CHAPTER 1

INTRODUCTION
Commodity Futures
Commodity includes all kinds of goods. FCRA defines goods as every kind of moveable
property other than actionable claims, money and securities. Or any product that can be
used for commerce or an article of commerce which is traded on an authorized commodity
exchange is known as commodity.
The commodity futures trading, consists of a futures contract, which is a legally binding
agreement providing for the delivery of the underlying asset or financial entities at specific
date in the future.
Like all future contracts, commodity futures are agreements to buy or sell
something at a later date and at a price that has been fixed earlier by the buyer and seller.
So, for example, a cotton farmer may agree to sell his output to a textiles company
many months before the crop is ready for actual harvesting.
This allows him to lock into a fixed price and protect his earnings from a steep drop
in cotton prices in the future. The textiles company, on the other hand, has protected itself
against a possible sharp rise in cotton prices.
The complicating factor is quality. Commodity futures contracts have to specify the quality
of goods being traded. The commodity exchanges guarantee that the buyers and sellers will
stick to the terms of the agreement.
When you buy or sell a futures contract, you are not actually signing a written piece of
paper drawn up by a lawyer; you are entering into a contractual obligation which can be
met in one of two ways. The first is by making or taking delivery of the actual commodity.
This is the exception, not the rule however, as less than 2% of all futures contracts are met
by actual delivery. The other way to meet your obligation, the method you most likely will
use, is by offset. Very simply, offset is making the opposite, or offsetting sale or purchase of
the same number of contracts bought or sold sometime prior to the expiration date of the
contract. This can be easily done because futures contracts are standardized.

Characteristics of futures trading

A "Futures Contract" is a highly standardized contract with certain distinct features. Some
of the important features are as under:
a. A future trading is necessarily organized under the auspices of a market association
so that such trading is confined to or conducted through members of the association
in accordance with the procedure laid down in the Rules & Bye-laws of the
association.
b. It is invariably entered into for a standard variety known as the "basis variety" with
permission to deliver other identified varieties known as "tender able varieties".
c. The units of price quotation and trading are fixed in these contracts, parties to the
contracts not being capable of altering these units.
d. The delivery periods are specified.
e. The seller in a futures market has the choice to decide whether to deliver goods
against outstanding sale contracts. In case he decides to deliver goods, he can do so
not only at the location of the Association through which trading is organized but
also at a number of other pre-specified delivery centres.
In futures market actual delivery of goods takes place only in a very few cases.
Transactions are mostly squared up before the due date of the contract and contracts are
settled by payment of differences without any physical delivery of goods taking place.

Commodity market
The commodity market is a market where forwards, futures and options contracts
are traded on commodities. Commodity markets have registered a remarkable growth in
recent years. The stage is now set for banks to trade in commodity futures. This could help
producers of agricultural products bankers and other participants of the commodity
markets. Banks have started acknowledging the commodity derivatives market. In this
context the Punjab National Bank and the Corporation Bank have sanctioned loans worth
Rs 50 crore to commodity futures traders over the past six months.

In the present global economic scenario, due to various factors such as inflation,
political factors, natural factors, the variations in prices of all commodities are a natural
phenomenon. So, from the point of the cultivators of the commodity (in case of agricultural
products) or dealers in the metals, there is a genuine need for them, an instrument with
which they can hedge their risks. Thus, a commodity future is one of the most important
derivative securities. With this they will be able to reduce risks.
Consequently, the speculators who play an important part, in determining the price
also come in the picture. Thus with the help of their speculative expertise, it can also be a
very lucrative investment opportunity. Through this, project, an attempt is made to prove
that commodity futures can be used effectively as a risk reduction instrument and also as a
very good investment opportunity.
The futures market in commodities offers both cash and delivery-based settlement.
Investors can choose between the two. If the buyer chooses to take delivery of the
commodity, a transferable receipt from the warehouse where goods are stored is issued in
favor of the buyer. On producing this receipt, the buyer can claim the commodity from the
warehouse. All open contracts not intended for delivery are cash-settled. While speculators
and arbitrageurs generally prefer cash settlement, commodity stockiest and wholesalers go
for delivery. The option to square off the deal or to take delivery can be changed before the
last day of contract expiry. In the case of delivery-based trades, the margin rises to 0-25%
of the contract value and the seller is required to pay sales tax on the transaction.
Trading in any contract month will open on the twenty first day of the month, three
months prior to the contract month. For example, the December 2005 contracts open on 21
September 2005 and the due date is the 20-day of the delivery month. All contracts settling
in cash will be settled on the following day after the contract expiry date. Commodity
trading follows a T+1 settlement system, where the settlement date is the next working day
after expiry. However, in case of delivery-based traders, settlement takes place five to
seven days after the expiry.
Tradable Commodities:
World-over one will find that a market exits for almost all the commodities. 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, Oils, Oilseeds etc.
Soft Commodities: Coffee, Cocoa, Sugar etc.
Live Stock: Live Cattle, Pork Bellies etc.
Energy: Crude Oil, Natural Gas, Gasoline etc.

Returns from Commodity trading:

Absolute returns from stocks and bonds are definitely higher than pure commodities. But
commodity trading carries a lower downside risk than other asset classes, as pricing in
commodity future is less volatile compared to equities and bonds. While the average annual
volatility is 25-30% in benchmark equity indices like the BSE Sensex or NSE's Nifty, it is
12-18% in gold, 15-25% in silver, 10-12% in cotton and 5-10% in government securities.
According to study, if an investor had put his money only in silver and bonds from 19972003, his absolute returns would above been 24%. Commodities are also good bets to
hedge against inflation. Gold offers good protection against exchange rate fluctuations, and,
in particular, against fluctuations in the value of the US dollar against other leading
currencies. However, unlike stocks, commodity prices are dependent on their demandsupply position, global weather patterns, government policies related to subsidies and
taxation and international trading norms as guided by the World Trade Organisation
(WTO).

Trading participants:
Hedgers
In a commodity market, hedging is done by a miller, processor, stockiest of goods, or the
cultivator of the commodity. Sometimes exporters, who have agreed to sell at a particular
price, need to be a hedger in a futures and options market. All these persons are exposed to
unfavorable price movements and they would like to hedge their cash positions.

In general, hedgers use futures for protection against adverse future price
movements in the underlying cash commodity. Hedgers are often businesses, or
individuals, who at one point or another deal in the underlying cash commodity. Take an
example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For
protection against higher prices of the produce, he hedges the risk exposure by buying
enough future contracts of the produce to cover the amount of produce he expects to buy.
Since cash and futures prices do tend to move in tandem, the futures position will profit if
the price of the produce raise enough to offset cash loss on the produce.

Speculators

Speculator does not have any position on which they enter in futures options market. They
only have a particular view about the future price of a particular commodity. They consider
various fundamental factors like demand and supply, market positions, open interests,
economic fundamentals internal events, rainfall, crop predictions, government policies etc.
and also considering the technical analysis, they are either bullish about the future process
or have a bearish outlook.
In the first scenario, they buy futures and wait for rise in price and sell or unwind their
position the moment they earn expected profit. If their view changes after taking a long
position after taking into consideration the latest developments, they unwind the transaction
by selling futures and limiting the losses. Speculators are very essential in all markets. They
provide market to the much desired volume and liquidity; these in turn reduce the cost of
transactions. They provide hedgers an opportunity to manage their risk by assuming their
risk.
Arbitrageur
He is basically risk averse. He enters in to those contracts where he can earn risk less
profits. When markets are imperfect, buying in one market and simultaneous selling in
another market gives risk less profit. It may be possible between two physical markets,
same for 2 different periods or 2 different contracts.

What makes commodity trading attractive?

A good low-risk portfolio diversifier
A highly liquid asset class, acting as a counterweight to stocks, bonds and real
estate
Less volatile, compared with, say, equities
Investors can leverage their investments and multiply potential earnings
Better risk- adjusted returns
A good hedge against any downturn in equities or bonds as there is little correlation
with equity and bond markets
High correlation with changes in inflation
No securities transaction tax levied.
SEBI guidelines for commodity futures trading
There are many regulatory authorities, who are monitoring commodity futures
trading, one of them is SEBI. The following Report is one of the regulatory frameworks for
the commodity futures trading.
Report of the committee appointed by the SEBI on participation by Securities
Brokers in Commodity Futures Markets under the chairmanship of Shri K.R. Ramamurthy
(February 5, 2003)
The following were the recommendations:I

I) Participation of Securities Brokers in Commodity Futures Market

II
The committee was of the unanimous view that participation of intermediaries like
securities brokers in the commodity futures market is welcome as it could inter-alia
increase the number of quality players, infuse healthy competition, boost trading
volumes in commodities and in turn provide impetus to the overall growth of the
commodity market.
Since the commodity market falls under the regulatory purview of a separate
regulatory authority viz., Forward Market Commission, to ensure effective
6

regulatory oversight by the Forward Market Commission, and to avoid any possible
regulatory overlap, the pre-condition for such entry by intending participating
securities brokers in the commodity futures market would be through a separate
legal entity, either subsidiary or otherwise. Such entity should conform from time to
time to the regulatory prescription of Forward Market Commission, with reference
to capital adequacy, net worth, membership fee, margins, etc.
The committee took note of the fact that the existing provisions of the Securities
Contracts (Regulation) Rules, 1957 forbid a person to be elected as a member of a
recognized stock exchange if he is engaged as principal or employee in any
business other than that of securities, except as a broker or agent not involving any
personal financial liability. The Committee recommended that the above provisions
in the Securities Contract (Regulations) Rules be removed/amended suitably to
facilitate securities brokers participation/engagement in commodity futures.
An important felt need was the necessity to improve market awareness of trading
and contracts in commodities. The committee therefore recommended the forward
market commission take appropriate initiatives in training the market participants.
II) Risk containment measures
In the background of the Forward Market Commissions report on risk containment
measures currently obtaining in commodity markets and the committees recommendation
to permit security brokers participation in commodities markets only through a separate
legal entity, the committee considers that ensuring strict compliance of the regulatory
prescriptions like net worth, capital adequacy, margins, exposure norms, etc., by the
respective market regulators, and due oversight would be an adequate safeguard to ensure
that the risks are not transmitted from one market to the other.
III) Utilization of existing infrastructure of stock exchanges

On the issue of convergence/integration of the securities market and commodities market,

that is, of allowing stock exchanges to trade in commodity derivatives and vice versa, the
committee was of the view that in the current statutory and regulatory framework and
existence of two separate and established regulators, the issue of integration of the two
markets would require detailed examination, particularly for the purpose of defining clearly
the scope of regulatory purview and responsibility.
Also, given the concerns raised by a section of members that such integration may lead to
further fragmentation of volumes and liquidity in the nascent commodity markets, the
committee was of the view that the issue of markets could be taken up for consideration at
a future date as the two markets mature further.

Types of futures contracts

a)

Agricultural futures contracts:

These contracts are traded in grains, oil, livestock, forest products, textiles and
foodstuff. Several different contracts and months for delivery are available for
different grades or types of commodities in question. The contract months depend
on the seasonality and trading activity.

b)

Metallurgical futures contract:This category includes genuine metal and petroleum contracts. Among the metals,
contracts are traded in gold, silver, platinum and copper. Of the petroleum products,
only heating oil, crude oil and gasoline is traded.

c)

Interest rate futures contract

These contracts are traded on treasury bills, notes, bonds, and banks certification of
deposit, as well as Eurodollar.

d)

Foreign exchange futures contract

These contracts are trade in the British Pound, the Canadian Dollar, the Japanese Yen, the
Swiss Franc and the Deutsche Mark. Contracts are also listed on French Francs, Dutch
Guilders and the Mexican Peso, but these have met with only limited success.

Commodity trading Exchanges in India:

In India there are 25 recognized future exchanges, of which there are three national
level multi-commodity exchanges. After a gap of almost three decades, Government of
India has allowed forward transactions in commodities through online commodity
exchanges, a modification of traditional business known as Adhat and Vadya Vyapar to
facilitate better risk coverage and delivery of commodities.
The three exchanges are:
National Commodity & Derivatives Exchange Limited (NCDEX)
Multi Commodity Exchange of India Limited (MCX)
National Multi-Commodity Exchange of India Limited (NMCEIL)
National Commodity & Derivatives Exchange Limited (NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally
managed on-line multi commodity exchange promoted by ICICI Bank Limited (ICICI
Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE). Canara
Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India
Limited), Goldman Sachs, Indian Farmers Fertiliser Cooperative Limited (IFFCO) and
Punjab National Bank by subscribing to the equity shares have joined the initial promoters
as shareholders of the Exchange. NCDEX is the only commodity exchange in the country
promoted by national level institutions. This unique parentage enables it to offer a bouquet
of benefits, which are currently in short supply in the commodity markets. The institutional
promoters and shareholders of NCDEX are prominent players in their respective fields and

bring with them institutional building experience, trust, nationwide reach, technology and
risk management skills.
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies
Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It
commenced its operations on December 15, 2003.
NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange
with an independent Board of Directors and professional management - both not having
any vested interest in commodity markets. It is committed to provide a world-class
commodity exchange platform for market participants to trade in a wide spectrum of
commodity derivatives driven by best global practices, professionalism and transparency.
NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various
laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act,
Contract Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members about 550 centers
throughout

India.

