EXECUTIVE SUMMARY

The US dollar has been under pressure for the past one and a half months and most commodity prices have risen over the same period. And indeed, historically, there has been a negative correlation between the dollar and the commodity prices. The reason for this can basically be found in the law of one price. In principle, commodity cost the same as the underlying supply and demand situation would the commodities. These underlying conditions do not, in principle changes, when the value of the dollar changes, and therefore the price in the dollar will rise when dollar weakens. One could also argue that a weaker dollar often goes hand in hand with the easing of US (global) monetary policy, which is positive for global growth and hence global demand for commodities, the negative correlation between the dollar and commodities is certainly no secret in the financial markets. Therefore there is often a speculative buying of commodities when the dollar weakens or when there is an expectation that it will. The classic dollar hedge is gold. Over the past ten years, the correlation between EUR/USD and gold has been almost 50%. However, since 2006, this correlation has actually been more than 70%. Historically speaking, there is also a close correlation between UUR/USD and oil, albeit less pronounced than the correlation with gold. But here too the correlation over the past one and a half years has been stronger almost as strong as for gold. In our view, a combination of speculative interest in oil and OPECs attempts to win compensation for the weaker dollar via higher prices has been the main reason for the close correlation between the oil and EUR/USD over the past two years. Metals are also closely correlated with EUR/USD, although the link is a little weaker than for both gold and oil. Over the past ten years, however this correlation has been at level similar to oil. There is, though, one commodity group that is not particularly correlated with EUR/USD, and that is agricultural commodities. This is presumably due to agricultural commodities having, until recently, been less dependent on global business cycle, as prices here are often determined by the weather and politics. This may, though, be about to change due to the ethanol link and increase in speculative interests in agriculture produce. We generally expect the dollar to weaken further in the coming three months. Given the strengthening correlation between commodities and EUR/USD, this would suggest further prices rises for commodities, with gold and oil leading the way followed by metals, likewise the prospects of more rate cuts in the US is positive for global growth and the business cycle and this could lend additional support to commodity prices, hence we expects oil will remain above USD 80 in the coming months.
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The best way to understand the short-term is to constantly study market history. If current movement in prices, no matter how disconcerting, can be viewed with in the proper context of past market precedents, the odds of getting swept away by our dangerous emotion of greed and fear fade considerably. In light of these studies, we believe that current gold weakness is easily explained and perfectly normal and healthy. Because gold is the ultimate form of money, in the first third of the major bull market it trades more like a currency than a commodity. The dollar gold price is the exchange rate between paper dollars and gold, and it is affected not only by gold supply and demand but by the US dollar demand and supply as well, if a dollar strengthening, then gold generally weakens at least in the early years of a secular bull market. The most direct driver of the price of gold in these early years of this bull is the exchange rate between gold money and dollar currency.

CHAPTER 1 INDUSTRY PROFILE

COMMODITY AND COMMODITY MARKET

INTRODUCTION
India a commodity based economy where two-third of one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, future market trades in commodity are largely used at risk management (hedging) mechanism on either physical commodity itself or open position in commodity stock. For instance, a jeweler can hedge his inventory against perceived short term down turn in gold prices by going short in the future markets. The article aims at know how of the commodity market and how the commodities traded on the exchange. The idea is to understand the importance of commodities derivatives and learn about the market from the Indian point of view. In fact it was one of the most vibrant markets till early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now, the most of the restrictions being removed, there is tremendous potential for growth of this market in the country.

COMMODITY
A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as any kind of movable property, expect actionable claims, money and securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets may find commodity are unfathomable market. But commodities are easy to understand as far as fundamental of demand and supply is concerned. Retail investors should understand the risks and advantages of trading in commodities future before taking a leap. Historically, pricing in commodities future is less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of commodities markets in India is also quite significant. Of the countrys GDP of Rs 13,20,720 crore, commodities related industries constitute around 58 percent. Currently, the various commodities across the country clock an annual turnover of Rs 140,000 crore. With the introduction of future trading, the size of future market grows may fold here on.

COMMODITY MARKET
Commodity market is an important constituent of the financial market of any country; it is area where a wide range of products, viz precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative position in commodities and exploit arbitrage opportunities in the market.

S NO. 1 2 3

MARKET SEGMENT

2009-10 2,518,322 2,318,531 3,745,507 3,230,002 1,099,534 2,130,468 515,505 503,053 12,452 130,215

2010-11 2,827,872 3,867,936 4,160,702 3,641,672 1,147,027 2,494,645 519,030 499,503 19,527 500,000

Government security market FOREX market Total stock market turnover (I+II) I National stock exchange (A+B) a) cash b) derivatives II Bombay stock exchange (A+B) a) cash b) derivatives 4 Commodity market SOURCE: SEBI bulletin

ITS EVALUATION IN INDIA

Bombay cotton trade association ltd, set up in 1875, was the first organized future market. Bombay cotton exchange ltd was established in 1893 following the widespread discontent amongst leading cotton mills owners and merchants over functioning of Bombay cotton trade association. The future trading in oil seeds started in 1900 with the establishment of Gujarati Vyapari Mandali, which carried on future trading in groundnuts, castor seeds and cotton. Futures trading in wheat was existent a several places in Punjab and Uttar Pradesh. But the most notable future exchange for wheat was chamber of commerce at Hapur set up in 1913. Future trade in bullion began in Mumbai in 1920. Calcutta hessian exchange ltd was established in 1919 for future trading in raw jute and jute goods. But organized future trading in raw jute began only in 1927 with the establishment of East Indian Jute Association ltd. These two associations amalgamated in 1945 to form the East India jute & Hessian Ltd, to conduct organized trading in both raw jute and jute goods. Forwards contracts (regulation) act was enacted in 1952 and the forwards market commissions (FMC) were established in 1953 under the ministry of consumer affairs and public distribution. In due course, several other exchanges were created in the country to trade in diverse commodities.

COMMODITY ECOSYSTEM

Indian commodity markets- set as paradigm shift

Four licenses recently issued by govt. of India to set up national online multi commodity exchanges- to ensure a transparent price discovery and risk management mechanism. List of commodities for future trade- increased from 11 in 1990 to over 100 in 2003. Reforms with regard to sale, storage and movement of commodity initiated. Shift from administered pricing to free market pricing- WTO regime. Overseas hedging has been allowed in metals. Petro products marketing companies have been allowed to hedge prices. Institutionalization of agriculture.

Indias place in world market

COMMODITY Rice (paddy) Wheat Pulses Ground nut Rapeseed Sugarcane Tea Coffee (green) Jute & jute fibers Cotton

INDIA 240 74 13 6 6 315 0.75 0.28 1.74 2.06

WORLD 2049 599 55 35 40 1278 2.99 7.28 4.02 18.84

SHARE 11.71 12.35 23.64 17.14 15.00 24.65 25.08 3.85 43.30 10.09

RANK Third Second First Second Third Second First Eight Second Third

BUSINESS POTENTIAL

Commodities

Size of physical market (Rs. Crore)

Conservative multiplier (in 3 years)

Global multiplier (in 3-5 years)

Gold &silver

43000

20 times 8,30,000 10 times 3,00,000 10 times 1,10,000 12,40,000

50 times 21,50,000 20 times 6,00,000 20 times 2,20,000 29,70,000

Edible oils

30000

Metals

11000

Total

84,000

Participants in commodity futures

Farmers/producers Merchandisers/traders
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Importers Exporters Consumers/industry Commodity financers Agriculture credit providing agencies Corporate having price risk exposure in commodities

Benefits of future trading

Price discovery for commodity players
A farmer can plan his crop by looking at prices prevailing in the future market

Hedging against price risk

A farmer can sell in future to ensure remunerative prices A processor/ manufacturing firm can buy in future to hedge against volatile raw material costs. A exporter can commit to a price to his foreign client A stockiest can hedge his carrying risk to ensure smooth prices of the seasonal commodities round the year

Easy availability of a finance

Based on hedged position commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks.

