INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

NEW DELHI





THESIS REPORT ON


VOLATILITY & PRICING OF COMMODITY
DERIVATIVES




SUBMITTED TO:

PROF. VIJAY KUMAR BODDU



EXTERNAL GUIDE:

MR. NARENDRA BANSAL


SUBMITTED BY:

SUNIL KUMAR
PGP/SS/2009-11
REGISTRATION ID NO.: DS/09/11-F-220

PGP/SS/2009-11 DS/09/11-F220 ii
ABSTRACT
Commodities trading is now a buzzword among the investor community in India,
which is evident from the statistics that show how the trading volumes in
commodities trading has been steadily rising over the years outshining the more
popular and retail centric equities trading. The figures indicate that trading volumes
generated in commodities have grown in a steady upward trend and much faster than
that in equities during past couple of years.
Indias total commodity futures turnover on four national and 18 regional exchanges
during April 1 to 15, 2010 rose by 30% year-on-year at Rs.3.09 lakh crore. The
turnover in the commodities grew by 48% in the fiscal year 2009-10 to Rs.77.65 lakh
crore.
In India, investors showed an intelligent trend of investment in commodities as most
of the investment flow went for high return yielding commodities like bullion, crude
oil, energy and metals. Though, agricultural commodities too held a significant share
in the total commodities trading volumes.
Trading in commodity derivatives on exchange platforms is an instrument to achieve
price discovery, better price risk management, besides helping macro economy with
better resource allocation. Though the volume of commodity futures trade increased
exponentially after the withdrawal of prohibition in 2003, the functioning of futures
markets came under scrutiny during 200607 due to price rise and the government has
proposed to impose transaction tax by 0.017 per cent on trading volume in the 2008
09 budget.
The commodity market and the exchange takes place in Indian market are broadly
classified into two principle categories that is agriculture and non agriculture
commodity market.
The first part of the thesis work deals with the significance of commodity market. As
commodity market is the place where 2 parties agree to buy and sell a specified and
standardized quantity of a commodity at a certain time of future at a price agreed
upon at the time of agreement agreed upon irrespective of availing future price.

PGP/SS/2009-11 DS/09/11-F220 iii
Following the significance of commodity market is the history of the commodity
market. The root of commodity market is traced from Japan where Japanese
merchants used to store rice in ware houses and later on they have issued Rice
tickets. And as the time passes rice tickets are started to accepted as a currency.
Patterns of exchange that was prevailing in the market which was auction and the
pattern that is currently prevailing in the market which is future is discussed. Major
international and national players are described.
Various national and international markets and their features in brief are described.
The perspective of commodity market in which active and passive mode of
commodity market, volatility, liquidity of commodity market and their relation with
economy are discussed.
Benefits of future commodity markets to agriculturists, farmers are discussed in brief
along with price discovery, price risk management, import-export competitiveness,
improved product quality-market transparency etc. are discussed. The attractive
features of commodity market, various instruments those are available in the market
are listed.
Participants of the commodity market those are hedgers, speculators and arbitrators
their power and limitations, functioning etc. are described in brief.
At the end unresolved issues of commodity market and future prospect of commodity
market is written down.

PGP/SS/2009-11 DS/09/11-F220 iv
CERTIFICATE OF ORIGINALITY

This is to certify that the thesis titled Volatility & Pricing of Commodity
Derivatives was prepared and submitted by me to Indian Institute of Planning &
Management, New Delhi in partial fulfillment for the award of the Master Degree in
Business Administration, and this report has not been submitted elsewhere.

