Intrim Report On Commodity

Interim report

“Commodity market-A new source of investment and customer preference towards commodity market in volatile market”

Presented by: Sunil .D. Tiwari. Enroll no.8NBMM017 Semester: III, ASIM Mumbai.

Submitted to: Faculty Supervisor - Prof. P. S. Raghukumari

INTRODUCTION Whether it’s retiring early, saving for children’s education, paying off a loan or to live a secured and satisfied life everyone has dreams they can achieve by investing their savings. However, the question that arises is that, should one leave his money tucked away in the bank or plough it into the stock market where the potential for higher returns is greater but the chances of losing money is higher? Deciding where to invest depends on one`s attitude towards risk (one`s capacity to take risk and one`s tolerance towards risk) and the investment horizon and non-availability of guaranteed-return investment products. In such a scenario, investing in equity, which offers returns that are higher than the inflation rate, help to build wealth and to improve the standard of living. It is fine that stock market fluctuates over time. At present as far as the world economy is concerned it is on a boom. As soon as globalization and liberalization has come into act it has well shaped the economy. India has turned out to be the hot destination for the money investors and this has resulted growth in the sensex .It was never hoped before that BSE will ever touch the mark of 16000 points. But only due to the new economic opportunities and the confidence of people in India’s economic future it has been successful .Investing in equity is the way to earn money and to fulfill the dreams. The risk involved with investing in equity can be moderated by careful stock selection and close monitoring.

INVESTMENT AVENUES AND ALTERNATIVES Investment alternatives vary from fixed income to variable income which includes RBI bonds, government securities, fixed deposit, equity investments, property and so on. In recent years the 6.5 percent tax-free RBI Bonds have become a very popular saving instrument -- especially amongst individuals. Till 1996, these bonds gave returns of 10 per cent. This came down to 9 per cent and then 8 percent and then in 2003 it was reduced to 6.5 per cent (tax free). Nowadays, 8 percent taxable Government of India bonds are also doing well to attract investors who want safe and higher yield. However, with inflation at nearly 4.5%, the return offered by these instruments were still attractive. However, with the scrapping of the tax-free bonds, safe investment options for individuals have become very limited and people are now choosing to go with either post office saving schemes or equity related instruments.

Take a look at what is happening. Debt funds, which were said to be relatively risk-free, are giving very less returns. Monthly Income Plans offered by mutual funds are also not attractive as their portfolio is made up of 80 percent debt and 20 percent equity. With debt giving very less returns and returns from equity becoming stagnant, the returns from MIPs are also very attractive. The returns offered by MIPs are totally dependant upon the type of security and debt instruments held by the fund But with recent rally in the stock market, very few people are now going for MIPs and have a very positive sentiment about the market and would like to stay with the market for long. But continuously we still have a single question in mind: The person in the 30 percent tax bracket, the 8 per cent RBI bonds will give returns of approximately 5.6 per cent. Though this is much lower than the previous 6.5 percent, it is still a better than most other options. If you are a senior citizen, the Senior Citizens Savings scheme offering a 9 Percent yearly interest is a good investment option. The scheme was announced in the Budget 2006-2007 and was meant for people above the age of 60. However, this scheme has a maximum deposit limit of Rs. 15 lacs while RBI Bonds do not have any limit. In this case, the term for deposit is five years with a facility for premature withdrawal. The 9 percent returns are subject to tax, so if you are in the 30 percent tax bracket, you will effectively get returns of 6.3 per cent. Another option can be Floating Rate Bond Fund offered by mutual funds. Basically, these funds invest in floating rate instruments and therefore have a direct correlation to interest rates. If interest rates go up the returns from these funds rise and returns fall with a fall in interest rates. This is unlike debt funds, where there is a reverse relationship between interest rates and returns. A rise in interest rates results in a fall in returns. In the current scenario, these funds are likely to give returns of 5 percent to 5.5 percent. The dividends are tax-free in the hands of the investor and most importantly, there is complete liquidity. Again, there is no limit on the amount that can be deposited. Also, there is hardly any volatility making it a safe option. If you are willing to take a bit of risk, you can divide your portfolio in such a way that 60 percent is invested in floating rate bond funds and the remaining 40 percent in equity. That's like having an MIP except that instead of 80 percent in debt and 20 percent in equity, here the 60 percent is in floating rate bond funds. Such a portfolio can give you returns of aprox. 8.5 % to 9.5 %. The NSCs and the Kisan Vikas Patras give returns of 8 percent so for those in the 30 percent tax bracket, it works out to 5.6 percent. Here too there is no limit on the amount of deposit. However, here the interest is posted only at the time of maturity. So it is not a good option if you want regular returns. On the other hand, RBI Bonds give returns every six months or half yearly. So, depending upon their risk profile and need for liquidity,

one will have to decide on their portfolio. For anyone below 35 years, it is recommend that one should invest some part of there portfolio in RBI Bonds and in NSCs, KVPs as a long term investments and the remaining in combination of floating rate bond funds and equity But for those above 35, it is advocate that one should look at nearly 40 percent in RBI Bonds, 30 percent in NSCs, KVPs, hence giving safe and regular income. And the remaining 30 per cent in floating rate bond funds and equity. For those above the age of 60, 40 percent must be put in the Senior Citizens Scheme (of course, this is up to a maximum limit of Rs 15 lakh), another 40 percent in RBI Bonds and the remaining 20 percent in floating rate bond funds, so that one has some liquidity.As an investor one has a wide array of investment avenues available to one Investment Avenues Non-Marketable Financial Assets

