SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES (SIMS)

DERIVATIVE ASSIGNMENT ON

PRECIOUS METALS
FACULTY: Mr. ANEESH DEY DATE OF SUBMISSION: 30th September 2011 BATCH 2010-12

SUBMITTED BY:Sunil Singh Bhandari(C 64) Bimal Kumar Goenka(C 52) Umrao Negi(C 38) Vijayendra Pratap Singh(C 59) Sarthak Chhetri(C 16) Devesh Baliyan(C 07) Navneet Pal(C 31)

TABLE OF CONTENTS

1 2

EXECUTIVE SUMMARY............................................................................................................................. 4 INTRODUCTION ....................................................................................................................................... 5 2.1 2.2 2.3 GOLD....................................................................................................................................................... 5 SILVER ..................................................................................................................................................... 5 PLATINUM ................................................................................................................................................ 6

3 4

WHY PRECIOUS METALS .......................................................................................................................... 7 DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT .................................................................. 8 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 FUTURES CONTRACT ................................................................................................................................... 8 OPTION CONTRACT ..................................................................................................................................... 8 INDEX FUTURES AND INDEX OPTION CONTRACTS.............................................................................................. 9 STRUCTURE OF DERIVATIVE MARKETS IN INDIA ................................................................................................ 9 REGULATORY FRAMEWORK OF DERIVATIVES MARKETS IN INDIA ........................................................................... 9 DERIVATIVE CONTRACTS PERMITTED BY SEBI ................................................................................................. 10 ELIGIBILITY CRITERIA FOR STOCKS ON WHICH DERIVATIVES TRADING MAY BE PERMITTED ......................................... 11 MINIMUM CONTRACT SIZE ......................................................................................................................... 11 LOT SIZE OF A CONTRACT ............................................................................................................................ 11 CORPORATE ADJUSTMENT .......................................................................................................................... 12 MARGINING SYSTEM IN THE DERIVATIVE MARKETS .......................................................................................... 12 MARKET WIDE POSITION LIMITS FOR SINGLE STOCK FUTURES AND STOCK OPTION CONTRACTS ................................. 14 MEASURES HAVE BEEN SPECIFIED BY SEBI TO PROTECT THE RIGHTS OF INVESTOR IN DERIVATIVES MARKET ................ 14

SPOT AND FUTURES FUNDAMENTALS USEFUL FOR COMMODITY TRADING .......................................... 16 5.1 SPOT PRICES AND FUTURE PRICE EXPECTATIONS .............................................................................................. 16 5.2 DELIVERY MONTHS & SPOT/FORWARD CODES .............................................................................................. 17 5.2.1 Delivery Months .............................................................................................................................. 17 5.2.2 Forex Spot & Forward Rate Codes .................................................................................................. 17 5.2.3 Precious Metal and Coin Codes ....................................................................................................... 17 5.3 CONTANGO AND BACKWARDATION ............................................................................................................. 18 5.3.1 Normal and Inverted: Snapshot in Time ......................................................................................... 18 5.3.2 Supply/Demand Determines the Shape .......................................................................................... 19 5.3.3 Contango and Normal Backwardation: Patterns over Time ........................................................... 19

6 7

SILVER FUTURES MARKET FACTS ........................................................................................................... 21 SILVER FUTURES TRADING UPDATES ..................................................................................................... 22 7.1 7.2 CHART ................................................................................................................................................... 22 CURRENT SILVER HIGHLIGHTS ..................................................................................................................... 23

LEADING INDICATORS OF SILVER ........................................................................................................... 24 8.1 8.2 8.3 TECHNICAL INDICATORS ............................................................................................................................. 24 FUNDAMENTAL INDICATORS ....................................................................................................................... 25 ECONOMIC AND VARIOUS OTHER INDICATORS ................................................................................................ 25

TECHNICAL INDICATORS RECENT TREND FOR SILVER............................................................................. 26 9.1 MOVING AVERAGE ................................................................................................................................... 26

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9.1.1 Chart ............................................................................................................................................... 26 9.2 BOLLINGER BAND ..................................................................................................................................... 27 9.2.1 Chart ............................................................................................................................................... 27 9.3 MACD .................................................................................................................................................. 28 9.3.1 Chart ............................................................................................................................................... 29 9.4 SLOW STOCHASTIC (SSTO) ........................................................................................................................ 29 9.4.1 Chart ............................................................................................................................................... 30 10 11 SILVER VS GOLD ..................................................................................................................................... 31 SILVER FORCAST .................................................................................................................................... 32 11.1.1 11.1.2 11.1.3 11.1.4 11.1.5 12 13 Why silver is in a bull market and what is the highest predictions? ........................................... 33 Silver prices forecast considers dwindling supplies .................................................................... 33 Increasing industrial demand is bullish for silver ........................................................................ 33 Increasing investment demand .................................................................................................. 34 Silver is very undervalued comparing to gold ............................................................................. 34

RECOMMENDATIONS ............................................................................................................................ 35 REFERENCES .......................................................................................................................................... 36

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1 EXECUTIVE SUMMARY
Commodity trading is the market activity, which links the producers of the commodities effectively with their commercial consumers. Commodity trading mainly takes place in the commodity markets where raw or primary products are usually exchanged. The raw commodities here are traded on regulated commodities exchanges, in which they are bought and sold in standardized forms of contracts. Commodity market is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period. Commodities count as extremely lucrative investment opportunities due to their liquidity, as the speculators do not have to hold onto them. However, risk management strategies play an important role for commodity trading. Futures trading is the process of trading commodities. As in other cases of investments, such as stocks and bonds, when trading futures, one actually does not buy anything or own anything. It is just about speculating on the future direction of the price in the commodity one is trading. This is like betting on future price direction. The terms "buy" and "sell" merely indicates the direction one expects future prices will take. The project involved the detailed research on price trend of the silver futures and what are the leading and lagging technical, fundamental and economical indicators to predict the price of silver futures. The project also focus on how silver is valued in comparison to the other precious metals. The project also gives insight why silver is trading so high in present market scenario and what is price range for silver on which silver generally trade. Silver futures market future prediction is also done based on technical and fundamental analysis.

PRECIOUS METALS | EXECUTIVE SUMMARY ,

2 INTRODUCTION
Since the dawn of time, gold and silver have been a recognized store of value. And even today, precious metals have their place in a savvy investor's portfolio. But which precious metal is best for investment purposes? And why are they so volatile? If you're just getting started in precious metals, read on to learn more about how they work and how you can invest in them. There are many ways to buy into precious metals like gold, silver and platinum and a host of good reasons why you should give in to the treasure hunt.