The

reach

will

gradually

be

expanded

to

more

centers.

NCDEX currently facilitates trading of 57 commodities

Agriculture

Barley, Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Crude
Palm Oil, Cotton Seed Oilcake, Expeller Mustard Oil, Groundnut (in shell), Groundnut
Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian Parboiled Rice,
Indian Pusa Basmati Rice, Indian Traditional Basmati Rice, Indian Raw Rice, Indian 28.5
mm Cotton, Indian 31 mm Cotton, Masoor Grain Bold, Medium Staple Cotton, Mentha
Oil, Mulberry Green Cocoons, Mulberry Raw Silk, Mustard Seed, Pepper, Potato, Raw
Jute, Rapeseed-Mustard Seed Oilcake, RBD Palmolein, Refined Soy Oil, Rubber, Sesame
Seeds, Soyabean, Sugar, Yellow Soybean Meal, Tur, Turmeric, Urad, V-797 Kapas, Wheat,
Yellow Peas, Yellow Red Maize.

10

Metals
Aluminium Ingot, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel Cathode,
Silver, Sponge Iron, Zinc Ingot.
Energy
Brent Crude Oil, Furnace Oil
Multi Commodity Exchange of India Limited (MCX)
MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated
on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director,
Reliance Industries Ltd.; and has permanent recognition from the Government of India for
facilitating online trading, clearing and settlement operations for commodities futures
market across the country. Today, MCX features amongst the world's top three bullion
exchanges and top four energy exchanges.
MCX offers a wide spectrum of opportunities to a large cross section of participants
including producers/ processors, traders, corporate, regional trading centre, importers,
exporters, co-operatives and industry associations amongst others. Headquartered in the
financial capital of India, Mumbai, MCX is led by an expert management team with deep
domain knowledge of the commodities futures market. Presently, the average daily
turnover of MCX is around USD1.55 bn (Rs.7,000 crore - April 2006), with a record peak
turnover of USD3.98 bn (Rs.17,987 crore) on April 20, 2006. In the first calendar quarter
of 2006, MCX holds more than 55% market share of the total trading volume of all the
domestic commodity exchanges. The exchange has also affected large deliveries in
domestic

commodities,

signifying

the

efficiency

of

price

discovery.

Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering

multiple commodities for trading with wide reach and penetration, MCX is well placed to
tap the vast potential poised by the commodities market.
Key shareholders

11

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for
Agriculture and Rural
Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund
(Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of
India, Canara Bank, Bank of India, Bank of Baroda , HDFC Bank and SBI Life Insurance
Co. Ltd.

Vision and Mission

MCX will offer unparalleled efficiencies, unlimited growth and infinite opportunities to
all market participants. It will be acknowledged as the Exchange of Choice, based on its
strong service availability backed by superior technology.
MCX is committed towards revolutionizing the Indian commodity markets. It aims to
empower the market participants through innovative product offerings and business rules;
so that the benefits of futures markets can be fully realized. MCX will focus its efforts
towards meeting the requirements of all the stakeholders in the commodity ecosystem
without any bias. It shall focus its efforts towards establishing globally acceptable industry
norms.
Neutral Image
MCX's most important strength is that it is an independent and de-mutualized exchange
since inception.
Value Proposition
Headquartered in the financial capital of India, Mumbai, MCX is led by an expert
management team with deep domain knowledge of the commodities futures market. It also
has strong partnerships with banks, financial institutions, warehousing companies and other
stakeholders of the marketplace.
Insurance of Settlement Guarantee Fund
MCX is the only domestic exchange which has insured its Settlement Guarantee Fund, to
the tune of Rs.100 crores by The New India Assurance Co.Ltd.'
Strategic Equity Partnerships
12

MCXs wide based strategic equity partners include - Financial Technologies (I) Ltd., State
Bank of India Ltd. and its associates, National Bank for Agriculture & Rural Development
(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an
affiliate of Fidelity International, Corporation Bank Ltd., Union Bank of India Ltd., Canara
Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd., HDFC Bank Ltd., SBI Life Insurance
Co. Ltd.

Trade Support
MCX has already tied up exclusively with some of the largest players in the commodities
eco-system namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United
Planters Association of India and India Pepper & Spice Trade Association. MCX has also
established the National Gold Delivery market in partnership with World Gold Council.
International Alliances
MCX has various strategic Memorandum of Understandings/ Licensing Agreements with
global exchanges like The Tokyo Commodity Exchange (TOCOM); The Baltic Exchange,
London; Chicago Climate Exchange (CCX); New York Mercantile Exchange (NYMEX),
London Metal Exchange (LME); Dubai Multi Commodities Centre (DMCC); New York
Board of Trade (NYBOT) and Bursa Malaysia Derivatives, Berhad (BMD)
FTIL: Technology Partner
Financial Technologies India Ltds (FTIL) proven mettle of end-to-end exchange trading
technologies addressing trading/ surveillance/ clearing and settlement operations help
enhance the MCX Trade Life Cycle operations (Pre-Trade, Trade and Post-Trade). In
addition to its technological capabilities, FTIL also brings to MCX its associations with
technology giants such as Microsoft/ Intel and HP.
Trading:
13

MCX employs state-of-the-art, new generation integrated trading platform that permits
faster and efficient operations in a cost effective manner. The Exchange Central System is
located in Mumbai, and maintains the Central Order Book, which matches the trades on a
pre-defined matching algorithm, and confirms the execution of trades to the members on an
online real-time basis. It has an integrated Surveillance and Settlement System. Exchange
members located across the country are connected to the central system through VSAT,
Leased line, Internet or any other mode of communication as permitted by the Exchange.
The Exchange also has a Disaster Recovery Site.
Risk Management
The central objective of MCX's Risk Management System is to assess and manage the risk
of the market in an expeditious manner to ensure smooth and timely pay-in/ pay-out
process of the Exchange. Some of the basic functions of Risk Management are as follows
Real-time Margining System at client level
Monitoring of position limits (Quantity)
Capital adequacy norms
Daily price limits
Initial margins
Special margins
Marked-to-market margin
Delivery period margin
Clearing and Settlement
The Clearing and Settlement System of the Exchange is system driven and rule based.
The Exchange has its own in-house clearing house, which undertakes to clear each and
every trade and is counter-party for all trades; thus offering novation (zero counter-party
risk) to each and every trade executed on the Exchange

14

Clearing Bank Interface:

Exchange maintains electronic interface with its Clearing Banks. All members of the
exchange have their
Settlement and Client Accounts for exchange operations with the Clearing Bank. All
debits and credits are effected electronically through Settlement account only.

Delivery and Final Settlement

All contracts on maturity are for delivery. MCX specifies tender and delivery periods. For
example, such periods can be from the 8th working day till the 15th day of the month where 15th is the last trading day of the contract month - as tender and/ or delivery
period. A seller or a short open position holder in that contract may tender documents to
the exchange expressing his intention to deliver the underlying commodity. The exchange
would then select the buyer from the long open position holder for the tendered quantity.
Once the buyer is identified, seller has to initiate the delivery process and the buyer has to
take delivery according to the delivery schedule prescribed by the exchange.

15

CHAPTER 2
RESEARCH DESIGN
2.1 Introduction
Research refers to the search for the knowledge. One can also define research as a
scientific, systematic search for the actual information on a specific topic. In fact, research
is an art of scientific investigation. A careful investigation or enquiry specially through
search for new fact in any branch of knowledge.
Here the data collected are analyzed through Beta and Volatility to find out the degree of
risk involved in commodity futures.
2.2 Statement of the problem
Commodity Future is a very important instrument in hedging risks, which arises in
the spot market. Speculators and hedgers use commodity utures to reduce the risks.
Commodity Futures have volatility. Because of variability, Commodity futures are not
much popular. Here an attempt is made to know volatility involved in 10 Commodity
Futures.
2.3 Need of the study
Commodity market is growing and it is becoming more critical. Therefore the research is in
on the commodity futures and analysis of risk and return involved in commodity futures.
2.4 Objectives
The objectives of the study are:
To study the growth of commodity futures trading.
To analyses the risk involved in various commodity.
To know the use of strategies available in the commodity market.

16

2.5 Scope of the study

One month spot prices for commodity futures like Soya bean, Potato, Barely, Red
Chilli, Gold, Silver, Aluminum, Nickel, copper and Crude oil etc are collected for
calculation.
The above mentioned commodity futures are more traded in the market in terms of
volume.
2.6 Methodology
Methodology states that how the research studies should be undertaken. This includes the
design specifications, sources of data, methods of primary data collection, methods used for
collecting secondary data etc. Mainly secondary data has been used for the study.
Secondary data consists of collecting information from various financial sites. It includes
the records and reports of research experts. For analysis and interpretation statistical tools
are used.
In this study standard deviation and Beta are used for calculating Risk and Return of
commodity futures.
2.7 Sample Design
NCDEX and MCX are the Indias the two major exchanges for commodity trading and as
many as more than 55 commodities are listed.10 commodity futures are taken sample size
for the purpose of the study.

2.8 Sources of data

The required information or data collected from the stock brokers and two major
exchanges.
The spot prices of commodity were collected from for one month of march from
various websites.
The secondary data were the basis for the study.

2.9 Tools used for analysis

Figure, beta and standard deviation are used for analysis
17

2.10 Limitations of the study

The following are the limitations of the study.
Due to non-availability of sufficient time one month data was taken for analysis.
The data are available in the date of the expiry of the contract.
Most of the information gathered for the study is from Internet and magazines etc.
that are in the printed form. Hence, the level of accuracy cannot be expressed to be
100 per cent.

18

2.11 Layout of chapters

Chapter 1: introduction
This chapter includes introduction of the research topic, subject background of the
research topic .

Chapter 2: Research Design

This chapter includes brief introduction of research study, statement of the problem,
review of literature, objectives of the study, scope of the study, methodology, sampling
design, tools for data collection and limitations of the study.

Chapter 3: Profile of respondent

This chapter includes industry profile and company profile and Commodity profile.

Chapter 4: Analysis and Interpretations of data

This chapter contains the analysis of secondary data using calculations like beta,
standard deviation. This also contains tables followed by graph, which support the
analysis.

Chapter 5: Summary of findings, conclusions and Suggestions

This chapter provides a summary of findings and conclusions drawn from the analysis.
Suggestions are also given with respect to the research topic.

19

CHAPTER 3

INDUSTRY PROFILE
The process of economic liberalization in India began in 1991. As part of this process,
several capital market reforms were carried out by the capital market regulator Securities
and Exchange Board of India. One such measure was to allow trading in equities-based
derivatives on stock exchanges in 2000. This step proved to be a shot in the arm of the
capital market and volumes soared within three years.
The success of the capital market reforms motivated the government and the Forward
Market Commission (the commodities market regulator) to kick off similar reforms in the
commodities market. Thus almost all the commodities were allowed to be traded in the
futures market from April 2003. To make trading in commodity futures more transparent
and successful, multi-commodity exchanges at national level were conceived and were
allowed to start futures trading in commodities on-line.
A lot of water has flown since then. Today commodities exchanges have become an
integral part of Indian financial system. Their volumes have gone through the roof; from a
humble Rs 5000 crores in 2003 today it stands north of Rs 27 lac crores per year. This rise
in volumes has been led by bullion (gold and silver) trading. Simultaneously, MCX has
emerged as the second largest commodity exchange in the world in terms the number of
silver contracts traded. Similarly it is the third largest commex in the world today
considering the number of gold contracts traded.
There is yet another feather in the cap of Indian commixes; while the American commixes
still continue to have open outcry system, Indian ones have begun in style, with every
aspect of trading fully computerized. Thus you have trading engines which match buy and
sell orders at the nanosecond basis.
Coming to commodities, today Indian investors can trade in a great number of commodities
on these bourses, and the list is getting bigger by the day. No wonder then that the
20

commodity futures market is being viewed as a significant business segment by many

businessmen, investors, institutions, brokers, banks et al.
In spite of all this flurry of activity during past three-four years, the awareness about
commodities remains low. Many investors are still not aware that they can invest in
commodities as diverse as gold, silver, jeera, and cotton with the click of a mouse, right
from the confines of their living room. No doubt many are unaware that commodities are
completely unrelated to other investment vehicles and thus can act as a buffer in the times
of crisis.

