In this analysis it is noticeable that nearly all the investors have invested in pepper, coffee futures. This can be attributed to the fact that since Sulthan Bathery is a primary market of pepper, most of the investors are traders of pepper or farmers who are cultivators of pepper & coffee who are trading with an intention to discover better prices. Most investors invest in Chilli and Jeera to spread their risks which they could face in the other commodities such as pepper etc. The investors invest in different commodities based on seasons to spread their risk. Chilli whose marketing season begins in the first week of March, peaks during the month of April. The main producers of jeera other than India are Syria and Turkey, they harvest their new crop in the months august to September so until then Indian jeera / Cumin seeds finds good market in overseas countries. So these can be some reasons why investors are trading in chilli and jeera. Investors of Gold and Silver are mostly gold or silver merchants, who trade with the intentions to protect their underlying stock, from price fluctuations or price failures.
53
4) Most Preferred form of trading
a. Based on age < 30
preferred form of trading based on age <30
15% 4% High risk high return Low risk low return Low risk high return 81%
Graph 4.1 Trading patterns
It can be seen that investors below the age group of 30 years are more of a risk takers hoping for high return, it could be said the investors in this age group dont look at investing in the commodity futures as a saving, but they look at commodity futures more in a vibrant spirit, hence they do take risks. In this case 81% would invest with the intentions of high return and to attain this return they dont mind taking high risk.
54
b. Based on age 30-40
preffered form of trading based on age group 30-40
28% High risk high return Low risk low return 63% 9% Low risk high return
Graph 4.2 Trading Patterns of Age group 30-40
It is noticeable that in the age group between 30 years to 40 years that the investors attitude is different from the age group of less than 30 years. Here the investors prefer low risk but high returns, it can be said that the investors are more savings oriented. Here 63% of the investors preferred trading in low risk high return commodities future.
55
c. Based on age 40-50
Preferred form of trading based on age group 40-50
13% High risk high return Low risk low return 60% 27% Low risk high return
Graph 4.3 Trading Patterns of Age Group 40-50
It is noticeable that in the age group between 40 years to 50 years that the investors attitude is different from the age group of less than 30 years but similar to the age group between 30 years to 40 years. Here the investors prefer low risk but high returns, it can be said that the investors are more savings oriented. Here 60% of the investors preferred trading in low risk high return commodities future, while 27% preferred trading in low risk and expected returns. In this age group only a mere 13% preferred trading in high risk high return futures.
56
5) Through whom the commodity futures trading is done
Preferred form of intermediaries

90 80 70 60 50 40 30 20 10 0
84 Series1 9 Registered brokers Agents 7 Don't trade
intermediaries
Graph 5 Intermediaries
84% of the investors did trading through registered brokers i.e. the members of the exchange. 9% did trading through agents i.e. the franchisees of the members. 7% did not trade at all.
57
6) Performance of commodity futures in Indian market
Opinion about Indian Commodities futures market

80 70 60 50 40 30 20 10 0 73
Series1 15 3 Excellent 7 2 Good opinion Average Below Average
Very Good
Graph 6 Performance of Commodity Futures
73% of the respondents felt that the commodity derivatives market in India was average compared to the global derivatives market, this could be due to factors such as, few malpractices, contract period difference between exchanges, delivery lot difference. 7) Has futures trading helped in improving commodity market
Futures trading helps in improving commodities market
16% 6% Yes No Can't Say
78%
Graph 7 Interdependence of Future Trading
58
78% of the respondents felt th futures trading has helped in improving at commodities market. Only 6% was of the opinion that it did n improve the ot commodities market.
8) Participants of commodity futures market
Participants in Commodities market