How commodity future helps

Risk management
Growers short hedge on upcoming produce Traders short hedge on stored quantity Manufacturer long hedge on input cost, short hedge on finished products

Price discovery

Futures can be used as indicative prices for negotiating the export prices and also upcountry sales.

Profitability area in future market

Action Cover raw material price risk Impact Certainty in input cost. Certainty in cost of production. Certainty about profit. Certainty I income

Cover the export commitment

Cover the input requirements through future market

Less financing requirements; reduced interest cost. Reduces cost of production. Increase in profits Save on storage and storage management costs. Increase in profitability

Buy in future markets

Future of commodity markets

India largest consumer producer exporter importer Large size intermediaries penetrate commodity market Banks to finance commodities futures a secured route RBI permits banks to hedge their bullion risk through risk through future exchange other commodity to follow Using exchange network for various product and services BPO & trade interest will attract international players Hub for value added services & food processing New class for commodity traders & value investors

India to become hub of global trading in commodities. It is a US $ 600 billion opportunity

Structure of commodity markets

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Different types of commodities traded

World over one will find that exist for almost all the commodities known to us. These
commodities can be broadly classified into the following:

Precious metals: gold, silver, platinum etc. Other metals: nickel, aluminum, copper etc. Agro based commodities: wheat, corn, cotton, oil, oil seeds etc. Soft commodities: coffee, cocoa, sugar etc. Energy: crude oils, natural gas, gasoline etc.

Different segments in commodities market

The commodity market exist in two distinct forms namely over the counter (OTC) market and the Exchange based market. Also, as in equities, there exist the spot and the derivative segment. The spot market are essentially over the counter markets and the participation is restricted to the people who are involved with the commodity say the farmer, processor, wholesaler etc. derivative trading takes place through exchange-based markets with standardization contracts, settlements etc.

Leading commodity markets of the world

Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) and the Chicago Board Of Trade (CBOT). Leading commodities markets in India The government has now allowed national commodity exchange, similar to BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven; screen based trading system for trading. The forward markets commission (FMC) will regulate these exchanges.
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Consequently four commodities exchanges have been approved to commence business in this regard. They are: Multi Commodity Exchange (MCX) located at Mumbai. National Commodity and Derivative Exchange Ltd (NCDEX) located at Mumbai. National Board of Trade (NBOT) located at Indore. National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Volumes in commodity derivative worldwide

Graph :

Commodity futures trading in India

INTRODUCTION
Derivative as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. The basic concept of derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features, which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of the contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need any special facility for storage, due to the bulky nature of the underlying assets, physical settlement in the commodity derivatives creates the needs of warehousing. Similarly, the concept of VARTING QUALITY OF ASSETS. Does not really exist as far as financial underlying are concerned. However in the

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case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed.

Benefits to industry from future trading.

Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending. Hedged position of producers and processors would reduce the risk of default faced by banks. Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity exchange to act as distribution network to retail agriculture finance from banks to rural households. Provide trading limit finance to traders in commodities exchanges.

Benefits to exchange members

Access to a huge potential market much greater than the securities and cash market in commodities. Members can trade in multiple commodities from a single point, on real time basis. Traders would be trained to be rural advisors and commodity specialist and through them multiple rural needs would be met, like bank credit, information dissemination, etc.

Why commodity futures?

One answer that is heard in the financial sectors is we need commodity future markets so that we will have volumes, brokerage fees and something to trade. I think that is missing the point. We have to look at futures markets in the perspective- what is role for commodities futures in Indias economy? In Indian agriculture has traditionally been an area with heavy government intervention. Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they have import export restrictions and a host of other interventions. Many economists think that we could have major benefits from liberalization of agricultural sectors.

In this case, the question arises about who will maintain the buffer stock, how will we smoothen the price fluctuation, how will farmer not be vulnerable that tomorrow the price
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will crash when the crops comes out, how will farmers get signals that in the future there will be a great need for wheat or rice. In all these aspects the futures market has a very big role to play. If you think there will be storage of wheat tomorrow, the future prices will go up today, and will carry signals back to the farmers making sowing decision today. In this fashion, a system of future market will improve cropping patterns. Next, if I am growing wheat and am worried that by the time the harvest comes out prices will go down , then I can sell my wheat in the future market, I can sell at a price which is fixed today, which eliminates my risk from price fluctuations. These days, agriculture requires investments- farmers spend money on fertilizers, high yielding varieties, etc. they are worried when making these investments that by the time the crops come out prices might have dropped, resulting in losses. Thus a farmer would like to lock in his future price and not to be exposed to fluctuations in prices. The third is the role about storage. Today we have the food corporation of India, which is doing a huge job of storage, and it is a system which in our opinion does not work. Future market will produce their own kind of smoothing between the present and the future. If the future price is high and the present price is low, an arbitrager will buy today and sell in the future. The converse is also true, thus if the future price is low the arbitrager will buy in future market. These activities produce their own optimal buffer stocks, smooth prices. They also work very effectively when there is a trade in agricultural commodities; arbitrageurs on future market will use import and export to smooth Indian prices using foreign spot market. In totality, commodity future markets are a part and parcel of program for agriculture liberalization. Many agriculture economists understand the need of liberalization in the sector. Future markets are an instrument for achieving that liberalization.

Hedging
Hedging means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risk associated with price changes. Hedging is a two- step process. A gain or loss in the cash position due to the changes in the prices levels will be countered by changes in the value of the futures position. For example, a wheat farmer can sell wheat futures to protect the value of his crops prior to harvest. If there is a fall in price, the loss in the cash market position will be countered by a gain in future futures position.
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Hedging is the way of reducing some of the risk involved in holding an investment. There are many different risks against which one can hedge and many different methods of hedging. When someone mentions hedging, think of insurance. A hedging is just a way of insuring an investment against risk. Consider a simple case. Much of the risk in holding any particular stock is market risk; i.e. if the market falls sharply, chances are that any particular stock will fall too. So if you own a stock with good prospects but you think the stock market in general is overpriced, you may be well advised to hedge your position. There are many ways of hedging against market risk. The simplest, but most expensive method is to buy a put option for the stock you own. (Its most expensive because you are buying insurance not only against market risk but against the risk of the specific security as well). You can buy a put option on the market as which will cover general market declines. You can hedge by selling financial futures. In my opinion, the best hedge is to sell short the stock of the competitor to the company whose stock you hold. For example; if you like Microsoft and think they will eat Borlands lunch, MSFT and short BORL, no matter which way the market as a whole goes, the offsetting position hedge away the away the market risk. You make money as long as you are right about the relative competitive position of the two companies, and it doesnt matter whether the market zooms or crashes.

If youre trying to hedge an entire portfolio, futures are probably are probable the cheapest way to do so. But keep in mind the following points. The efficiency of the hedge is strongly dependent on your estimate of the correlation between your high-beta portfolio and the broad market index. If the market goes up, you may need to advance more margin to cover your short position, and will not be able to use your stocks to cover the margin calls. If the market moves up, you will not participate in the rally, because by intention, youve set up your futures position as a complete hedge.

You might also consider the purchase out-of-the-money put LEAPS on the OEX, as way of setting up a hedge against major market drops. Another technique would be to sell covered calls on your stocks (assuming they have options). You wont be completely covered against major market drops, but will have some protection, and some possibility of participating in a rally (assuming you can roll up for a credit).

How hedging is done?

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In this type of transaction, the hedger tries to fix the price at a certain level with the objective of ensuring certainty in the cost of production or revenue of sale. The futures market also has substantial participation by speculators who take positions based on the price movement and bet upon it. Also, there are arbitrageurs who use this market to pocket profits whenever there are inefficiencies in the prices. However, they ensure that the prices of spot and futures remain correlated.