21

COMPANY PROFILE
Part of SSKI group, an organization with over 80 years of experience. The company
is one of the premiers in the broking companies of India. Over the years it has grown into a
company with specialized company dealing with all kinds of trading of stock, derivatives,
commodity trading. The company has more than 180 outlets spread over 90 cities across
India.
Focus of Share Khan is to conduct easy transaction through technology that is online
trading, phone trading, financial advice and research support and high quality customer
service.
Research coverage
Active coverage of political developments, economy changes.
Sector wise investment strategies are in place.
Stock ideas are presented from time to time in tune with overall strategy.
Total coverage exceeds some 100 stocks spread over 20 sectors.
Coverage includes all GDR stocks.
It is amongst the widest coverage broking houses in India.
Operation of SSKI
Intuitional Broking.
Investment Banking.
Retail Broking.
ShareKhan-Retail Broking Brand
ShareKhan is the retail broking arm of SSKI group. Sharekhan has successfully
transformed into a full fledged retail brand of SSKI. It is one stop shop for all kinds of
trading activities related to shares and other recent happenings like derivative market and
evolved commodity market in India.
ShareKhan along with Banks in India has fund transfer facility with many of these banks.
The online form of trading is carried on through ShareKhan.com. It allows the clients to
access the website to know about latest news in market and impact it has on the various
scrips.
22

SSKI is in Indian Securities Business since 1922. ShareKhan is serving institutional

investors- Domestic/International.
SSKI is in Indian Securities Business since 1922. ShareKhan is serving institutional
investors- Domestic/International.
The institutional research team is rated as one of the best in the industry. ShareKhan has
been rated as among top 3 domestic brokerage and rated as one of the most aggressive in
the industry.
Product and Service
The products of ShareKhan can be broadly classified into three types suiting the clients
trading habits.
Three Key Products
IT-Enabled call center for servicing clients.
Integrated depository services / Demat account for transparency.
Online fund transfer facility with HDFC, Citibank, GTB, IDBI Bank. Regular
banking facility with any bank in India.
ShareKhan also offers personalized research advice through website,
E-mail, sms and messenger.
Derivatives Trading
Share Khan is a significantly large player in this with over 5% market share. It offers
complete intellectual support to the clients. The trading facility is available through the
ground network as well as over the internet. It has also created proprietary intellectual
material for client servicing- Derivative digest, Derivatives info kit, Options calculator.
Derivative Product:
For Buyers
Going with the brave heart view.
Advantage option.
For Portfolio Hedging
23

 Nifty futures and using the beta factor.

Flex option.
SDS(Structured Derivatives Strategy)
Research Product
The research is varied but focused in each of the area of the operation. These are tailor
made to suit the following needs of customers.
Intra-day trading.
Short term trading
Long term investing
High Yield product.
Hedging products
Research based on fundamental view, Technical view and dealing room information. The
delivery is through the website, Branch, E-mail, SMS and instant messenger.
Investment Ideas
Share khan has a broad based distribution of funds across various sectors covering major
companies in these sectors. Some of the important sectors are
Automobile
Petrochemicals
Banking
Pharma
Home Textile
Retail Finance
Media
IT Services
Oil and gas
Telecom
Clientele-FII
24

 Emerging Alliance Capital Management

Market Investment Management
Edinburgh Fund Management Limited
Foreign and Colonial Emerging Markets
Goldman Sachs Investment Management
Government of Singapore Investment Corporation
Grantham, Mayo, Van Otterloo & co.
Indosuez Asset management
Jardine Fleming Investment Management Limited
LGT Asset Management
Lloyd George Investment Management
Martin Currie Investment Management Limited
Morgan Stanley Asset Management
TIAA-Cref Investment Management
UBS
Sharekhan is the pioneer in many of this field and has the experience of handling
many project like
1st Telecom Offering
1st Competitively Bid Power project
1st M & A Cellular
1st Barge mounted IPP
1st Web Service Provider
Nicholas Piramal and HDFC, by Warburg Pincus
It is among the top 3 branded retail service providers (Rs 1000+crs avg daily vol-AprDec03). It is the No.2 player in online business. It has the largest network of branded
broking outlets in the country serving more than 10,000 clients.
Strengths That Set Us Apart
We have been in information services since inception and have assiduously built the
data and skill set necessary for the business.

25

 We have leveraged our content to create our ShareKhan brand, which is

synonymous with high quality and credible information on business and finance.
Our top management team represents a skill set, which is mutually exclusive but
collectively exhaustive.
The strength of the organization is that the organizations has been continuously
innovating and reinvent it.
COMMODITY PROFILE:
AGRO-PRODUCTS: POTATO
General Characteristics
Potato is the world's fourth important food crop after wheat, rice and maize owing to its
great yield potential and high nutritive value and accounts for nearly half of the worlds
annual output of all root and tuber crops. Thus, with an annual global production of about
300 million tonnes, potato is an economically important staple crop in both developed and
developing countries.
Supply Demand Scenario
India is ranked 5th in potato production after China, Russian Federation, Poland
and Ukraine. However, potato productivity in India is merely 16-19 tonnes/ha vis-vis that of European countries and USA, i.e 30-40 tonnes/ha.
The potatoes in India are cultivated under highly diversified agro-climatic
conditions ranging from sea level to snowline and up to three crops are raised per
year.
Summer crop- March- April---------------------August-September
Autumn crop- August-September---------------December- January
Spring crop- January - February-------------- May-June
Potato is mainly rabi crop and is grown mainly in UP, Punjab, Haryana, West
Bengal, Madhya Pradesh, Bihar, Andhra Pradesh, Tamil Nadu and Gujarat.

26

 During 2004-05, 24.15million ton potato was produced in the country while
production figure for 2003-04 is 23.27 million ton. According to the ministry of
agriculture advance estimate potato production during 2005-06 will be 24.65
million tons.
Average acreage under potato varies between 12 to 15 lakh hectares depending on
the weather condition during sowing period.
Monthly Price Volatility
Monthly Variation in Potato Prices (Jan.2000-June 2004)

Volatility
No. of times

<5
12.96

5 - 10

10 - 15

14.81

18.52

> 15
55.70

Major Trading Centers

There are four-potato export zone in India viz. in UP, Punjab, MP and West Bengal. The
major potato markets in UP are Agra, Hathras, Kanpur, Meerut, Farrukkhabad; Jalandhar,
Ludhiana, Phul and Patiala in Punjab; Ujjain, Indore and Dewas in MP and Hoogly,
Burdwan and Howrah in West Bengal
Market Influencing Factors
Variations in potato domestic acreage based on yield and price realization
Crop development based on weather progress in key growing regions particularly
cold wave and heavy rains during tuber formation
Comparative price with other vegetables in the domestic market,
Upcountry demand of potato from the major cities and food processing industries
The potato price tends to firm up during the planting period and eases down during
the harvesting period.
Transportation charges have also profound impact on prices
27

Potato growers and traders hoard the commodity before selling in expectation of better
prices. Potato can be kept in cold storages without spoilage for 5-6 months.

28

RED CHILLI:
General Characteristics
Chillies belong to the genus capsicum, under the solanaceae family and are
believed to have originated from South America.
Chillies are valued principally for their high pungency and colour.
Chilli forms an indispensable culinary spice in several parts of the world. It is also
used in beverages and in the preparation of medicines.
Supply Characteristics
India is the world's largest producer, consumer and exporter of chillies in the world.
India also has the largest area under chillies in the world. Chillies are the most
common spice cultivated in India. It is estimated that India produced 1060345 tons
of dry chilli from an area of 8,84,183 hectares in 2003-04.
Almost all the states of India produce the crop. The important chilli growing states
of India are Andhra Pradesh (46%), Karnataka (15%), Maharashtra, Madhya
Pradesh, Orissa, West Bengal, Rajasthan and Tamil Nadu.
Chillies can be grown during the entire year at one or the other part of the country.
However, the major arrival season extends from February to April. The crop
planting starts from August and extends till October. While, the harvesting begins
from December with 5% of the arrivals usually reported in this month. The peak
arrivals are reported in February to March.
There are several varieties of chilli cultivated in India. The most popular among
these are, Sannam, LC 334, Byadgi, Wonder Hot, Jwala etc.
The major chilly growing districts of Andhra Pradesh are Guntur, Warangal,
Khammam, Krishna and Prakasham.

29

Demand Characteristics
India is the largest consumer of chilli in the world. Around 90% of India's
production, is consumed within the country.
It is estimated that around 25-30% of the chilly crop is used for powder
preparation, with the branded chilly powder manufacturers accounting for around
5% of the total volume.
India exports around 80000 - 1 lakh tons of chillies a year.
India exports chillies in the form of dried chillies, chilly powder, picked chillies
and chilly oleore.
The export of chillies in 2003-04 was worth Rs.366.8 crores (US $ 79.95 million).
The total quantity exported was 86575 tons.
Chilli constituted 33% of total spices exported from India in 2003-04.
Trade Characteristics
Well-established spot markets at Guntur, Warangal, Khammam in Andhra Pradesh;
Raichur, Bellary in Karnataka are the major price reference points, as these are
based at the production centers.
The trade channel involves several members viz., a village level trader,
commission agent, wholesaler, retailer, agents for exporters and exporters. The
commodity changes hands several times, exposing all these members to price risk.
Guntur is Asia's largest market for chillies. Normally, about 80 lakh to one crore
bags of chillies, weighing approximately 35 to 50 kgs is traded during the season at
Guntur market alone. The marketing season begins in the first week of February,
peaks during the month of April, and closes by the middle of May.
The market players estimate that trade worth nearly Rs 500 crores takes place in
Guntur during season. During the peak arrival period around 0.8 - 1 lakh bags of
35-50 kg is traded here daily.
Around 35-40% of the crop that arrives at Guntur, is estimated to be stored in the
cold storages present at Guntur and surrounding areas.
30

Market influencing factors

The commodity displays high volatility, with the prices heavily dependent on
season, production in different producing tracts spread across the country, demand
from exporters and the stock available at the cold storages.
The prices of the major chilly varieties sold in the country are correlated with each
other. As a result, the players in other varieties can also hedge their risks through
this single variety. .
BLACK PEPPER:
The supply of pepper has seen a dramatic increase over the last ten years. While prices
have fallen over the last three years, the market has absorbed the supply of pepper
Global Scenario
The global production of pepper fluctuates between 3-3.5 lakh tons 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.
Vietnam's sudden increase in production has resulted in the global production,
increasing to 3-3.5 lakh tons from 1.9-2 lakh tons in the late nineties. Vietnam is
the world's largest producer and exporter of pepper in the world now.
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 for
pepper. The primary international grades and their markets are Lampung at

31

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.
Indian Scenario
India harvests most of its pepper at the beginning of the year. 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 Tamil Nadu.
During 2003, Indian exports of pepper amounted to 17,200 tons, registering a 31%
fall compared to exports of 24,914 tons in 2002. The export in 2003 was the lowest
quantity of pepper exported from India during the last four decades. This quantity
was only 64% of the average export over the last five years. In terms of export
share, India contributed only 8% to total producing country exports in 2003, a fall
from the 14% of average share during last five years.
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 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 d
Delhi have recently developed as the major up country markets for pepper.

32

Markets 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 of a year.
Year ending stocks and stocks-to-consumption.
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.

COFFEE (ROBUSTA):
Introduction
Coffee is a beverage obtained from coffee plants fruit called cherry. The coffee
plant refers to any type of tree in the genus madder family which is actually a
tropical evergreen shrub that has the potential to grow 100 feet tall
Coffea arabica and Coffea robusta are the two most commonly cultivated species
of coffee plant having economic significance. Robusta bean is smaller and rounder
than an Arabica bean. Robusta beans produce a bitter-tasting coffee with about 50
percent more caffeine than Arabica
Arabica accounts for about 70 percent of the world's coffee production. Robusta
coffee trees represent about 30 percent of the world's market
The coffee trees grow well in tropical regions with abundant rainfall, year-round
warm temperatures with no frost. The coffee tree needs an average temperature
between 17 C to 23 C with abundant precipitation and good soil conditions for
33

good growth. Robusta can withstand warmer temperatures, up to 29 C and can

also thrive at lower altitudes than Arabica.
The coffee plant produces its first full crop of beans at about 5 years old and then
remains productive for about 15 years
The average coffee tree produces enough beans to make about 0.45 kg to 0.7 kg of
roasted coffee per year
It takes approximately 9,000 handpicked green coffee beans to make a kg of coffee
There is usually one coffee harvest per year. North of the equator, harvest takes
place between Sept and March, and south of the equator between April and May
India is the only country that grows all of its coffee under shade. Some regions
with high elevations are ideally suited for growing Arabicas of mild quality while
those with warm humid conditions are best suited for Robustas
Ninety percent of the world coffee trade is in green (unroasted) coffee beans. In
most countries there is one main harvest a year. Coffee is usually shipped
unroasted (green coffee) in 60 kg jute or sisal / hemp bags marked with the grade,
country of origin and method of processing
There is no extreme peak in world production at any one time of the year, although
coffee consumption declines by 12 percent or more below the years average in the
warm summer months
Indian Scenario
India is the worlds fifth largest producer of coffee. India produces 2,74,000 tons of
coffee annually which constitutes of 94,000 tons and 1,80,000 tons of Arabica and
Robusta coffee respectively
The crop year of Indian coffee lies between October to September
Coffee growing regions in India can be grouped under three distinct categories Traditional areas representing the southern states of Karnataka, Kerala and Tamil
Nadu and Non-traditional areas comprising Andhra Pradesh and Orissa in the
Eastern Ghats of the country. The Northeastern region comprising the 'Seven
Sister' states of Assam, Manipur, Meghalaya, Mizoram, Tripura, Nagaland and
Arunachal Pradesh
34