2.1

Gold

Gold is unique for its durability (it doesn't rust or otherwise corrode), malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewellery and as a form of currency.

The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold. To put it simply, when the hoarders feel like selling, the price drops. When they want to buy, new supply is quickly absorbed and the gold prices are driven higher.

2.2

Silver

Unlike gold, the price of silver swings between its perceived role as a store of value and its very tangible role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold. So, while silver will trade roughly in line with gold as an item to be hoarded (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on price. That equation has always fluctuated with new innovations, including: 1. Silver's once predominant role in the photography industry (silver-based photographic film), which was been eclipsed by the advent of the digital camera. 2. The rise of a vast middle class in the emerging market economies of the East, which created an explosive demand for electrical appliances, medical products and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired commodity. 3. Silver's use in batteries, superconductor applications and microcircuit markets. It's unclear whether (or to what extent) these developments will affect overall noninvestment demand for silver. One fact remains; silver's price is affected by its applications and is not just used in fashion or as a store of value. (Find out how everyday items you use can affect your investments in Commodities That Move The Markets.)

PRECIOUS METALS | INTRODUCTION

2.3

Platinum

Like gold and silver, platinum is traded around the clock on global commodities markets. It tends to fetch a higher price than gold during routine periods of market and political stability simply because it's much rarer; far less of the metal is actually pulled from the ground annually. Other factors that determine platinum's price include: 1. Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewellery accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest. 2. Because of the auto industry's heavy reliance on the metal, platinum prices are determined in large part by auto sales and production numbers. "Clean air" legislation could require automakers to install more catalytic converters, increasing demand, but in 2009 American and Japanese car makers were turning to recycled auto catalysts, or using more of platinum's reliable (and usually less expensive) sister group metal, palladium. 3. Platinum mines are heavily concentrated in only two countries: South Africa and Russia. This creates greater potential for cartel-like action that would support, or even artificially raise, platinum prices. Investors should consider that all of the above factors serve to make platinum the most volatile of the precious metals. (For more on this entire industry, check out The Industry Handbook: Precious Metals.) Filling Up Your Treasure Chest Let's take a look at the options available to those who want to invest in precious metals. 1. Commodity ETFs: Exchange traded funds exist for all three precious metals, but as of 2009, you'll have to be able to trade the London Stock Exchange (LSE) to access one for platinum. ETFs are a convenient and liquid means of purchasing and selling gold, silver or platinum. (For more insight, see Gold Showdown: ETFs Vs. Futures.) 2. Common Stocks and Mutual Funds: Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wiser to stick to funds with managers with solid performance records. (For related reading, see Strike Gold With Junior Mining.) 3. Futures and Options: The futures and options markets offers liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits - and losses - can be had with derivative products. (For more on these agreements for delivery, check out Trading Gold and Silver Futures Contracts.) 4. Bullion: Coins and bars are strictly for those who have a place to put them. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright bothersome to hold.

PRECIOUS METALS | INTRODUCTION

5. Certificates: Certificates offer investors all the benefits of physical gold ownership minus the hassle of transportation and storage. That said, if you're looking for insurance in a real disaster, certificates are just paper. Don't expect anyone to take them in exchange for anything of value.

3 WHY PRECIOUS METALS

Precious metals offer unique inflationary protection - they have intrinsic value, they carry no credit and they themselves cannot be inflated (you can't print more of them). They also offer genuine "upheaval insurance," against financial or political/military upheavals. From an investment theory standpoint, precious metals also provide low or negative correlation to other asset classes like stocks and bonds. This means that even a small percentage of precious metals in a portfolio will reduce both volatility and risk. Several factors account for an increased desire to hoard the precious metals: 1. Systemic Financial Concerns When banks and money are perceived as unstable and/or political stability is questionable; gold has often been sought as a safe store of value. 2. Inflation When real rates of return in the equity, bond or real estate markets are negative, people regularly flock to gold as an asset that will maintain its value. 3. War or Political Crises War and political upheaval have always sent people into gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination. (For related reading, check out War's Influence On Wall Street.)

PRECIOUS METALS | WHY PRECIOUS METALS

4 DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT

The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:- A Derivative includes: - a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security a contract which derives its value from the prices, or index of prices, of underlying securities

4.1

Futures Contract

Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash. However so far delivery against future contracts have not been introduced and the future contract is settled by cash settlement only.

4.2

Option contract

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc. Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option in securities" means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities;An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price. Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame. As in the case of futures contracts, option contracts can also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract. However so far delivery against option contracts have not been introduced and the option contract, on exercise or expiry, is settled by cash settlement only.

PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT

4.3

Index Futures and Index Option Contracts

Futures contract based on an index i.e. the underlying asset is the index,are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index. Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date. An index, in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices. In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued. By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry. Therefore index options are the European options while stock options are American options.

4.4

Structure of Derivative Markets in India

Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a SelfRegulatory Organisation (SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment.

4.5

Regulatory framework of Derivatives markets in India

With the amendment in the definition of 'secruities' under SC(R)A (to include derivative contracts in the definition of securities), derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lays down the provisions for trading and settlement of derivative contracts. The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. SEBI has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House. The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressal of investor grievances. Some of the important eligibility conditions are

Derivative trading to take place through an on-line screen based Trading System. The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation.

PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT

The Derivatives Exchange/ Segment should have arrangements for dissemination of information about trades, quantities and quotes on a real time basis through atleast two information vending networks, which are easily accessible to investors across the country. The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country. The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading. The Derivative Segment of the Exchange would have a separate Investor Protection Fund. The Clearing Corporation/House shall perform full novation, i.e., the Clearing Corporation/House shall interpose itself between both legs of every trade, becoming the legal counterparty to both or alternatively should provide an unconditional guarantee for settlement of all trades. The Clearing Corporation/House shall have the capacity to monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both. The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the position. The concept of value-at-risk shall be used in calculating required level of initial margins. The initial margins should be large enough to cover the one-day loss that can be encountered on the position on 99% of the days. The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT) for swift movement of margin payments. In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House shall transfer client positions and assets to another solvent Member or close-out all open positions. The Clearing Corporation/House should have capabilities to segregate initial margins deposited by Clearing Members for trades on their own account and on account of his client. The Clearing Corporation/House shall hold the clients' margin money in trust for the client purposes only and should not allow its diversion for any other purpose.

The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades executed on Derivative Exchange / Segment. Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE and the F & O Segment of NSE.

4.6

Derivative contracts permitted by SEBI

Derivative products have been introduced in a phased manner starting with Index Futures Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and July 2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for derivatives trading in December 2002. Interest Rate Futures on a notional bond and T-bill priced off ZCYC have been introduced in June 2003 and exchange traded interest rate futures on a notional bond priced off a basket of Government Securities were permitted for trading in January 2004.

PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT

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4.7

Eligibility criteria for stocks on which derivatives trading may be permitted

A stock on which stock option and single stock future contracts are proposed to be introduced is required to fulfill the following broad eligibility criteria:

The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis. The stock's median quarter-sigma order size over the last six months shall be not less than Rs.1 Lakh. A stock's quarter-sigma order size is the mean order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation. The market wide position limit in the stock shall not be less than Rs.50 crores.

A stock can be included for derivatives trading as soon as it becomes eligible. However, if the stock does not fulfill the eligibility criteria for 3 consecutive months after being admitted to derivatives trading, then derivative contracts on such a stock would be discontinued.

4.8

Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market. In February 2004, the Exchanges were advised to re-align the contracts sizes of existing derivative contracts to Rs. 2 Lakhs. Subsequently, the Exchanges were authorized to align the contracts sizes as and when required in line with the methodology prescribed by SEBI.

4.9

lot size of a contract

Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying. For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT

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4.10 Corporate adjustment

The basis for any adjustment for corporate action is such that the value of the position of the market participant on cum and ex-date for corporate action continues to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. in-the-money, at-the-money and out-of-themoney. Any adjustment for corporate actions is carried out on the last day on which a security is traded on a cum basis in the underlying cash market. Adjustments mean modifications to positions and/or contract specifications as listed below:

Strike price Position Market/Lot/ Multiplier

The adjustments are carried out on any or all of the above based on the nature of the corporate action. The adjustments for corporate action are carried out on all open, exercised as well as assigned positions. The corporate actions are broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are:

Bonus Rights Merger/ demerger Amalgamation Splits Consolidations Hive-off Warrants, and Secured Premium Notes (SPNs) among others

The cash benefit declared by the issuer of capital is cash dividend.

4.11 Margining system in the derivative markets

Two type of margins have been specified -Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which depends on the time in which Mark to Market margin is collected.Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures Contracts MTM may be considered as Mark to Market Settlement. Dr. L.C Gupta Committee had recommended that the level of initial margin required on a position should be related to the risk of loss on the position. The concept of value-at-risk should be used in calculating required level of initial margins. The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The recommendations of the Dr. L.C Gupta Committee have been a guiding principle for SEBI in prescribing the margin computation & collection methodology to the Exchanges. With the introduction of various derivative products in the Indian securities Markets, the margin computation methodology, especially for initial margin, has been modified to address the specific risk characteristics of the product. The margining methodology specified is consistent with the margining system used in developed financial & commodity derivative markets worldwide. The exchanges were given the freedom to either develop their own margin computation PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT 12

system or adapt the systems available internationally to the requirements of SEBI. A portfolio based margining approach which takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all Derivative Contracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures, has been prescribed. The initial margin requirements are required to be based on the worst case loss of a portfolio of an individual client to cover 99% VaR over a specified time horizon.The Initial Margin is Higher of (Worst Scenario Loss +Calendar Spread Charges) Or Short Option Minimum Charge The worst scenario loss are required to be computed for a portfolio of a client and is calculated by valuing the portfolio under 16 scenarios of probable changes in the value and the volatility of the Index/ Individual Stocks. The options and futures positions in a client's portfolio are required to be valued by predicting the price and the volatility of the underlying over a specified horizon so that 99% of times the price and volatility so predicted does not exceed the maximum and minimum price or volatility scenario. In this manner initial margin of 99% VaR is achieved. The specified horizon is dependent on the time of collection of mark to market margin by the exchange. The probable change in the price of the underlying over the specified horizon i.e. 'price scan range', in the case of Index futures and Index option contracts are based on three standard deviation (3s ) where 's ' is the volatility estimate of the Index. The volatility estimate 's ', is computed as per the Exponentially Weighted Moving Average methodology. This methodology has been prescribed by SEBI. In case of option and futures on individual stocks the price scan range is based on three and a half standard deviation (3.5 s) where 's' is the daily volatility estimate of individual stock. If the mean value (taking order book snapshots for past six months) of the impact cost, for an order size of Rs. 0.5 million, exceeds 1%, the price scan range would be scaled up by square root three times to cover the close out risk. This means that stocks with impact cost greater than 1% would now have a price scan range of - Sqrt (3) * 3.5s or approx. 6.06s. For stocks with impact cost of 1% or less, the price scan range would remain at 3.5s.For Index Futures and Stock futures it is specified that a minimum margin of 5% and 7.5% would be charged. This means if for stock futures the 3.5 s value falls below 7.5% then a minimum of 7.5% should be charged. This could be achieved by adjusting the price scan range.The probable change in the volatility of the underlying i.e. 'volatility scan range' is fixed at 4% for Index options and is fixed at 10% for options on Individual stocks. The volatility scan range is applicable only for option products.Calendar spreads are offsetting positions in two contracts in the same underlying across different expiry. In a portfolio based margining approach all calendar-spread positions automatically get a margin offset. However, risk arising due to difference in cost of carry or the 'basis risk' needs to be addressed. It is therefore specified that a calendar spread charge would be added to the worst scenario loss for arriving at the initial margin. For computing calendar spread charge, the system first identifies spread positions and then the spread charge which is 0.5% per month on the far leg of the spread with a minimum of 1% and maximum of 3%. Further, in the last three days of the expiry of the near leg of spread, both the legs of the calendar spread would be treated as separate individual positions. In a portfolio of futures and options, the non-linear nature of options make short option positions most risky. Especially, short deep out of the money options, which are highly susceptible to, changes in prices of the underlying. Therefore a short option minimum charge has been specified. The short option minimum charge is 3% and 7.5 % of the notional value of all short Index option and stock option contracts respectively. The short option minimum charge is the initial margin if the sum of the worst -scenario loss and calendar spread charge is lower than the short option minimum charge. To calculate volatility estimates the exchange are required to uses the methodology specified in the Prof J.R Varma Committee Report on Risk Containment Measures for Index Futures. Further, to calculate the option value the exchanges can use standard option pricing models - BlackScholes, Binomial, Merton, Adesi-Whaley.The initial margin is required to be computed on a real time basis and has two components:- The first is creation of risk arrays taking prices at discreet times taking latest prices and volatility estimates at the discreet times, which have been specified. The second is the application of the risk arrays on the actual portfolio positions to compute the portfolio values and the initial margin on a real time basis. The initial margin so computed is deducted from the available Liquid Networth on a real time basis. At the end of the day NSE sends a client wise file to all the brokers and this margin is debited to clients. Next day the broker is supposed to report the collection of margin. If the PRECIOUS METALS | DERIVATIVE TRADING FUNDAMENTALS AND REQUIREMENT 13

margin is short, a penalty is levied and the outstanding position is liable to be squared up at the cost of the investor.

