1.

1 ABOUT THE STUDY

Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

The study about the effectiveness of future contact is useful for those who are risk averse and those who want to protect themselves from the risk arising from unexpected market movements. The study also focuses on the effectiveness of the hedged portfolio. The return from the not hedged portfolio is exposed to unlimited market risk. However by hedging the portfolio with appropriate hedge ratios one can minimize the unexpected market moves.

Using the relationship between the changes in the futures prices and the prices of the cash asset, we may now proceed to determine the appropriate number of futures contract to buy or sell when hedging. In this context, the hedge ratio is different as the number of futures contracts to buy (or sell) per unit of the spot good position. Normally, one would believe that the size of the position taken in the futures contract should be same as the size of the exposure in the cash asset, (implying that for Rs.10 lakh position in the cash market, the position taken in futures market should also be Rs 10 lakh) so that the hedge ratio is implicitly taken to be 1.0.

This ratio was developed as the optimal hedge ratio for any unbiased futures market. If the futures market is unbiased, the only advantage to hedging is to reduce risks associated with deviations from the expected income. By using the minimum-variance hedge ratio, a producer will eliminate the maximum amount of uncertainty that can possibly be eliminated by hedging. Therefore, if the futures market is unbiased, the minimum-variance hedge ratio will always be the optimal hedge ratio for any risk averse producer regardless of the degree of risk aversion.

Hedge Ratio = Co-Efficient Of Correlation *

Standard Deviation Of Spot Price Standard Deviation Of Future Price

The degree, to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market return. For all practical purposes, the market returns are measured by the returns on the index, since the index is a good reflector of the market.

1.2 ABOUT THE INDUSTRY

COMMODITY MARKETS Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. HISTORY The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade. SIZE OF THE MARKET The trading of commodities consists of direct physical trading and derivatives trading. The commodities markets have seen an upturn in the volume of trading in recent years. In the five years up to 2009, the value of global physical exports of commodities increased by 25% while the notional value outstanding of commodity .Over-the-counter derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%.

RECENT TRENDS IN COMMODITIES The 2010 global boom in commodity prices - for everything from coal to corn was fueled by heated demand from the likes of China and India, plus unbridled speculation in forward markets. That bubble popped in the closing months of 2009 across the board. As a result, farmers are expected to face a sharp drop in crop prices, after years of record revenue. Other commodities, such as steel, are also expected to tumble due to lower demand. This will be a rare positive for manufacturing industries, which will experience a drop in some input costs, partly offsetting the decline in downstream demand INVESTMENT RETURNS It is generally agreed that commodities have an expected return of 5% in real terms which is based on the risk premium for 116 different commodities weighted equally since 1888 (Source Report 219171-Wharton Business School). It is common for investment professionals to mistakenly claim there is no risk premium in commodities. SPOT TRADING Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale market. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection. FORWARD CONTRACTS A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.

FUTURES CONTRACTS A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and Futures contracts are based on whats termed "Forward" Contracts. Early on these "forward" contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural Products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early Forward contracts for example, were used for rice in seventeenth century Japan. Modern "forward", or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. HEDGING Hedging", a common (and sometimes mandatory) practice of farming cooperatives, insures against a poor harvest by purchasing futures contract in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. Whole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nations

DELIVERY AND CONDITION GUARANTEES In addition, delivery day, method of settlement and deliver point must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.

MULTI COMMODITY EXCHANGE: MCX is a demutualised nationwide electronic multi commodity futures exchange set up by Financial Technologies with permanent recognition from Government of India for facilitating online trading, clearing & settlement operations for futures market across the country. The exchange started operations in November 2003.

Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures trading in 55 commodities as on December 31, 2007, defined in terms of the type of contracts offered, from various market segments including bullion, energy, ferrous and non-ferrous metals, oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibers. The exchange strives to be at the forefront of developments in the commodities futures industry and has forged ten strategic alliances across the world, including with Tokyo Commodity Exchange, Chicago Climate Exchange, London Metal Exchange, New York Mercantile Exchange, New York Board of Trade and Bursa Malaysia Derivatives. The Key shareholders in MCX are: State Bank of India and its associates (SBI), National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), SBI Life Insurance Co. Ltd., Bank of India (BoI) , Bank of Baroda ( BoB ), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank,Benett Coleman & Company Limited , Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Trusteeship Service Limited, IL&FS Trust Company Limited, Kotak group, Citibank Strategic Holdings Mauritius Limited, Merrill Lynch Holdings (Mauritius) and Financial Technologies of India Ltd.
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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.

MCX COMDEX MCX COMDEX is designed & developed by the Research & Planning Department of Multi Commodity Exchange of India Ltd. (MCX) in association with the Indian Statistical Institute (ISI), Kolkata. This is the maiden Composite Commodity Index in India based on commodity futures prices of an exchange. Also Group Indices for MCX AGRI, MCX METAL & MCX ENERGY on commodity futures prices have been developed to represent different commodity segments as traded on the exchange.