Example- case of steel An automobile manufacturer purchase huge quantities of steel as raw material for automobile production. The automobile manufacturer enters into a contractual agreement for exports automobile three months hence to dealers in the east European market. This presupposes that the contractual obligation has been fixed at the time of signing the contractual agreement for exports. The automobile manufacturer is now exposed to risk in the form of increasing steel prices. In order to hedge against price risk, the automobile manufacturer can buy steel future contracts, which could mature in three months hence. In case of increasing or decreasing steel prices, the automobile manufacturer is protected. Let us analyze the different scenarios: Increasing steel prices If steel prices increases, this would result in the value of the future contacts, which the automobile manufacturer has bought hence, he makes profit in the future transaction, but the automobile manufacturer needs to buy steel in the physical market to meet his export obligation. This means that he faces a corresponding loss in the physical market. But this loss is offset by his gains in the future market. Finally, at the time of purchasing steel in the physical market, the automobile manufacturer can square off his position in the future market by selling the steel future contracts, for which he has an open position. Decreasing the steel prices If the steel prices decreases, this would result in a decrease in the value of the future contracts, which the automobile manufacturer has bought, hence he makes losses in the future transaction. But the automobile manufacturer needs to buy steel in the physical market to meet his export obligations. This means that he faces a corresponding gain in the physical market. The loss in the future market is offset by his gains in the physical market. Finally, at the time of purchasing steel in the physical market, the automobile manufacturer can square off his position in the future market by selling the steel future contracts, for which he has an open position. This result in a perfect hedge to lock the profits and protect from increase or decrease in raw material prices. It also provides the added advantage of just-in-time inventory management for the automobile manufacturer.
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Understanding the meaning of buying/long hedge

A buying hedge is also called the long hedge. Buying hedge means buying a future contracts top hedge a cash position. Dealers, consumers, fabricators, etc. who have taken or intend to take an exposure in the physical market and want to lock- in prices, use the buying hedge strategy.

Benefits of buying hedge strategy:

To replace inventory at a lower prevailing cost. To protect the uncovered forward sale of finished products.

The purpose of entering into the buying hedge is to protect the buyer against the price increase of the commodity in the spot market that has already been sold at a specific price but not purchased as yet. It is very common among importer and exporter to sell commodities at an agreed- upon price for forward delivery is considered uncovered. Long hedgers are traders and processors who have made formal commitments to deliver a specified quantity of raw material and processed goods at a later date, at a price currently agreed upon and who do not have the stocks of the raw material necessary to fulfill their forward commitment.

Understanding the meaning of selling/short hedge

A selling is also called a short hedge. Selling hedge means selling a future contracts to hedge. Uses of selling hedge strategy To cover the price of finished products. To protect inventory not covered by forward sales. To cover the prices of estimated production of finished goods.

Short hedgers are merchants and processors who acquire inventories of the commodities in the spot market and who simultaneously sell an equivalent amount or less in the future market. The hedgers in this case are said to be long in their spot transaction and short in their future transactions.

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Understanding the basis

Usually, in the business of buying or selling a commodity, the spot price is different from the price quoted in the future markets. The future price is the spot price adjusted for the cost like freight, handling, storage and quality, along with the impact of supply and demand factor. The price difference between the spot and futures keeps on changing regularly. The price difference (spot future price) is known as the basis and the risk arising out of the difference is defined as basis risk. A situation in which the difference between the spot and futures prices reduces (either negative or positive) is defines as narrowing of the basis. A narrowing of the basic benefits the short hedgers and a widening of the basic benefits the long hedger in a market characterized by contango- when future price is higher than spot price. In market characterized by backwardation- when future quote at a discount to spot price- a narrowing of the basic benefits the long hedger and a widening of the basic benefits the short hedgers. However, if the difference between spot and future prices increases (either negative or positive side) it is defined as widening of the basis. The impact of this movement is opposite to that as in the case of narrowing.

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CHAPTER 2 COMPANY PROFILE

AN INTRODUCTION TO EDELWEISS

Edelweiss capital was started by two IIM graduates Mr. Rashesh Shah and Mr. Venkat Ramaswami. The Company is operating in India as an Integrated Investment Banking Company. Edelweiss strives to be a thinking organization, trying to be innovative and imaginative. The policy of the company ensures transparency and greater opportunities for all its clients.

SNAPSHOT
Approach- Client Focus, Execution orientation, Culture, Professional Integrity, Research Driven Aim- building long term relationships with the clients and equipping the clients about the market knowledge so that they can address the day by day fast growing opportunities USP- The single minded focus on thought leadership and relentless pursuit of the new and different is it in products, services or people, model of employee ownership Culture- Entrepreneurial and result driven emphasizing confidentiality and integrity Operations- stock broking, research services, distribution of financial products, depository services, and proprietary trading, 47 per cent of its revenue is from treasury and wholesale financing Research (POD) - 90 researchers, covers over 200 stocks across 19 sectors that accounts for about 70% of the total market capitalization Offices- operates from 56 offices in 21 Indian cities, employs over 1600 employees Major clients- ESL focuses on the wholesale equity segment, providing broking services to Institutional and corporate clients and high net worth individuals Market Capitalization- Rs 5,500 crore (Rs 55 billion), Equity Base- over Rs 2,000 crore
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Website- www.edelcap.com, www.edelblue.com

HIGHLIGHTS
ESL has a strong equity research team, which covers approximately 50 - 60 companies within 6 industry categories, with a focus on large and medium cap stocks. The companys Equities Broking division has now expanded to include 215 stocks in 19 sectors accounting for 70 percent of market capitalization Alternate Asset Managements total asset value currently stands at $625 million Wholesale Financing division soared to Rs. 141 crore in FY08 from Rs. 7 crore in the previous year Edelweiss is amongst the largest institutional broking firm, enjoying a healthy 5% plus market share in the institutional broking segment Edelweiss is also in the process of widening its product portfolio by penetrating into product specific and sector specific niches, which will broaden and strengthen its entire institutional business Asset base of over INR 800 cr. In lending business It is empanelled with over 40 leading FIIs, FIs, Mutual Funds, Banks and Insurance companies Listing in various stock exchanges NSE: EDELWEISS, BSE: 532922, Bloomberg: EDEL.IN Awarded as Best Merchant Banker by the Outlook Money NDTV Profit Awards, 2008 Ranked among the top ten players in Annual Bloomberg and Annual ThomsonReuters Present Chairman and CEO- Mr. Rashesh Shah Well respected Brand with strong position in relevant market segments

STRENGHTS OF THE COMPANY

Has an integrated business model, which specializes in providing a wide range of financial products and services such as investment banking, institutional equities, wealth management, and wholesale finance. Is well positioned to leverage the growing financial sector in India and become a significant market player, especially in areas like investment banking, institutional equities etc.
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Has a strong research platform with research products, such as fundamental and alternative research, catering to institutions and HNWIs. The fundamental research covers ~190 companies which represent ~69% of the market capitalization of all the companies listed on BSE as on August, 2007. On the other hand alternative research utilizes quantitative techniques to identify short term and medium term investment opportunities in the capital market The company has a strong internal controls and risk management system employed throughout the firm to access and monitor risk across various business line. The Risk exposure is monitored and controlled through a variety of separate but complementary financial, credit and operational reporting system Is an established brand with strong track record of high growth and profitability Is strongly focused on nurturing & maintaining strong business relationships with corporate & institutional clients Well positioned to utilize the immense opportunities in the Indian financial sector

RECENT APPROACH
Edelweiss is a premium broking firm whose targets were only HNWI clients. But seeing the opportunity in retail sector it has forayed into it. The company is providing the same research facility to its retail clients as it provided to its premium clients. It is offering an online platform to the clients which will increase transparency and make business hassle free for the clients. The company is making a shift from ESL (Edelweiss Securities limited) to EBL (Edelweiss Broking Limited). The benefits offered by the company to its clients are: Online Platform News alert through Mobile messages and e-mail Dealer support Portfolio Doctor (Turtle) Toll Free Number (Helpline Services)

Thus the company is customer focused and protects the wealth of its customers through its innovative ideas. The company is repositioning itself from a niche marketer to a mass marketer and is aiming at Brand Repositioning.

