A PROJECT REPORT ON

__________________________________________________
AT
_____________________________________________
HYDERABAD
A PROJECT REPORT SUBMITTED TO

OSMANIA UNIVERSITY
HYDERABAD
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE AWARD OF THE DEGREE IN
BACHELORS OF BUSINESS ADMINISTRATION
SUBMITTED
BY
_________________________________
_______________________________
VILLA MARIE PG COLLEGE FOR WOMEN
SOMAJIGUDA- 82
2014-2016

DECLARATION
I the undersigned solemnly declare that the report of the
summer

training

work

entitled

study

on

_____________________________________________ is based on my work

carried out during the course of my study under the supervision of
________________________________

_____________________________________&
Mrs_______________________________,

Faculty,

Department

of

Management. Villa Marie Degree College

I assert that the statements made and conclusions drawn are an
outcome of the project work. I further declare that to the best of my
knowledge and believe the project report does not contain any part of
any work which has been submitted for the award of any other degree/
diploma/ certificate in this university or any other university.
_______________________
(Signature of the student)
DATE:
PLACE:

ACKNOWLEDGEMENT
I am extremely grateful to Principal Dr. Y. Philomena and the
Department of B.B.A for giving me the opportunity of learning through
this research project. It has been an excellent and rewarding
experience, and has immensely increased my knowledge.
I wish to express my sincere gratitude and appreciation to my project
guide and mentor, Ms.____________________, Head of Department,
Department of Business Administration, for her support, guidance and
encouragement.
I would also like to extend special thanks to my family and friends who
have been a constant source of support and encouragement. Without
them, this project would not have been materialized.

_______________________
(Signature of the student)
DATE:
PLACE:

ABSTRACT

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 Aug 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.

Chapter - I
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.
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 Futures 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.
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.

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.
To understand the status of precious metals and their
fluctuation.
To have correlation between Gold and Silver and Analyze
the circumstances and future.
Scope of the study

One month spot prices for precious metals like commodity futures like
Gold and Silver are collected for calculation. The above mentioned
commodity futures are more traded in the market in terms of volume.
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.
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 apart from precious metals like gold and silver.

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.
Tools used for analysis
Correlation,

Figure, beta and standard deviation are used for

analysis
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.

Chapter - II
REVIEW OF LITRATURE
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.

10

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

11

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 cashsettled. 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.
12

Live Stock: Live Cattle, Pork Bellies etc.

Energy: Crude Oil, Natural Gas, Gasoline etc.
Indian companies that are well-positioned and have global aspirations
can be nurtured to enter global markets. The Indian government should
play a crucial role in encouraging financial institutions to set up a fund
that would support the Indian multinationals.

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 1997-2003, 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 demand-supply 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
13

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
14

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 Aug 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.

15

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
II
III
IV
V
VI
VII

I) Participation of Securities Brokers in Commodity

Futures Market
VIII

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 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

16

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

removed/amended

Securities
suitably

Contract
to

(Regulations)

facilitate

Rules

securities

be

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,

17

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 Aug 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:18

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)

19

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 Aug 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

20

commodity

markets.

It

is

committed

to

provide

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.

21

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
regional

including

trading

producers/

centre,

processors,

importers,

exporters,

traders,

corporate,

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

22

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
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.

23

Neutral Image
MCX's most important strength is that it is an independent and demutualized 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
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,

24

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:
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-

25

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

26

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 Aug 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.

27

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

28

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 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.
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.

29

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-------------- Aug-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.

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.2014-June 2015)

30

10 15

Volatility
No. of times

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

31

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.
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 2014-11.

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
32

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.

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 2015-12 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

33

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 Aug.

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.

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. .

34

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 2014.

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 Panjang (Indonesia), Sarawak
35

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 2015, production of pepper in India was reported to be

65,000 tons against 80,000 tons in 2015.

Kerala accounts for 90% of India's pepper production.