 In Karnataka, Chikmagalur, Coorg and Hassan are the major coffee producing
districts producing around 76,300 tons and 1,19,975 tons annually of Arabica and
Robusta coffee respectively
In Kerala, Wyanad, Travancore and Nelliampathy are the major coffee producing
districts producing around 1,375 tons and 55,450 tons annually of Arabica and
Robusta coffee respectively
In Tamil Nadu, Pulney, Nilgiris, Shevroy (Salem) and Anamalais (Coimbatore) are
the major coffee producing districts producing around 14,375 tons and 4,450 tons
annually of Arabica and Robusta coffee respectively
Among non-traditional areas, Andhra Pradesh, Orissa and North Eastern Region
produce around 1,950 tons and 125 tons annually of Arabica and Robusta coffee
respectively
India annually exports 2,01,498 tons of coffee annually to around 44 countries
across globe with Italy (26.5%), Russian Federation (14.61%), Germany (8.31%),
Belgium (5.55%) and Spain (5.11%) being the top 5 destinations for Indian coffee
In 2005, estimated domestic consumption was 80200 tons.
Global Scenario
After petroleum, coffee is the world's most important traded commodity.
Coffee supply and demand worldwide is subject to considerable fluctuations from
year to year. These fluctuations are caused by a variety of factors like economic
interests of the producing and purchasing companiesbesides the climatic factors.
Till 1989, the International Coffee Organisation (ICO) controlled the global coffee
trade. After 1989, coffee became a free-trade commodity
The present coffee producing belt around the globe encompasses approximately 70
countries
About 7-million tons of green coffee are shipped worldwide each year
The three major growing regions are Africa, South America and Asia
Brazil, Columbia and Vietnam are the world's top 3 coffee producing countries
The estimated value of the export of green coffee is 10 billion dollar

35

Factors Affecting Coffee Prices

The size and availability of coffee stocks worldwide
Seasonal factors have a significant influence on the price of coffee
Change in coffee consumption pattern governed by factors such as population size
of coffee consumers, standard of living and cultural acceptability
Availability and price of coffee substitutes like tea, cocoa and coffee complements like
sugar also play a very important role in determining coffee prices
METALS: GOLD
Gold is the oldest precious metal known to man. 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 highs and may be
due for a severe correction.
To fully appreciate why 8,000 years of experience say " gold is forever", we should review
why the world reveres what England's 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 Egyptians were perhaps more accurate in observing that gold's value was
a function of its pleasing physical characteristics and its scarcity.
Gold is primarily a monetary asset and partly a commodity.
More than two thirds of gold's total accumulated holdings account as 'value for
investment' with central bank reserves, private players and high-carat Jewellery.
Less than one third of gold's total accumulated holdings is as a 'commodity' for
Jewellery in Western markets and usage in industry.
The Gold market is highly liquid and gold held by central banks, other major
institutions and retail Jewellery keep coming back to the market.

36

 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 price of gold are different from, and in many
cases opposed to the forces that influence most financial assets.
South Africa is the world's largest gold producer with 394 tons in 2001, followed
by US and Australia.
India is the world's largest gold consumer with an annual demand of 800 tons.
World Gold Markets
London as the great clearing house
New York as the home of futures 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 India's liberalized gold regime.
India in World Gold Industry:
(Rounded Figures)
Total Stocks
Central Bank holding
Annual Production
Annual Recycling
Annual Demand
Annual Imports
Annual Exports

India (In Tons)

13000
400
2
100-300
800
600
60

37

World (In Tons)

145000
28000
2600
1100-1200
3700
-----

% Share
9
1.4
0.08
13
22
-----

Indian Gold Market

Gold is valued in India as a savings and investment vehicle and is the second
preferred investment after bank deposits.
India is the world's largest consumer of gold in jewellery as investment.
In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewellers and exporters. At present, 13 banks are active in the import of
gold.
This reduced the disparity between international and domestic prices of gold from
57 percent during 1986 to 1991 to 8.5 percent in 2001.
The gold hoarding tendency is well ingrained in Indian society.
Domestic consumption is dictated by monsoon, harvest and marriage season. Indian
jewellery offtake is sensitive to price increases and even more so to volatility.
In the cities gold is facing competition from the stock market and a wide range of
consumer 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 factors - US Dollar, Interest rate
Comparative returns on stock markets
Domestic demand based on monsoon and agricultural output.

38

SILVER
General Characteristics
Silver's unique properties make it a very useful 'Industrial Commodity', despite it being
classed as a precious metal.
Demand for silver is built on three main pillars; industrial uses, photography and Jewellery
& silverware accounting for 342, 205 and 259 million ounces respectively in 2002.
Just over half of mined silver comes from Mexico, Peru and United States, respectively, the
first, second and fourth largest producing countries. The third largest is Australia.
Primary mines produce about 27 percent of world silver, while around 73 percent comes as
a by-product of gold, copper, lead, and zinc mining.
The price of silver is not only a function of its primary output but more a function of the
price of other metals also, as world mine production is more a function of the prices of
other metals.
The tie between silver and economic activity is strong, given that around two-thirds of total
silver fabrication is in the industrial and photographic sectors.
Often a faster growth in demand against supply leads to drop in stocks with government
and investors.
Economically viable primary silver mine is a function of the world silver price level.
Indian Scenario
Silver imports into India for domestic consumption in 2002 was 3,400 tons down
25 % from record 4,540 tons in 2001.
Open General License (OGL) imports are the only significant source of supply to
the Indian market.

39

 Non-duty paid silver for the export sector rose sharply in 2002, up by close to
200% year-on-year to 150 tons.
Around 50% of India's silver requirements last year were met through imports of
Chinese silver and other important sources of supply being UK, CIS, Australia and
Dubai.
Indian industrial demand in 2002 is estimated at 1375 tons down by 13 % from
1,579 tons in 2001. In spite of this fall, India is still one of the largest users of
silver in the world, ranking alongside Industrial giants like Japan and the United
States.
By contrast with United States and Japan, Indian industrial offtake for fabrication
in hardcore industria applications like electronics and brazing alloys accounts for
only 15 % and the rest being for foils for use in the decorative covering of food,
plating of Jewellery, silverware and jari.
In India silver price volatility is also an important determinant of silver demand as
it is for gold.
World Markets
London Bullion Market is the global hub of OTC (Over-The-Counter) trading in silver.
Comex futures in New York is where most fund activity is focused.
Biggest Price Movement since 1995
Between February 4 - 6, 1998, daily prices rocketed by 22.3%, based on a noted US
financier had accumulated nearly 130 ounces of physical silver.
Aluminium:
Characteristics Of Aluminium
Aluminium is the third most abundant element in the Earth's crust. In nature
however it only exists in very stable combinations with other materials

40

(particularly as silicates and oxides) and it was not until 1808 that its existence was
first established.
Aluminum is light. Its density is only one third that of steel. Aluminum is resistant
to weather, common atmospheric gases and a wide range of liquids. Aluminum has
a high reflectivity, and therefore finds more decorative uses. Aluminum has high
elasticity, which is an advantage in structures under shock loads.
Aluminium keeps its toughness down to very low temperatures, without becoming
brittle like carbon steels. It is easily worked and formed. Aluminium conducts
electricity and heat nearly as well as copper.
Supply and Demand :
Global Scenario
Aluminium ore, most commonly bauxite, is plentiful and occurs mainly in
tropical and sub-tropical areas - Africa, West Indies, South America and
Australia. There are also some deposits in Europe
The leading producing countries include the United States, Russia, Canada, the
European Union, China, Australia, Brazil, Norway, South Africa, Venezuela, the
Gulf States (Bahrain and United Arab Emirates), India and New Zealand;
together they represent more than 90 percent of the world primary aluminium
production.
The largest aluminium markets are North America, Europe and East Asia.
The global production of aluminium is about 27.7 and 28.9 million tons in 2003
and 2004 respectively.

41

Indian Scenario
India is considered the fifth largest producer of aluminium in the world.
It is estimated at about 3037 million tonnes for all categories of bauxite (proved,
probable and possible). With the present level of consumption of aluminum, the
identified reserves would have an estimated life of over 350 years. India's reserves
are estimated to be 7.5 per cent of the total deposits and installed capacity is about
3 per cent of the world.
In terms of demand and supply, the situation is not only self-sufficient, but it also
has export potential on a competitive basis. India's annual export of aluminium is
about 82,000 tonnes.
Indias annual consumption of Aluminum is around 6.18 lakh tons and is projected
to increase to 7.8 lakh tones by 2007.
About a decade back, the primary Indian aluminium producers were BALCO,
NALCO, INDAL, HINDALCO and MALCO. Of the five, two (BALCO and
NALCO) were in the public sector while the other three were in the private sector
As a result of the process of liberalization of trade in aluminium, India has
emerged as a net exporter of aluminium, on competitive terms. Government
monopoly, in terms of aluminium production, removal of price and distribution
control over aluminium, has been diluted in favour of private sector. The
ownership pattern in private sector has undergone changes. With the takeover of
INDAL by the HINDALCO, it has emerged as the major producer of aluminium in
the country.
World Aluminium Markets
LME, TOCOM, SHFE and NYMEX are the important international markets that provide
direction to the aluminium prices.

42

COPPER
Characteristics of Copper
Copper ranks third in world metal consumption after steel and aluminum. It is a
product whose fortunes directly reflect the state of the world's economy.
Copper is the best non-precious metal conductor of electricity. The metal's
exceptional strength, ductility, and resistance to creeping and corrosion, makes it
the preferred and safest conductor for building wiring. Copper is also used in
power cables, either insulated or uninsulated, for high, medium and low voltage
applications. Copper is an essential component of energy efficient motors and
transformers and automobiles.
Supply and Demand:
Global Scenario
Economic, technological and societal factors influence the supply and demand
of copper. As society's need for copper increases, new mines and plants are
introduced and existing ones expanded.
Land-based resources are estimated at 1.6 billion tons of copper, and resources
in deep-sea nodules are estimated at 0.7 billion tons.
The global production of refined copper is around 15 million tons.
The major copper-consuming nations are Western Europe (28.5%), the United
States (19.1%), Japan (14%), and China (5.3%).
Copper and copper alloy scrap composes a significant share of the world's
supply.
The largest international sources for scrap are the United States and Europe.
Chile, Indonesia, Canada and Australia are the major exporters and Japan,
Spain, China, Germany and Philippines are the major importers.

43

Indian Scenario
The size of Indian Copper Industry is around 4 lakh tons, which as percentage of
world copper market is 3 %.
Birla Copper, Sterilite Industries are two major private producers and Hindustan
Copper Ltd the public sector producers.
India is emerging as net exporter of copper from the status of net importer on
account of rise in production by three companies.
Copper goes into various usage such as Building, Cabling for power and
telecommunications,

Automobiles

etc.