60 50 40 30 20 10 0 Hedging Speculation Participants Arbitrage 1 Series1 54 45
Graph 8 Participants of Commodities market
Many participants in the commodities futures market are hedgers. They use the futures market to reduce a particular risk they face. 54% participate in market through hedging, which is because most of the participants are traders and farmers of the commodities and they use hedging to make the outcome certain. 45% of the participants participate in the commodities market through speculation. Here most of the participants are business people, students etc who involve themselves in trading to benefit from price movements. Only 1% respondents participated in the commodities market through arbitrage.
59
9) Do futures market price of commodity depend on spot market
Future market prices depend on spot market price
20% Yes No 12% 68% Can't Say
Graph 9 Dependence on Spot Market Price
68% investors felt that the future market prices depended on the spot market price. 12% said that it did not depend on spot market prices, and the rest could not see any inter linkage between futures market prices and spot market prices.
60
10) Do future trading help in price discovery
Future trading helps in price discovery
27% Yes No 5% 68% Can't Say
Graph 10 Price Discovery
68% felt that future trading helps in price discovery, 5% of the respondents said that futures trading did not lead to price discovery. Most respondents were of the opinion that price discovery is one of the main factors for the success of futures trading.
61
FINDINGS
Most respondents would invest in commodity futures. The commodity markets are mostly based on hedgers and speculators. Future prices has an inter link between spot market prices. Many are not aware of the correlation between commodities. Most respondents felt that futures trading helped in improving commodity market.
It was observed that future trading helped in price discovery. Most investors felt that the commodity futures in Indian market were in an average state compared to Global Commodities Market.
Risk is factor dependent on the age, younger people are more risk oriented than the people in the age group between 30- 50.
62
Suggestions
Awareness should be improved, thereby making user aware of t e h opportunities, once the investors are aware they would make use in an appropriate manner.
More the industry should be pushed to a hedger based market, thereby avoiding unhealthy price fluctuations.
Farmers are not very active. For them to benefit they should be encouraged to trade.
63
Conclusion
Over centuries, India has always been considered as an agrarian society and our culture and lifestyle have been derived out of it. It is no doubt that the farming community would remain the backbone of the nation not only as an economic activity but also performing the task of providing food to our population estimated at above 1 billion. Thus, the countrys economic history stands as a proof of this strong relationship between the farmers and our economy. The agriculture industry requires increasing capital formation, improved availability of agricultural inputs, infrastructure facilities for agricultural business. A conducive environment also helps in bringing cost effectiveness by influencing the price structure of both inputs and outputs throughout the country. The existence of commodity exchanges will strengthen the market based trading system. Commodity exchanges will create an environment where fa rmers will have many options o selling their f commodities like spot market. With these benefits, commodity futures exchanges could serve as one of the main instruments to break the vicious cycle in which farmers are caught. Unless, fair prices are provided for their produce, farmers cannot make increased investments in inputs, thus affecting the yield and their income. The existence of commodity futures exchanges will refine and strengthen the database for agricultural sector, which will be helpful in bringing greater reliability to estimates and forecasts, thus, strengthening the process of planning and policy making.
Reviving commodity derivatives industry is expected to actualize the vast untapped growth potential of the agriculture sector and to make it a catalyst in economic growth rather than being a drag on the economy
64
References
Books referred 1. Derivatives Simplified- An introduction to Risk Management P. Vijaya Bhaskar, B. Mahapatra. 2. Bogle on Mutual Funds John C Bogle. 3. Investors Handbook P. Nandagopal. 4. Commodity Exchanges in India and Commodity Markets Series Dr. Madhoo Pavaskar 5. Derivative Markets in India 2003 Susan Thomas.