The other producers are Karnataka and Tamil Nadu.

During 2015, Indian exports of pepper amounted to

17,200 tons, registering a 31% fall compared to exports of 24,914 tons

in 2014. The export in 2016 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 2015, export of whole pepper

from India was only 26% of the total production, against 31% during
2014. 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 2015, only 30% of
India's export was shipped to the United States.
Major Indian Markets

36

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.
Markets Influencing Factors
Indian

pepper

is

at

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 reexport 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
37

madder family which is actually a tropical evergreen shrub that has the
potential to grow 100 feet tall

commonly

Coffea arabica and Coffea robusta are the two most

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 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 Aug

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.

38

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

39

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

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

40

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 2013, 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 freetrade 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

41

The estimated value of the export of green coffee is 10

billion dollar
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 Aug 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 Augnard Keynes, cynically called the "barbarous relic."
Why gold is "good as gold" is an intriguing question. However, we think
42

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.

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

43

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) India (In Tons)World (In Tons)% Share
Total Stocks
145000
Central Bank holding
Annual Production
Annual Recycling
100-300
1100-1200
Annual Demand
Annual Imports
Annual Exports

44

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.

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

agricultural output.

45

based

on

monsoon

and

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 2015.
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.

46

Indian Scenario

Silver imports into India for domestic consumption in

2014 was 3,400 tons down 25 % from record 4,540 tons in 2015.

Open General License (OGL) imports are the only

significant source of supply to the Indian market.

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 2016 is estimated at 1375

tons down by 13 % from 1,579 tons in 2015. 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.

47

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 (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.

48

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.

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.

49

Indias annual consumption of Aluminum is around 6.18

lakh tons and is projected to increase to 7.8 lakh tones by 2015.

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.

50

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%).
51

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.

52

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

5 & above

53

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, multifunctional 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.

54

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
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.

55

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 2015 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 2016.

56

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.

57

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.

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

58

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

59

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.

60

Its exports represent 55 per cent of the oil traded

internationally.

61

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, KrishnaGodavari 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.

62

Disinvestment/restructuring of public sector units and

complete deregulation of Indian retail petroleum products sector is

under way.

Prevailing Duties & Levies on Crude Oil

Particulars
Basic Customs Duty
Rs.1800 per metric tonne
Rs.50 per metric tonne
Education cess

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).

63

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.
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 2003-04, 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 80,000-1,00,000 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.

64

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.
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

65

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 be

66

COMPANY PROFILE
Angel Broking's tryst with excellence in customer relations began
in 1987. Today, Angel has emerged as one of the most respected
Stock-Broking and Wealth Management Companies in India. With its
unique retail-focused stock trading business model, Angel is
committed to providing Real Value for Money to all its clients.
The Angel Group is a member of the Bombay Stock Exchange (BSE),
National Stock Exchange (NSE) and the two leading Commodity
Exchanges in the country: NCDEX & MCX. Angel is also registered as a
Depository Participant with CDSL.
Our Business:

Equity Trading
Commodities
Portfolio Management Services
Mutual Funds
Life Insurance
67

IPO
Depository Services
Investment Advisory
Angel Group
Angel Broking Ltd.
Angel Commodities Broking Ltd.
Angel Securities Ltd.

68


Our Vision
To provide best value for money to investors
through innovative products, trading/investments
strategies,

state

of

the

art

technology

and

personalized service.
Our Motto
To have complete harmony between quality-in-process
and continuous improvement to deliver exceptional
service that will delight our Customers and Clients.

Our CRM Policy : Customer is King

A Customer is the most Important Visitor on our
premises. He is not dependent on us, but we are
dependent on him. He is not an interruption in
our work. He is the purpose of it. He is not an
outsider in our business. He is part of it. We are
not doing him a favour by serving him. He is
doing us a favour by giving us an opportunity to
do

so.