4.12 Market wide position limits for single stock futures and stock option Contracts
Market wide position limits on Single Stock Derivative Contracts are as follows The market wide limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock is lower of-- 30 times the average number of shares traded daily, during the previous calendar month, in the relevant underlying security in the underlying segment,Or- 20% of the number of shares held by non-promoters in the relevant underlying security i.e. free-float holding.This limit would be applicable on all open positions in all futures and option contracts on a particular underlying stock.

4.13 Measures have been specified by SEBI to protect the rights of investor in Derivatives Market

The measures specified by SEBI include:

Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the

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Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges. The Exchanges are required to set up arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country.

Remember, Derivatives are tools which can be used for hedging, speculation as well as trading. It is always advisable to take positions in derivatives with caution. Since the trader is required to give only margin, there is a tendency of overtrading which must be avoided. Overtrading may result in failure to pay margin call &/or MTM the outstanding position is liable to be squared up. Before trading it is necessary that the investor should go through the risk disclosure document carefully so that he is aware of the precautions to be taken in derivatives trading

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5 SPOT AND FUTURES FUNDAMENTALS USEFUL FOR COMMODITY TRADING

The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date. This is in contrast with the forward price established in a forward contract or futures contract, where contract terms (price) are set now, but delivery and payment will occur at a future date. Spot rates are estimated via the bootstrapping method, which uses prices of the securities currently trading in market, that is, from the cash or coupon curve. The result is the spot curve, which exists for each of the various classes of securities. For securities, the synonymous term cash price is more often used.

5.1

Spot prices and future price expectations

Depending on the item being traded, spot prices can indicate market expectations of future price movements in different ways. For a security or non-perishable commodity (e.g. silver), the spot price reflects market expectations of future price movements. In theory, the difference in spot and forward prices should be equal to the finance charges, plus any earnings due to the holder of the security, according to the cost of carry model. For example, on a share the difference in price between the spot and forward is usually accounted for almost entirely by any dividends payable in the period minus the interest payable on the purchase price. Any other price would yield an arbitrage opportunity and riskless profit (see rational pricing for the arbitrage mechanics).

In contrast, a perishable or soft commodity does not allow this arbitrage - the cost of storage is effectively higher than the expected future price of the commodity. As a result, spot prices will reflect current supply and demand, not future price movements. Spot prices can therefore be quite volatile and move independently from forward prices. According to the unbiased forward hypothesis, the difference between these prices will equal the expected price change of the commodity over the period.

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5.2

Delivery Months & Spot/Forward Codes

5.2.1

Delivery Months

Jan Month Code F

Feb G

Mar H

Apr J

May K

Jun M

Jul N

Aug Q

Sep U

Oct V

Nov X

Dec Z

Cash/Spot A0

5.2.2

Forex Spot & Forward Rate Codes

Cash/ Spot Spot/Forward Code A0

Over night A1

Next Day A2

3 Day A3

1 week W1

2 week W2

3 week W3

1 Mon M1

2 Mon M2

3 Mon M3

4 Mon M4

5 Mon Spot/Forward Code M5

6 Mon M6

7 Mon M7

8 Mon M8

9 Mon M9

10 Mon N0

11 Mon N1

1 Year Y1

18 Mon N8

21 Mon N2

2 Years Y2

3 Years Spot/Forward Code Y3

4 Years Y4

5 Years Y5

7 Years Y7

10 Years Z0

20 Years Z2

30 Years Z3

5.2.3

Precious Metal and Coin Codes

Spot

1 Mon

3 Mon

1 Year

Hong Kong Close

Lon don AM Fix

Lond on Fix

Lon don PM Fix

NY Close

Zurich Close

Zuric h Metal Pool

Spot/Forward Code

A0

M1

M3

Y1

HC

LA

LF

LP

NC

ZC

ZP

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5.3

Contango and Backwardation

The shape of the futures curve is important to commodity hedgers and speculators. Both care about whether commodity futures markets are contango markets or normal backwardation markets. This isn't semantic: in 1993 the German company Metallgesellschaft famously lost more than $1 billion dollars mostly because management deployed a hedging system that profited from normal backwardation markets but did not anticipate a shift to contango markets. In this article, we'll lay out the difference between contango and backwardation and show you how to avoid serious losses. 5.3.1 Normal and Inverted: Snapshot in Time

A contango market is often confused with a normal futures curve; and a normal backwardation market is confused with an inverted futures curve. Let's start by getting an understanding of the difference between the two. Start with a static picture of a futures curve. A static picture of the futures curve plots futures prices (y-axis) against contract maturities (i.e., terms to maturity). This is analogous to a plot of the term structure of interest rates: we are looking at prices for many different maturities as they extend into the horizon. The chart below plots a normal market in Greenland an inverted market in red:

The plot above is a hypothetical plot for crude oil futures. There is no reason to expect a flat line. The current price is called the spot price. In the chart above, the spot price is $60. In the normal (green line) market, a one-year futures contract is priced at $90. Therefore, if you take a long position in the oneyear contract, you promise to purchase one contract for $90 in one year. Our long position is not an option in the future - it is an obligation in the future. (To learn more, read Futures Fundamentals.)

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5.3.2

Supply/Demand Determines the Shape

The red line in Figure 1, on the other hand, depicts an inverted market. In an inverted market, the futures price for faraway deliveries is less than the spot price. Why would a futures curve invert? Because, in the case of a physical asset, there may be some benefit to owning the asset (called the convenience yield) or, in the case of a financial asset, ownership may confer a dividend to the owner. (For related reading, see The Importance of Dividends, The Power of Dividend Growth and How Dividends Work For Investors.) A few fundamental factors (i.e., the cost to carry a physical asset or finance a financial asset) inform supply/demand for the commodity, which ultimately determines the shape of the futures curve. If we really want to be precise, we could say that fundamentals like storage cost, financing cost (cost to carry) and convenience yield inform supply and demand. Supply meets demand where market participants are willing to agree about the expected future spot price. Their consensus view sets the futures price. And that's why a futures price changes over time: market participants update their views about the future expected spot price. (For related reading, see the Economics Basics tutorial.) The traditional crude oil futures curve, for example, is typically humped: it is normal in the short-term but gives way to an inverted market for longer maturities.