Two

major

states

owned

telecommunications service providers; BSNL and MTNL consume 10% of

country's copper production. Growth in the building construction and automobile
sector would keep demand of copper high.
World Copper Markets
LME and NYMEX are the two international markets, which provide direction to
the copper prices.
The eight leading refining nations, viz., United States,Japan, Chile, Canada,
Zambia, Belgium, and the Federal Republic of Germany account for 67% of total
refined metal production.
Frequency Distribution of Copper Spot Prices at LME
Percentage Change
Monthly

0-2
46

2-5
36

44

5 & above
21

Factors Influencing Copper Markets

Copper prices in India are fixed on the basis of the rates that rule on LME the
preceding day.
World copper mine production through exploration of new mine and expansion of
existing mine.
Economic growth of the major consuming countries such as China, Japan,
Germany etc.
Growth and development in the Building, electronics and electrical industry.
STEEL LONG
General Characteristics
Steel is an alloy of iron and carbon, containing less than 2% carbon, 1%
manganese and small amounts of silicon, phosphorus, sulphur and oxygen. Steel is
the most important engineering and construction material in the world. It is the
most important, multi-functional and most adaptable of materials. Steel production
is 20 times higher as compared to production of all non-ferrous metals put
together.
Steel compared to other materials of its type has low production costs. The energy
required for extracting iron from ore is about 25 % of what is needed for extracting
aluminum. There are altogether about 2000 grades of steel developed of which
1500 grades are high-grade steels. The large number of grades gives steel the
characteristic of a basic production material.
Categories of Steel
Steel market is primarily divided into two main categories - flat and long. A flat
carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate
products vary in dimensions from 10 mm to 200 mm and thin flat rolled products
from 1 mm to 10 mm. Plate products are used for ship building, construction, large
45

diameter welded pipes and boiler applications. Thin flat products find end use
applications in automotive body panels, domestic 'white goods' products, 'tin cans'
and the whole host of other products from office furniture to heart pacemakers.
Plates, HR coils and HR Sheet, CR Sheet and CR coils, GP / GC (galvanized plates
and coils) pipes, etc. are included in this category.
A long steel product is a rod or a bar. Typical rod products are the reinforcing rods
made from sponge iron for concrete, ingots, billets, engineering products, gears,
tools, etc. Wiredrawn products and seamless pipes are also part of the long
products group. Bars, rods, structures, railway materials, etc. are included in this
category.
Sponge Iron / Direct reduced iron (DRI): This is a high quality product produced
by reducing iron ore in a solid state and is primarily used as an iron input in
electric arc furnace (EAF) steel making process. This industry is an integral part of
the steel sector. India is one of the leading countries in terms of sponge iron
production. There are a number of coal-based sponge irons / DRI plants (in the
eastern and central region) and also three natural gas based plants (in the western
part of the country) in the country.
Global Scenario
The total output of word crude steel in 2003 stood at 945 million tons, resulting
in a growth of 6.7% over the previous year.
China is the world's largest crude steel producer in the year 2003 with around
220.12 million tons of steel production, followed by Japan and USA. USA was
the largest importer of steel products, both finished and semi-finished, in 2002,
followed by China and Germany.
The world's largest exporter of semi-finished and finished steel was Japan in
2002, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by China is
estimated to increase by 12-13% in 2004.

46

Indian Scenario
India is the eighth largest producer of steel with an annual production of 36.193
million tons, while the consumption is around to 30 million tons.
Iron & steel can be freely exported and imported from India. India is a net exporter
of steel.
The Government of India has taken a number of policy measures, such as removal
of iron & steel industry from the list of industries reserved for public sector,
deregulation of price and distribution of iron & steel and lowering of import duty
on capital goods and raw materials, since liberalization for the growth and
development of Indian iron & steel industry.
After liberalization, India has seen a huge scale addition to its steel making capacity. The
country faces no shortage of iron and steel materials. Factors Influencing Demand &
Supply of Steel Long and Steel Flat
The demand for steel is dependent on the overall health of the economy and the
infrastructure developmental activities being undertaken.
The steel prices in the Indian market primarily depend on the domestic demand
and supply conditions, and international prices.
Government and different producer and consumer associations regularly monitor
steel prices.
The duty imposed on import of steel and its fractions also have an impact on steel
prices.
The price trend in steel in Indian markets has been a function of world's economic
activity.
Prices of input materials for iron and steel such as power tariff, freight rates and coal
prices, also contribute to the rise in the input costs for steel making.

47

CRUDE OIL
General Characteristics
Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural
underground reservoirs. Oil and gas account for about 60 per cent of the total
world's primary energy consumption.
Almost all industries including agriculture are dependent on oil in one way or
other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides,
paints, perfumes, etc. are largely and directly affected by the oil prices.
Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil,
residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke,
asphalt and other products are obtained from the processing of crude and other
hydrocarbon compounds.
The prices of crude are highly volatile. High oil prices lead to inflation that in turn
increases input costs; reduces non-oil demand and lower investment in net oil
importing countries.
Categories of Crude oil
West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is
39.6 degrees (making it a "light" crude oil), and it contains only about 0.24 percent
of sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4
per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to
Brent, although on a daily basis the pricing relationships between these can very
greatly.
Brent Crude Oil stands as a benchmark for Europe.
India is very much reliant on oil from the Middle East (High Sulphur). The OPEC
has identified China & India as their main buyers of oil in Asia for several years to
come.

48

Crude Oil Units (average gravity)

1 US barrel = 42 US gallons.
1 US barrel = 158.98 litres.
1 tonne = 7.33 barrels .
1 short ton = 6.65 barrels .
Note: barrels per tonne vary from origin to origin.
Global Scenario
Oil accounts for 40 per cent of the world's total energy demand.
The world consumes about 76 million bbl/day of oil.
United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan
(5.4 million bbl/d) are the top oil consuming countries.
Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002),
of which OPEC was 112 billion tones.
OPEC fact sheet
OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of
eleven developing countries that are heavily dependent on oil revenues as their main source
of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
OPEC controls almost 40 percent of the world's crude oil.
It accounts for about 75 per cent of the world's proven oil reserves.
Its exports represent 55 per cent of the oil traded internationally.

49

Indian Scenario
India ranks among the top 10 largest oil-consuming countries.
Oil accounts for about 30 per cent of India's total energy consumption. The
country's total oil consumption is about 2.2 million barrels per day. India imports
about 70 per cent of its total oil consumption and it makes no exports.
India faces a large supply deficit, as domestic oil production is unlikely to keep
pace with demand. India's rough production was only 0.8 million barrels per day.
The oil reserves of the country (about 5.4 billion barrels) are located primarily in
Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins.
Balance recoverable reserve was about 733 million tones (in 2003) of which
offshore was 394 million tones and on shore was 339 million tones.
India had a total of 2.1 million barrels per day in refining capacity.
Government has permitted foreign participation in oil exploration, an activity
restricted earlier to state owned entities.
Indian government in 2002 officially ended the Administered Pricing Mechanism
(APM). Now crude price is having a high correlation with the international market
price. As on date, even the prices of crude bi-products are allowed to vary +/- 10%
keeping in line with international crude price, subject to certain government laid
down norms/ formulae.
Disinvestment/restructuring of public sector units and complete deregulation of
Indian retail petroleum products sector is under way.
Prevailing Duties & Levies on Crude Oil
Rates
Particulars
Basic Customs Duty
Cess
NCCD*
Education cess
Octroi

10%
Rs.1800 per metric tonne
Rs.50 per metric tonne
2%
3%

50

Market Influencing Factors

OPEC output and supply .
Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that
causes supply disruptions.
Global demand particularly from emerging nations.
Dollar fluctuations.
DOE / API imports and stocks.
Refinery fires & funds buying.
Exchanges dealing in crude futures
The New York Mercantile Exchange (NYMEX) .
The International Petroleum Exchange of London (IPE).
The Tokyo Commodity Exchange (TOCOM).
ENERGY: CASTOR OIL
General Characteristics:
Castor oil is used as a raw material in the manufacture of a number of chemicals used in the
manufacture of surfactants, specialty soaps, surface coatings, cosmetics and personal care
products, pharmaceuticals, perfumes, plasticisers, greases and lubricants, and specialty
rubber etc.

51

Indian Scenario
India is the world leader in castor seed and oil production and dominates the
international castor oil trade.
The Indian variety of castor has 48 % oil content of which 42% can be extracted,
while the cake retains the rest.
India's castor oil production fluctuates between 2.5-3.5 lakh tons a year. In 200304, India's estimated castor oil production was 2.8 lakh tons.
Gujarat accounts for 86% of India's castor seed production followed by Andhra
Pradesh and Rajasthan. Castor is mainly grown in Mehsana, Banaskantha and
Saurashtra/Kutch regions of Gujarat and Nalgonda and Mahboobnagar districts of
Andhra Pradesh.
Castor is a Kharif crop. The sowing season of castor is from July to October and
the harvesting season is from October to April.
The annual domestic consumption of castor oil in India is only about 80,0001,00,000 tons. Of this, the soap industry consumes about 25,000 tons, the paint and
allied industries 35,000 tons and the lubricant and derivatives industry 20,000 tons.
India annually exports around 2.0 - 2.4 lakh tons of commercial castor oil. From
India castor oil is exported in two forms - First Special Grade and Castor Oil
Commercial through mainly Kandla port. There is a large scope for improving
India's earning from castor by converting the castor oil to various derivatives.
A considerable quantity of the castor oil is also used in adulteration of edible oils
like groundnut oil due to price differential.
Major Trading Centers
The major castor oil markets in Gujarat are Rajkot, Ahmedabad, Gondal, Gadwal, Bhabar,
and in Andhra Pradesh are Jedcherla and Yemignoor.

52

World Scenario
India is the leading producer of castor oil in the world, followed by China and Brazil with
0.8 and 0.4 lakh tons respectively. The present annual world trade in castor oil is estimated
at about 2.0 - 2.50 lakh tons. The major importers of castor oil in the world market are
European Union, US and Japan. The world demand for castor oil is estimated to be
growing at the rate of about 3 to 5 % per annum. Both Brazil and China have experienced a
steady increase in their domestic castor oil consumption in the recent years and thus utilize
almost their entire production. India consumes only a quarter of its castor oil production
and exports the rest.
Market Influencing Factors
Variations in castor seed domestic acreage based on yield and price realization.
Crop development based on monsoon progress in key growing regions.
Chinese and Brazilian crop size .
Comparative price with other vegetable oils in the domestic market.
Upcountry demand of castor oil from the major cities, Export demand of castor
oil from US, Europe and Japan .
The castor seed price tends to firm up during the planting period and eases
down during the harvesting period. Prices tend to show inter-seasonal variation
of almost Rs 200 - Rs 350 per quintal.
Castor seed growers and crushers hoard the commodity before selling in
expectation of better prices. Castor oil too can be kept in containers without
spoilage for long period.

53

CHAPTER 4
Analysis and Interpretation of Data
Table 4 .1
Calculation of Beta and Volatility of Gold futures

Date

GOLD
open
(Rs)

GOLD
Close
(Rs)

RETURN
ON GOLD
% (Y)

INDX
METAL
open

INDX
METAL
close

RETURN
ON INDX
METAL (X)

X*Y

X*X

1/3/2007

9648

9563

-0.8810

2724.98

2687.47

-1.3765

1.2127

1.8948

2/3/2007

9540

9288

-2.6415

2689.88

2599.96

-3.3429

8.8303

11.1750

3/3/2007

9298

9334

0.3872

2596.64

2612.61

0.6150

0.2381

0.3783

5/3/2007

9328

9290

-0.4074

2608.78

2586.59

-0.8506

0.3465

0.7235

6/3/2007

9401

9383

-0.1915

2587.16

2615.51

1.0958

-0.2098

1.2008

7/3/2007

9351

9400

0.5240

2617.63

2643.16

0.9753

0.5111

0.9512

8/3/2007

9411

9435

0.2550

2645.84

2657.42

0.4377

0.1116

0.1916

9/3/2007

9430

9392

-0.4030

2656.84

2630.41

-0.9948

0.4009

0.9896

10/3/2007

9401

9383

-0.1915

2630.8

2630.74

-0.0023

0.0004

0.0000

12/3/2007

9386

9372

-0.1492

2632.02

2648.87

0.6402

-0.0955

0.4098

13-03-2007

9388

9327

-0.6498

2650.02

2629.42

-0.7774

0.5051

0.6043

14-03-2007

9307

9251

-0.6017

2623.19

2621.04

-0.0820

0.0493

0.0067

15-03-2007

9272

9315

0.4638

2627.26

2670.68

1.6527

0.7664

2.7313

16-03-2007

9318

9379

0.6546

2670.84

2685.93

0.5650

0.3699

0.3192

17-03-2007

9387

9384

-0.0320

2686

2685.93

-0.0026

0.0001

0.0000

19-03-2007

9393

9385

-0.0852

2688.18

2687.26

-0.0342

0.0029

0.0012

20-03-2007

9397

9391

-0.0639

2688.3

2680.96

-0.2730

0.0174

0.0745

21-03-2007

9399

9381

-0.1915

2679.69

2667.53

-0.4538

0.0869

0.2059

22-03-2007

9390

9440

0.5325

2678.59

2696.93

0.6847

0.3646

0.4688

23-03-2007

9437

9341

-1.0173

2700.78

2671.93

-1.0682

1.0867

1.1411

24-03-2007

9333

9339

0.0643

2676.6

2677.17

0.0213

0.0014

0.0005

26-03-2007

9350

9359

0.0963

2683.53

2697.26

0.5116

0.0492

0.2618

27-03-2007

9355

9332

-0.2459

2681.42

2654.84

-0.9913

0.2437

0.9826

28-03-2007

9336

9352

0.1714

2678.86

2687.1

0.3076

0.0527

0.0946

29-03-2007

9364

9361

-0.0320

2691.71

2700.83

0.3388

-0.0109

0.1148

30-03-2007

9375

9339

-0.3840

2702.33

2704.74

0.0892

-0.0342

0.0080

-2.3146

11.6174

5.3576

TOTAL

-5.0191

n = 26

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

54

Beta = n * xy - (x) (y)

n * x 2-(x) 2
Beta = 26 * 11.617364 (- 2.314649861 * - 5.019058869)
26 * 5.357604 (- 2.314649861)2

Beta = 302.051 (11.617)

139.297 (5.357)
Beta = 290.434
133.94
Beta = 2.16
Volatility = Standard Deviation of Return on Gold
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 0.656
One Percent change in INDX Metal return causes 2% change in the Commodity return.
When there is a decline of 10 % in the index return, the Commodity with a beta of 2 would
give a negative return of 20%.
The table 4.1 shows that the beta value of Gold more than 1.It indicates that the Gold
futures were more risky in the month of March 2007 and the volatility is low.