Web Sites referred 1. www.ncdex.com (21st April 2007) 2. www.mcxindia.com (21st April 2007) 3. www.ipc.com (21st April 2007) 4. www.indianpepperindustry.com (25th April 2007) 5. www.futurestrading.com (25th April 2007) 6. www.pepperstatistics.com (25th April 2007) 7. www.nseindia.com (25th April 2007) 8. www.internetworldstats.com/stats.htm (27th April 2007) 9. www.researchindex.com (27th April 2007) 10. www.fmc.gov.in (1st May 2007)
65
Appendix
Questionnaire
Investor Perception of Trading In Commodity Futures
1.
Name
2.
Sex: M / F
3.
Age: < 30 years 30 40 years 40 50 years > 50 years
4.
Most preferred form of trading in commodity futures ( ) High risk high return ( ) Low risk low return ( ) Low risk high return
5.
Through whom do you trade in commodity futures ( ) Registered brokers ( ) Agents ( ) Dont trade
6.
What is your opinion about trading in commodity futures
7.
Would you invest in commodity futures ( ) Yes ( ) No
66
8.
Have you invested in commodity futures ( ) Yes ( ) No
9.
If yes, then in ( ) Pepper ( ) Coffee ( ) Chilli ( ) Jeera ( ) Gold ( ) Silver ( ) Rubber
10. What is your opinion about commodity futures in Indian market ( ) Excellent ( ) Very Good ( ) Good ( ) Average ( ) Below Average
11. Has futures trading helped in improving commodity market ( ) Yes ( ) No ( ) Cant say
12. In what way it has helped ( ) Hedging ( ) Speculation ( ) Arbitrage
13. Do future market prices of commodity depend on spot market ( ) Yes
67
( ) No ( ) Cant say
14. Do future trading help in price discovery ( ) Yes ( ) No ( ) Cant say
15. Do you know about Bhas Securities / Commodities Private Ltd. ( ) Yes ( ) No
Thank You
68
Regional Exchanges Sr. 1 2 Name and Address Bhatinda am & Oil Exchange Ltd., Bhatinda. The Bombay Commodity Exchange Ltd., Mumbai Gur Groundnut Oil, Sunflower Oil, Commodities
3 4 5 6 7 8
Cottons eed, Safflower, Groundnut, Castor oil-Int'l, Castor seed, Cottonseed oil, Sesamum Oil, Sesamum Oilcake, Safflower Oilcake, Rice Bran, Rice Bran Oil, Rice Bran Oilcake, Safflower Oil, Crude Palm Oil The Rajkot Seeds oil & Bullion Merchants" AsGroundnut Oil, Castor seed sociation Ltd.,Rajkot The Meerut Agro Commodities Exchange Co. Gur Ltd., Meerut The Spices and Oilseeds Exchange Ltd. Turmeric Ahmedabad Commodity Exchange Ltd., Ahmedabad Vijay Beopar Chamber Ltd., Muzaffarnagar India Pepper & Spice Trade Association. Cottonseed, Castor seed Gur, Mustard Seed Pepper Domestic-MG 1 , Pepper Domesti c-500g/
Kochi
P e p I, Black Pepper Int'I-MLS ASTA, Black p e r Int'I-VB ASTA, Black pepper Int'l FAa, Rubber RSS 4 Gur, Rapeseed/Mustard seed Rapeseed / Mustard seed, rapeseed / Mustard seed oil, Rapeseed / Mustard seed oilcake, soy bean, soy meal, soy oil, crude palm oil. Gur, Rapeseed / Mustard seed Indian Cotton Gur, Rapeseed / Mustard seed
9 10
Rajdhani Oils and Oilseeds Exchange Ltd., Delhi National Board of Trade (NBOT), Indore
11 12 13
The Chamber of Commerce, Hapur The East India Cotton Association, Mumbai (EICA) The Central India Commercial Exchange Ltd., Gwalior
69
14 15 16
17
18 19
The East India Jute & Hessian Exchange Ltd., Hessian sacking Kolkotta First Commodity Exchange of India Ltd., Kochi Copra, Coconut oil, copra cake Rapeseed / Mustard seed, Rapeseed/Mustard Bikaner Commodity Exchange Ltd, Bikaner seed oil, Rapeseed / Mustard seed oilcake, Guarseed, Gram, Gaur Gum The Coffee Futures Exchange India Ltd. Coffee - Plantation A, Coffee - Robusta (COFC), Cherry AB, Raw Coffee Arabica Parchment, Raw Coffee Bangalore Robusta Cherry Sugar Grade - M, Sugar Grade E-Sugar-India Ltd. S Surendranagar Cotton Oil and Oilseeds Kapas Assoc. Ltd., Surendranagar Haryana Commodities Ltd., Hissar E-Commodities Ltd. and Bombay Bullion Association source: www.fmc.gov.tn ) Rapeseed, Mustard seed, Rapeseed / Mustard seed Oil
20 21
70
SPICES - PEPPER
General Characteristics The primary international grades and their markets are Lampu ng at Panjang (Indonesia), Sarawak at Kuching (Malaysia) Vietnam at HCM City (Vietnam). However, Malabar grade of pepper from India traded at Kochi, Kerala is considered to be the premium grade of pepper and rules above the international grades.
Global Scenario Production and Consumption . The global production of pepper fluctuates between 3-3.5 lakh tons, with a production of 3.25 lakh tons recorded in 2003. . Vietnam (85000 tons), Indonesia (67000 tons), India (65000 tons), Brazil (35000 tons), Malaysia (22000 tons), Sri Lanka (12750 tons), Thailand, China are the major producers of pepper in the World. . The global exports of pepper are around 2-2.5 lakh tons. with 2.29 lakh tons being exported in 2003. . The major exporters of pepper are Vietnam (82000 tons), Indonesia (57000 tons), Brazil (37940 tons), Malaysia (18500 tons) and India (17200 tons).
Major World Markets New York. Singapore and Rotterdam are major international trading centers.