1.3 ABOUT THE COMPANY

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Aditya Trading Solutions Pvt. Ltd., ATS is a full service commodity brokerage and trading firm specializing in Risk Management. ATS management had years of experience heading risk management departments of various oil majors and fortune companies Aditya trading solutions private limited is a full spectrum INVESTMENT MANAGEMENT house specializing in online commodity trading. We are one of the earliest members of MCX and pioneers of online commodity broking in TAMILNADU. ATS is promoted by young and dynamic entrepreneurs who have years of proven experience in international derivative markets like NYMEX and worked with several FORTUNE 500 companies.

Our Mission To provide cost effective Trading, Investment & Risk Management solutions to our ever increasing client base in a professional and ethical way. We offer you following services

Trading & investment access to MCX, NCDEX, NSE, SSE & Currency futures Physical Delivery of commodities Price risk management & Hedging Wealth management with capital protection Research & investment advisory

24 X 7 online back office

When you are a client of ATS you never have to worry about not knowing your account status. You can access your Trading/Accounts statement any time, anyplace at your convenience
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with help of our 24 X 7 online back office software. Online Trading Platform We provide you online trading software to help you place your orders at the click of a button. We ensure that the entire process right from opening your account to placing an order online is as simple and hassle free as possible.

Research Guidance

We provide you with highly successful Trading/Investment calls to enhance your profitability. Our research will guide you in making informed decisions Which will make your WEALTH GROW. Research on your mobile

Imagine how profitable you can be if critical research calls are available to you on time, We at ATS deliver trading calls to your mobile through SMS on, every time.

OUR MANAGEMENT

Mr. Vikas Jain - Managing Director

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Mr. Sunish C V Director Mr. Suresh Kumar P - Vice President Ms. Divya B - Financial Controller Mr. Manoharan - Business Leader Mr. Lenish K - Risk Manager

PRODUCTS AND SERVICES OFFERED

Equity & Derivatives Equity and derivatives go hand in hand as they help maximize return and minimize risk at the same time! ADITYA clients are assisted in protecting the downside risk to their portfolio using appropriate combination of options. Our advisory is skilled to help you in maximizing your gains from your existing corpus using numerous strategies based on the direction and intensity of the views. ADITYA ensures that you get the one of the finest trading experiences through:

An experienced and qualified team of Equity professionals offering unbiased advice on equity investment decisions. All members having immense experience and each of them being professionally certified by the National Stock Exchange.

A high level of personalized and confidential service. Constant monitoring of client portfolio so that the returns are maximized and the risks are minimized Secure, integrated broking system
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Powerful Research & Analytics

ADITYA has a great retail network, with its presence through more than 150 branches across more than 10 states. This means, you can walk into any of these branches and get in touch with our highly skilled and dedicated staff to get the best services.

Commodities Commodities are now an asset class! For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are an excellent option. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. Historically, prices in commodities futures have been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. ADITYA helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap. It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country. ADITYA commodity services are a class apart and the following features differentiate our services from others:

Professionally qualified analysts with rich industry experience Research on Agro Commodities, Precious Metals, Base Metals, Energy products and Polymers Market watch for MCX and NCDEX with BSE / NSE Streaming quotes and live updates Relationship management desk Educating clients on commodities futures market

Depository

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ADITYA is a depository participant with Central Depository Services (India) Limited (CDSL) and uses the latest in technology to deliver DP Services in a hassle free, secure and transparent environment. There are two main reasons why you should use ADITYAs DP services:

ADITYA ensures that its clients focus on investment and trading decisions rather than the drudgery of operational and transactional processes. ADITYA offers a risk free, prompt and efficient depository process.

Depository Services provided by ADITYA include:

Account Opening Dematerialization Dematerialization Account Transfer Nomination Pledging

Investment Advisory ADITYA has a dedicated team of professionals handling the investment advisory services of the firm. These experts use their knowledge of investments, tax laws, and insurance to recommend financial options to clients in accordance with their short-term and long-term goals. Some of the issues that the specialists address are general investments, retirement planning, tax planning and child education & welfare planning. Our certified Investment Advisory Managers strive to understand each individual clients needs, risk profiles and investment goals to provide the best advice. Apart from

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advising, they help clients build and track their investments. They also regularly monitor, report and recommend changes based on the performance of the portfolio. Investment Advisory helps you in the following ways:

Provides you with the information to make fruitful and timely financial decisions. Helps you understand how each financial decision other areas of your finances. Aids you in assessing the level of risk that is suited to your lifestyle and financial situation. Facilitates you to manage your finances based on the goals that you are looking to achieve.