Equity Shares

Bonds

Life Insurance Policies

Mutual Fund Schemes

Money Market Instruments

Real Estate

Precious Objects Financial Derivatives

Non-marketable Financial Assets - A good portion of financial assets is represented by non-marketable financial assets. These can be classified into the following broad categories: • Bank deposits • Post office deposits

• Company deposits • Provident fund deposits Equity Shares - Equity shares represent ownership capital. As an equity shareholder, you have an ownership stake in the company. This essentially means that you have a residual interest in income and wealth. Perhaps, the most romantic among various investment avenues, equity shares are classified into the following broad categories by stock market analysts: • Blue chip shares • Growth shares • Income shares • Cyclical shares • Speculative shares Bonds - Bonds or debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated steam of cash flow. Bonds may be classified into the following categories: • Government securities • Government of India relief bonds • Government agency securities • PSU bonds • Debentures of private sector companies • Preference shares Money Market Instruments - Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments. The important money market instruments are: • Treasury bills • Commercial paper • Certificates of deposits

Mutual Funds - Instead of directly buying equity shares and/or fixed income instruments, you can participate in various schemes floated by mutual funds which, in turn, invest in equity shares and fixed income securities. There are three broad types of mutual fund schemes: • Equity schemes • Debt schemes • Balanced schemes Life Insurance - In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice and the assured sum the benefit. The important types of insurance policies in India are: • Endowment assurance policy • Money back policy • Whole life policy • Term assurance policy Real Estate - For the bulk of the investors the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate: • Agricultural land • Semi-urban land • Time share in a holiday resort Precious Objects - Precious objects are items that are generally small in size but highly valuable in monetary terms. Some important precious objects are: • Gold and silver • Precious stones • Art objects Financial Derivatives - A financial derivative is an instrument whose value is derived from the value of an underlying asset. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are:

• Options • Futures Since every individual would like to earn return on their investment but where to invest has always been a problem. There has always been a confusion as to which instrument to invest, which instrument will give me higher returns, etc. Even now nuclear families are in and so are longer life spans. Even inflation is increasing and so do the standard of life, medical costs, and other things. In such a scenario, one need to think as to how he will take care of all his future needs and build up a corpus that will not only take care of routine expenses but also provide for extra costs, especially of health care. One need to have a corpus of funds, post-retirement, which will give him close to 100% of the salary to preserve the lifestyle he has grown to enjoy.

Commodity Market Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.

Commodity exchange A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

Commodity Futures A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons:

Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.

Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.

The objectives of Commodity futures: • Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism. • Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments. • Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. • Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

Benefits of Commodity Futures Markets:The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1. Price Discovery:-Based on inputs regarding specific market information, the

demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers

leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal. 2. Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc. 3. Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions. 4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments. 5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on

farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions. 6. Credit accessibility: - The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to

payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending. 7. Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

History of Evolution of commodity markets Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as “rice tickets”. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for “futures trading” evolved. Where the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to someone who needs the same. Similarly producer who not intended to deliver his produce to dealer could pass on the same responsibility to someone else. The price of such contract would dependent on the price movements in the wheat market. Latter on by making some modifications these contracts transformed in to an instrument to protect involved parties against adverse factors such as unexpected price movements and unfavorable climatic factors. This promoted traders entry in futures market, which had no intentions to buy or sell wheat but would purely speculate on price movements in market to earn profit. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to regulate and supervise these contracts. That’s why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933,

during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges – the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

History of Commodity Market in India The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures’ trading was permitted in all recommended commodities. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually non- existent, except some negligible activities on OTC basis. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai and National Multi-Commodity Exchange of India Limited (NMCEIL) Ahmedabad.There are other regional commodity exchanges situated in different parts of India.

Legal framework for regulating commodity futures in India The commodity futures traded in commodity exchanges are regulated by the Government under the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator for the commodities trading is the Forward Markets Commission, situated at Mumbai, which comes under the Ministry of Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC) It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952. Commission consists of minimum two and maximum four members appointed by Central Govt. Out of these members there is one nominated chairman. All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India.