- Mahatma Gandhi
Business Philosophy
Ethical practices & transparency in all our
dealings
Customers interest above our own
69

Our Quality Assurance Policy

We are committed to providing world-class products and
services

which

exceed

the expectations of our customers, achieved by teamwork

and

process

continuous improvement.

70

of

Mr. Dinesh Thakkar

Founder Chairman & Managing Director
The Angel Group of Companies was brought to life by Mr. Dinesh
Thakkar. He ventured into stock trading with an intention to raise
capital for his own independent enterprise. However, he recognized
the opportunity offered by the stock market to serve individual
investors. Thus Indias first retail-focused stock-broking house was
established in 1987. Under his leadership, Angel became the first
broking house to embrace new technology for faster, more effective
and affordable services to retail investors.
Mr. Thakkar is valued for his understanding of the economy and the
stock-market. The print and electronic media often seek his views on
the market trend as well as investment strategies.
Mr. Lalit Thakkar
Managing Director Institutional broking
Mr. Lalit Thakkar is the motivating force behind Angels highly
acclaimed Research team. Hes been a part of the senior management
team since the Angel Groups inception. His technical and fundamental
outlook has provided impetus to Angels market research team.
Research-based & personalized advisory services are Angels forte,
and Mr. Lalit Thakkar has undoubtedly been the brain behind it.
When it comes to analyzing the market, Mr. Lalit Thakkar is truly
a genius. His hands-on experience and fundamental knowledge of

71

the market can predict the market trend early. His views on the
market trend are often quoted in the print and electronic media.
Investing in shares or stock market is inarguably the best
route to long-term wealth accumulation. However, it can also be a
very risky proposition due to high risk-return trade-off prevalent in the
stock market. Hence, it is more appropriate to take help of an
experienced and trustworthy expert who will guide you as to when,
where and how to invest. Angel provides guidance in the exciting
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Three different online products tailored for traders & investors
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72

Support
24x7 Web-enabled Back Office
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The derivative segment is a highly lucrative market that gives
investors an opportunity to earn superlative profits (or losses) by
paying a nominal amount of margin. Over past few years, Future &
Options segment has emerged as a popular medium for trading in
financial markets. Future contracts are available on Equities, Indices,
Currency and Commodities.
Angel with its membership as Trading and Clearing Member of NSE
F&O Segment and BSE Derivatives Segment, provides you a
gateway to the exciting world of derivative market.
Work Culture.At Angel, we keep exploring new paths to provide the best
value to all our internal and external customers. We consider people
as our biggest asset and believe in creating long term relationships by
nurturing talent from within. A fast-growing, forward-looking
organization like ours, demands HR to be a key responsibility area of
our core management team.
Our HR team constantly explores ways to enhance and
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responsibility effectively. Ours is a winning t eam of highly

73

determined, motivated, and adaptable people, all working diligently to

take Angel's exciting success story forward.

74

75

Work Culture
Ca
Philosophy

HR

Employee

Engagement
Leaders

Performance

Management
Proud to

hip Academy be an Angel

PF and FNF

Status

HR Philosophy
At Angel, People come first. Along with our customers, our employees
are equally vital to our organization. The Business of HR is to foster an
entrepreneurial spirit whereby Angels can operate with ownership as
an entrepreneur (profit center) within the confines of their job role and
earn over and above their fixed salaries.
We believe in inculcating a sense of responsibility and ownership in all
Angels which brings out the entrepreneurial zeal to explore potential
within as well as beyond job boundaries.