We offer advice on and help invest in the following products:

Mutual Funds Insurance - Life & Non - Life Bonds Deposits IPOs

Research Our primary strengths lie in research and operational efficiency. The day-to-day operations are managed by some of the best professionals in the industry having in-depth understanding of underlying market trends and sound business practices The Research Team comprises of competent professionals with vast experience, insightful analytical abilities and high standards of integrity. Some of our research reports are as below:

Economic Outlook and Updates Sector & Company Reports Technical Recommendations Daily Market Report
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Daily Technical Outlook Reports on New Fund Offerings Weekly analysis of mutual funds Fund Focus Weekly debt report: Debt Dose Monthly Newsletter - ADITYA Investment Flash Monthly 4 Pager - ADITYA Wealth Wise

2.1 OBJECTIVES OF THE STUDY

To find out the effectiveness of future contract as a tool of hedging.

Analysis of minimizing the market risk through Future contracts. To find the effectiveness of hedging. To find optimum hedge ratios so that to determine the volume of commodities to be sold or bought in future.
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2.2 SCOPE OF THE STUDY

A hedge using index futures removes the risk arising from market moves and leaves the hedger exposed only to the performance of the portfolio relative to the market

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Futures contracts enable market participants to alter risks, which they face caused by adverse and unexpected price changes. Hedging through future market is advantageous because of its low cost. This study is useful for those who are risk averse and those who want to protect themselves from the risk arising from unexpected market movements. The study also focuses on the effectiveness of the hedged portfolio. The return from the not hedged portfolio is exposed to unlimited market risk. However by hedging the portfolio with appropriate hedge ratios one can minimize the unexpected market moves.

2.3 LIMITATIONS OF THE STUDY

Only commodities under MCX have been selected. The study is limited to five year data.

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Among many commodities only 5 commodities are included for this study. Hedging is a tool to mitigate loss not for earning profit. Only particular sector, AGRI index only taken for consideration. For this study only quarterly closing data is used.

2.4 RESEARCH METHODOLOGY

INTRODUCTION Research methodology is a way to systematically solve the research problems. It includes the overall research design, the sampling procedure, and Data collection method and analysis procedure.
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The Advance Learners Dictionary of Current English lays down the meaning of research as A careful investigation or inquiry especially through search for new facts in any branch of knowledge.

RESEARCH DESIGN A research design is the arrangement of condition for collection and analysis of data in a manner, which may result in an economy in procedure. It stands for advance planning for collection of the relevant data and the techniques to be used in analysis, keeping in view the objectives of the research and availability of time. The research used here for the study is analytical research. It is quite informal, it relays on the secondary data .The result are usually used for making decision by themselves.

SAMPLE SIZE AND SAMPLING TECHNIQUE

Samples of five commodities from MCX AGRI index are taken for this study. The sampling technique used for this study is conveyance sampling.

SOURCES OF DATA

Main objective of this analysis is to find out the effectiveness of future contract using technical analysis. Source of data collected is Secondary. Print media and internet has been used for data collection. The data was obtained from the multi commodity exchange website (www.mcxindia.com). For the purpose of this study the monthly opening and closing prices of five commodities included in Multi Commodity Exchange were taken and their price movements are computed and studied. The commodities selected are as follows:
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Cardamom Refsoyaoil Menthaoil Crude Pam oil Potato

STATISTICAL TOOLS

Moving average Standard Deviation Co-efficient of Correlation Hedge Ratio Beta-Technical indicator

MOVING AVERAGE

The market does not rise of all in the straight line. The up moves and down moves are interrupted by counter moves quite after the other counter moves is quite volatile making it
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difficult for the analyst to gauge the underlying trend is to smooth the data which can be done with the help of Moving average. SIMPLE MOVING AVERAGE In the technical analysis the moving average is one if the key trend lines that are plotted on the chart reflecting the closing price over weeks. When the moving average moves above or below the daily charts it may generate a buy or sell signal.

STANDARD DEVIATION:

Standard Deviation is a statistical tool, which measures the variability of returns from the expected value, or volatility. It is denoted by sigma(s) . It is calculated using the formula mentioned below:

Where,

is the sample mean, xi s are the observations (returns), and N is the total number of

observations or the sample size.

CORRELATION:

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Correlation analysis helps to determine the strength of the linear relationship between the two variables X and Y, in other words, as to how strongly are these two variables correlated. Karl Pearson, in 1896, developed an Index or Coefficient of this association in cases where the relationship is a linear one, i.e. where the trend of the relationship can be described by a straight line. The Pearsons coefficient of correlation is designated by r. The coefficient of correlation r can be designed as a measure of strength of the linear relationship between the two variables X and Y. The sign of the coefficient can be positive or negative. It is positive when the slope of the line is positive and it is negative when the slope of the line is negative.

The Coefficient of Correlation (r)

r =

n( XY) ( X) ( Y ) n X 2 ( X)2 n Y 2 ( Y ) 2

BETA:

The degree, to which different portfolios are affected by these systematic risks as compared to the effect on the market as a whole, is different and is measured by Beta. To put it differently, the systematic risks of various securities differ due to their relationships with the market. The Beta factor describes the movement in a stock's or a portfolio's returns in relation to that of the market return. For all practical purposes, the market returns are measured by the returns on the index, since the index is a good reflector of the market.