5.3.3

Contango and Normal Backwardation: Patterns over Time

We have established that a futures market is normal if futures prices are higher at longer maturities and inverted if futures prices are lower at distant maturities. This is where the concept gets a little tricky, so we'll start with two key ideas: As we approach contract maturity (we might be long or short the futures contract, it doesn't matter), the futures price must converge toward the spot price. The difference is called the basis. That's because, on the maturity date, the futures price must equal the spot price. If they don't converge on maturity, anybody could make free money with an easy arbitrage. (For more insight, see why do futures' prices converge upon spot prices during the delivery month?) The most rational futures price is the expected future spot price. For example, if you and your counterparty both could foresee that the spot price in crude oil would be $80 in one year, you would rationally settle on an $80 futures price. Anything above or below would represent a loss for one of you! Now we can define contango and normal backwardation. The difference is that normal/inverted refers to the shape of the curve as we take a snapshot in time. Contango and normal backwardation refer to the pattern of prices over time. Specifically, is the price of our contract rising or falling? Suppose we enter into a Dec 2008 futures contract, today, for $100. Now go forward one month. The same Dec 2008 future contract could still be $100. But it might also have increased to $110 (this implies

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normal backwardation) or it might have decreased to $90 (implies contango). The definitions are as follows: Contango is when the futures price is above the expected future spot price. Because the futures price must converge on the expected future spot price, contango implies that futures prices are falling over time as new information brings them into line with the expected future spot price. Normal backwardation is when the futures price is below the expected future spot price. This is desirable for speculators who are "net long" in their positions: they want the futures price to increase. So, normal backwardation is when the futures prices are increasing. Consider a futures contract that we purchase today, due in exactly one year. Assume the expected future spot price is $60 (see the blue flat line in Figure 2 below). If today's cost for the one-year futures contract is $90 (the red line), the futures price is above the expected future spot price. This is a contango scenario. Unless the expected future spot price changes, the contract price must drop. If we go forward in time one month, note that we will be referring to an 11-month contract; in six months, it will be a sixmonth contract.

Sorting Out the Confusion Clearly, it is more precise to say that in contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising. This is not exactly the same as the shape of the futures curve because futures prices are constantly adjusting to consensus expectations about the expected future spot price. Finally, consider a distinction that seems to exist only to confuse. Normal backwardation is not quite the same as backwardation. (For more insight on this, pick up a copy of "Futures, Options and Swaps" (2007) by Robert Kolb and James Overdahl). Backwardation is the same as inverted when futures prices are lower than spot prices. But in many cases, it's better to stick with inverted and drop backwardation altogether.

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6 SILVER FUTURES MARKET FACTS

Silver trading has been appealing to the investor for a number of reasons over the years. It been used as legal tender, and, prior to the 1900s the silver standard preceded the gold standard. Silver is considered one of the precious metals, and like gold, signifies prestige yet with a purifying element. Its appeal owing to the range of products it goes into making. Properties of the metal are that it has high reflectivity, and high electrical and thermal conductivity. The current market applications form an array that include the making of solar cells, mirrors, electronics (solder and contacts), restorative dentistry (amalgam) and jewellery and silverware, coins and metals, and for certain medical purposes. Silver is used to make rods in nuclear reactor cores. Its integral role in photographic film however is diminishing, a demand trend that is expected to continue. While overall utility demand should remain strong, in large-part, based on jewellery buyer sentiment. World Production: main sources of mining output come from the countries of Peru, Mexico, China, Chili and Australia - with 2007 production falling in that order. Silver is often mined and found with other metals such as copper, lead and zinc that it naturally accompanies. The increase in silver prices in the years 2008, 2009 and 2010, have provided reasoning for mining companies to re-evaluate prior operations that have since been closed. As a result, given the substantially greater ounce returns, and prospective profitability, mines have been re-opened such as those located in Mexico and elsewhere. Besides silver futures on the COMEX, which merged with the NYME New York Mercantile Exchange in 1994 as a commodity futures exchange - trading also occurs on CBOT Chicago Board of Trade. Other investment opportunities are in the form of bars, coins, rounds and mining companies. Ticker Symbol: SI Exchange: COMEX* Hours of Trading: 8:25 Am to 1:25 PM Eastern Standard Time Unit/Contract Size: 5,000 troy ounces Price Quote: Per troy ounce Min. Price Change: $0.005 per troy ounce or $25.00 per contract Months of Trading: Jan, Mar, May, Sept (23 mo period) and July, December (60 mo.) Last Trading Day: On the maturing delivery month, at the close of business on the third to the last business day. * in addition is traded as CBOT Chicago Board of Trade with silver Considered both a precious metal and an industrial metal, there are a number price influences on silver. The price does change similarly with that of gold (following the spread between them is a common practice among investors, the gold-silver ratio). And it, too is among the highest investment risks for trading. So as always, consult a professional before investing. You could profit a lot, but loose unimaginably. PRECIOUS METALS | SILVER FUTURES MARKET FACTS 21

7 SILVER FUTURES TRADING UPDATES

During the fiscal year, silver enjoyed uncanny acclaim. Yielding potentially stellar percentage gains. Many analysts attribute this to its utility/industrial value combined with scarcity.

7.1

Chart

The chart clearly shows that the price of silver steadily rises till May 2011 but after that there is a huge fall of 50% of the years rise. Currently the market is trying to stabilize. From here we can expect the both ways movement depending upon the fundamentals and technical.

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7.2

Current Silver Highlights

May 6, 2011 - the metal has dropped over the course of the week, opening at $34.70 for July delivery due in large part to the release of recent hiring statistics. April 11, 2011 - the futures contract for silver goes to new records, trading at over $40 an ounce, opening at $41 for the May contract. March 21, 2011 - floor trading saw silver open at $35.75 per ounce for April contract with U.S. forces now recently engaged in Libya. February 21, 2011 - silver rises as a multiple percentage of its partner as both unrest intensifies in the Mideast and Africa and as an inflationary hedge, the metal is sent to over $33 and with futures close by, a 30 year, 1980 high is broken. January 28, 2011 - spot silver rises approximately 3.5% to outpace gold due mainly to civil chaos in Egypt. To wrap the week at $28.01 December 31, 2010 - the week saw silver attaining a 30 yr high for March delivery at $30.93 an ounce. December 2, 2010- silver futures for March have risen to $28.41 per ounce, continuing the upward trend. Like it's partner, the increase is attributed to a slackening dollar. November 8th, silver reaches a 30 year high, reaching the $28 range on the 9th. October 24, 2010 - silver follows gold's recent decline, its largest loss since last July for the metal. September 24, 2010, silver reaches $21.48 an ounce. A thirty-year high September 24, 2010, silver reaches $21.48 an ounce. A thirty-year high August 26, 2010- silver for December delivery tops nineteen dollars, like its yellow partner, attaining nearly a two month high. Aug 2, 2010 silver futures crest for September delivery. July 7, 2010 it rises to over the $18.00 mark. While earlier in the week on the 3rd, President Obama announced the government backed plan for $2 billion in loans going to solar panel projects that utilitize silver, as the panels seem to gain some momentum. June 8, 2010 silver increases along with gold before tapering, reaching to around $18.47 for July delivery with the rise in both metals attributable to a search for a safe haven. May 17, 2010 silver gains a total 4.2% for the year which is triple that seen by gold on the COMEX. Cited is metals industrial value. April 9, 2010, Silver went to $18.35 per ounce for May delivery on COMEX, reacting to problematic Greek debt. March 23 - May delivery prices tip downward with signals of a stonger dollar, following suit with gold. February 22, 2010 - silver gains appeals as China's recent sale of U.S Treasuries may indicate a shift toward acquiring more of the precious metal By January 22nd, like gold, silver drops in large part due to the China news of a 10 plus % growth of GDP raising the possibility of an interest rate hike.