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THE PRODUCTS AND SERVICES OFFERED BY EDELWEISS ARE AS FOLLOWS:SERVICES

Wholesale financing Treasury Asset management Wealth Management

Insurance Broking
Private Client Broking Institutional Equities Investment Banking

Capital based Agency based Recent initiatives/high growth areas

Investment Banking: This includes services such as M&A advisory, transaction execution relating to structured finance, equity markets, real estate, and infrastructure. Institutional Equities: Edelweiss Institutional equities business comprises institutional equity sales, sales-trading, and research. Private Client Brokerage: These services are targeted at high net worth and other individuals who actively invest and trade in the equity market. Wealth Management: Wealth management involves providing investment advisory, planning & asset deployment services to high net-worth individuals.

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Asset Management: This involves both asset management as well as investment advisory services. Under this, the company advises three funds with an aggregate corpus of over USD 330 mn. Insurance Brokerage: Edelweiss has also entered the non-life insurance brokerage business as an IRDA registered broker in 2005 and it distributes insurance products through its subsidiary, Edelweiss Insurance Brokers Limited. Treasury: The internal treasury operations manage the excess capital funds by investing the same in low risk strategies to achieve risk-adjusted returns. Wholesale financing: Wholesale business provides the high net worth individual and corporate clients with facilities such as loans against shares, loans to finance IPO subscriptions, and loans against mutual fund units. This is done through a subsidiary, ECL Finance Limited.

PRODUCTS
Advisory Based Broking (ABB) an asset management service. Margin Funding- The Company provides funds to people who wish to invest large amount in stock market but are lacking in fund. Fund is provided against securities. The company has a policy of hair cut which means that the assets that are kept as securities, they are valued less than their original price. Fund is provided for investing in only those stocks that are listed in the stock brokers list of the company. This is to save the company from loss as company has those stocks in the list that are less volatile and whose market value is good. Structured Product- As such, structured products were created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to utilize the current market trend Mutual Fund- This is a product offered by the company that takes money from the investors and invests it in the stock market on their behalf as customers are not fully aware of the stock market. They take money from many customers and collectively invest in the stock market. Insurance- Another product offered by the company in which the agent gets commission on every insurance policy done by him Arbitrage- Arbitrage, or true arbitrage, involves buying and selling a security and taking advantage of prices differences that may exists on different markets. While rare, this does happen from time to time
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De-Mat account- it refers to Dematerialized Account. It is necessary to sell and buy stocks. So it is just like a bank account where actual money is replaced by shares. One has to approach the DPs, to open his demat account. So one doesnt have to possess any physical certificates showing that you own these shares. They are all held electronically in the account. As one buys and sells the shares, they are adjusted in their account. Just like a bank passbook or statement, the DP provides with periodic statements of holdings and transactions. Portfolio Management Services- this product comes under wealth management. Customers are advised where they should invest their total investment savings. Initial Public Offering (IPO) - This product invites public to participate in the bidding process. Commodity market- In this market metals and agricultural products are traded. MCX for metal products and NCDEX for agricultural products.

CLIENT REVENUE MIX

institutional/corporate clients

individual clients

22%

78%

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GROWTH STRATEGY

The Companys growth areas are basically across three categories- Products, asset classes and client segments. It basically focuses on HNWI clients, and now it has come into the retail segment which is its source of growth. From the asset side it gets fixed income and is also into real estate. The popular products are wholesale financing, financial product distribution etc.

(1) SELLING STRATEGY OF EDELWEISS

Relationship strategy The key to success in selling is the ability to establish working relationships with the customers in which mutual support, trust and goals are nurtured over time. Edelweiss stresses on building good relationship with its clients as in case of financial firms the intangible nature of services makes Relationship strategy vital. The main purpose of a salesperson is not just to make sales but to create customers. Product centered selling and client centered selling

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Product-centered selling 1. Stress on research and development of product 2. 3. Emphasis on knowledge of product

Client-centered selling 1. Stress on research and development of relationships with clients 2. Emphasis on knowledge of customers

Influenced by past performance of 3. directed more to consideration of future products and competition and present Growth and developments in the client situations World

4.

Seeks to be accepted as a reliable, 4. seeks to raise clients expectations of credible source of information and Personal excellence service

The strategy of Edelweiss is a mix of product centered and client centered strategy. (2) EDELWEISS SALES MANAGEMENT PROCESS

Formulation of strategic sales program

Implementation of the sales program

Evaluation and control of sales force performance

26

First a strategic sales program is made keeping in mind the companys objectives. Then accordingly the sales program is implemented. Following this there is an evaluation of the sales force performance. The company adopts majorly Direct Selling Strategy to sell its products. The concept of telemarketing is being adopted by the company. Appointments are fixed over the phone which is followed by the client meeting. The whole process can be shown with the help of a flowchart:-

Create direct selling process

Identify the customer

Make appointment with customer

Give suitable demo &pitch

Ensure knowledge about product

Ensure increase in cust. value

After sales prompt service

Close deal

Sales organization always makes effort to increase sales, thereby achieving the principle of profit maximization, thus contributing to the overall growth of the enterprise. Sales goal should be SMART Specific, Measurable, Attainable, Realistic, and Time-bound

(3) METHODS OF APPROACH ADOPTED BY SALESPERSONS TO SELL EDELWEISS PRODUCTS

Cashing in on Brand Name or the Companys reputation- Representatives approach the customers with the strength of Brand name that Edelweiss has. Though the company is new in Bangalore, it is a well-established brand in Mumbai. Customer Benefit Approach- they convey to customers the benefits they will get after getting associated with Edelweiss, like online platform and local dealer support. Interactive Approach- the approach is interactive i.e. it is a two way communication and client queries are always welcomed

27

AIDAS THEORY OF SELLING

ATTENTION

Seek the attention of the prospect client

INTEREST

Maintain the attention by creating interest

DESIRE

Create desire in customers mind to buy the product

ACTION

Induce the client to buy the product

SELLING SKILLS - Talking about the skills that a salesperson should posses, they are as follows:-

28

Problem solving skills

Conflict management & resolution skills

Effective communicatio n skills

negotiation & bargaining skills

Listening skills

Possession of these skills is very important as conversion of a prospect customer to a company client very much depends on the selling skills and how the matter is put forth the client. The project part that covers D-Mat account sales, involves calling the clients, interacting with them and convincing them to maintain a good relationship with the company so that the company is in a profit.

(4) THE MAJOR ATTRIBUTES OF THE SELLING STRATEGY IN THE COMPANY

Sales target- The sales team is given a fixed target which it needs to achieve within a month. Motivational Rewards- The team who performs the best is given some rewards. This is to motivate others to perform well and at the same time appreciate the hard work done by the winning team Continuous Evaluation- the sales team has to appear in the evaluation conducted by the company to test their market and product knowledge. This is done to ensure that the company has the best sales force Training Program- Team leaders are given training regarding the product and market so that they can handle customer queries.
29

Thus the company follows an effective sales strategy (PUSH STRATEGY) which is customer focused.