21

Methodology/Formula Beta is calculated as,

Covariance is a statistic that measures how two variables co-vary, and is given by:

Where, N denotes the total number of observations, and arithmetic averages of x and y.

and

respectively represent the

Hedge ratio

Using the relationship between the changes in the futures prices and the prices of the cash asset, we may now proceed to determine the appropriate number of futures contract to buy or sell when hedging. In this context, the hedge ratio is different as the number of futures contracts to buy (or sell) per unit of the spot good position. Normally, one would believe that the size of the position taken in the futures contract should be same as the size of the exposure in the cash asset, (implying that for Rs.10 lakh position in the cash market, the position taken in futures market should also be Rs 10 lakh) so that the hedge ratio is implicitly taken to be 1.0.

Hedge Ratio = Co-Efficient Of Correlation *

Standard Deviation Of Spot Price Standard Deviation Of Future Price

2.5 REVIEW OF LITERATURE

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Several source exist those describing regression techniques to determine the optimal hedge ratio and the corresponding hedging effectiveness. Benninga, et al. (1984) derived the minimum-variance hedge ratio from an ordinary least squares (OLS) regression with cash price levels (or price changes) as the dependent variable and futures price levels (or price changes) as the explanatory variable. The minimum-variance hedge ratio is simply the slope coefficient of the OLS regression, or equivalently: Covariance (Cash, Futures) / Variance (Futures). This ratio was developed as the optimal hedge ratio for any unbiased futures market. If the futures market is unbiased, the only advantage to hedging is to reduce risks associated with deviations from the expected income. By using the minimum-variance hedge ratio, a producer will eliminate the maximum amount of uncertainty that can possibly be eliminated by hedging. Therefore, if the futures market is unbiased, the minimum-variance hedge ratio will always be the optimal hedge ratio for any risk averse producer regardless of the degree of risk aversion. Kamara (1982) compared cash market volatility before and after the introduction of futures trading and found that the introduction of commodity futures trading generally reduced or at least did not increase cash price volatility. Singh (2000) investigated the hessian cash (spot) price variability before and after the introduction of futures trading (1988-1997) in Indian markets using the multiplicative dummy variable model and concluded that futures trading has reduced the price volatility in the hessian cash market.

Cross-Hedging

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One of the purposes of this study is to determine whether the cash hog index can serve as an effective risk management tool for large buyers and sellers. Hayenga and Di Pietre (1982) studied a very similar situation in analyzing the hedging possibilities of wholesale pork products with the live hog futures contract from 1970 to 1979. Their results showed a very high correlation between pork product prices and live hog futures prices. However, their methodology differed significantly from the methods that will be employed in this study. First, they used average price levels rather than price changes over a specific lagged period. Second, their model reduced ten years of daily data to a sample size of ten for each regression, placing a great deal of emphasis on each individual observation. Third, they used a simple minimum-variance regression technique that may not be appropriate for reasons similar to those suggested by Myers and Thompson (1989). Hayenga, et al. (1994) further examined cross-hedging beef and pork products using both unconditional and conditional approaches. They concluded that meat handlers should consider using more sophisticated cross-hedging models in order to provide better results. Thompson, et al. (1993) gave further background on cross-hedging commodities, focusing on the relationships between cash canola prices and soybean, soybean oil, and soybean meal futures prices. Using price changes over different lagged time periods, the authors provided a detailed analysis of the minimum-variance hedge ratio and also provided a hedging effectiveness measure indicating the proportion of cash price variance that can be eliminated through hedging at the minimum-variance rate. Hedging effectiveness can be measured by using the R 2 coefficient when using OLS regression techniques.

TABLE 3.1 TABLE SHOWING THREE DAY MOVING AVERAGE OF CARDAMOM

Month
March06 June 06

Spot price
265.5 250

Moving avg.

Future price
275.8

Moving avg.

332.6
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258.9

372.5667

September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

482.3 372.5 435.7 464.9 485.5 588.5 614 613.5 703 548 604 803 677.5 1005.5 1187.6 1678.1 1125.2 1500

368.3 430.2 424.4 462 513 562.7 605.3 643.5 621.5 618.3 651.7 694.8 828.7 956.9 1290 1330 1434

583 479.6 592.8 527 566.5 670.5 545 560 706.5 554 590 785 698.25 1140.25 1297.1 1442 1025.6 1598.8

440.5 551.8 533.1333 562.1 588 594 591.8333 603.8333 606.8333 616.8333 643 691.0833 874.5 1045.2 1293.117 1254.9 1355.467

CHART 3.1 CHART SHOWING THREE DAY MOVING AVERAGE OF CARDAMOM

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INTERPRETATION The moving average of future price of Cardamom is going above the moving average of spot price it shows a buy signal to the investor in future contract.

TABLE 3.2 TABLE SHOWING THREE DAY MOVING AVERAGE OF CRUDE PAMOIL

Month
March06 June 06 September 06

Spot price
164.1 174.7 188

Moving avg.

Future price
178.1

Moving avg.