55

Graph 4.1(a)

56

Table 4.2
Calculation of Beta and Volatility of Silver futures

Date

Silver
open
(Rs)

Silver
Close
(Rs)

RETURN
ON Silver
% (Y)

INDX
METAL
open

INDX
METAL
close

RETURN
ON INDX
METAL (X)

X*Y

X*X

1/3/2007

20480

19749

-3.5693

2724.98

2687.47

-1.3765

4.9133

1.8948

2/3/2007

19926

18609

-6.6095

2689.88

2599.96

-3.3429

22.0947

11.1750

3/3/2007

18700

18842

0.7594

2596.64

2612.61

0.6150

0.4670

0.3783

5/3/2007

19000

19734

3.8632

2608.78

2586.59

-0.8506

-3.2860

0.7235

6/3/2007

19176

19540

1.8982

2587.16

2615.51

1.0958

2.0800

1.2008

7/3/2007

19440

19516

0.3909

2617.63

2643.16

0.9753

0.3813

0.9512

8/3/2007

19550

19515

-0.1790

2645.84

2657.42

0.4377

-0.0784

0.1916

9/3/2007

19501

19308

-0.9897

2656.84

2630.41

-0.9948

0.9845

0.9896

10/3/2007

19319

19333

0.0725

2630.8

2630.74

-0.0023

-0.0002

0.0000

12/3/2007

19350

19452

0.5271

2632.02

2648.87

0.6402

0.3375

0.4098

13-03-2007

19450

19266

-0.9460

2650.02

2629.42

-0.7774

0.7354

0.6043

14-03-2007

19225

19120

-0.5462

2623.19

2621.04

-0.0820

0.0448

0.0067

15-03-2007

19151

19407

1.3367

2627.26

2670.68

1.6527

2.2092

2.7313

16-03-2007

19441

19520

0.4064

2670.84

2685.93

0.5650

0.2296

0.3192

17-03-2007

19522

19517

-0.0256

2686

2685.93

-0.0026

0.0001

0.0000

19-03-2007

19544

19552

0.0409

2688.18

2687.26

-0.0342

-0.0014

0.0012

20-03-2007

19564

19633

0.3527

2688.3

2680.96

-0.2730

-0.0963

0.0745

21-03-2007

19640

19571

-0.3513

2679.69

2667.53

-0.4538

0.1594

0.2059

22-03-2007

19590

19772

0.9290

2678.59

2696.93

0.6847

0.6361

0.4688

23-03-2007

19750

19510

-1.2152

2700.78

2671.93

-1.0682

1.2981

1.1411

24-03-2007

19511

19518

0.0359

2676.6

2677.17

0.0213

0.0008

0.0005

26-03-2007

19540

19636

0.4913

2683.53

2697.26

0.5116

0.2514

0.2618

27-03-2007

19650

19499

-0.7684

2681.42

2654.84

-0.9913

0.7617

0.9826

28-03-2007

19513

19616

0.5279

2678.86

2687.1

0.3076

0.1624

0.0946

29-03-2007

19605

19595

-0.0510

2691.71

2700.83

0.3388

-0.0173

0.1148

30-03-2007

19605

19622

0.0867

2702.33

2704.74

TOTAL

-3.5325

0.0892

0.0077

0.0080

-2.3146

34.2755

24.9298

N = 26

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

Beta = n * xy - (x) (y)

57

n * x 2-(x) 2

Beta = 26 * 34.27551648 - (- 2.3146499 * - 3.5324914)

26 * 24.929823 (-2.3146499)2
Beta = 891.1634285 (8.17648)
648.175 5.3576
Beta = 882.987
642.817

Beta = 1.37

Volatility = Standard Deviation of Return on Silver

(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.826
The table 4.2 shows that the beta value of Silver is more than 1. It indicates that the Silver
futures were more risky in the month of March 2007 and the volatility is also high.

58

Graph 4.2(a)

59

Table 4.3
Calculation of Beta and Volatility of Aluminum futures

RETURN
ON
Aluminum
% (Y)

INDX
METAL
open

INDX
METAL
close

RETURN
ON INDX
METAL
(X)

Date

Aluminum
open (Rs)

Aluminum
Close (Rs)

1/3/2007

125.2

124.7

-0.3994

2724.98

2687.47

-1.3765

0.5497

1.8948

2/3/2007

124.65

122.35

-1.8452

2689.88

2599.96

-3.3429

6.1682

11.1750

3/3/2007

122

122.35

0.2869

2596.64

2612.61

0.6150

0.1764

0.3783

5/3/2007

121.8

120.45

-1.1084

2608.78

2586.59

-0.8506

0.9428

0.7235

6/3/2007

120.85

120.25

-0.4965

2587.16

2615.51

1.0958

-0.5440

1.2008

7/3/2007

120.85

121.45

0.4965

2617.63

2643.16

0.9753

0.4842

0.9512

8/3/2007

121.85

121.9

0.0410

2645.84

2657.42

0.4377

0.0180

0.1916

9/3/2007

121.55

120.45

-0.9050

2656.84

2630.41

-0.9948

0.9003

0.9896

10/3/2007

120.45

120.65

0.1660

2630.8

2630.74

-0.0023

-0.0004

0.0000

X*Y

X*X

12/3/2007

120.5

122.2

1.4108

2632.02

2648.87

0.6402

0.9032

0.4098

13-03-2007

121.95

121

-0.7790

2650.02

2629.42

-0.7774

0.6056

0.6043

14-03-2007

120.7

121.75

0.8699

2623.19

2621.04

-0.0820

-0.0713

0.0067

15-03-2007

121.8

123.55

1.4368

2627.26

2670.68

1.6527

2.3745

2.7313

16-03-2007

123.8

124.45

0.5250

2670.84

2685.93

0.5650

0.2966

0.3192

17-03-2007

124.3

124.4

0.0805

2686

2685.93

-0.0026

-0.0002

0.0000

19-03-2007

124.2

125

0.6441

2688.18

2687.26

-0.0342

-0.0220

0.0012

20-03-2007

124.75

123.45

-1.0421

2688.3

2680.96

-0.2730

0.2845

0.0745

21-03-2007

123.15

121.25

-1.5428

2679.69

2667.53

-0.4538

0.7001

0.2059

22-03-2007

121.75

122.35

0.4928

2678.59

2696.93

0.6847

0.3374

0.4688

23-03-2007

122

121.45

-0.4508

2700.78

2671.93

-1.0682

0.4816

1.1411

24-03-2007

121.95

121.25

-0.5740

2676.6

2677.17

0.0213

-0.0122

0.0005

26-03-2007

121.75

119.15

-2.1355

2683.53

2697.26

0.5116

-1.0926

0.2618

27-03-2007

119.7

118.35

-1.1278

2681.42

2654.84

-0.9913

1.1180

0.9826

28-03-2007

118.1

117.9

-0.1693

2678.86

2687.1

0.3076

-0.0521

0.0946

29-03-2007

117.3

121.25

3.3674

2691.71

2700.83

0.3388

1.1409

0.1148

30-03-2007

121.7

121.7

0.0000

2702.33

2704.74

0.0892

0.0000

0.0080

15.6871

24.9298

TOTAL

-2.7580

-2.3146

n = 26

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

60

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 26 *15.687149 (-2.3146499 * - 2.7580026)

26 * 24.929823 - (- 2.3146499)2

Beta = 401.482
642.81
Beta = 0.624

Volatility = Standard Deviation of Return on Aluminium

(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.157
The table 4.4 shows that the beta value of Aluminium is less than 1. It indicates that the
Aluminum futures were less risky in the month of March 2007 and the volatility is high.

61

Graph 4.3(a)

62

Table 4.4
Calculation of Beta and Volatility of Copper futures

Date

Copper
open
(Rs)

Copper
close
(Rs)

RETURN
ON
Copper (y)

INDX
METAL
open

INDX
METAL
close

RETURN
ON INDX
METAL (X)

xy

x*x

1/3/2007
2/3/2007

272.9
273

272.3
268.45

-0.2199
-1.6667

2724.98
2689.88

2687.47
2599.96

-1.3765
-3.3429

0.3026
5.5715

1.8948
11.1750

3/3/2007
5/3/2007

268.75
268.7

268.8
265.45

0.0186
-1.2095

2596.64
2608.78

2612.61
2586.59

0.6150
-0.8506

0.0114
1.0288

0.3783
0.7235

6/3/2007
7/3/2007

266.9
270.2

269.75
276

1.0678
2.1466

2587.16
2617.63

2615.51
2643.16

1.0958
0.9753

1.1701
2.0936

1.2008
0.9512

8/3/2007
9/3/2007

276.4
279.8

280.25
275.3

1.3929
-1.6083

2645.84
2656.84

2657.42
2630.41

0.4377
-0.9948

0.6096
1.5999

0.1916
0.9896

275
276

275.55
280.85

0.2000
1.7572

2630.8
2632.02

2630.74
2648.87

-0.0023
0.6402

-0.0005
1.1250

0.0000
0.4098

13-03-2007
14-03-2007

281.5
278

278.45
279.75

-1.0835
0.6295

2650.02
2623.19

2629.42
2621.04

-0.7774
-0.0820

0.8422
-0.0516

0.6043
0.0067

15-03-2007
16-03-2007

280.7
291.6

291.4
294.25

3.8119
0.9088

2627.26
2670.84

2670.68
2685.93

1.6527
0.5650

6.2998
0.5135

2.7313
0.3192

17-03-2007
19-03-2007

294.55
294

294.2
295.35

-0.1188
0.4592

2686
2688.18

2685.93
2687.26

-0.0026
-0.0342

0.0003
-0.0157

0.0000
0.0012

20-03-2007
21-03-2007

295.8
294.1

294.55
293.3

-0.4226
-0.2720

2688.3
2679.69

2680.96
2667.53

-0.2730
-0.4538

0.1154
0.1234

0.0745
0.2059

22-03-2007
23-03-2007

293.5
298

298
298.55

1.5332
0.1846

2678.59
2700.78

2696.93
2671.93

0.6847
-1.0682

1.0498
-0.1972

0.4688
1.1411

24-03-2007
26-03-2007

298.35
299.25

298.85
302.95

0.1676
1.2364

2676.6
2683.53

2677.17
2697.26

0.0213
0.5116

0.0036
0.6326

0.0005
0.2618

27-03-2007
28-03-2007

303.5
295

295.05
296.1

-2.7842
0.3729

2681.42
2678.86

2654.84
2687.1

-0.9913
0.3076

2.7599
0.1147

0.9826
0.0946

29-03-2007
30-03-2007

295.9
299.8

299.45
302.7

1.1997
0.9673

2691.71
2702.33

2700.83
2704.74

0.3388
0.0892

0.4065
0.0863

0.1148
0.0080

-2.3146

26.1956

24.9298

10/3/2007
12/3/2007

TOTAL
N=26

8.6688

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

63

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 26 * 26.195583 (-2.314649859 * 8.668773775)

26 * 24.92982302 - (- 2.314649859)2
Beta = 681.085 (-20.065176)
648.175 5.3576

Beta = 701.15
642.817794
Beta = 1.09

Volatility = Standard Deviation of Return on Copper

(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.363

The table 4.5 shows that the beta value of Copper is more than 1. It indicates that the
Copper futures were more risky in the month of March 2007 and the volatility is also high.