(Signature of Student)

PGP/SS/2009-11 DS/09/11-F220 v
CERTIFICATE FROM GUIDE
This is to certify that the thesis titled Volatility & Pricing of Commodity
Derivatives prepared by Mr. Sunil Kumar for the award of degree in Master of
Business Administration has been completed under my supervision & guidance. It is
an original piece of work based on primary as well as secondary data.
This work is satisfactory and complete in every respect. I wish him all the success for
his future endeavour.
Thanking you
Yours Sincerely

(Narendra Bansal)



PGP/SS/2009-11 DS/09/11-F220 vi
THESIS TOPIC APPROVAL LETTER
From: Thesis <thesis@iipm.edu>
Date: Thu, May 5, 2011 at 2:24 PM
Subject: Thesis Topic Approval (F) SS 09-11
To: suniliipm911@gmail.com

Dear Sunil Kumar,
This is to inform that your thesis proposal on Volatility & Pricing of Commodity
Derivatives, to be conducted under the guidance of Mr. Narendra Bansal is hereby
approved and the topic registration id number is DS/09/11-F-220
Make it a comprehensive thesis by ensuring that all the objectives as stated by you in
your synopsis are met using appropriate research design; a thesis should aim at adding
value to the existing knowledge base.
You are required to correspond with us by sending the thesis final draft to Prof. Vijay
Kr. Boddu at boddu.vijay@iipm.edu Ph.-0124-3350714 before the thesis submission.
NB:
1) A thesis would be rejected if there is any variation in the topic/title from the one
approved and registered with us.
2) The candidate needs to handwrite at least 1200 to 1500 words on the summary of
thesis at the time of viva
Regards,
Prof .Sumanta Sharma
Dean (Projects)
IIPM
Sumanta.sharma@iipm.edu
Phone:
+91 0124 3350701 (D)
+91 0124 3350715 (Board)



PGP/SS/2009-11 DS/09/11-F220 vii

THESIS SYNOPSIS
DETAILS OF THE STUDENT
Name : Sunil Kumar
Section : SF-1
Phone : +91-9582044577
Email : suniliipm911@gmail.com
Thesis Topic : Volatility & Pricing of Commodity Derivatives
Batch : PGP/SS/2009-2011
Specialization : Finance & Marketing
INTRODUCTION
Trading in derivatives first started to protect farmers from the risk of the value of their
crop going below the cost price of their produce. Derivative contracts were offered on
various agricultural products like cotton, rice, coffee, wheat, pepper, etc. Commodity
derivatives have had a long and a chequered presence in India. The commodity
derivative market has been functioning in India since the nineteenth century with
organised trading in cotton through the establishment of Cotton Trade Association in
1875. Over the years, there have been various bans, suspensions and regulatory
dogmas on various contracts. National Commodity and Derivatives Exchange
(NCDEX) is the largest commodity derivatives exchange.
Commodity derivatives, which were traditionally developed for risk management
purposes, are now growing in popularity as an investment tool. Most of the trading in
the commodity derivatives market is being done by people who have no need for the
commodity itself. They just speculate on the direction of the price of these
commodities, hoping to make money if the price moves in their favour. The
commodity derivatives market is a direct way to invest in commodities rather than
investing in the companies that trade in those commodities.
It is easier to forecast the price of commodities based on their demand and supply
forecasts as compared to forecasting the price of the shares of a company -- which
depend on many other factors than just the demand -- and supply of the products they

PGP/SS/2009-11 DS/09/11-F220 viii
manufacture and sell or trade in. Also, derivatives are much cheaper to trade in as
only a small sum of money is required to buy a derivative contract.
The most critical function in a commodity derivatives exchange is the settlement and
clearing of trades. Commodity derivatives can involve the exchange of funds and
goods. The exchanges have a separate body to handle all the settlements, known as
the clearing house.
RESEARCH OBJECTIVE
o To provide a introduction to commodity derivative products, including pricing,
hedging and structuring commodity derivatives.
o This study will cover both exchange traded and over the counter commodity
derivatives in addition to commodity derivative securities
Sub Objectives:
Special features of the underlying commodity as it relates to derivatives
Commodity structures from both issuer and investor / hedger perspective
Structuring, pricing, hedging and basic management of commodity derivatives
Commodity derivative structures designed to optimise risk / return profiles for
both issuer and purchaser
Structuring, pricing and hedging of OTC commodity derivatives
Structured securities with commodity linkage
RESEARCH METHODOLOGY
Sources of Secondary data : O Books on Commodity Markets
O Internet
O Trade Reports
Sources of Primary data :
Tool used : Questionnaire & Interview
Sampling method : Judgmental sampling
Sample size : 50 respondents
Target audience : Traders