175.6 199.1667
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186.3 197.7

187.3667 210.2

December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

234.8 231.3 326.1 396 413.8 304.7 511.9 343 264.8 307.7 335.8 318 357.4 359.8 364.7 413.7 549.7

218.0333 264.0667 317.8 378.6333 371.5 410.1333 386.5333 373.2333 305.1667 302.7667 320.5 337.0667 345.0667 360.6333 379.4 442.7

246.6 242.2 342 407.5 420.6 313.6 516.2 339.8 276.7 314.6 339.5 313.5 373.6 366.9 360 412.6 567.4

228.8333 276.9333 330.5667 390.0333 380.5667 416.8 389.8667 377.5667 310.3667 310.2667 322.5333 342.2 351.3333 366.8333 379.8333 446.6667

CHART 3.2 CHART SHOWING THREE DAY MOVING AVERAGE OF CRUDE PAM OIL

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INTERPRETATION The moving average of future price of Crude Pam oil is going above the moving average of spot price it shows a buy signal to the investor in future contract.

TABLE 3.3 TABLE SHOWING THREE DAY MOVING AVERAGE OF MENTHAOIL

Month
March06

Spot price
477.1

Moving avg.

Future price
422.7

Moving avg.

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June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

538.6 786.2 642.9 554.7 529.4 511.8 480.5 495.9 555.9 612.3 589.6 587.6 527.8 543.5 641.2 668.5 781.2 973.4 1318

600.6333 655.9 661.2667 575.6667 531.9667 507.2333 496.0667 510.7667 554.7 585.9333 596.5 568.3333 552.9667 570.8333 617.7333 696.9667 807.7 1024.2

509.1 758.9 611.1 543.6 523.8 543.7 444.1 446.7 544.9 620.3 546 530.5 521.5 523.7 603.6 628.6 759.6 885.3 1190

563.5667 626.3667 637.8667 559.5 537.0333 503.8667 478.1667 478.5667 537.3 570.4 565.6 532.6667 525.2333 549.6 585.3 663.9333 757.8333 944.9667

CHART 3.3 CHART SHOWING THREE DAY MOVING AVERAGE OF MENTHAOIL

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INTERPRETATION The moving average of spot price of Menthaoil is going above the moving average of future price it shows a sell signal to the investor in future contract.

TABLE 3.4 TABLE SHOWING THREE DAY MOVING AVERAGE OF POTATO

Month
March06

Spot price
617.9

Moving avg.

Future price
749.8

Moving avg.

30

June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

544.7 725.9 521.2 516.5 603.9 603.1 507.6 489.9 393.5 405 325 661.6 1003.5 1304 1100.2 572.5 461.4 622.8 725.2

629.5 597.2667 587.8667 547.2 574.5 571.5333 533.5333 463.6667 429.4667 374.5 463.8667 663.3667 989.7 1135.9 992.2333 711.3667 552.2333 603.1333

568.5 536.2 504 574.1 574.1 656.7 511.6 487.8 436.8 448.5 511.3 754.1 1175.5 1282 649.1 526.5 492.2 595.4 661.9

618.1667 536.2333 538.1 550.7333 601.6333 580.8 552.0333 478.7333 457.7 465.5333 571.3 813.6333 1070.533 1035.533 819.2 555.9333 538.0333 583.1667

CHART 3.4 CHART SHOWING THREE DAY MOVING AVERAGE OF POTATO

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INTERPRETATION The moving average of future price of Potato is going above the moving average of spot price it shows a buy signal to the investor in future contract.

TABLE 3.5 TABLE SHOWING THREE DAY MOVING AVERAGE OF REFSOYOIL

Month
March06

Spot price
364.1

Moving avg.

Future price
387.65

Moving avg.

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June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

398.7 425 460.8 463.5 490.1 486.85 546.95 606.9 701.8 590.3 485.6 448.25 470.3 429.55 483.3 450.65 440.65 481.75 626.2

395.9333 428.1667 449.7667 471.4667 480.15 507.9667 546.9 618.55 633 592.5667 508.05 468.05 449.3667 461.05 454.5 458.2 457.6833 516.2

417.5 419.75 488.45 476.55 505.65 471.65 574.15 589.7 681.35 538.85 447.65 441.7 487.75 437.7 493.1 452.2 446.2 500.25 654.95

408.3 441.9 461.5833 490.2167 484.6167 517.15 545.1667 615.0667 603.3 555.95 476.0667 459.0333 455.7167 472.85 461 463.8333 466.2167 533.8

CHART 3.5 CHART SHOWING THREE DAY MOVING AVERAGE OF RFSOYAOIL

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INTERPRETATION The moving average of future price of Refsoyaoil is going above the moving average of spot price it shows a buy signal to the investor in future contract.