National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers through out India. NCDEX currently facilitates trading of 57 commodities. Commodities Traded at NCDEX:-

• Bullion  Silver, Brent  Gold KG

• Minerals  Electrolytic Copper Cathode,  Aluminum Ingot,  Nickel  Cathode,  Zinc Metal Ingot,  Mild steel Ingots

• Oil and Oil seeds: Cotton seed,  Oil cake,  Crude Palm Oil,  Groundnut (in shell),  Groundnut expeller Oil,  Cotton,  Mentha oil,  RBD Pamolein, RM  seed oil cake,  Refined soya oil,  Rape seeds,  Mustard seeds,  Caster seed,  Yellow soybean,  Meal

• Pulses  Urad,

 Yellow peas,  Chana,  Tur,  Masoor, •

Grain  Wheat,  Indian Pusa Basmati Rice,  Indian parboiled Rice (IR-36/IR-64),

 Indian raw Rice (ParmalPR-106),  Barley,  Yellow red maize

• Spices  Jeera,  Turmeric,  Pepper

• Plantation  Cashew,  Coffee Arabica,  Coffee Robusta

• Fibers and other  Guar Gum,  Guar seeds,  Guar,  Jute sacking bags,  Indian 28  cotton,

 Indian 31mm cotton,  Lemon, Grain Bold,  Medium Staple,

 Mulberry,  Green Cottons,  Potato,  Raw Jute,  Mulberry raw Silk,  V-797 Kapas,  Sugar,  Chilli LCA334

• Energy  Crude Oil,  Furnace oil

Multi Commodity Exchange of India Limited (MCX) Multi Commodity Exchange of India Limited (MCX) is an independent and demutulized exchange with permanent reorganization from Government of India, having Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Cnnara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana.

National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was

granted approval by Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.

INTERNATIONAL COMMODITY EXCHANGES Futures’ trading is a result of solution to a problem related to the maintenance of a year round supply of commodities/ products that are seasonal as is the case of agricultural produce. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the world’s biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious metals. The exchange is in existence since last 132 years and performs trades trough two divisions, the NYMEX division, which deals in energy and platinum and the COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

London Metal Exchange The London Metal Exchange (LME) is the world’s premier non-ferrous market, with highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed in the 19th century. The primary focus of LME is in providing a market for participants from non-ferrous based metals related industry to safeguard against risk due to movement in base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a day through an inter office telephone market and also through a electronic trading platform. It is famous for its open-outcry trading between ring dealing members that takes place on the market floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade The first commodity exchange established in the world was the Chicago Board of Trade (CBOT) during 1848 by group of Chicago merchants who were keen to establish a central market place for trade. Presently, the Chicago Board of Trade is one of the leading exchanges in the world for trading futures and options. More than 50 contracts on futures and options are being offered by CBOT currently through open outcry and/or electronically. CBOT initially dealt only in Agricultural commodities like corn, wheat, non storable agricultural commodities and non-agricultural products like gold and silver.

Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice, Gold, Silver etc.

Tokyo Commodity Exchange (TOCOM) The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange in the world. It trades in to metals and energy contracts. It has made rapid advancement in commodity trading globally since its inception 20 years back. One of the biggest reasons for that is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management in commodities like the Middle East Crude Oil. TOCOM’s recent tie up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing platform for futures price discovery in Asia for Asian players in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from demand-supply situation in Asia. In Jan 2003, in a major overhaul of its computerized trading system, TOCOM fortified its clearing system in June by being first commodity exchange in Japan to introduce an inhouse clearing system. TOCOM launched options on gold futures, the first option contract in Japanese market, in May 2004.

Commodities traded:- Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminum, Rubber, etc

Chicago Mercantile Exchange:The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the largest futures clearing house in the world for futures and options trading.

Formed in 1898 primarily to trade in Agricultural commodities, the CME introduced the world’s first financial futures more than 30 years ago. Today it trades heavily in interest rates futures, stock indices and foreign exchange futures. Its products often serves as a financial benchmark and witnesses the largest open interest in futures profile of CME consists of livestock, dairy and forest products and enables small family farms to large Agri-business to manage their price risks. Trading in CME can be done either through pit trading or electronically.

Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

Working of commodity market There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse. But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots. The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: - At this stage the following is the system implemented- Order receiving - Execution - Matching - Reporting - Surveillance - Price limits - Position limits II. Clearing: - This stage has following system in place- Matching - Registration - Clearing - Clearing limits - Notation - Margining - Price limits - Position limits - Clearing house. III. Settlement: - This stage has following system followed as follows-

Marking to market Receipts and payments Reporting Delivery upon expiration or maturity.

Current Scenario in Indian Commodity Market Need of Commodity Derivatives for India India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 810%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National Exchanges:Pattern on Multi Commodity Exchange (MCX) MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures’ trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demandsupply and hence, the price signals largely reflect international scenario. Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc. Whose market sizes are considerably small making then vulnerable to manipulations.

Pattern on National Commodity & Derivatives Exchange (NCDEX) NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE) NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities. Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors: - Majority of trade has been concentrated in few commodities that are • Non Agricultural Commodities (bullion, metals and energy) • Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Mentha etc.

Trade strategy It appears that speculators or operators choose commodities or contracts where the market could be influenced and extreme speculations possible. In view of extreme volatilities, the FMC directs the exchanges to impose restrictions on positions and raise margins on those commodities. Consequently, the operators/speculators chose another commodity and start operating in a similar pattern. When FMC brings restrictions on those commodities, the operators once again move to the other commodities. Likewise, the speculators are moving from one commodity to other (from methane to Urad to guar etc) where the market could be influenced either individually or with a group. Beneficiaries: - So far the beneficiaries from the current nature of trading are  Exchangers: - making profit from mounting volumes

 Arbitragers  Operators In order to understand the extent of progress the trading the trading in Commodity Derivatives has made towards its specified objectives (price discovery and price risk management), the current trends are juxtaposed against the specification

Specified and actual pattern of futures trade:Process Aught to be Commodities There should be large demand for and supply of the commodity- no individual or a group of persons acting in concert should be in a position to influence the demand or supply, and consequently the price substantially Towards this, the major Produced or consumed Commodities in the Country such as wheat, rice, jute etc. and India is the top first or second producer of these Commodities.