64

Graph 4.4(a)

65

Table 4.5
Calculation of Beta and Volatility of Crude Oil futures
Crude Oil
open (Rs)

Crude Oil
Close (Rs)

1/3/2007

2700

2721

0.7778

2227.46

2213.09

-0.6451

-0.5018

0.4162

2/3/2007

2725

2728

0.1101

2219.03

2180.33

-1.7440

-0.1920

3.0416

3/3/2007

2722

2723

0.0367

2181.2

2178.17

-0.1389

-0.0051

0.0193

5/3/2007

2718

2675

-1.5820

2180.09

2155.62

-1.1224

1.7757

1.2599

6/3/2007

2680

2691

0.4104

2165.15

2165.15

0.0000

0.0000

0.0000

7/3/2007

2695

2738

1.5955

2182.26

2181.78

-0.0220

-0.0351

0.0005

8/3/2007

2745

2734

-0.4007

2206.22

2202.43

-0.1718

0.0688

0.0295

9/3/2007

2733

2697

-1.3172

2209.03

2187.75

-0.9633

1.2689

0.9280

10/3/2007

2691

2668

-0.8547

2176.18

2170.4

-0.2656

0.2270

0.0705

Date

INDX
Energy
open

INDX
Energy
close

RETURN
ON INDX
Energy
(X)

RETURN
ON Crude
Oil % (Y)

X*Y

X*X

12/3/2007

2666

2621

-1.6879

2181.19

2165.28

-0.7294

1.2312

0.5321

13-03-2007

2629

2618

-0.4184

2178.7

2172.56

-0.2818

0.1179

0.0794

14-03-2007

2602

2569

-1.2683

2174

2150.01

-1.1035

1.3995

1.2177

15-03-2007

2573

2567

-0.2332

2162.21

2162.21

0.0000

0.0000

0.0000

16-03-2007

2655

2653

-0.0753

2171.87

2170.39

-0.0681

0.0051

0.0046

17-03-2007

2636

2646

0.3794

2177.99

2177.85

-0.0064

-0.0024

0.0000

19-03-2007

2647

2645

-0.0756

2181.98

2164.97

-0.7796

0.0589

0.6077

20-03-2007

2646

2614

-1.2094

2175.21

2163.22

-0.5512

0.6666

0.3038

21-03-2007

2619

2612

-0.2673

2163.67

2155.1

-0.3961

0.1059

0.1569

22-03-2007

2617

2674

2.1781

2166.94

2166.94

0.0000

0.0000

0.0000

23-03-2007

2682

2710

1.0440

2199.35

2196.14

-0.1460

-0.1524

0.0213

24-03-2007

2712

2716

0.1475

2206.3

2205.46

-0.0381

-0.0056

0.0014

26-03-2007

2720

2723

0.1103

2215.49

2215.27

-0.0099

-0.0011

0.0001

27-03-2007

303.5

295.05

-2.7842

2199.09

2186.92

-0.5534

1.5408

0.3063

28-03-2007

2727

2764

1.3568

2224.28

2224.28

0.0000

0.0000

0.0000

29-03-2007

2764

2871

3.8712

2251.18

2247.45

-0.1657

-0.6414

0.0275

30-03-2007

2879

2860

-0.6600

2276.67

2272.7

-0.1744

0.1151

0.0304

-10.0768

7.0446

9.0547

TOTAL

-0.8163

n = 26

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

66

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 26 * 22.06463459 (4.648941883 * - 0.816341125)

26 * 19.67905569 (4.648941883)2

Beta = 573.68 (- 3.7951)

511.654 21.61266

Beta = 577.475
490.04

Beta = 1.17
Volatility = Standard Deviation of Return on Crude Oil
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.352

The table 4.6 shows that the beta value of Crude Oil is more than 1. It indicates that the
Crude Oil futures were more risky in the month of March 2007 and the volatility is also
high.

67

Graph 4.5(a)

68

Table 4.6
Calculation of Beta and Volatility of Barely futures
RETURN
ON
Barely(y)

INDEX
AGRI
open

INDEX
AGRI
close

RETURN
ON INDEX
AGRI(x)

739.6

-1.3867

1520.18

1518.37

-0.1191

0.1651

0.0142

735

730.4

-0.6259

1511.85

1508.17

-0.2434

0.1523

0.0592

3-Mar-07

728.2

721.6

-0.9063

1505.01

1505.1

0.0060

-0.0054

0.0000

5-Mar-07

723.8

723

-0.1105

1508.06

1507.36

-0.0464

0.0051

0.0022

6-Mar-07

720.2

714.4

-0.8053

1511.32

1509.31

-0.1330

0.1071

0.0177

7-Mar-07

712

707.8

-0.5899

1512.07

1511.33

-0.0489

0.0289

0.0024

8-Mar-07

705

712.4

1.0496

1508

1509.64

0.1088

0.1142

0.0118

9-Mar-07

710.2

729.6

2.7316

1508.8

1512.48

0.2439

0.6662

0.0595

10-Mar-07

730

724.4

-0.7671

1515.55

1515.81

0.0172

-0.0132

0.0003

12-Mar-07

729

731.2

0.3018

1520.15

1518.06

-0.1375

-0.0415

0.0189

13-Mar-07

733.4

755

2.9452

1520.61

1519.37

-0.0815

-0.2402

0.0066

14-Mar-07

750

736.4

-1.8133

1520.17

1519.92

-0.0164

0.0298

0.0003

15-Mar-07

736

751.6

2.1196

1519.38

1522.65

0.2152

0.4562

0.0463

16-Mar-07

748

763.4

2.0588

1530.26

1532.96

0.1764

0.3633

0.0311

17-Mar-07

764

764.6

0.0785

1532.68

1532.98

0.0196

0.0015

0.0004

19-Mar-07

755.2

758

0.3708

1529.74

1529.95

0.0137

0.0051

0.0002

20-Mar-07

752.6

761

1.1161

1529.8

1529.72

-0.0052

-0.0058

0.0000

21-Mar-07

763

759.6

-0.4456

1535.45

1533.2

-0.1465

0.0653

0.0215

22-Mar-07

761.8

772.6

1.4177

1536.15

1544.35

0.5338

0.7568

0.2849

23-Mar-07

774.8

796.4

2.7878

1541.67

1543.63

0.1271

0.3544

0.0162

24-Mar-07

787

792

0.6353

1542.36

1542.36

0.0000

0.0000

0.0000

26-Mar-07

783.2

793.8

1.3534

1545.18

1549.08

0.2524

0.3416

0.0637

27-Mar-07

804

819.6

1.9403

1552.74

1553.97

0.0792

0.1537

0.0063

28-Mar-07

824

833.2

1.1165

1560.09

1566.66

0.4211

0.4702

0.1774

29-Mar-07

835

847

1.4371

1579.43

1577.73

-0.1076

-0.1547

0.0116

30-Mar-07

850.2

844.2

-0.7057

1578.45

1578.75

0.0190

-0.0134

0.0004

31-Mar-07

836.2

830.6

-0.6697

1578

1577.35

-0.0412

0.0276

0.0017

3.7902

0.8547

Barely
Open(Rs)

Barely
Close(Rs)

1-Mar-07

750

2-Mar-07

Date

TOTAL

14.6342

1.1065

xy

N=27

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

69

X*x

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 27 * 3.776058 (1.128725073* - 16.009568)

27 * 0.852677 (1.128725073)2

Beta = 86.14297
21.8534

Beta = 3.94
Volatility = Standard Deviation of Return on Barely
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.352
The table 4.6 shows that the beta value of Barely is more than 1. It indicates that the Barely
futures were more risky in the month of March 2007 and the volatility is also high.

70

Table 4.7
Calculation of Beta and Volatility of Chilli futures

RETURN
ON
Chilli(y)

INDEX
AGRI
open

INDEX
AGRI
close

RETURN
ON
INDEX
AGRI(x)

Chilli
close (Rs)

Chilli
close (Rs)

1-Mar-07

4161

4246

2.0428

1520.18

1518.37

-0.1191

-0.2432

0.0142

2-Mar-07

4255

4171

-1.9741

1511.85

1508.17

-0.2434

0.4805

0.0592

3-Mar-07

4145

4248

2.4849

1505.01

1505.1

0.0060

0.0149

0.0000

5-Mar-07

4269

4404

3.1623

1508.06

1507.36

-0.0464

-0.1468

0.0022

6-Mar-07

4450

4550

2.2472

1511.32

1509.31

-0.1330

-0.2989

0.0177

7-Mar-07

4580

4457

-2.6856

1512.07

1511.33

-0.0489

0.1314

0.0024

8-Mar-07

4413

4206

-4.6907

1508

1509.64

0.1088

-0.5101

0.0118

9-Mar-07

4198

4416

5.1929

1508.8

1512.48

0.2439

1.2666

0.0595

10-Mar-07

4381

4355

-0.5935

1515.55

1515.81

0.0172

-0.0102

0.0003

12-Mar-07

4345

4593

5.7077

1520.15

1518.06

-0.1375

-0.7847

0.0189

13-Mar-07

4550

4554

0.0879

1520.61

1519.37

-0.0815

-0.0072

0.0066

14-Mar-07

4505

4449

-1.2431

1520.17

1519.92

-0.0164

0.0204

0.0003

15-Mar-07

4430

4481

1.1512

1519.38

1522.65

0.2152

0.2478

0.0463

16-Mar-07

4460

4430

-0.6726

1530.26

1532.96

0.1764

-0.1187

0.0311

17-Mar-07

4460

4468

0.1794

1532.68

1532.98

0.0196

0.0035

0.0004

19-Mar-07

4480

4549

1.5402

1529.74

1529.95

0.0137

0.0211

0.0002

20-Mar-07

4550

4548

-0.0440

1529.8

1529.72

-0.0052

0.0002

0.0000

21-Mar-07

4568

4793

4.9256

1535.45

1533.2

-0.1465

-0.7218

0.0215

22-Mar-07

4780

4968

3.9331

1536.15

1544.35

0.5338

2.0995

0.2849

23-Mar-07

4974

5004

0.6031

1541.67

1543.63

0.1271

0.0767

0.0162

24-Mar-07

5024

4948

-1.5127

1542.36

1542.36

0.0000

0.0000

0.0000

26-Mar-07

4997

5228

4.6228

1545.18

1549.08

0.2524

1.1668

0.0637

27-Mar-07

5275

5375

1.8957

1552.74

1553.97

0.0792

0.1502

0.0063

28-Mar-07

5424

5427

0.0553

1560.09

1566.66

0.4211

0.0233

0.1774

29-Mar-07

5444

5334

-2.0206

1579.43

1577.73

-0.1076

0.2175

0.0116

30-Mar-07

5340

5475

2.5281

1578.45

1578.75

0.0190

0.0480

0.0004

31-Mar-07

5495

5453

1578

1577.35

-0.0412

0.0315

0.0017

1.1065

3.1583

0.8547

Date

TOTAL

-0.7643
26.1591

xy

N=27

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

71

X*x

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 27 * 3.158348 (1.10654* - 26.15905)

27 * 0.854734 (1.10654)2

Beta = 56.32937
21.8534

Beta = 2.57
Volatility = Standard Deviation of Return on Chilli
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 2.610
The table 4.7 shows that the beta value of Chilli is more than 1. It indicates that the Chilli
futures were more risky in the month of March 2007 and the volatility is also high.

72

Graph 4.7(a)

73

Table 4.8
Calculation of Beta and Volatility of Potato futures
Potato
Open(Rs)

Potato
Close(Rs)

1-Mar-07

634.8

2-Mar-07

655

3-Mar-07

RETURN
ON
INDEX
AGRI(x)

RETUIRN
ON
Potato(y)

INDEX
AGRI
open

INDEX
AGRI
open

663.8

4.5684

1520.18

1518.37

-0.1191

-0.5439

0.0142

638.1

-2.5802

1511.85

1508.17

-0.2434

0.6280

0.0592

633.1

628.8

-0.6792

1505.01

1505.1

0.0060

-0.0041

0.0000

5-Mar-07

621

638.6

2.8341

1508.06

1507.36

-0.0464

-0.1316

0.0022

6-Mar-07

638.1

638.6

0.0784

1511.32

1509.31

-0.1330

-0.0104

0.0177

7-Mar-07

639

639.6

0.0939

1512.07

1511.33

-0.0489

-0.0046

0.0024

8-Mar-07

640

662.5

3.5156

1508

1509.64

0.1088

0.3823

0.0118

9-Mar-07

674

675

0.1484

1508.8

1512.48

0.2439

0.0362

0.0595

10-Mar-07

670.5

678.6

1.2081

1515.55

1515.81

0.0172

0.0207

0.0003

12-Mar-07

680

683.4

0.5000

1520.15

1518.06

-0.1375

-0.0687

0.0189

13-Mar-07

689

686.4

-0.3774

1520.61

1519.37

-0.0815

0.0308

0.0066

14-Mar-07

686

656.4

-4.3149

1520.17

1519.92

-0.0164

0.0710

0.0003

15-Mar-07

652

650.2

-0.2761

1519.38

1522.65

0.2152

-0.0594

0.0463

16-Mar-07

650

653.7

0.5692

1530.26

1532.96

0.1764

0.1004

0.0311

17-Mar-07

650.2

656.6

0.9843

1532.68

1532.98

0.0196

0.0193

0.0004

19-Mar-07

652.7

651.2

-0.2298

1529.74

1529.95

0.0137

-0.0032

0.0002

20-Mar-07

654

642.9

-1.6972

1529.8

1529.72

-0.0052

0.0089

0.0000

21-Mar-07

641

639.8

-0.1872

1535.45

1533.2

-0.1465

0.0274

0.0215

22-Mar-07

636.3

612

-3.8190

1536.15

1544.35

0.5338

-2.0386

0.2849

23-Mar-07

603.6

613.7

1.6733

1541.67

1543.63

0.1271

0.2127

0.0162

24-Mar-07

610

603.8

-1.0164

1542.36

1542.36

0.0000

0.0000

0.0000

26-Mar-07

596.5

608.2

1.9614

1545.18

1549.08

0.2524

0.4951

0.0637

27-Mar-07

603.4

605.2

0.2983

1552.74

1553.97

0.0792

0.0236

0.0063

28-Mar-07

597.2

605.8

1.4401

1560.09

1566.66

0.4211

0.6064

0.1774

29-Mar-07

603

607.6

0.7629

1579.43

1577.73

-0.1076

-0.0821

0.0116

30-Mar-07

610

602.1

-1.2951

1578.45

1578.75

0.0190

-0.0246

0.0004

31-Mar-07

602.9

595.9

-1.1611

1578

1577.35

-0.0412

0.0478

0.0017

1.1065

-0.2604

0.8547

Date

TOTAL

3.0029

xy

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

74

x*x

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 27 * -0.26044 (1.10654* - 3.002897)

27 * 0.854734 (1.10654)2

Beta = -10.3546
21.8534

Beta = -0.47
Volatility = Standard Deviation of Return on Potato
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.97
The table 4.8 shows that the beta value of Potato is less than 1. It indicates that the Potato
futures were less risky in the month of March 2007 and the volatility is high.