TABLE 3.6 TABLE SHOWING THE HEDGE RATIO OF CARDAMOM

Month

Spot price

Change in spot price

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Future price

Change in future price

March06 June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

265.5 250 482.3 372.5 435.7 464.9 485.5 588.5 614 613.5 703 548 604 803 677.5 1005.5 1187.6 1678.1 1125.2 1500 -15.5 232.3 -109.8 63.2 29.2 20.6 103 25.5 -0.5 89.5 -155 56 199 -125.5 328 182.1 490.5 -552.9 374.8

275.8 258.9 583 479.6 592.8 527 566.5 670.5 545 560 706.5 554 590 785 698.25 1140.25 1297.1 1442 1025.6 1598.8 -16.9 324.1 -103.4 113.2 -65.8 39.5 104 -125.5 15 146.5 -152.5 36 195 -86.75 442 156.85 144.9 -416.4 573.2

Standard deviation of spot price Standard deviation of future price Coefficient of correlation Hedge ratio
35

389.886 366.762 0.9713 1.032524

INTERPRETATION The spot price and future price of Cardamom have an almost equal standard deviation of 389.886& 366.762 respectively and a highly positive correlation of 0.9713.It shows an equal price movement in spot trading and future trading. Since hedge ratio is 1.032524, it may be observed from these results that 1.032524futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.032524 futures, he can able to make profit or avoid loss. This is by means of, 1.032524 *16.9 = Rs. 17.45 Spot loss = Rs 15.5 Futures gain = Rs 17.45 Thus it will give a profit of Rs1.95

TABLE 3.7 TABLE SHOWING THE HEDGE RATIO OF CRUDE PAM OIL

Month
March06 June 06 September 06 December 06

Spot price
164.1 174.7 188 234.8

Change in spot price

Change Future price

178.1

10.6 13.3 46.8

36

186.3 197.7 246.6

8.2 11.4 48.9

March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

231.3 326.1 396 413.8 304,7 511.9 343 264.8 307.7 335.8 318 357.4 359.8 364.7 413.7 549.7

-3.5 94.8 69.9 17.8 -109.1 207.2 -168.9 -78.2 42.9 28.1 -17.8 39.4 2.4 4.9 49 136

242.2 342 407.5 420.6 313.6 516.2 339.8 276.7 314.6 339.5 313.5 373.6 366.9 360 412.6 567.4

-4.4 99.8 65.5 13.1 -107 202.6 -176.4 -63.1 37.9 24.9 -26 60.1 -6.7 -6.9 52.6 154.8

Standard deviation of spot price Standard deviation of future price Coefficient of correlation Hedge ratio

104.9579 101.4121 0.9978 1.032687

37

INTERPRETATION The spot price and future price of Crude Pam oil have an almost equal standard deviation of 104.9579& 101.4121 respectively and a highly positive correlation of 0.9978.It shows an equal price movement in spot trading and future trading. Since hedge ratio is 1.032687, it may be observed from these results that 1.032687futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.032687 futures, he can able to make profit or avoid loss. This is by means of, 1.032687 *8.2 = Rs. 8.468 Spot loss = Rs 10.6 Futures gain = Rs 8.468 Thus it will reduce the loss from Rs 10.6 to Rs2.132

TABLE 3.8 TABLE SHOWING THE HEDGE RATIO OF MENTHAOIL

Month
March06 June 06 September 06 December 06 March07 June07 September07

Spot price
477.1 538.6 786.2 642.9 554.7 529.4 511.8

Change in spot price

Future price
422.7

Change in future price

61.5 247.6 -143.3 -88.2 -25.3 -17.6

38

509.1 758.9 611.1 543.6 523.8 543.7

86.4 249.8 -147.8 -67.5 -19.8 19.9

December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

480.5 495.9 555.9 612.3 589.6 587.6 527.8 543.5 641.2 668.5 781.2 973.4 1318

-31.3 15.4 60 56.4 -22.7 -2 -59.8 15.7 97.7 27.3 112.7 192.2 344.6

444.1 446.7 544.9 620.3 546 530.5 521.5 523.7 603.6 628.6 759.6 885.3 1190

-99.6 2.6 98.2 75.4 -74.3 -15.5 -9 2.2 79.9 25 131 125.7 304.7

Standard deviation of spot price Standard deviation of future price Coefficient of correlation Hedge ratio

200.913 178.1139 0.9909 1.1177

INTERPRETATION The spot price and future price of Menthaoil have an almost equal standard deviation of 200.913& 178.1139 respectively and a highly positive correlation of 0.9909.It shows an equal price movement in spot trading and future trading.
39

Since hedge ratio is 1.1177, it may be observed from these results that 1.1177futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.1177 futures, he can able to make profit or avoid loss. This is by means of, 1.1177 *86.4 = Rs. 96.569 Spot loss = Rs 61.5 Futures gain = Rs 96.569 Thus it will give a profit of Rs 35.069 to the investor.