Actual Largely Traded are

Trade Strategy

Over speculation and Manipulation leading to wide Fluctuations.

Hedging together with Moderate speculation to Smoothen the price Fluctuations. Beneficiaries Farmers/producers,, Consumers and traders Either through direct Participation or through Price signals.

• Bullion, Metals and • Commodities with small market size (or narrow Commodities) like guar, Burmese Urad, Mentha etc.

So far exchangers, arbitrageurs, Operators etc., Further there were instances of Wrong price signals accruing losses to farmers in case of menthe, and to traders in case Of imported pulses.

Price Discovery

Objectives

Risk Management

• Pure replication of International trends not Taking in account of Domestic D-S in case of Non-agril. Commodities • Wide fluctuations from Over speculation and Manipulation in case of Largely traded agril. commodities No such evidences and contrarily, the extreme volatilities in certain commodities are making futures More risky for participants.

Thus it is evident that the realization of specified objectives is still a distinct destination. It is further, evident from the nature of the commodities largely traded on national exchanges that the factors driving the current pattern of futures trade are purely speculative. Reasons for prevailing trade pattern:No wide spread participation of all stake holders of commodity markets. The actual benefits may be realized only when all the stake holders in commodity market including producers, traders, consumers etc trade actively in all major commodities like rice, wheat, cotton etc. Some Suggestions to make futures market as a level playing field for all stake holders:• Creation of awareness among farmers and other rural participants to use the futures trading platform for risk mitigation. • Contract specifications should have wider coverage, so that a large number of varieties produced across the country could be included. • Development of warehousing and facilities to use the warehouse receipt as a financial instrument to encourage participation farmers. • Development of physical market through uniform grading and standardization and more transparent price mechanisms.

• Delivery system of exchanges is not good enough to attract investors. E.g.- In many commodities NCDEX forces the delivery on people with long position and when they tend to give back the delivery in next month contract the exchange simply refuses to accept the delivery on pretext of quality difference and also auctions the product. The traders have to take a delivery or book losses at settlement as there are huge differences between two contracts and also sometimes few contracts are not available for trading for no reason at all. • Contract sizes should have an adequate range so that smaller traders can participate and can avoid control of trading by few big parties. • Setting of state level or district level commodities trading helpdesk run by independent organization such as reputed NGO for educating farmers. • Warehousing and logistics management structure also needs to be created at state or area level whenever commodity production is above a certain share of national level. • Though over 100 commodities are allowed for Derivatives trading, in practice only a few commodities derivatives are popular for trading. Again most of the trade takes place only on few exchanges. This problem can possibly solved by consolidating some exchanges. • Only about 1% to 5% of total commodity derivatives traded in country are settled in physical delivery due to insufficiencies in present warehousing system. As good delivery system is the back bone of any Commodity trade, warehousing problem has to be handled on a war footing. • At present there are restrictions in movement of certain goods from one state to another. These needs to be removed so that a truly national market could develop for commodities and derivatives. • Regulatory changes are required to bring about uniformity in Octri and sales tax etc. VAT has been introduced in country in 2005, but, has not yet been uniformly implemented by all states. • A difficult problem in Cash settlement of Commodities Derivatives contract is that, under Forward Contracts Regulation Act 1952 cash settlement of outstanding contracts at maturity is not allowed. That means outstanding contracts at maturity should be settled in physical delivery. To avoid this participants square off their their positions before maturity. So in practice contracts are settled in Cash but before maturity. There is need to modify the law to bring it closer to the wide spread practice and save participants from unnecessary hassle.

1.

Investing in Commodity Market

Suppose An investor want to invest in the commodity Market and he/she wants to purchase steel from the market then he/she will go through following stages1. He/she must know general characteristics of steel 2. Categories of steel 3. He/she should be aware of global as well as Indian scenario 4.

After considering the factor he/she should know which factor will affect the demand and supply of steel.

The duty imposed on import of steel and its fractions also have an impact on steel prices. The price trend in steel in Indian markets has been a function of World’s economic activity. Prices of input materials of iron and steel such as power tariff, fright rates and coal prices, also contribute to the rise in the input costs for steel making. Monthly Variations in Steel Prices from Feb 2005- Dec 2006: Percentage Change

> 5%

2-5%

< 2%

Ingots- Mandi

2

10

10

HRC 2.5 Mumbai

8

3

11

HRC 2.0 Imported

12

4

6

HRC fob- Europe

5

9

8

No. of Times

Contract specifications of Steel Flat Symbol

STEELFLAT

Description

STEELFLATMMMYY

Trading Period

Mondays through Saturdays

Trading session

Monday to Friday: 1st session: 10.00 am to 5.00 pm 2nd session: 5.30 pm to 8.00 pm Saturday: 10.00 am to 2.00 pm

No. of contracts a year

12

Contact Duration

4 months

Trading Trading unit

25 MT

Price Quote

Rs./ton, Ex-Taloj Kalambo (excluding execise duty and sales tax).