75

Graph 4.8(a)

76

Table 4.9
Calculation of Beta and Volatility of Soya bean futures
Soya
bean
Open(Rs)

Soya
bean
Close(Rs)

RETURN
ON Soya
bean(y)

INDEX
AGRI
open

INDEX
AGRI
close

Return
on index
Agri(x)

1-Mar-07

1500

1501.35

0.0900

1520.18

1518.37

-0.1191

-0.0107

0.0142

2-Mar-07

1495.1

1491.55

-0.2374

1511.85

1508.17

-0.2434

0.0578

0.0592

3-Mar-07

1485

1492.2

0.4848

1505.01

1505.1

0.0060

0.0029

0.0000

5-Mar-07

1491

1483

-0.5366

1508.06

1507.36

-0.0464

0.0249

0.0022

6-Mar-07

1482

1485.95

0.2665

1511.32

1509.31

-0.1330

-0.0354

0.0177

7-Mar-07

1485.35

1486.65

0.0875

1512.07

1511.33

-0.0489

-0.0043

0.0024

8-Mar-07

1492

1492.55

0.0369

1508

1509.64

0.1088

0.0040

0.0118

9-Mar-07

1495.8

1497.9

0.1404

1508.8

1512.48

0.2439

0.0342

0.0595

10-Mar-07

1496

1510.1

0.9425

1515.55

1515.81

0.0172

0.0162

0.0003

12-Mar-07

1515

1515.2

0.0132

1520.15

1518.06

-0.1375

-0.0018

0.0189

13-Mar-07

1516

1533.6

1.1609

1520.61

1519.37

-0.0815

-0.0947

0.0066

14-Mar-07

1525.1

1523.4

-0.1115

1520.17

1519.92

-0.0164

0.0018

0.0003

15-Mar-07

1525

1540.25

1.0000

1519.38

1522.65

0.2152

0.2152

0.0463

16-Mar-07

1536.5

1543.25

0.4393

1530.26

1532.96

0.1764

0.0775

0.0311

17-Mar-07

1548.9

1546.3

-0.1679

1532.68

1532.98

0.0196

-0.0033

0.0004

19-Mar-07

1545

1554.35

0.6052

1529.74

1529.95

0.0137

0.0083

0.0002

20-Mar-07

1553.6

1559.35

0.3701

1529.8

1529.72

-0.0052

-0.0019

0.0000

21-Mar-07

1563.9

1569.95

0.3869

1535.45

1533.2

-0.1465

-0.0567

0.0215

22-Mar-07

1570

1578.4

0.5350

1536.15

1544.35

0.5338

0.2856

0.2849

23-Mar-07

1581.6

1594.65

0.8251

1541.67

1543.63

0.1271

0.1049

0.0162

24-Mar-07

1599

1597.25

-0.1094

1542.36

1542.36

0.0000

0.0000

0.0000

26-Mar-07

1599

1594.7

-0.2689

1545.18

1549.08

0.2524

-0.0679

0.0637

27-Mar-07

1589

1583.75

-0.3304

1552.74

1553.97

0.0792

-0.0262

0.0063

28-Mar-07

1585

1596.65

0.7350

1560.09

1566.66

0.4211

0.3095

0.1774

29-Mar-07

1599

1598.7

-0.0188

1579.43

1577.73

-0.1076

0.0020

0.0116

30-Mar-07

1602

1599

-0.1873

1578.45

1578.75

0.0190

-0.0036

0.0004

31-Mar-07

1597

1590.05

-0.4352

1578

1577.35

-0.0412

0.0179

0.0017

1.1065

0.8564

0.8547

Date

TOTAL

5.7161

x*y

Source: Secondary data taken from various sites (www.ncdex.com) (www.mcx.com)

77

x*x

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 27 * -0.85643 (1.10654* - 5.716133)

27 * 0.854734 (1.10654)2

Beta = 16.79847
21.8534

Beta = 0.76
Volatility = Standard Deviation of Return on Soya bean
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 0.46
The table 4.9 shows that the beta value of Soya bean is less than 1. It indicates that the
Soya bean futures were less risky in the month of March 2007 and the volatility is also low.

78

Graph 4.9(a)

79

Table 4.10
Calculation of Beta and Volatility of Natural gas futures

DATE

Natural
gas
Open(Rs)

Natural
gas
Close(Rs)

RETURN
ON
Natural
gas (X)

INDEX
Energy
open

INDEX
Energy
close

RETURN
ON INDEX
Energy
(X)

xy

x*x

1/3/2007

329.6

326.6

-0.9102

2222.06

2222.17

0.0050

-0.0045

0.0000

2/3/2007

329.8

329.2

-0.1819

2225.35

2228.97

0.1627

-0.0296

0.0265

3/3/2007

325

325.8

0.2462

2223.87

2221.05

-0.1268

-0.0312

0.0161

5/3/2007

326.4

329.5

0.9498

2210.22

2198.71

-0.5208

-0.4946

0.2712

6/3/2007

331.8

336.8

1.5069

2201.27

2218.25

0.7714

1.1624

0.5950

7/3/2007

340.9

334

-2.0241

2223.76

2246.47

1.0212

-2.0671

1.0429

8/3/2007

332.9

329.1

-1.1415

2252.85

2239.67

-0.5850

0.6678

0.3423

9/3/2007

328.9

326.2

-0.8209

2234.57

2213.96

-0.9223

0.7572

0.8507

10/3/2007

325.5

323.8

-0.5223

2173.71

2196.6

1.0530

-0.5500

1.1089

12/3/2007

322

315.3

-2.0807

2183.2

2157.34

-1.1845

2.4646

1.4030

13-03-2007

313.8

315.9

0.6692

2159.89

2163.91

0.1861

0.1246

0.0346

14-03-2007

313.3

319.9

2.1066

2142.9

2149.71

0.3178

0.6695

0.1010

15-03-2007

320.1

313.3

-2.1243

2154.18

2133.54

-0.9581

2.0354

0.9180

16-03-2007

313

314

0.3195

2121.43

2128.14

0.3163

0.1011

0.1000

17-03-2007

313.1

313.6

0.1597

2116.65

2123.12

0.3057

0.0488

0.0934

19-03-2007

312.8

309.6

-1.0230

2123.76

2116.9

-0.3230

0.3304

0.1043

20-03-2007

310.5

310.3

-0.0644

2117.54

2098.13

-0.9166

0.0590

0.8402

21-03-2007

311.2

315.5

1.3817

2101.32

2104.01

0.1280

0.1769

0.0164

22-03-2007

315.3

323.4

2.5690

2115.52

2154.51

1.8430

4.7348

3.3968

23-03-2007

324

323.9

-0.0309

2177.69

2188.11

0.4785

-0.0148

0.2290

24-03-2007

323

324.2

0.3715

2199.14

2201.23

0.0950

0.0353

0.0090

26-03-2007

323.5

319.9

-1.1128

2211.63

2214.55

0.1320

-0.1469

0.0174

27-03-2007

321

327.1

1.9003

2185.42

2188.38

0.1354

0.2574

0.0183

28-03-2007

329

332.6

1.0942

2244.23

2275.91

1.4116

1.5446

1.9927

29-03-2007

331.1

336.1

1.5101

2288.7

2343.85

2.4097

3.6389

5.8065

30-03-2007

334.1

334

-0.0299

2358.48

2344.64

-0.5868

0.0176

0.3444

4.6485

15.4876

21.6083

TOTAL

2.7178

N=26

80

Beta = n * xy - (x) (y)

n * x 2-(x) 2

Beta = 26 * 15.48756 (4.648474* - 2.71776)

26 * 21.60831 (4.648474)2

Beta = 390.0432
540.2077

Beta = 0.72
Volatility = Standard Deviation of Return on Natural gas
(Standard deviation based on Arithmetical Returns calculated as per Excel Formulae)
Volatility = 1.29
The table 4.10 shows that the beta value of Natural gas is less than 1. It indicates that the
Natural gas futures were less risky in the month of March 2007 and the volatility is high.

81

Graph 4.10(a)

82

Table 4.11
List of Beta value for 10 Commodity
Gold

Beta
2.16

Silver

1.37

Aluminum

0.624

Copper

1.09

Crude Oil

1.17

Barely

3.94

Chilly

2.57

Potato

0.47

Soya bean
Natural gas

0.46
0.72

Commodity

83

CHAPTER 5
FINDINGS
The beta value of Gold more than 1, it indicates that gold futures were more risky in
the month of March 2007 the price variation is low.
The beta value of Silver more than 1, it indicates that Silver futures were more risk
in the month of March 2007 the price variation is high and the return is
comparatively high.
The Beta value of Aluminum is less than 1, it is considered to be less risky, the price
variation is and return is comparatively low.
The beta value of Copper is more than 1, in. It indicates that the Copper futures
were more risky in the month of March 2007 and the volatility is also high.
The beta value of Crude Oil is more than 1. It indicates that the Crude Oil futures
were more risky in the month of March 2007 and the volatility is also high.
The beta value of Barely is more than 1. It indicates that the Barely futures were
more risky and the volatility is also high.
The beta value of chilli is more than 1. It indicates that the Chilli futures were
more risky and the volatility is also high.
The beta value is negative in case of potato it show that potato risk investment
and price variation is also high it is difficult to forecast the future price.
The beta value of Soya been is less than 1. It indicates that the Soya bean futures
were less risky and the volatility is also low.
The beta value natural gas is less than 1. It indicates that the Natural gas futures
were less risky and the volatility is high.
Prices of Agriculture commodities mostly follow a cyclical pattern, unlike stocks.
Therefore the prices are expected to fall at some point of time, and do not attract
investors.
There is no adequate infrastructure such as roads, railways, waterways or other
means of transport as well as cold storage facilities to haul commodities from one
part of the country to another at the least cost to benefit final consumer.
84

 The present restrictions on the movement of certain goods from one state to another,
affects the prices largely.
There are many types of risks involved commodity futures trading, the various risk
management techniques can be used to minimize the risk, and henceforth benefit
from the different price movements.

85

RECOMMENDATIONS

More commodities must be introduced for trading.

Better analysis tools should be used to make better predictions.
The clients must be advised not to make their opinion while trading, as a wrong
position can prove to be very risky.
Investor should carefully study the market and risk involved before investing.
Investor should understand commodity futures contract and obligations before
entering into those contracts.
Since commodity futures are a new concept, more awareness must be created by
marketing this investment instrument appropriately. The people who have already
invested in commodity futures, to recommend their friends and family to invest here
too, can create this awareness.

86

CONCLUSION
The commodity future is the part of derivatives. The commodity futures markets are
experiencing tremendous growth in the recent past. This can be emphasized by the fact
that the trading volume of most commodities is increasing.
Price of agriculture commodities mostly fallows a cyclical pattern, unlike stocks.
Therefore the prices sre expected to fall at some point of time, and do not attract
investors.
There are many types of risks involved in commodity futures trading but commodity
futures are less risky than equity futures but it is highly volatile. The various risk
management techniques can be used to minimize the risk, and henceforth from the
different price movements.
Commodity futures trading included the intermediary and trading participants likes
brokers who make use of the various technical analysis tools in order to make
predictions of the price movements they also take into consideration the fundamental
analysis. Thus with the help of the various analysis tools, efficient price predictions can
be made, where the investors in commodity futures can benefit from the price
movements.

87

BIBLIOGRAPHY
Author

Books

George Kilenman

A step by step guide to commodity- Futures

and Options

Jake Bernstein

How the futures markets work

Websites
www.mcx.com
www.ncdex.com
www.derivativesindia.com
www.rbi.org

88

Introduction Of Analysis
The Standard Deviation: The standard deviation measures the absolute dispersion (or
variability of distribution: the greater amount of dispersion of variability), the greater the
standard deviation, for the greater will be the magnitude of deviations of the values of
their mean. A small standard deviation means the high degree of uniformity of the
observation as well as homogeneity of a series: a large standard deviation means just the
opposite.

89