(4) DISTRIBUTION STRATEGY

Distribution channels are organized structures performing the tasks necessary to facilitate exchange transactions. The functions of distribution channels are to create time, space and state utilities which constitute the added value of distribution. Distributors (wholesalers, retailers, agents, brokers) are required because manufacturers are unable to assume by themselves, at a reasonable cost, all the tasks implied by a free and competitive exchange process. Distribution channels can be characterized by the number of intermediary levels that separate the supplier from the end-user. The selection of a particular channel design is determined by factors related to market, buyer behavior and company characteristics. When the channel structure is indirect, some degree of co-operation and co-ordination must be achieved among the participants in the vertical marketing system. Regarding the number of intermediaries is necessary; three market coverage strategies are possible: intensive, selective or exclusive distribution. Distribution is one of the elements of marketing mix. Through distribution channel the product passes through intermediaries before reaching the end consumer. Distribution channel can have number of levels Zero level channel One level channel Two level channel

Choice of distribution channel depends on Market consideration consumer or industrial market, number of potential customers, size of order, buying habits of customers, geographical concentration of markets Product considerations - Technical nature, Perishability Company considerations- Financial resources, Services provided by the channels, Experienced and competent management, desire for control of channels
30

Middlemen considerations Competition, sales potential, Availability of desired middlemen, attitude of middlemen, cost

The key differentiating factors of a successful distribution channel are as follows: Quality of advice given by the company to its customers Choices of products After sales service Settlement of issues if any Managing distinct cultural and social ethos Marketing the product as an essential financial product Building trust

Role of distribution channels To adjust the discrepancy of assortment through the process of sorting, accumulation, allocation, and assorting To minimize the distribution costs through routinizing and standardizing transactions to make exchange more efficient and effective To facilitate the searching process of both buyers and sellers by structuring the information essential to both the parties To provide a place for both parties to meet each other and reducing uncertainty

Distribution channel strategy Setting distribution objectives in terms of the customer requirements Finalizing the set of activities that are required to be performed to achieve the channel objectives Organizing the activities so that the responsibility of performing the activities is shared among the entities who are meant to perform these activities Developing policy guidelines for the smooth functioning of the channel on a day to day basis

The distribution extension decision is based on distribution development index (DDI) a Category Development Index (CCI). If we see the current situation of edelweiss is considered then it can be seen that DDI is high as the brand is readily available in the market as compared to its competitors. While CCI is low if we consider the retail segment, in which the company is a new comer. Per capita consumption of its products in the market
31

relative to per capita consumption of the total financial products is low. So the strategy adopted by Edelweiss would be Concentrating on demand generation activities. In the retail sector the strategy of Edelweiss is to go for Brand Repositioning and become a mass marketer. The company is distributing Pamphlets among the customers for its promotion and building an image in the minds of the customers.

Distribution development

H u

concentrate on demand generation activities

concentrate on quality of distribution, service level

develop integrated sales & marketing package

extend distribution immediately

Category development

H- High L- low

Edelweiss is itself an intermediary between NSE and client and is a part of the distribution channel. But as a company it has its own distribution strategies to sell products to the customers.

(5) DISTRIBUTION CHANNELS OF THE COMPANY

The company has named the services provided to the customers as CLIENT ADVISORY SERVICES (CAS). The company has a multichannel distribution system. Client Advisory Services is mainly looking into five channels for distribution-:
32

A. Inbound Team B. Sub Broker/ Remissor C. Direct Selling Agency D. Retail shops or Kirana Store E. Corporate Accounts

Inbound Team: - CAS currently has an inbound team of 30 members divided into four team leaders. Each team leader can have 8 fixed cost agents reporting to him. These fixed cost agents are sourcing accounts directly from the market. Team leaders are reporting to ASM which in turn are reporting to the Regional Head. Each agent has a specific target assigned to him. Reporting Hierarchy:

Regional Head

Area Sales Manager

Team leaders

Fixed cost agents

Sub Broker/ Remissor- Sub brokers charge commission for the business they bring to the company by bringing clients. Sub-brokers have their own office space and they need not work in the office of the company they are working for as sub-broker. Whereas
33

Remissor is a type of Sub-Broker that uses the office space of the company it is working for. They have a fixed participation in the company. Remissor is given a certain low % as compared to Sub-brokers as they are using the resources of the company Direct Selling Agents (DSA)- DSAs are working for the company but they have no profit participation. They are given commission on the basis of account clients under Edelweiss. The DSAs looks for agents who can work under them. They have a team of around 7-8 members who source the clients for them. These agents get commission from the DSAs and they have no connection with the company. Retail Shops/ Kirana stores- This is a new concept that Edelweiss has come up with. The products are given to the Retail shops or Kirana stores as they have a strong customer base and this aids the distribution of the various products. The retail shops are given commission on the basis of products sold by them. Corporate Accounts- This is a way to get bulk accounts from the companies. NSE and BSE listed companies are offered free accounts. First an appointment is fixed in the target company which is followed by a corporate presentation. This is the major contributor to the companys sales.

(6) CHANNEL MANAGEMENT TASKS

Design of channel structure Ex ante phase

Distribution channel strategy Channel objectives Activity finalization Activity organization Developing Policy guidelines

Establishing the channel

Motivating the channel members

Ex poste phase
Resolving conflicts among channel members

34

Managing the distribution channels is an important task. It involves two phases- managing before the channel is actually executed. This is called the ex-ante phase. During this phase the channel is designed and established. The next phase is ex-poste phase, i.e. the phase after the channel has comes into work, in which the channel members are motivated and the conflicts are resolved.

(7) INNOVATION IN DISTRIBUTION CHANNELS

Horizontal Marketing System

Two or more companies at one channel level join together to increase coverage Eg.- Edelweiss' in mobile stores

Hybrid marketing system

A single firm sets up two or more marketing channels to increase coverage Eg.- Brokers, retailers.

Edelweiss Retail stores are an approach to shift from traditional marketing channels and this can give the competitive edge and is the differentiating factor.

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(8) DISTRIBUTION CHANNEL STRATEGY OF EDELWEISS BASED ON CUSTOMER BEHAVIOUR

PUSH FORCE Financially unaware/unsure sales force media Telephone, internet Face to face, telephone PULL FORCE

Financially aware/unsure Telemarketing, advertising Financially astute/sure Financial nichers Financial media

Recommendations, historical relationships

(9) A SHORT COMPARISON OF CONSUMER PRODUCTS TO THE FINANCIAL PRODUCTS WHEN IT COMES TO SALES AND DISTRIBUTION
The financial services are different from the consumer products offered. If we make a comparative analysis following points can be highlighted: Interaction with the customer- In case of consumer products the company has no direct contact with its customers. It distributes its products to the distributors and after that does not come in the picture. They come in contact with the customers only in case of any complaints. In case of a financial product the company personnel interact directly to the customers and convince them to buy the product. Thus the responsibility of company increase in case of financial products Buying Pattern- Many consumer products are taken by the customer on an impulse while taking a financial product involves a long thought process.

(10) VARIOUS ASPECTS OF CUSTOMER RELATIONSHIP MANAGEMENT

The customer relationship is aimed at creating strong long lasting, fruitful relationships by developing long-term bonds. As a result the customer starts identifying and
36

associating him with the product, prefers and accepts the companys products and services over competitors offerings and recommend others to buy. Moreover it costs less to retain customers than to compete for new customers. The project involves interacting with the existing HNWI clients and the clients who are in a dormant stage and convincing them to start business with the company and maintain their association with the company. This involves calling the existing clients and client visits. This helped in getting an insight into the various aspects of customer relationship.

FINANCIAL SERVICES
Edelweiss is financial service providing company. In case of financial company the differentiating factor is the services provided by the firm. Financial services basically mean all those kinds of services provided in financial or monetary terms, where the essential commodity is money. These services include; Leasing, Hire purchase, venture capital, Merchant banking, Insurance, housing finance, Mutual funds, factoring, stock broking and many others. The term financial services in its broader sense refer to mobilizing and allocation of savings. It is identified as all those activities involved in the process of converting savings into investment. There are number of factors which make the financial services different from physical goods. The major characteristics of financial services are Intangibility, Lack of ownership, Inseparability, Perishability, Heterogeneity, Fiduciary responsibility, Long term.

SERVICES MARKETING TRIANGLE

FIRM Internal marketing External Marketing

EMPLOYEES Interactive Marketing

CUSTOMERS

According to Grnroos the internal marketing has to be managed by the companys leadership, the interactive marketing happens between the employees and the clients and
37

the external marketing is what takes place between the companys management and the clients.