Maximum order size

200 MT

Tick size (minimum

Rs. 10

Price movement) Daily price limits

4%

Initial margin

5%

Special margin

In case of additional volatility, a special margin of 2% or such other percentage, as deemed fit, will be imposed immediately on, both buy and sale side in respect of all outstanding position, which will remain in force of next three days, after which the special margin will be relaxed.

Maximum Allowable For individual clients: 1,00,000 MT Open Position For a member collectively for all clients: 25% of open market position. Delivery Delivery unit

25 MT with tolerance limit Between 23.5 MT to 26.5 MT

Delivery Center(s)

Warehouses at Taloja/ Kalamboli

2. Investment in Equity Market Suppose an investor want to invest in the equity market then he/she will have to purchase share from the market. As he/ she purchase share from the market they want to know that weather the share of SBI is doing well in the market or not. Investors those who have invested in the equity market want to buy at lower price and want to sell their share at maximum possible price. Suppose an investor have taken shares of SBI then return on that share every year will be-

years

Month

S&P CNX NIFTY

2003

Jan

1154.67

0.0208

Feb

1178.72

Mar

2004

ROR (X)

ROR(Y)

X*X

Y*Y

X*Y

R=XAvg(X)

T=YAvg(Y)

R^2

T^2

284.55

0.0197

0.00043

0.00039

0.00041

0.0037

-0.0052

0.00001

0.00003

-0.0798

290.15

0.0014

0.00637

0.00000

-0.0001 1

-0.0970

-0.0235

0.00940

0.00055

1084.64

-0.0430

290.55

-0.0587

0.00185

0.00344

0.00252

-0.0602

-0.0835

0.00362

0.00698

Apr

1038

0.0812

273.5

0.0294

0.00660

0.00087

0.00239

0.0641

0.0046

0.00410

0.00002

May

1122.32

0.1336

281.55

0.2270

0.01784

0.05151

0.03031

0.1164

0.2021

0.01355

0.04085

Jun

1272.21

0.0516

345.45

0.1073

0.00266

0.01150

0.00553

0.0344

0.0824

0.00119

0.00679

July

1337.86

0.1497

382.5

0.0941

0.02240

0.00886

0.01409

0.1325

0.0693

0.01755

0.00480

Aug

1538.08

0.0469

418.5

0.0468

0.00220

0.00219

0.00220

0.0297

0.0220

0.00088

0.00048

Sep

1610.21

0.0993

438.1

0.0180

0.00986

0.00033

0.00179

0.0821

-0.0068

0.00674

0.00005

Oct

1770.08

0.0384

446

0.0670

0.00147

0.00449

0.00257

0.0212

0.0422

0.00045

0.00178

Nov

1837.98

0.1643

475.9

-0.0116

0.02699

0.00013

-0.0019 0

0.1471

-0.0364

0.02164

0.00133

Dec

2139.93

-0.0362

470.4

0.2004

0.00131

0.04014

-0.0072 6

-0.0534

0.1755

0.00285

0.03080

Jan

2062.42

-0.0049

564.65

0.0047

2.4E-05

2.2E-05

-2.3E05

-0.0220

-0.0202

4.8E-04

4.1E-04

Feb

2052.4

-0.0157

567.3

0.0581

0.00025

0.00337

-0.0009 1

-0.0328

0.0332

0.00108

0.00110

Mar

2020.25

0.0138

600.25

0.0301

0.00019

0.00090

0.00042

-0.0033

0.0052

0.00001

0.00003

Apr

2048.22

-0.1709

618.3

0.0012

0.02921

0.00000

-0.0002 1

-0.1881

-0.0236

0.03537

0.00056

May

1698.16

0.0175

619.05

-0.2419

0.00031

0.05852

-0.0042 4

0.0004

-0.2668

0.00000

0.07116

Jun

1727.93

0.0872

469.3

-0.0563

0.00761

0.00316

-0.0049 1

0.0700

-0.0811

0.00491

0.00658

July

1878.62

0.0018

442.9

-0.0014

3.4E-06

0.00000

-2.5E06

-0.0153

-0.0262

2.3E-04

0.00069

Aug

1882.09

0.0736

442.3

0.0190

0.00542

0.00036

0.00140

0.0564

-0.0059

0.00319

0.00003

Sep

2020.62

0.0241

450.7

0.0625

0.00058

0.00390

0.00151

0.0070

0.0376

0.00005

0.00141

Oct

2069.39

0.0965

478.85

-0.0213

0.00930

0.00045

-0.0020 5

0.0793

-0.0462

0.00629

0.00213

Nov

2268.99

0.0661

468.65

0.1544

0.00436

0.02383

0.01020

0.0489

0.1295

0.00239

0.01678

PRICE

Dec

2418.88

-0.0104

541

0.2121

0.00011

0.04499

-0.0022 0

-0.0275

0.1873

0.00076

0.03506

2 005

2 006

2 007

Jan

2393.76

0.0226

655.75

-0.033 1

0.00051

0.00110

-0.0007 5

0.0055

-0.0579

0.00003

0.00336

Feb

2447.94

-0.0320

634.05

0.0971

0.00102