Our HR Philosophy is to engage employees at professional, emotional

and material levels.
We aim to create an environment conducive to both
personal and professional development of the employees, leading to a
productive and happy work force
Angel believes that people impact business and therefore
each and every Angel is a key resource and a valuable asset
Our business philosophy of being transparent in all our
dealings with our customers, is equally applicable in dealings with

76

employees
We encourage initiative, provide professional freedom
and empower Angels based on trust

DATAANALYSIS
AND
INTERPRETATION

77

Calculation of Beta and Volatility of Gold

GOLD

GOLD
open RETURN
close ONINDEX
GOLD

METAL
INDEX

METAL
RETURN

ON

INDEX METAL (X)

1/1/2013
1/2/2013
1/3/2013
1/4/2013
1/6/2013
1/7/2013
1/1/2013
1/9/2013
1/10/2013
1/11/2013
1/13/2013
1/14/2013
1/16/2013
1/17/2013
1/11/2013
1/20/2013
1/21/2013
1/22/2013
1/23/2013
1/24/2013
1/25/2013
1/27/2013
1/21/2013
1/29/2013
1/30/2013
1/31/2013

30175
29988
30000
29910
29918
29950
29797
29886
29981
30039
30073
30093
30049
30120
30166
30158
30157
30350
30370
30780
30890
30984
31011
30952
30816
30800

30014
30014
29905
29903
29928
29767
29896
29967
30053
30032
30054
30005
30104
30164
30166
30184
30318
30317
30803
30877
30947
31070
30948
30847
30837
31206

4856.89 4817.22
4804.7 4724.34
4719.89 4598.74
4601.74 4420.2
4420.65 4396.69
4400.67 4421.14
4424.81 4473.6
4479.14 4527.78
4533.99 4374.14
4380.12 4418.7
4417.44 4392.01
4400.99 4405.93
4406.35 4374.91
4369.25 4345.38
4444.31
4439.69 4390.29
4392.32 4440.77
4438.75 4433.07
4432.03 4403.91
4408.99 4467.9
4472.82 4564.92
4581.79 4544.57
4550.92 4594.88
4602.68 4602.2
4608.2 4593.64
4591.86 4603.05
58.23
TABLE 5.1

78

Beta =

n * xy - (x) (y)
n * x 2-(y)

Y= RETURN ON GOLD
X=RETURN ON INDEX METAL

Beta = 26 *0.77 (2.99-0.07)

26 * 58.23 (2.99)2

Beta =

20.02 - (2.92)
1515.8 (8.9401)

Beta =

17.1
1506.8599

Beta = 0.011348177
Volatility = Standard Deviation of Return on Gold
(Standard deviation based on Arithmetical Returns calculated as per
Excel Formulae)
Volatility = 0.656
79

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 5.1

Graph 5.1(a)

Fig 5.1
Interpretation:-Shows that the beta value of Gold more than 1.It
indicates that the Gold futures were more risky in the month of Aug
2016 and the volatility is low.

80

Calculation of Beta and Volatility of Silver

futures
RETURN
SILVERSILVER
open RETURN

1/1/2013 67297
1/2/2013 67850
1/3/2013 62750
1/4/2013 59863
1/6/2013 54230
1/7/2013 55020
1/1/2013 55249
1/9/2013 57504
1/10/201359398
1/11/201354280
1/13/201353250
1/14/201353701
1/16/201353200
1/17/201352218
1/11/201352444
1/20/201353930
1/21/201353250
1/22/201353410
1/23/201353200
1/24/201353600
1/25/201355455
1/27/201358300
1/21/201357600
1/29/201357575
1/30/201357647
1/31/201357590

ON

INDEX
ON METAL
INDEX INDEX METAL

close (Rs)
SILVER %(Y)

METAL close

68803
63975
60052
55410
53590
55042
56688
58211
53755
53166
53270
53825
52962
51623
52910
53164
53224
53314
53392
55014
56324
56616
57479
57571
57658
57941