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LEADING INDICATORS OF SILVER

1. Technical Indicators & 2. Fundamental indicators 3. Economics and various other indicators

8.1

Technical Indicators

Technical indicators are the statistical tools to forecast or analyse or project the future of the market These are the charts based on historical data. Following are the various technical tools which study the history and project the future.

TOOLS

Bollinger Bands Commodity Channel Index Directional Movement Index Displaced Moving Average Envelope Exp. Moving Average High/Low Moving Average Highest High/Lowest Low Historic Volatility Least Sq. Linear Regression Line Oscillator MACD Momentum Moving Average Moving Standard Deviation Oscillator Parabolic Percent R Rate of Change Relative Strength Index Slow Stochastic Stochastic Var. Moving Average Volume and Open Interest Weighted Close Williams Accum. Dist. Index

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8.2

Fundamental Indicators

These are the indicator related to the overall economic conditions and the physical position of the commodities. Also the positions of everything related to the specific commodities. Following are the examples of fundamental indicators.

8.3

Economic and various other indicators

Currency GDP ABC Consumer Confidence Initial jobless claim Continuing claims Unemployment Rate Average weekly earnings Trade balance inventories Producers Price Index Consumer Price Index Other related metals Government actions Fiscal policy Monetary policy Inflation Demand and supply Others

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9 TECHNICAL INDICATORS RECENT TREND FOR SILVER

9.1

Moving Average

Moving averages are one of the most commonly used technical tools. They follow the trend, smooth the normal fluctuations of the data, and clearly signal long and short positions to the investor. This study displays moving averages as the normal crossover trading system. You may select up to three different averages. Most investors and charting services use three moving averages. Their lengths typically consist of short, intermediate, and long-term. A commonly used system is 4, 9, and 18 intervals. An interval may be ticks, minutes, days, weeks, or even months; it depends upon the chart type. The normal moving average crossover buy/sell signals are as follows. A buy signal is flashed when the short and intermediate term averages cross from below to above the longer term average. Conversely, a sell signal is issued when the short and intermediate term averages cross from above to below the longer term average. You can use the crossover approach with only two moving averages, but market technicians suggest longer term averages (a longer interval) when trading only two moving averages in a crossover system. 9.1.1 Chart

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The moving average indicates that the crossover of 4,8,14 day moving average changes the direction of momentum of the market. Recently in may its clearly visible that after the crossover the silver market crashed. Technically the market is giving hold position as of now.

9.2

Bollinger Band

Bollinger Bands are a kind of trading envelope. They are lines plotted at an interval around a moving average. Bollinger Bands consist of a moving average and two standard deviations charted as one line above and one line below the moving average. The line above is two standard deviations added to the moving average. The line below is two standard deviations subtracted from the moving average. Traders generally use them to determine overbought and oversold zones, to confirm divergences between prices and indicators, and to project price targets. The wider the bands are, the greater the volatility is. The narrower the bands are, the lesser the volatility is. The moving average is calculated on the close.

Parameters: Period (20) - the number of bars, or period, used to calculate the study. John Bollinger, the creator of

this study, states that those periods of less than ten days do not seem to work well for Bollinger Bands. He says that the optimal period for most applications is 20 or 21 days. Standard Deviation (2) - the percent of one standard deviation. John Bollinger suggests, if you reduce the number of days used to calculate the bands, you should also reduce the number of deviations and vise versa. For example, 200 percent of a standard deviation means two deviations above and two deviations below the moving average. If you use a period of 50, you may want to use 250 percent of a standard deviation. For a period of 10, you may want to use 150 or 100 percent. 9.2.1 Chart

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Now in the diagram above the tool used is Bollinger band. Upper band is the average of highs and the lower band is the average of lows and also the middle band is the average of the averages of lower band and the upper band. When the upper band is touched then this gives rise to sell call and when the lower band is touched then this gives rise to buy call. But the breakout of any of the two extreme will indicate the outbreak of the market in the same direction. In the given graph its clearly visible that in may the upper band touched and after that the market of silver crashed. Technically the chart is indicating the buy call as the lower Bollinger band is touched.

9.3

MACD

The MACD is similar in concept to the line oscillator. In fact, the buy/sell indicators are identical. The difference is the MACD uses exponential moving averages versus the simple moving averages used in the line oscillator study. Gerald Appel is credited with developing this study. His trading rules are simple. You buy when the oscillator crosses above the slower exponential moving average of the oscillator. Conversely, you sell when the oscillator crosses from above to below the exponential moving average of the oscillator. Lastly, divergence is possible with the MACD. The ideal signal would show divergence, clearly break a dominant trendline, and display the crossing of the MACD lines. Another approach is to use this study in conjunction with long term charts. For example, you select the underlying weekly or monthly chart that corresponds to the intraday or daily chart for the same futures instrument. Now, you display the study on the long term chart. If the longer term chart is bullish, i.e., a buy signal is indicated, you want to be very cautious in short positions. You are trading against the longer term trend.
Parameters: First (12) - the number of bars, or interval, used to calculate the first Exponential Moving Average. Second (26) - the number of bars, or interval, used to calculate the second Exponential Moving

Average.
Difference (9) - the number of bars, or interval, used to calculate an additional Exponential Moving

Average.

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9.3.1

Chart

Here again the lower panel of the chart clearly shows the movement of market as per the MACD indicator explained above. The example above indicates the buy call.