0.00942

-0.0031 0

-0.049 1

0.0722

0.00241

0.00522

Mar

2369.69

-0.0653

695.6

-0.036 7

0.00426

0.00134

0.00239

-0.082 5

-0.0615

0.00680

0.00378

Apr

2214.96

0.0988

670.1

-0.120 5

0.00976

0.01452

-0.0119 0

0.0816

-0.1454

0.00666

0.02113

May

2433.73

0.0683

589.35

0.1202

0.00466

0.01445

0.00821

0.0511

0.0954

0.00261

0.00909

Jun

2599.93

0.0428

660.2

0.0698

0.00183

0.00487

0.00299

0.0256

0.0449

0.00066

0.00202

July

2711.24

0.0335

706.25

0.1185

0.00112

0.01405

0.00397

0.0163

0.0937

0.00027

0.00877

Aug

2801.99

0.0943

789.95

0.0122

0.00889

0.00015

0.00115

0.0771

-0.0126

0.00595

0.00016

Sep

3066.15

-0.0881

799.6

0.1823

0.00777

0.03323

-0.0160 7

-0.105 3

0.1574

0.01109

0.02478

Oct

2795.89

0.1187

945.35

-0.112 7

0.01409

0.01269

-0.0133 7

0.1016

-0.1375

0.01031

0.01891

Nov

3127.8

0.0721

838.85

0.0888

0.00520

0.00789

0.00640

0.0550

0.0640

0.00302

0.00409

Dec

3353.37

0.0586

913.35

-0.009 3

0.00344

0.00009

-0.0005 4

0.0414

-0.0341

0.00172

0.00116

Jan

3549.92

0.0252

904.9

-0.039 4

0.00064

0.00155

-0.0009 9

0.0081

-0.0642

0.00006

0.00413

Feb

3639.43

0.1070

869.25

0.0137

0.01145

0.00019

0.00147

0.0898

-0.0111

0.00807

0.00012

Mar

4028.82

0.0459

881.2

0.1159

0.00211

0.01344

0.00532

0.0288

0.0911

0.00083

0.00829

Apr

4213.88

-0.1356

983.35

-0.022 0

0.01840

0.00048

0.00299

-0.152 8

-0.0469

0.02335

0.00220

May

3642.31

0.0218

961.7

-0.148 6

0.00048

0.02209

-0.0032 4

0.0046

-0.1735

0.00002

0.03010

Jun

3721.71

0.0064

818.75

-0.093 0

4.1E-05

0.00865

-5.9E04

-0.010 8

-0.1179

1.2E-04

0.01389

July

3745.46

0.0876

742.6

0.0931

0.00767

0.00867

0.00816

0.0704

0.0683

0.00496

0.00466

Aug

4073.55

0.0529

811.75

0.1472

0.00280

0.02167

0.00778

0.0357

0.1224

0.00128

0.01497

Sep

4288.97

0.0437

931.25

0.1096

0.00191

0.01202

0.00479

0.0266

0.0848

0.00071

0.00719

Oct

4476.5

0.0564

1033.35

0.0779

0.00318

0.00606

0.00439

0.0393

0.0530

0.00154

0.00281

Nov

4729.13

0.0062

1113.8

0.2234

3.8E-05

5.0E-02

1.4E-03

-0.011 0

0.1986

1.2E-04

3.9E-02

Dec

4758.45

0.0296

1362.65

-0.080 1

0.00088

0.00641

-0.0023 7

0.0125

-0.1049

0.00016

0.01101

Jan

4899.39

-0.0806

1253.55

-0.040 3

0.00649

0.00163

0.00325

-0.097 7

-0.0652

0.00955

0.00425

Feb

4504.73

0.0225

1203

-0.122 5

0.00050

0.01500

-0.0027 5

0.0053

-0.1473

0.00003

0.02171

Mar

4605.89

0.0713

1055.65

-0.118 6

0.00509

0.01405

-0.0084 6

0.0542

-0.1434

0.00293

0.02056

Apr

4934.46

0.0510

930.5

0.4819

0.00260

0.23222

0.02456

0.0338

0.4570

0.00114

0.20888

May

5185.95

0.0073

1378.9

0.1101

5.3E-05

1.2E-02

8.0E-04

-0.009 9

0.0853

9.7E-05

7.3E-03

Jun

5223.82

0.0497

1530.75

0.0113

0.00247

0.00013

0.00056

0.0325

-0.0136

0.00106

0.00018

July

5483.25

-0.0131

1548.05

0.0379

0.00017

0.00143

-0.0005 0

-0.030 3

0.0130

0.00092

0.00017

1

Beta Σxy

1.114

Σx

1.0298

Σy

1.4911

Σx2

1.3385

N

60

Σy2

2.2235

Β

2

3

0.824

Alpha Avg(X)

0.0172

Avg(Y)

0.0249

β

0.824

α

0.0107272

Coef.Correlation 0.64047

4

Coef of Determination

0.4102

5

6

Standard Devition SDx

0.07152

SDy

0.18619

Variance Vx

0.005115

Vy

0.03466

Average rate of return of SBI is lesser than that of its market returns. So, the returns are better than the market returns. Since standard deviation of SBI equity is less than its market, the risk is likely less compared to that of market. Lower the beta and higher the funds performance is the better equity for investment. One might expect the best performance by funds with low diversification because they apparently are attempting to beat the market by being unique in their selection or timing. Considering only the rate of return, all the equities outperformed the market.