4817.22-0.8167778
-1.8278191
0.667126
4724.34-1.672529
9.55202624
2.7973532
4598.74-2.5667971
11.0362049
6.5884474
4420.2 -3.9450295
29.3456999
15.563258
4396.69-0.5420017
0.63964801
0.2937659
4421.140.46515644
0.01859949
0.2163705
4473.6 1.10264622
2.87192149
1.2158287
4527.781.08592274
1.33511996
1.1792282
4374.14-3.5255922
33.4942541
12.429801
4418.7 0.88079779
-1.8076801
0.7758047
4392.01-0.5756728
-0.0216215
0.3313992
4405.930.11224747
0.02591886
0.0125995
4374.91-0.7135157
0.3192044
0.5091047
4345.38-0.546318
0.62250416
0.2984634
4444.312.16804598
1.92645379
4.7004234
4390.29-1.1126903
1.58042049
1.2380797
4440.771.10306171
-0.0538584
1.2167451
4433.07-0.127964
0.02300045
0.0163748
4403.91-0.6344722
-0.2289825
0.402555
4467.9 1.33613367
3.5248004
1.7852532
4564.922.05910365
3.22669024
4.2399079
4544.57-0.8123463
2.34646846
0.6599065
4594.880.96595853
-0.2029184
0.9330759
4602.2 -0.0104287
7.2453E-05
0.0001088
4593.64-0.3159585
-0.006029
0.0998298
4603.050.2436921
0.14852566
0.0593858

2.237841211
4856.89
-5.711127487
4804.7
-4.299601594
4719.89
-7.438651588
4601.74
-1.180158584
4420.65
0.039985464400.67
2.604572028
4424.81
1.229479688
4479.14
-9.500319876
4533.99
-2.052321297
4380.12
0.037558685
4417.44
0.230908177
4400.99
-0.447368421
4406.35
-1.139453828
4369.25
0.888566852
-1.420359726
4439.69
-0.048826291
4392.32
-0.179741621
4438.75
0.360902256
4432.03
2.638059701
4408.99
1.567036336
4472.82
-2.888507719
4581.79
-0.210069444
4550.92
-0.00694746
4602.68
0.019081652
4608.2
0.609480813
4591.86

81

-24.05998208
Table 5.2
Beta =

-6.3953276
97.8886246
58.230195

n * xy - (x) (y)
n * x 2-(x)

Y= RETURN ON Silver
X=RETURN ON INDEX METAL

Beta =

26 *97.8886246- (-6.3953276* -24.05998208)

26 * 24.929823 - (-6.3953276)2

Beta = 401.482
642.81
Beta = 1.37

Volatility = Standard Deviation of Return on Silver

(Standard deviation based on Arithmetical Returns calculated as per

Excel Formulae)
Volatility = 1.157

82

83

Graph5.2(a)

Fig 5.2
Interpretation:- that the beta value of silver is less than 1. It indicates
that the Aluminum futures were less risky in the month of Aug 2016and
the volatility is high.

84

List of Beta value for 9 Commodities

Beta
2.16

Commodity

1.37

85

FINDINGS, SUGGESTIONS, CONCLUSION

86

FINDINGS
The beta value of Gold more than 1, it indicates that gold

futures were more risky in the month of january 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 January the price variation
is high and the return is comparatively 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.
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.
SUGGESTION

More commodities must be introduced for trading.

Better analysis tools should be used to make better

predictions.

87

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.

88

LIMITATIONS
1)

Sample size is limited to some commodity

2)

Commodity trading is need high investment minimum of

2,00,000.
3)

To find out the commodity data very difficult.

4)

There might be chances of biasness.

Conclusion

The commodity future is the part of derivatives. The commodity futures

markets are

89

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 are 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.