TABLE 3.9 TABLE SHOWING THE HEDGE RATIO OF POTATO

Month
March06 June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08

Spot price
617.9 544.7 725.9 521.2 516.5 603.9 603.1 507.6 489.9 393.5 405

Change in spot price

Future price
749.8

Change in future price

-73.2 181.2 -204.7 -4.7 87.4 -0.8 -95.5 -17.7 -96.4 11.5
40

568.5 536.2 504 574.1 574.1 656.7 511.6 487.8 436.8 448.5

-181.3 -32.3 -32.2 70.1 0 82.6 -145.1 -23.8 -51 11.7

December08 March09 June09 September09 December09 March10 June10 September10 December10

325 661.6 1003.5 1304 1100.2 572.5 461.4 622.8 725.2

-80 336.6 341.9 300.5 -203.8 -527.7 -111.1 161.4 102.4

511.3 754.1 1175.5 1282 649.1 526.5 492.2 595.4 661.9

62.8 242.8 421.4 106.5 -632.9 -122.6 -34.3 103.2 66.5

Standard deviation of spot price Standard deviation of future price Coefficient of correlation Hedge ratio

244.2057 222.2211 0.8348 0.917388

INTERPRETATION The spot price and future price of Potato have an almost equal standard deviation of 244.2057& 222.2211 respectively and a highly positive correlation of 0.8348.It shows an equal price movement in spot trading and future trading. Since hedge ratio is 0.917388, it may be observed from these results that 0.917388futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 0.917388 futures, he can able to make profit or avoid loss. This is by means of, 0.917388 *181.3 = Rs. 166.32
41

Spot loss = Rs 73.2 Futures gain = Rs 166.32 Thus it will give a profit of Rs 93.12 to the investor.

TABLE 3.10 TABLE SHOWING THE HEDGE RATIO OF REFESAOIL

Month
March06 June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09

Spot price
364.1 398.7 425 460.8 463.5 490.1 486.85 546.95 606.9 701.8 590.3 485.6 448.25 470.3 429.55

Change in spot price

Future price
387.65

Change in future price

34.6 26.3 35.8 2.7 26.6 -3.25 60.1 59.95 94.9 -111.5 -104.7 -37.35 22.05 -40.75
42

417.5 419.75 488.45 476.55 505.65 471.65 574.15 589.7 681.35 538.85 447.65 441.7 487.75 437.7

29.85 2.25 68.7 -11.9 29.1 -34 102.5 15.55 91.65 -142.5 -91.2 -5.95 46.05 -50.05

December09 March10 June10 September10 December10

483.3 450.65 440.65 481.75 626,2

53.75 -32.65 -10 41.1 144.45

493.1 452.2 446.2 500.25 654.95

55.4 -40.9 -6 54.05 154.7

Standard deviation of spot price Standard deviation of future price Coefficient of correlation Hedge ratio

78.6434 77.5804 0.9630 0.976195

INTERPRETATION The spot price and future price of Refsoyaoil have an almost equal standard deviation of 78.6434 & 77.5804 respectively and a highly positive correlation of 0.9630.It shows an equal price movement in spot trading and future trading. Since hedge ratio is 0.976195, it may be observed from these results that 0.976195 futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, selling or buying of 0.975863 futures, he can able to avoid loss or earn profit. This is by means of,

0.976195 *29.85 = Rs. 29.13942

Spot loss = Rs 34.6

43

Futures gain = Rs 29.13942 Thus it will reduce the loss from Rs 34.6 to Rs 5.46

TABLE 3.11 TABLE SHOWING BETA VALUE OF SELECTED COMMODITIES

Commodity

Beta value

Cardamom

0.868076

Crude Pam oil

0.937119

Menthaoil

0.834548

Potato

0.721707

Refsoyaoil

0.809509

INTERPRETATION

44

The beta value of crude Pam oil (0.937119) show it is moderate risky and the beta value of cardamom, menthaoil & refsoyaoil was 0.868076, 0.834548& 0.809509 respectively. It show that this commodities are less risky than crude Pam oil. Potato is less risky than other commodities in the future market with the beta value of 0.721707.

4.1 FINDINGS OF THE STUDY

The moving average of future price of Cardamom is going above the moving average of spot price it shows a buy signal to the investor in future contract.

The moving average of future price of Crude Pam oil is going above the moving average of spot price, it shows a buy signal to the investor in future contract.

The moving average of spot price of Menthaoil is going above the moving average of future price, it shows a sell signal to the investor in future contract.

The moving average of future price of Potato is going above the moving average of spot price it shows a buy signal to the investor in future contract.

The moving average of future price of Refsoyaoil is going above the moving average of spot price it shows a buy signal to the investor in future contract.
45

For Cardamom, hedge ratio is 1.032524; it may be observed from these results that 1.032524futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.032524 futures, he can able to make profit or avoid loss.

For Crude Pam oil, hedge ratio is 1.032687, it may be observed from these results that 1.032687futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.032687 futures, he can able to make profit or avoid loss.

For Menthaoil, hedge ratio is 1.1177, it may be observed from these results that 1.1177futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 1.1177 futures, he can able to make profit or avoid loss.

For Potato, hedge ratio is 0.917388, it may be observed from these results that 0.917388futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, buying or selling of 0.917388 futures, he can able to make profit or avoid loss.