9.4

Slow Stochastic (SSTO)

Dr. George C. Lane is the author of the stochastic indicator. His basic premise is as follows:During periods of price decreases, daily closes tend to accumulate near the extreme lows of the day. Periods of price increases tend to show closes accumulating near the extreme highs of the day. The stochastic study is an oscillator designed to indicate oversold and overbought market conditions. Some technical analysts prefer the slow stochastic rather than the normal stochastic. The slow stochastic is simply the normal stochastic smoothed via a moving average technique. The slow stochastic, like the normal stochastic study, generates two lines. They are %K and %D. The stochastic has overbought and oversold zones. Dr. Lane suggests using 80 as the overbought zone and 20 as the oversold zone. Other technicians prefer 75 and 25. Dr. Lane also contends the most important signal is divergence between %D and the commodity. He explains divergence as the process where the stochastic %D line makes a series of lower highs while the commodity makes a series of higher highs. This signals an overbought market. An oversold market exhibits a series of lower lows while the %D makes a series of higher lows. PRECIOUS METALS | TECHNICAL INDICATORS RECENT TREND FOR SILVER 29

When one of the above patterns appear, you should anticipate a market signal. You initiate a market position when the %K crosses the %D from the right-hand side. A right-hand crossover is when the %D has bottomed or topped and is moving higher or lower and the %K crosses the %D line. According to Dr. Lane, your most reliable trades occur with divergence and when the %D is between 10 and 15 for a buy signal and between 85 and 90 for a sell signal.
Parameters: Overall Period (14) - the number of periods used to determine the highest high and lowest low. %K MA Period (3) - the number of periods used to determine the moving average for the %K value. %D MA Period (3) - the number of periods used to determine the moving average for the %D value. AdditionalLinePeriod (3) - the number of periods used to determine an additional Moving Average

on the Stochastic.

9.4.1

Chart

Here again the silver market has very much supported the technical indication of slow stochastic The indicator above indicates the buy call in the given silver chart

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10 SILVER VS GOLD
With so many traders debating silver or gold futures, and the kind of growing hype surrounding each of the metals, its interesting to explore firsthand why futures contract decisions are being made. Even if a diversified portfolio is sought, the makeup of each in the mix is crucial. There are the real world facts, of gold being bought in ever increasing quantities, largely in reaction to the questionable stabilities of fiat currencies of global markets, and the rising hoarding practices by countries such as China, and India. While mining only gets harder, large amounts of its supply are provided by recycling measures, such as from jewellery. The performance of silver in 2010 on the other hand, was undeniable, showing hands down gain of 75% on spot for the year. The supply of silver has dwindled, with the majority of its naturally occurring supply believed to have been already mined, gold scarcity pales by comparison. Too, recycling silver is less of a prospect, with so many of its industrial applications occurring in trace amounts. Viewing gold trading at around $1,400 and silver at or near $30 an ounce, at the start of 2011 (depending on delivery month, etc), it will be curious to see what happens. Many experts, digesting the whole picture, now forecast that silver will outperform gold, contrary to the yellow metal devotees.

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11 SILVER FORCAST
You have to plan ahead to stay ahead. Many sliver price predictions are quite daring. Many insiders forecast silver prices literally going through the roof, soaring in relative terms in the end of 2010 and beginning of 2011, just as they did in the 1970s. Of course, you have heard such prediction before, but the facts and fundamentals remain solidly in place for silver as it remains very undervalued on an historical basis, and is undervalued even against gold. Meanwhile gold has been getting plenty of attention from retail investors, thanks to a concerted push by everyone on TV, Talk Radio and Internet. Even Yahoo! Finance now shows gold prices under Market Summary on its front page. Yet silver remains obscure, the preserve of relatively few contrarian investors with the media and financial press barely covering it. That is why the only response bullish silver price predictions elicit is total disbelief expressed by light facial shock with eyes rolling sky high. All it is now when the silver prices are sitting in the intermediate stage of a bull market that will rival or surpass that of the 1970s. Silver today is worth less than $17.75 per ounce and was at $20.88 per ounce in March 2008. After an 18 month period of correction and consolidation, silver price looks set to challenge that high in the coming months. Our predictions continue to be bullish on gold (see Gold Price Direction Gold Prices Forecast 2009 2010), and we firmly believe that silver will likely outperform gold and quite substantially. In fact our silver prices forecast for 2010 and 2011 is such that silver will exceed its non inflation adjusted high of $48.70 per ounce and its price can reach $55 to $65 range in the coming years.

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11.1.1

Why silver is in a bull market and what is the highest predictions?

In recent years, gold and silver have outperformed equities and real estate. Due to the very bullish fundamentals, this trend is set to continue in the coming months. The forecast for silver prices in 2010 and 2011 is based on: - the increasing global macroeconomic, currency and geopolitical risks - silver historic role as money and a store of value - the ever declining and very small remaining silver deposits - significant industrial demand - significant and growing investment demand Gold, oil, potash, and other major commodities went over their record highs in recent years because of growing demand and short supply, geopolitical risks and concerns regarding the emergence of inflation and stagflation all pointing to higher silver prices in the long term. Silver rose from under $1.50 per ounce in 1970 to nearly $50 in 1980, increasing by some 2,400%. Were silver to replicate that, it would have to rise from $4.37 per ounce in 2001 to $110 per ounce. Such seemingly outlandish silver price predictions make many people laugh, but the silver record high in 1980 adjusted for inflation, according to the US government inflation figures, was around $130 per ounce.

11.1.2

Silver prices forecast considers dwindling supplies

According to commodities-research CPM Group, there were close to 2.2 billion ounces of silver in the world. While it may sound huge, the number of ounces stood at 12 billion in 1900. Today, there is less than 1 billion ounces of above ground refined silver. More than 90% of all the silver that has ever been mined, has been consumed by the global photography, technology, medical, defence and electronic industries. While the birth of digital photography certainly diminished use of silver in the photo industry, based on current and projected supply and demand trends, the amount of above ground refined silver is to shrink to even lower levels in the coming years as demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. However few in the investment world and almost nobody in retail are aware of this important fact. Why silver price has not gone up? We do not believe in conspiracy theories. The increased demand has been met by silver ounces from inventories and official government stockpiles, which today are getting close to depletion. Those include U.S., China, Russia and India reserves. Now 80% of silver has been mined as a by-product of other base metals such as copper, nickel, zinc and lead. In the event of a global stagflationary or deflationary slowdown, you cannot expect these base metal miners to increase production for the sake of silver as demand for their core product would likely fall, thus further decreasing the supply of mined silver. There are only a few pure silver mines remaining, all with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price rise. All these facts comprise a powerfully bullish picture which is unique to silver. 11.1.3 Increasing industrial demand is bullish for silver

Silver today is used more than ever in traditional applications such as mirrors, batteries, medical devices and electrical appliances as well as more recent ones like cell phones, flat-screen televisions, laptops and other modern high tech devices. Increasingly, silver antimicrobial and antibacterial qualities are being used in many types of medical applications. There are many ongoing research projects on the use of silver based compounds for therapeutic and antibacterial purposes. Increasing industrial demand and application for silver forecast higher prices due to economic growth in China, India, Vietnam, and Brazil. PRECIOUS METALS | SILVER FORCAST 33