90

BIBLIOGRAPHY

91

BIBLIOGRAPHY
Author name
Title name

Book namePublishing year

Volumes /page
number

Jack D. Schwager
Behavioural

Behavioural

Technical

Technical

Analysis: An

Analysis: An

Introduction
Adam Grimes
The
- Art &

Brown

Introduction
The Art &

Science of

Science of

Technical

Technical

Analysis: Market

Analysis: Market

Structure
Technical

Structure
Technical

Analysis

analsysis

3 volumes

Page number-230-

2 volumes

Demystified
Richard

Charting and

commodity

Technical

1-volume

trading

Analysis
Bragie hatson
commodity

commodity

analsysis

92

3volume

APENDIX
TERMS AND DEFINITIONS RELATED TO COMMODITY MARKET:

Accruals:-

Commodities on hand ready for shipment,

storage and manufacture

Arbitragers: - Arbitragers are interested in making purchase

and sale in different

markets at the same time to profit from price

discrepancy between the two markets.

At the Market: - An order to buy or sell at the best price

possible at the time an order reaches the trading pit.

Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the

floor of exchange to buy a

definite number of futures contracts at a

specific price.

Breaking: - A quick decline in price.

Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at the

price within the closing range.

Buy on opening: - To buy at the beginning of trading

session at a price within the

opening range.

Call: - An option that gives the buyer the right to a long

position in the underlying

futures at a specific price, the call writer

(seller) may be assigned a short position in the underlying futures if the

buyer exercises the call.

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Cash commodity: - The actual physical product on which a

futures contract is based. This product can include agricultural

commodities, financial instruments and the cash equivalent of index
futures.

Close: - The period at the end of trading session officially

designated by exchange during which all transactions are considered

made at the close.

Closing price: - The price (or price range) recorded during

the period designated by the exchange as the official close.

Day orders: - Orders at a limited price which are understood

to be good for the day

unless expressly designated as an open order

or good till canceled order.

Delivery: - The tender and receipt of actual commodity, or

in case of agriculture

commodities, warehouse receipts covering

such commodity, in settlement of futures

contract. Some contracts

settle in cash (cash delivery). In which case open positions are marked
to market on last day of contract based on cash market close.

Delivery month: - Specified month within which delivery

may be made under the terms of futures contract.

Delivery notice: - A notice for a clearing members

intention to deliver a stated quantity of commodity in settlement of a

short futures position.

Derivatives: - These are financial contracts, which derive

their value from an underlying asset. (Underlying assets can be equity,

commodity, foreign exchange, interest rates, real estate

or any other asset.) Four types of derivatives are trades

forward, futures, options and swaps. Derivatives can be traded either in

an exchange or over the counter.
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Exchange: - Central market place for buyers and sellers.

Standardized contracts ensure that the prices mean the same to

everyone in the market. The prices in an exchange are

determined in the form of a continuous auction by members

who are acting on behalf of their clients, companies or themselves.

Forward contract: - It is an agreement between two parties

to buy or sell an asset at a future date for price agreed upon while
signing agreement. Forward contract is not traded on an

Futures Contract:- It is an agreement between two parties

to buy or sell a specified and standardized quantity and quality of an

asset at certain time in the future at price agreed upon at the time of
entering in to contract on the futures exchange. It is entered on
centralized trading platform of exchange. It is standardized in terms of
quantity as specified by exchange. Contract price of futures contract is
transparent as it is available on centralized trading screen of the
exchange. Here valuation of Mark-to-Mark position is calculated as per
the official closing

Futures commission merchant: - A broker who is permitted

to accept the orders to buy and sale futures contracts for the
consumers.

Futures Funds: - Usually limited partnerships for investors

who prefer to participate in the futures market by buying shares in a

fund managed by professional traders or

commodity trading

advisors.

Futures

Market:-It

facilitates

buying

and

selling

of

standardized contractual agreements (for future delivery) of underlying

asset as the specific commodity and not the physical commodity itself.
The formulation of futures contract is very specific regarding the
quality of the commodity, the quantity to be delivered and date for

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delivery. However it does not involve immediate transfer of ownership

of commodity, unless resulting in

delivery. Thus, in futures markets,

commodities can be bought or sold irrespective of whether one has

possession of the underlying commodity or not. The futures market
trade in futures contracts primarily for the purpose of risk management
that is hedging on commodity stocks or forward buyers and sellers.
Most of these contracts are squared off before maturity and rarely end
in deliveries.