3PS OF SERVICES MARKETING

Coming to the Marketing Mix generally there are 4Ps (PRODUCT, PRICE, PLACE, PROMOTION) but when it comes to services marketing 3ps are added to it:PEOPLE The importance of people within the marketing of services has led to great interest in internal marketing. This recognizes the importance of attracting, motivating, training, and retaining quality employees by developing jobs to satisfy individual needs. People form an important part of the differentiation in a service organization which can create added value for the customer. PROCESS The processes by which services are created and delivered to the customer is a major factor within the services marketing mix as services customers will often perceive the service delivery system as part of the service itself. PHYSICAL EVIDENCE The exterior design can be utilized to communicate e.g. the history and values of the respective institution. The use of color in combination with texture and finishes is identified to be a simple but very effective factor of differentiation, helping to convey particular messages to the customer and creating a special atmosphere affecting employees and customers likewise. Two types of graphics can be used to establish identity, marketing graphics and branding graphics. While marketing graphics promote products and services, branding graphics enhance brand image and should be used complementary with all marketing activities (Grow, 2004).

MODERN MARKETING CONCEPT

Starting point

Focus

Means

End

38

Classical

Target Market

Consumer needs

Integrated Marketing

Customer Satisfaction

Contemporary Customer

Individual

Customer Experience

CRM

Customer Loyalty

Need of CRM To keep existing customers in the face of intense competition and the higher comparative cost of acquiring new customers Intense completion in the industry results in emphasis on service quality as means of achieving competitive advantage close and long term relationship with customers imply continuing exchange opportunities with existing customers at a lower marketing cost per customer Good relationship with customers can result in a good word-of-mouth publicity. Service quality cracks can often be prepared over where good relationships have existed previously To pursue a customer centric strategy rather than a product centric strategy

MODEL FOR CRM MARKETING

Customer needs assessment and acquisition

Customer development through personalization & customization

Customer retention and referring new customers

Addition of value with products and services Contact and involvement

Relationship marketing Commitment Recognition

High customer satisfaction Increased market share High customer loyalty High customer retention index Life time customer

Intimacy and one to one relationship Price offers Special facilities/services

Respect Reward

39

Reciprocation

CRM involves the above shown process. First the customer needs are identified and they are acquired. This is followed by development of customers through customization and then steps are taken to retain the customers.

(11) HNWIs VS RETAIL CLIENTS

HNWIs Individualized distribution Individualized Message Share of customer Profitable customers Customer retention Individual customer Customized offering Focus on few but profitable customers Extra services Proactive marketing RETAIL Mass distribution Mass advertising Share of market All customers Customer attraction Average customer Standard product Focus on large number of customers Normal services Reactive marketing

The above comparison shows that the strategy adopted for retail clients is different from that of HNWIs depending on their values and profit they bring to the organization.

(12) MARKETING STRATEGY OF EDELWEISS IN BANGALORE

SEGMENTING, TARGETING AND POSITIONING The company is segmenting the customers on the basis of demography. The various categories are Age- the company is targeting only those people who are of 28yrs. of age and above. This is to ensure that they have a sound understanding of stock market Gender- Male clients are being targeted as it is the case with most of the families that the male members trade and women dont take much interest in trading. So they are targeting the male clients

40

Educational qualification- The Company is looking for educated customers who can understand the stock market and get the advice given by the company. As Edelweiss is a premium broking firm so while it is catering to the retail clients but still it is maintaining its image Income level- the company is targeting people who have an annual income of 3lakhs and above. This ensures that they are able to invest in the stock market

CLASSIFICATION OF CUSTOMERS ON BASIS OF THEIR VOLUME & LEVEL OF INVESTMENT

According to the above diagram the HNWIs are the customers whose volume is low but their level of investment is huge so they are of much importance. As the volume of customers decrease their level of investment increases that means that there are few clients that account for most of the profits of the company. The research and development wing has taken a center stage in the innovation process going forward. The company is thus positioning itself as a premium broking firm as it basically caters to HNI clients. It believes in providing quality service to its clients. Even as it enters the retail segment, it is maintaining its premium image as is clear from the choice segmentation of customers. It maintains a good client base and provides quality services to them. The company is POD (Point of differentiation) is its quality Research and development.
41

FACING THE COMPETITORS

Flank attack is the strategy adopted by Edelweiss to attack its competitors. In this strategy the company attacks on the competitors weak point. Here the company is attacking the competitors on the basis of brokerage and research. Few strategies recommended by Edelweiss Our recommended strategy is to be overweight domestic-focused sectors: telecom, industrial, consumer discretionary, and BFSI Our top large cap picks are Bharti, BHEL, Crompton, Hero Honda, HDFC Bank, SBI, Sun TV and Suzlon.

EDELWEISS IN NEWS SPONSOR OF ICL- Edelweiss is the sponsor of ICL and this will give it wider coverage and help it build its brand. The technique for which Edelweiss is going is Event sponsorship and this is an effective way to cover mass media. TIE-UP WITH UNION BANK OF INDIA- to roll out Wealth Management Services to cater its High Net worth Individuals (HNI) in Mumbai. Under the conditions of the tie-up, Edelweiss will be contributing a whole range of wealth management products and alternative investment options such as structures product, Real Estate Funds, Art.

Edelweiss is looking for long term customer base and for that reason it is trying to understand the investment pattern of the customers and accordingly suggest them the financial products matching their risk profile. While other companies are just selling their products Edelweiss by conducting this survey is actually trying to understand the investment needs of the customers.

OPPORTUNITIES BEFORE THE COMPANY

Strong economic growth, increased geographic penetration, growth of SMEs and the increasing need for capital among Indian corporations are expected to continue to drive Indias financial services industry. The Company is already well established in domains such as investment banking. Moreover, it plans to invest a large part of its IPO in prepaying of loans, enhance margins with stock exchanges and establish new offices.

42

Huge untapped retail segment - the Company has a huge opportunity before it as it has a vast untapped retail segment. Increasing affluent class- The rise of the affluent class will aid the growth of the company The Indian financial sector carries immense growth opportunities, be it investment banking, wealth management, insurance broking or any other domain The focus on diversity has already reduced the risk of client and product concentration. With a continuous rise in number of HNIs, and the expansion of capital markets, domains such as investment banking, PMS are likely to experience outstanding growth

CHALLENGES BEFORE THE COMPANY

More people have sold the shares in the Indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. Foreign investors have pulled out from stock markets leading to heavy losses in stocks and mutual funds Because of such uncertainty many people have started saving money in banks rather than investing Business Volatility- The business in which the company is in is very volatile and keeps changing with the market situation. So to keep a good pace of growth is the challenge that lies ahead Competition- The competition is fierce among different market players and standing in this situation is a challenge Risk management- The business is prone to a high risk and minimizing risk is the need of the time People- The company should maintain the good working force that it has with it at present and improve it to gain competitive advantage

43

DE-MAT ACCOUNT SALES

Along with classifying the customers into various categories the de-mat was also pitched to them especially to those customers who lacked in their investment in the stock market and did not had the right combination of investments.