Their growing middle classes are now demanding the quality of life and standard of living enjoyed by many in the West and thus the demand for silver will likely increase. An important side note unlike gold, silver is not recycled because of its much lower value. So silver is in a way like oil as it is consumed and used, its gone forever. 11.1.4 Increasing investment demand

With the recent hiatus in real estate and stock market and with gold being very expensive, predictions of increasing investing demand for silver are coming to fruition. There has been a marked increase in investment demand for silver in recent years. The introduction of ETFs that track the price of silver, a new global liquidity bubble, the significant growth in the global money supply, the proliferation of wealthy people, hedge funds and the exponential growth in derivatives. In 2003, Warren Buffet called the latter financial weapons of mass destruction. Investors in silver bullion coins and bars are hedging themselves against further deflation and falls in property and equity markets. They are further protecting themselves against rising inflation, possible currency devaluations and still very prevalent geopolitical and macroeconomic risks such as those posed by the humongous global derivatives market. 11.1.5 Silver is very undervalued comparing to gold

Silver has gotten grossly undervalued versus gold with the gold-to-silver per ounce ratio at 62:1 ($1,105 / $17.75), which goes against a long term historical basis with average gold-to-silver ratio of 15:1. It has been estimated that geologically there are some 15 pieces of silver for every one piece of gold. In 1980, this ratio was 17 ($850 / $50) for a short time while the average in the 20th century has been around 40:1. So if the ratio gets close to 40 at today gold prices, the silver price should be around $27.50 ($1,100 / 40). So silver price predictions for 2010 and 2011 are based on the facts that this is a unique metal in terms of being both a monetary and an industrial metal. Silver is priced at less than $17/oz today. The average nominal price of silver in 1979 and 1980 was $21.80 per ounce and $16.39 per ounce respectively. In todays dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60 per ounce and $44 per ounce in 1979 and 1980. Add to this the rising gold prices, geopolitical complications, ever decreasing value of paper money and dwindling supplies.

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12 RECOMMENDATIONS
In recent years, gold and silver have outperformed equities and real estate. Due to the very bullish fundamentals, this trend is set to continue in the coming months. Silver today is worth less than $17.75 per ounce and was at $20.88 per ounce in March 2008. After an 18 month period of correction and consolidation, silver price looks set to challenge that high in the coming months. With few pure silver mines remaining, all with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price rise. All these facts comprise a powerfully bullish picture which is unique to silver. Investors in silver bullion coins and bars are hedging themselves against further deflation and falls in property and equity markets. Trend is likely to be continuing in future and thus demand for silver will be high. Investors are further protecting themselves against rising inflation, possible currency devaluations and still very prevalent geopolitical and macroeconomic risks such as those posed by the humongous global derivatives market. Thus further indicating rise in demand in future. Viewing gold trading at around $1,400 and silver at or near $30 an ounce, at the start of 2011. Forecast is that silver will outperform the gold in the coming future. Growing demand and short supply, geopolitical risks and concerns regarding the emergence of inflation and stagflation all pointing to higher silver prices in the long term. Significant industrial demand, significant and growing investment demand also indicating to the higher silver prices in the long term. Like gold, silver is not recycled because of its much lower value. So silver is in a way like oil as it is consumed and used, its gone forever. Thus further increasing its scarcity. Silver today is used more than ever in traditional applications such as mirrors, batteries, medical devices and electrical appliances as well as more recent ones like cell phones, flat-screen televisions, laptops and other modern high tech devices. Thus indicating further price increase for silver. Increasingly, silver antimicrobial and antibacterial qualities are being used in many types of medical applications thus the demand for silver will likely increase. Increasing industrial demand and application for silver forecast higher prices due to economic growth in China, India, Vietnam, and Brazil. Growing middle classes are now demanding the quality of life and standard of living enjoyed by many in the West and thus the demand for silver will likely increase.

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13 REFERENCES
http://www.investopedia.com/dictionary/ http://www.moneycontrol.com/news/ http://www.mckinseyquarterly.com/home.aspx http://knowledge.wharton.upenn.edu/ http://www.careers-in-business.com/ http://www.cob.ohio-state.edu/fin/journal/jofsites.htm http://thomsonreuters.com/products_services/financial/ http://india.wsj.com/home-page http://www.forbes.com/ http://www.tradingeconomics.com/ http://www.bloomberg.com/ http://futuresource.quote.com/home.action www.bmfbovespa.com.br http://www.cmegroup.com http://www.cme.com/about/ins/caag/opebusines2798.html http://www.ci.chi.il.us/Landmarks/B/BoardTrade.html http://www.gutenberg.org/etext/4382 "Topic Galleries - chicagotribune.com". Chicago Tribune. CNN.com "CME Group and Citadel to Launch the First Integrated Credit Default Swaps Trading Platform and Central Counterparty Facility, Linked to CME Clearing". December 28, 2008. Efinancialnews.com Hedgefundsreview.com http://www.livemint.com/ http://epaper.timesofindia.com/index.asp http://www.investorwords.com/ Saphir, Ann (2008-03-03). "Trading Places". Crain's Chicago Business (Crain Communications Inc.). CMEgroup.com Cameron, Doug (December 26, 2008). "End of Line For Futures Exchange". Wall Street Journal. "MF Global to Exit U.S. Futures Exchange". December 26, 2008. "U.S. Futures Exchange to List Mini-Sized U.S. Dollar-Denominated DAX(R) Futures Contract". PRNewswire. U.S. Futures Exchange. September 9, 2008. http://www.businessweek.com/ http://www.economist.com/ http://www.investors.com/ http://money.cnn.com/magazines/fortune/ "U.S. Futures Exchange to list Mini-Sized U.S. Dollar-Denominated DAX Futures Contract". U.S. Futures Exchange. September 9, 2008. http://www.cmegroup.com NYBOT press release NYCP website White, Norval & Willensky, Elliot (2000). AIA Guide to New York City (4th ed.). New York: Three Rivers Press. ISBN 0812931076., p.157 http://wetfeet.com/ http://www.institutionalinvestor.com/ http://www.euromoney.com/ http://www.ft.com/home/uk PRECIOUS METALS | REFERENCES 36

New York City Landmarks Preservation Commission. Guide to New York City Landmarks (4th ed.) New York:Wiley, 2009. ISBN 978-0-470-28963-1, p.22 CME website CME website press release Nathan Lewis (26 June 2009), "Where's the gold?", The Huffington Post List of Commodity Delivery Dates on Wikinvest

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