Indian Scenario: .During 2003 production of pepper in India was reported to be 65,000 tons against 80,000 tons in 2002. Kerala accounts for 90% of India's pepper production. The other producers are Karnataka and TamilNadu. India harvests most of its pepper at the beginning of the year. During 2003 Indian exported 17,200 tons of pepper, which is lower by 31% compared to exports of 24,914 tons in 2002. Developments in the spice industry in India have significantly affected exports. During 2003, export of whole pepper from India was only 26% of the total production, against 31 % during 2002. The main market for Malabar
71
black was United States, which traditionally imported around 50% of India's exports, followed by Canada, Netherlands and Italy. However, during 2003, only 30% of India's export was shipped to the United States
Major Indian Markets Kochi, Sulthan Bathery in Kerala are the major primary markets. Nagpur, Indore and Delhi have recently developed as the major up-country markets for pepper.
Market Influencing Factors . Indian pepper is at a premium against all the international grades. However, the production and exports of pepper from other locations has a profound influence on Indian pepper prices too. . Weather and the annual production per year. . Year ending stocks and stocks-to-consumption ratio. Indian pepper arrives in the market in the beginning of the year. However, distress selling is not witnessed in pepper and the producers hold back the stock in anticipation of better prices. . Government policies with regard to Imports and exports.
. Traders allege large-scale imports of pepper from Sri Lanka and re-export from India as a major price depressing factor and Government has been asked to take measures to stop this practice.
Production profile
_Country
Brazil India Indonesia Malayasia Sri Lanka Viatnam Others Total
2000 2001
2002
2003
2004
2005(P)
26383 43000 45000 50000 45000 40000 58000 79000 80000 65000 62000 70000 77500 59000 66000 65000 30500 29000 24000 27000 24000 21000 20000 20000 10676 7800 12600 12660 12000 13500 36000 56000 75000 85000 85000 85000 26625 33895 38712 36500 39659 41775 259186 305695 341312 335160 294159 299275
72
Quality Specifications
Black Pepper, Malabar Grade I well dried free from oil wash . with light pepper permissible up to 2% . with extraneous matter such as bran, chaff, stalks and stones permissible up to 0.5%; .moisture permissible up to 11 %
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EXECUTIVE SUMMARY

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Profile of the company

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Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Products and Services

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Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ideal ratio is above 1.

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Ohio University Christ College Academy For Management Education

Remarks and Comments on the Ratios

Ohio University Christ College Academy For Management Education

A STUDY ON COMMODITY DERIVATIVES

Ohio University Christ College Academy For Management Education

Figure 1 Trading Structure in a Derivative market

History of Commodity Market

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Derivative contracts can be traded either in an exchange or over-the-counter.

Ohio University Christ College Academy For Management Education

Meaning of Forward, Futures

Difference between Spot and Futures markets

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Evolution of Commodity futures in India

Ohio University Christ College Academy For Management Education

Meaning and objectives of commodity futures

Ohio University Christ College Academy For Management Education

Pricing commodity futures

F=S+C (Where F=Futures price S=Spot price C=Cost of carry)

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Participants in Commodity derivatives Market

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Ohio University Christ College Academy For Management Education

ADVANCED CONCEPTS IN COMMODITY FUTURES

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Advantages & Limitations of Hedging

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Ohio University Christ College Academy For Management Education

Meaning of spread trading

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Ohio University Christ College Academy For Management Education

Clearing, Settlement and Delivery Mechanism

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Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education

Ohio University Christ College Academy For Management Education