SWOT ANALYSIS:

COMPARITIVE ANALYSIS
Edelweiss Sharekha n
Competitiv e Good

Religare India Infoline

Motilal Oswal

ICICI Direct

Indiabulls

Brokerag e Services Online trading

Competitiv e Premium

nomina high l
average average

nomina High l
good Very good

Low
average

Yes with Yes with yes excellent the most software preferre d Excellent Good Not good Very in good Kolkata Free for Rs.400 the 1st year, 562 Free account opening Rs.725 averag e averag e Rs.325

yes

Yes

Yes but Real-time no quotes streamin g Very good Excellent average Satisfactor y Rs.500

Research

averag e averag e Rs.450

averag e good

Brand image

AMC

Rs.325

Rs.500

De-mat account charges

Rs.300

Rs.500

Rs.425

Around Rs.750

Rs.500

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Exposure

3-4 times 5 times

56times

34times

67times

3-5 times 6-7times

INTERPRETATION
From the above table following conclusions can be drawn: When it comes to brokerage, Edelweiss is very competitive. Though there are many firms that are offering very low brokerage to the clients, the company has come up with its new prepaid plans in which the brokerage is as low as 10 paisa. There are different plans depending on the trading volume of the clients Services offered by Edelweiss are premium and one of the best among all. Edelweiss has online trading platform that has live streaming quotes and Express trade facility wherein the client can punch in the trade while looking at the values of the stocks. Research of Edelweiss is best among all its competitors and no one can beat Edelweiss on that The only point that is not in the favor of Edelweiss is low Brand equity in Kolkata. The Brand image is not there in the minds of the people as the company is new in Kolkata. So the company needs to work on it and establish a good brand image as it matters a lot in this industry From the above table it can be seen that ICICI and Sharekhan are its biggest competitors. ICICI is the major competitor, the benefit that it enjoys is that the customers can have their account I its bank so fund transfer is very easy. Besides it has a very good brand image and people trust on that. This is the reason that despite charging a high brokerage it is very popular among masses. Sharekhan is customer friendly and its terminal is considered very fast. So Edelweiss needs to focus on these two competitors.

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COMPARITIVE MARKET SHARE OF EDELWEISS

6
17.19

12.71
15.81

6.93
27.69 13.67

Edelweiss HDFC

Sharekhan Indiabulls

ICICI others

Motilal Oswal

ICICI is the market leader followed by Sharekhan. Edelweiss holds 6% of the market share and shows a bright potential of growth.

46

CHAPTER 3

GENERAL CHARACTERISTICS: GOLD

If its yellow, heavy and malleable and ductile (stretches or draws out into thin wire without breaking) then its probably gold. Gold doesnt combine with other elements too often, so it will usually be found in pure examples. Gold naturally occurs with pyrite (iron sulfide, fes2) and arsenopyrite (iron arsenic sulfide, feAsS) in lode deposits, which means in veins or deposited in fissures of adjoining rock. Pyrite and chalcopyrite are very often mistaken for gold but are lighter in weight and more brittle, pulverizing to powder when hammered. Golds name is believed to be Anglo-Saxon, but its uncertain where it originated. The atomic symbol for gold is Au, and its atomic number is 79 with an atomic weight of 196.967. Gold will melt at a temperature of 1063* C. golds specific gravity is between 15.6 to 19.3, with hardness between 2.5 and 3. Gold has traditionally been found in elastic placer sedimentary deposits, from a source in ingenious rock in veins and hydrothermal replacement deposits

1 grain= .0648 grams 24 grains= 1 penny weight 1 DWT= 1.5552 grams 20 DWT= 1 ounce 1 ounce= 31.1 grams 12 ounce= 1 troy pound

pure gold is 1.000 fine commercial gold is .999 fine 24 karat = 100% gold 18 karat = 75% gold 14 karat = 58% gold 10 karat = 42% gold

47

BREIF HISTORY OF GOLD:

Gold is the oldest precious metal known to men. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time high and may be due for a severe correction. To fully appreciate why 8000 years of experience say gold is forever, we should review why the world reveres what England most famous economist, John Maynard Keynes, cynically called the barbarous relic Why gold is good as gold is an intriguing question. However, we think that the more pragmatic ancient Egyptian were perhaps more accurate in observing the gold value was a functions of its pleasing physical characteristic and its scarcity. Gold is primarily a monetary asset and partly a commodity. More than two third of gold total accumulated holdings account as value for investment with central bank reserves, private players and high-carat jewelry. Less than one third of gold total accumulated holding is as a commodity for jewelry in western market and usage in industry. The gold market is highly liquid and gold held by central banks, other major institution and retail jewelry keep coming back to the market. Due to large stocks of gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. Economic forces that determine the prices of gold are different from, and in many cases opposed to the forces that influence most financial assets. South Africa is the world largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world largest gold consumer with an annual demand of 800 ton.

WORLD GOLD MARKETS

London as the great clearing house New York as the home of future trading Zurich as a physical turntable Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions Tokyo where TOCOM sets the mood of japan Mumbai under Indias liberalized gold regime

48

India in world gold industry

(Rounded figures) Total stocks Central bank holding Annual production Annual demand Annual imports Annual exports Annual recycling India (in tons) 1300 400 2 800 600 60 100-300 World (in tons) 145000 28000 2600 3700 ----1100-1200 % share 9 1.4 0.08 22 ----13

Indian gold market

Gold is valued in India as saving and investment vehicle and is the second preferred investment after bank deposit. India is the world largest consumer of gold in jewelry as investment. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewelers and exporters. At present, 13 banks are active in the import of gold. This reduces disparity between international and domestic prices of gold from 57% during 1986 to 1991 to 8.5% in 2001. The gold holding tendency is well ingrained in Indian society. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewelry off take is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and wide range of consumers goods. Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant both qualitatively and quantitatively.

Market moving factors

Above ground supply from sales by central banks, reclaimed scrap and official gold loans Producer / miner hedging interest World macro- economic factor US dollar interest rate Comparative return on stock markets Domestic demand based on monsoon and agricultural output.

49

Frequency dist. Of gold London fixing volatility from 1995 till date
Percentage change Daily Number of times Percentage times Weekly Number of times Percentage times >5% 4 0.2 3 0.7 54 2.4 62 14.1 2-5 % 2147 97.4 376 85.3 < 2%

Biggest price movement since 1995 Between September 24 and October 5, 1999, daily prices witnessed a rally of more than 21% based on surprised announcement by 15 European central banks of five-year suspension on all new sales of gold from their reserves.

CONTRACT SPECIFICATION

Type of contract Name of commodity Ticker symbol Trading system Basis Unit of trading Delivery unit Quotation/base value Tick size Quality specification

Quantity variation Delivery center Additional delivery center Hours of trading

Futures contract specification Gold GLDPURMUMK NCDEX trading system Ex-Mumbai inclusive of custom duty and Octopi, exclusive sales tax/vat 1 kg 1 kg Rs per 10 grams of gold with 995 fineness Re 1 Not more than 999.9 fineness bearing a serial number and identifying stamp of a refiner approved by the exchange. List of approved refiners is available at www.ncdex.com None Mumbai Ahmedabad As per direction of the forward markets commission from time to time currently:Mondays to Fridays: 10:00 AM to 11:55 PM Saturdays: 10:00 AM to 2:00 PM On the expiry date, contracts expiring on that day will not be available for trading after 5 PM

50

Tender period

The exchange may vary with due notice. Tender period would be of 5 working days during trading hours prior to and including the expiry date of the contract Pay-in and pay-out: On a t+1 basis. If the tender date is T then, pay-in and pay-out would happen on T+1 day. If such a T+1 day happen to be a Saturday, a Sunday or a holiday at the exchange, clearing banks or any of the service providers, pay-in and pay-out would be effected on the next working day. There would be 5 pay-in & pay-outs starting T+1 the 5th being the final settlement. Expiry date of the contract: 20th of the delivery month. If 20th happens to be a holiday, a Saturday or a Sunday then due date shall be the immediately preceding trading day of the exchange, which is other than a Saturday. The settlement of the contract would be by a staggered system of 5 pay-ins and pay-outs which would be the final settlement of the contract Upon the expiry of the contracts all the outstanding positions should result in compulsory delivery. The penalty structure for failure to meet delivery obligation will be as per circular number. NCDEX/TRADING-091/2007/235 dated October 4, 2007. During the tender period if any delivery is tendered by seller, the corresponding buyer having open position and matched as per process put in place by the exchange, shall be bound to settle by7 taking delivery on T+1 day from the delivery center where the seller has delivered same.