For Refsoyaoil, hedge ratio is 0.976195, it may be observed from these results that 0.976195 futures contracts should be sold/bought to hedge 1 unit of spot position. If the investor, selling or buying of 0.975863 futures, he can able to avoid loss or earn profit.

46

The beta value of crude Pam oil (0.937119) show it is moderate risky and the beta value of cardamom, menthaoil & refsoyaoil was 0.868076, 0.834548& 0.809509 respectively. It show that this commodities are less risky than crude Pam oil. Potato is less risky than other commodities in the future market with the beta value of 0.721707.

4.2 SUGGESTIONS

47

Hence we all aware of commodity market are highly riskier which makes the investors uncertain about their results. To avoid this, Hedging acting as the very effective risk reducing tool. Normally Hedging did in future market. In this study the selected commodities are Hedged with its own futures and obtained Hedge ratio.

From the Hedge ratio we found out the optimal number of futures contract to Hedge one unit of commodity. So the investors will be able to know optimal number of futures to Hedge.

It will help the investors to know the size of contracts available for them to Hedge.

If the investors want to play Hedging effectively then they should have a sound knowledge about the future market as well as cash market.

48

4.3 CONCLUSION

Commodities play the vital role in risk management investor prefer investing in commodities on the own estimates rather than using and knowing about the methods of minimizing the risk. The first step before getting into the trading activity is to know about commodities and methods to value them in order to minimize the chance of default or risk involved in it due to speculative in nature.

Thus hedging act as an important risk reducing concept in the commodity market. The important thing here is that hedging does not always make money. The best that can be achieved using hedging is the removal of unnecessary risk. The hedged position will make less profit than the not hedged position. One should not enter into a hedging strategy hoping to make excess profits for sure; all that can come out of hedging is reduced risk.

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APPENDIX

Month

Spot price Future of price of Cardamo Cardamom m 265.5 250 482.3 372.5 435.7 464.9 485.5 588.5 614 613.5 703 548 604 803 677.5 1005.5 1187.6 1678.1 1125.2 1500 275.8 258.9 583 479.6 592.8 527 566.5 670.5 545 560 706.5 554 590 785 698.25 1140.25 1297.1 1442 1025.6 1598.8

Spot price of CPO

Future price of CPO 178.1 186.3 197.7 246.6 242.2 342 407.5 420.6 313.6 516.2 339.8 276.7 314.6 339.5 313.5 373.6 366.9 360 412.6 567.4

Spot price of Menthaoil 477.1 538.6 786.2 642.9 554.7 529.4 511.8 480.5 495.9 555.9 612.3 589.6 587.6 527.8 543.5 641.2 668.5 781.2 973.4 1318

Future price of Menthaoil 422.7 509.1 758.9 611.1 543.6 523.8 543.7 444.1 446.7 544.9 620.3 546 530.5 521.5 523.7 603.6 628.6 759.6 885.3 1190

March06 June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September0 Decemb09 March10 June10 September10 December10

164.1 174.7 188 234.8 231.3 326.1 396 413.8 304.7 511.9 343 264.8 307.7 335.8 318 357.4 359.8 364.7 413.7 549.7
50

Month March06 June 06 September 06 December 06 March07 June07 September07 December07 March08 June08 September08 December08 March09 June09 September09 December09 March10 June10 September10 December10

Spot price of Potato 617.9 544.7 725.9 521.2 516.5 603.9 603.1 507.6 489.9 393.5 405 325 661.6 1003.5 1304 1100.2 572.5 461.4 622.8 725.2

Future price of Potato 749.8 568.5 536.2 504 574.1 574.1 656.7 511.6 487.8 436.8 448.5 511.3 754.1 1175.5 1282 649.1 526.5 492.2 595.4 661.9
51

Spot price of Refsoyaoil 364.1 398.7 425 460.8 463.5 490.1 486.85 546.95 606.9 701.8 590.3 485.6 448.25 470.3 429.55 483.3 450.65 440.65 481.75 626.2

Future price of Refsoyaoil 387.65 417.5 419.75 488.45 476.55 505.65 471.65 574.15 589.7 681.35 538.85 447.65 441.7 487.75 437.7 493.1 452.2 446.2 500.25 654.95

REFERENCE

1. Avadhani V.A., Investment Management, Himalaya Publishing House, NewDelhi, 2nd

Edition, 1999.
2. Bhalla

V.K.,

Investment

Management,

Security

Analysis

and

Portfolio

Management, S.Chand & Co Ltd, New Delhi, 2nd Edition, 1997.

52

3. Gupta.S.P., Statistical Methods, Sultan Chand & Co, 35th Edition, 2007. 4. Kothari.C.R., Research Methods and Techniques, Wishwa Prakashan Publishing,

New Delhi, 1990.

5. Prasanna Chandra, Financial Management-Theory and Practice, Tata Mc Graw Hill,

International Edition, 5th edition, 2000.

WEBSITES

1. www.adityatrading.com 2. www.mcxindia.com 3. www.investopedia.com 4. www.google.com

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