3. Investment in Mutual fund When an investor wants to invest in the mutual fund he/she can go to Investment Company which they prefer. When an investor put give their money to investment company inventors money are converted into NAV. Therefore their NAV growth NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realizable value that the investor will get for each unit that he is holding if the scheme is liquidated on that date NAV per share = Current value of fund holdings / No. of fund shares Eg: Rs.100, 000 / 3,333 = 30 The NAV is calculated by dividing the current value of the portfolio by the number of fund shares outstanding. For open-ended mutual funds, new shares are issued as money flows into the fund. Likewise, the number of shares outstanding is reduced as investments are redeemed. The NAV increases as the value of the portfolio's holdings increase. For example, if a share of a stock fund costs Rs.30 today and Rs.18 one year ago, there has been a gain (or profit) of Rs.12 a share, or about 66%, before fund expenses. The change in a fund's NAV determines its performance. Comparing NAV performance enables investors to differentiate funds on a relative basis.

4. Investment in Derivatives A few basis strategies which investor can take into consideration while investing into the market-

A view on the market A.

Assumption: Bullish on the market over the short term

Possible Action by investors: Buy Nifty calls Example: Current Nifty is 1880. You buy one contract of Nifty near month calls for Rs.20 each. The strike price is 1900, i.e. 1.06% out of the money. The premium paid by you will be (Rs.20 * 200) Rs.4000.Given these, your break-even level Nifty is 1920 (1900+20). If at expiration Nifty advances by 5%, i.e. 1974, then Nifty expiration level 1974.00 Less Strike Price 1900.00 Option value 74.00 (1974-1900) Less Purchase price 20.00 Profit per Nifty 54.00 Profit on the contract Rs.10800 (Rs. 54* 200) 1) If Nifty is at or below 1900 at expiration, the call holder would not find it profitable to exercise the option and would loose the entire premium, i.e. Rs.4000 in this example. If at expiration, Nifty is between 1900 (the strike price) and 1920 (breakeven), the holder could exercise the calls and receive the amount by which the index level exceeds the strike price. This would offset some of the cost. 2) The holder, depending on the market condition and his perception, may sell the call even before expiry.

B. Assumption: Bearish on the market over the short term Possible Action by Investors: Buy Nifty puts Example: Nifty in the cash market is 1880. You buy one contract of Nifty near month puts for Rs.17 each. The strike price is 1840, i.e. 2.12% out of the money. The premium paid by you will be Rs.3400 (17*200). Given these, your break-even level Nifty is 1823 (i.e. strike price less the premium). If at expiration Nifty declines by 5%, i.e.1786, then Put Strike Price 1840 Nifty expiration level 1786

Option value 54 (1840-1786) Less Purchase price 17 Profit per Nifty 37 Profit on the contract Rs.7400 (Rs.37* 200) 1) If Nifty is at or above the strike price 1840 at expiration, the put holder would not find it profitable to exercise the option and would loose the entire premium, i.e. Rs.3400 in this example. If at expiration, Nifty is between 1840 (the strike price) and 1823 (breakeven), the holder could exercise the puts and receive the amount by which the strike price exceeds the index level. 2) The holder, depending on the market condition and his perception, may sell the put even before expiry.

Put as a portfolio Hedge Assumption: Investors are concerned about a downturn in the short term in the market and its effect on your portfolio. The portfolio has performed well and you expect it to continue to appreciate over the long term but would like to protect existing profits or prevent further losses. Possible Action by Investor: Buy Nifty puts. Example: You held a portfolio with say, a single stock, HLL valued at Rs.10 Lakhs (@ Rs.200 each share). Beta of HLL is 1.13. Current Nifty is at 1880. Nifty near month puts of strike price 1870 is trading at Rs.15. To hedge, you bought 3 puts 600{Nifties, equivalent to Rs.10 lakhs*1.13 (Beta of HLL) or Rs.1130000}. The premium paid by you is Rs.9000, (i.e.600 * 15). If at expiration Nifty declines to 1800, and Hindustan Lever falls to Rs.195, then Put Strike Price 1870 Nifty expiration level 1800 Option value 70 (1870-1800) Less Purchase price 15 Profit per Nifty 55 Profit on the contract Rs.33000 (Rs.55* 600) Loss on Hindustan Lever Rs.25000 Net profit Rs. 8000

Hypothesis:

Null hypothesis: Most of people invest in commodity market.