Due date/expiry date

Delivery specification

Closing of contract

Opening of contracts

Clearing and settlement of contract will commence with the commencement of tender period by compulsory delivery of each open position tendered by the seller on T+1 to the corresponding buyer matched by the process put in place by the exchange. Upon the expiry of the contract all the outstanding open position should result in compulsory delivery. Trading in the far month contract will open on the 10th
51

day of the month in which the near month contract is due to expire. If the 10th happens to be non-trading day, contracts would open on the next trading day. Number of active contracts Minimum of two contracts with a maximum of 12 contracts running concurrently. Price limits Daily price fluctuation limit is (+/-) 4%. If the trade hits the prescribed daily price limit there will be a cooling off period for 15 minutes. Trade will be allowed during this cooling off period with in the price band. There after the price band will be raised by another 50% of the existing limit i.e. (+/-) 2% and trade will be resumed. If the price hits the revised price band (6%) again during the day, trade will only be allowed with in the revised price band. No trade/order shall be permitted during the day beyond the revised limit of 6% except such further variation as may be permitted by the regulators. Position limit Client-wise 2 MT The above limits will not apply to bonafide hedgers. For bonafide hedgers the exchange will decide the limits on a case-to- case basis. Quality allowance (for delivery) Gold bars of 999.9 / 995 fineness. A premium will be given for fineness above 995. The settlement price for more than 995 fineness will be calculated at (actual fineness) final settlement price. Premium of 0.49 % would be given for gold delivered of 999.9 purity. Special margin In case of additional volatility, a special margin at such other percentage, as deemed by the regulator/exchange, may be imposed on either the buy or the sell side in respect of all outstanding positions. Removal of such margins will be at the discretion of the regulator/exchange. Additional margin In addition to the above margins the regulator/exchange may impose additional margin on both long and short side at such other percentage, as deemed fit, removal of such margin will be at the discretion of regulator/exchange.

52

HISTORICAL GOLD PRICE IN INDIA

53

RELATIVE SHARE OF COUNTRY THAT EXPORT GOL

54

CHAPTER 4 RESEARCH METHODOLOGY

Statement of Problem
The prices of commodities as well as the foreign currency were highly volatile. The foreign currency in this regard could be attributed as dollar and the commodity could be attributed to gold. People face hardship these days as the prices are rising in respect of gold. It was not just volatile but the rising prices of the gold as well as cost of living could not be matched. Similarly, the nation faced exchange problem which was rising very steeply. Therefore, there was a need to study relation between commodity prices of gold with that of foreign currency.

Objective of the study:

To ascertain the relationship between gold as a commodity and dollar as a currency. To ascertain the movement in the prices of gold whether up or down, due to change in the movement of dollar prices

Data collection:
The data to be collected will be the secondary data which is available on the websites. The data to be collected is on the basis of the price movement of the gold on the NCDEX and MCX exchanges and in case of foreign currencies the historical data available on Google will be beneficial.

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Tools for analysis:

We will be using correlation analysis to find out the relationship between gold and foreign currencies. Correlation coefficient indicates the strength and the direction of linear relationship between two variables. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (+1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negative correlated will move by an equal amount in the opposite direction.

The measured variable y which is conventionally called the dependent variable is correlated with x called the independent variable.

Limitation of the study:

We can only rely on the data that is available on the websites. Only the prices are being considered to conduct the study. The economic variables that govern price movements are not being considered. The fluctuations in the currency prices are not only the factor that affects the gold prices.

Contribution to the study:

The study will help the large institutional investors in reducing their losses in the Fore and commodity market and also will give a new direction for the players who trade in gold or the people like us in India who are the largest consumers of it in the present era. All in all it will help the investors to reduce their risks through counter investing i.e. hedging their risk by taking exposure in the commodities market.

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CHAPTER 5 Analysis dollar and gold

The first step was to confirm whether there was a statistically significant correlation between changes in the dollar gold price. Six month data were used. A statistically significant and contemporaneous correlation was found between the gold price and dollar exchange rates. The correlation was, as expected, negative, indicating that a fall in the dollar against the other currencies is associated with a rise in the gold price and vice versa. The second step was to develop a mathematical equation relating changes in the logarithm of the gold price to change in the dollar exchange rates. The results revealed that a change in the gold price the last week of December was generally barely statistically significant, as when dollar prices came to the closing price of INR 39.43, the gold prices reached the level of 10664. As expected the results showed that a fall in the dollar provokes a gold price rise and vice versa. Finally, the mathematical relationship between dollar exchange rate and the gold price had shifted from time to time that in nearly every sub-period there was a mathematical definable relationship. The breaks varied from exchange rates to exchange rates, but many occurred either in the 1979 to 1980 period, a time of noticeable change in the global economic climate, or around 1985, the time of the plaza exchange rate accord. Mathematical equation was developed for each of the sub-periods identified. The conclusion was that while the relationship varied substantially from one sub-period to the next, the gold responses to dollar exchange rates movements remained remarkably similar. This demonstrates that the relationship between the gold price and each exchange rate has changed from time to time, but with only one or two expectation, gold has maintained its hedging power through each different episode. Its reaction to exchange to exchange rates movements has been remarkably consistent over time and across currencies. The effectiveness of gold as a hedge depends on the factors such as the level of the exchange rates, the gold prices at the time and how much the exchange rates moves.

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CHAPTER 6 FINDINGS Gold as a dollar hedge a breakdown of data, findings and analysis
The data
Movements of gold price were tested statistically against currency rates as dollar. There was a negative correlation between dollar and gold.

Findings

The US dollar has been under pressure for the past one and a half months and most commodity prices have risen over the same period. And indeed, historically, there has been a negative correlation between the dollar and the commodities prices. The reason for this can basically be found in the law of one price. The classic dollar hedge is gold. Over the past ten years, the correlation between EUR/USD and gold has been almost 50%. However, since 2006, this correlation has actually been more than 70%. Historically speaking, there has also been a correlation between EUR/USD and oil. But here too the correlation over the past two-year has been stronger than- almost as strong as for gold. We generally expect the dollar to weaken further in the coming three months. Given the strengthening correlation between commodities and EUR/USD, this would suggest further price rises for commodities, with gold and oil leading the way followed by the metals. Likewise, the prospect of more rate cuts in the US is positive for global growth and the business cycle and this could lend additional support to commodity prices. The primary contributor to the increase in the gold prices has been the inverse correlation of the gold prices to the value of the dollar. Gold is an ideal diversifier because the economic forces that determine the prices of gold are different from, and in many cases opposed to the forces that influence most traditional financial assets such as shares, bonds and even property. By constructing a global Hard Asset Index based on gold mines, metals, timber and real estate, the researcher found that moderate or balanced investors would benefit from a 10 percent allocation to Hard Assets while aggressive investors would benefit from a 25 % allocation. Reducing a portfolios volatility or risk by adding gold (and other hard asset) allows the portfolio manager to rearrange the asset mix to include a greater weighing in higher return, higher-volatility assets hence enhancing the performance of the portfolio without increasing the risk

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CHAPTER 7 Recommendations and suggestions

Gold
The primary contributors to the increase in the gold prices have been the inverse correlation of the gold prices to the value of the dollar. Gold is an ideal diversifier because the economic forces that determine the price of gold mines, metals, timber and real estate, the researcher found that Moderate and a balanced investors would benefit from a 10 percent allocation to Hard Asset Aggressive investors would benefit from a 25 present allocation Reducing a portfolios volatility or risk by adding gold (and other hard asset) allows the portfolio manager to rearrange the asset mix to include a greater weighing in higher return, higher-volatility assets hence enhancing the performance of the portfolio without increasing the risk The institutional investors and the individuals can hedge their risks by taking futures and options contract Futures are standardized contracts Futures price are regularly reported in the financial press These are settled daily Contracts are usually closed out prior to maturity These are marked to market which gives the investors an extra support as it is the practice of revaluing an instrument to reflect the current market values of the relevant market variables.

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BIBLIOGRAPHY

The price movement will be collected from the following websites: www.mcxindia.com www.ncdex.com www.bonanzaonline.com

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