Hedging: - Means taking a position in futures market that is

opposite to position in the physical market with the objective of

reducing or limiting risk associated with price.

In the money: - In call options when strike price is below the

price of underlying futures. In put options, when the strike price is

above the underlying futures. In-the-money

options are the most

expensive options because the premium includes intrinsic value.

Index Futures: - Futures contracts based on indexes such

as the S & P 500 or Value Line Index. These are the cash settlement
contracts.

Investment Commodities: - An investment commodity is

generally held for investment purpose. e.g. Gold, Silver.

Limit: - The maximum daily price change above or below the

price close in a specific

futures market. Trading limits may be

changed during periods of unusually high market activity.

Limit order: - An order given to a broker by a customer who

has some restrictions upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out

a long or short position, but more often used by the trade to mean a
reduction or closing out of long position.

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Margin: - Cash or equivalent posted as guarantee of

fulfillment of a futures contract (not a down payment).

Margin call: - Demand for additional funds or equivalent

because of adverse price movement or some other contingency.

Market to Market: - The practice of crediting or debating a

traders account based on daily closing prices of the futures contracts

he is long or short.

Market order: - An order for immediate execution at the best

available price.

Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts

long and the open contracts short held in any commodity by any
individual or group.

Offer: - An offer indicating willingness to sell at a given price

(opposite of bid).

On opening: - A term used to specify execution of an order

during the opening.

Open contracts: - Contracts which have been brought or sold

without the transaction having been completed by subsequent sale,

repurchase or actual delivery or receipt of commodity.

Open interest: - The number of open contracts. It refers

to unliquidated purchases or sales and never to their combined total.

Option: - It gives right but not the obligation to the option

owner, to buy an underlying asset at specific price at specific time in

the future.

Out-of-the money: - Option calls with the strike prices

above the price of the underlying futures, and puts with strike prices
below the price of the underlying futures.

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Over the counter: - It is alternative trading platform, linked

to network of dealers who do not physically meet but instead

communicates through a network of phones &

computers.

Premium: - The amount by which a given futures contracts

price or commoditys

quality exceeds that of another contract or

commodity (opposite of discount). In options, the price of a call or put,

which the buyer initially pays to the option writer (seller).

Price limit: - The maximum fluctuation in price of futures

contract permitted during one trading session, as fixed by the rules of a

contract market.

Purchase and sales statement: - A statement sent by FMC

to a customer when his

futures option has been reduced or closed

out (also called P and S)

Put: - In options the buyer of a put has the right to continue

a short position in an

underlying futures contract at the strike price

until the option expires; the seller (writer) of the put obligates himself
to take a long position in the futures at the strike price if the buyer
exercises his put.

Range: - The difference between high and low price of the

futures contract during a given period.

Ratio hedging: - Hedging a cash position with futures on a

less or more than one-for-one basis.

Settlement price: - The official daily closing price of futures

contract, set by the

exchange for the purpose of setting margins

accounts.

Short: - (1) The selling of an option futures contract. (2) A

trader whose net position in the futures market shows an excess of

open sales over open purchases.

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Speculator: - Speculator is an additional buyer of the

commodities whenever it seems that market prices are lower than they
should be.

Spot Markets:-Here commodities are physically brought or

sold on a negotiated basis.

Spot price: - The price at which the spot or cash commodity

is selling on the cash or spot market.

Spread: - Spread is the difference in prices of two futures

contracts.

Striking price: - In options, the price at which a futures

position will be established if the buyer exercises (also called strike or

exercise price).

Swap: - It is an agreement between two parties to exchange

different streams of cash flows in future according to predetermined

terms.

Technical analysis (charting): - In price forecasting, the

use of charts and other devices to analyze price-change patters and

changes in volume and open interest to predict future market

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