H¹ Hypothesis: Most of people invest in other investment such as Equity, mutual fund, Debt securities, bonds etc.

METHODOLOGY OF THE STUDY Data collection instrument: Primary Data: 1. Collection of data through Questionnaires: The data collected for the study purpose is through questionnaires. One hundred customers and non consumer were selected randomly for the study purpose and then the information revealed from the customers is analyzed and interpreted in the study. 2. Organization of field work: Initial field work has to be done for testing tools for data collection. The data was collected through the direct interaction with the customers & non consumers through questionnaires answered by them.

Secondary Data: The data that is used in this project is also in the form of secondary nature. The data is collected from secondary sources such as various websites, journals, newspapers, books, etc. the analysis used in this project has been done using selective technical tools. In Equity market, risk is analyzed and trading decisions are taken on basis of technical analysis. It is collecting share prices of selected companies for a period of five years.

Sampling plan  Sampling: Since I have selected commodities segment to do market research. 100%

coverage was difficult within the limited period of time. Hence sampling survey method was adopted for the purpose of the study.

 Population: Since this survey has to be completed in 3 months that’s why total no of

customers those who are investing in the market can’t be taken.  Sampling size: I am taking sample of hundred for the purpose of the study. Sample

consisted of small investors, large investors and traders. 

Sampling Methods: Probability sampling requires complete knowledge about all sampling units in the universe. Due to time constraint non-probability sampling was chosen for the study.

 Sampling procedure: From large number of customers & non consumers sample lot,

I am selecting particular area churchgate were through my questionnaire I will do my survey and as churchgate is one of the area where I will get mixture of the traders.  Field Study: Directly approached respondents (businessmen, small shopkeepers,

physical commodities traders and service class people).

TOOLS & TECHNIQUES: The following statistical techniques were used for measuring the performance of the company’s funds. 1. Rate of Return (ROR) N2-N1 ROR

= N1 Where, N1 is Close period at period1 N2 is Close period at

period 2. Standard Deviation (SD) Σ [R-AVG(R)] SD

= N Where, R is rate of return N is total number of months

3. Beta n Σxy – Σx * Σy Beta

= n Σx2 – (Σx)2

4. Alpha

Alpha

=

Avg (y) – (beta*Avg (x))

5. Coefficient of Correlation n Σxy – Σx * Σy Coefficient of Correlation = [(n Σy2 – (Σy) 2) (n Σx2 – (Σx) 2)] ½

6. Coefficient of Correlation

Coefficient of determination =

(Coefficient of Correlation) 2

FORMULAS 1. EXPECTED RISK CALCULATION:

PORTFOLIO RISK = SQRT ((XX2*SDX2) + (XY2*SDY2) + (2*XX*XY* (rXY*SDX2*SDY2)))] Where, Xx, Xy = proportion of total portfolio invested in security X& Y respectively sdx, sdy = standard deviation of stock X & stock Y respectively rxy = correlation coefficient of x & y 2. EXPECTED RETURN OF A PORTFOLIO CALCULATION:

PORTFOLIO RETURN =[(XX*RX)+(XY*RY)] Where, XX = proportion of total portfolio invested in security X XY = proportion of total portfolio invested in security Y RX = expected return to security X RY = expected return to security Y 3. ARITHMETIC RETURN

Where • •

Vi is the initial investment value and Vf is the final investment value

4. STANDARD DEVIATION

σ

= Square root ((∑mean return -expected return)^2/N)

5. COVARIANCE - COV (X, Y)=1/N∑[(RX-RX)(RY-RY) 6. BETA: The Beta coefficient, in terms of finance and investing, is a measure of a

stock (or portfolio)’s volatility in relation to the rest of the market. Beta is calculated for individual companies using regression analysis. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. The formula for the Beta of an asset within a portfolio is

Where, ra measures the rate of return of the asset, rp measures the rate of return of the portfolio of which the asset is a part And Cov (ra, rp) is the covariance between the rates of return. The beta movement should be distinguished from the actual returns of the stocks. For example, a sector may be performing well and may have good prospects, but the fact that its movement does not correlate well with the broader market index may decrease its beta. Beta is a measure of risk and not to be confused with the attractiveness of the investment.

BIBILOGRAPHY

Website:1. 2. 3. 4.

www.nseindia.com www.pdfcoke.com www.moneycontrol.com www.mutualfundindia.com

Books:1. COMMODITY MARKET- AN INTRODUTION (Edited by N Janaradhan Rao) 2. COMMODITY MARKET- RECENT DEVELOPMENT (Edited by Dhanapani Alagiri) 3. INDIAN STOCK MARKET-A EMPIRICAL STUDY (Edited by O.P.Gupta, Amitabh Gupta, Chandrima Sikadar, Tapas Mahapatra)

4. OPTIONS, FUTURES, AND OTHER DERIVATIVES- 5TH EDITION (By John C. hull)

References: 1. Presentation on Futures Market: How do the Farmers fit in? - (Presented By - P H RAVIKUMAR, MD & CEO, NCDEX LTD)

2. Presentation on Commodity Markets-Business Potential & Strategy - www.pdfcoke.com