PGP/SS/2009-11 DS/09/11-F220 ix
Corporate hedgers
Producers

Statistical Analysis : o Volatility Measurement for selected
commodities for the last quarter
o Price analysis of the selected
commodities
SCOPE OF THE WORK
The study will be limited to:
Economic issues in commodities markets
Commodity price and volume risk analysis
Modeling of commodity spot prices and forward curves in Indian Commodity
markets
Real options valuation and hedging of physical assets in the various industry
sectors.
JUSTIFICATION OF CHOOSING THE TOPIC
The last few years have been a watershed for the commodities, cash and derivatives
industry. New regulations and products have led to an explosion in the commodities
markets, creating a new asset for investors that includes hedge funds as well as
University endowments, and has resulted in a spectacular growth in spot and
derivative trading.
Producers need to manage their exposure to fluctuations in the prices for their
commodities. They are primarily concerned with fixing prices on contracts to sell
their produce. A gold producer wants to hedge his losses attributable to a fall in the
price of gold for his current gold inventory. A cattle farmer wants to hedge his
exposure to changes in the price of his livestock.
End-users need to hedge the prices at which they can purchase these commodities. A
university might want to lock in the price at which it purchases electricity to supply its
air conditioning units for the upcoming summer months. An airline wants to lock in

PGP/SS/2009-11 DS/09/11-F220 x
the price of the jet fuel it needs to purchase in order to satisfy the peak in seasonal
demand for travel.
Speculators are funds or individual investors who can either buy or sell commodities
by participating in the global commodities market. While many may argue that their
involvement is fundamentally destabilizing, it is the liquidity they provide in normal
markets that facilitates the business of the producer and of the end-user.
The price risk in commodities is often more complex and volatile than that associated
with currencies and interest rates. Commodity markets may also be less liquid than
those for interest rates and currencies and, as a result, changes in supply and demand
can have a more dramatic effect on price and volatility. These market characteristics
can make price transparency and the effective hedging of commodities risk more
difficult.
ARTICLES AND BOOKS REFERRED
o Commodities and Commodity Derivatives: Modeling and Pricing for
Agriculturals, Metals and Energy, By Helyette Geman, Wiley
DETAILS OF THE EXTERNAL GUIDE
Name: Mr. Narendra Bansal, Chartered Accountant
Qualification: M.Com, F.C.A.
SUMMER TRAINING DETAILS
COMPANY : Kotak Mahindra Old Mutual Life Insurance
POSITION : Management Trainee
PERIOD OF WORK : 2 months
PROJECT DETAILS : Consumer behavior towards Financial Products
JOB PROFILE : Sales Executive

PGP/SS/2009-11 DS/09/11-F220 xi
ACKNOWLEDGEMENT
An Acknowledgement is the expression of ones thanks giving to the people who
have extended their help in every possible way. Help is a voluntary fulfillment of
duty, which, all the people mentioned below have performed it to their maximum
possible, in a way giving us & our research the utmost important.
At the onset, we wish to express our gratitude to Prof. Vijay Kr. Boddu, Academic
Coordinator, Indian Institute of Planning and Management for showing keen interest,
constant support & help in completing this report successfully.
I am thankful to my thesis guide Mr. Narendra Bansal for guiding me throughout
this study without his help this thesis would have not be completed.
We would also like to thanks to the authors, websites for providing us the related
information to our thesis subject.
I appreciate the co-ordination extended by my friends and also express my sincere
thankfulness to the entire faculty members of Indian Institute of Planning &
Management, Delhi, giving me the opportunity to do this project/study and also
assisting me for the same.
It was the light of there knowledge under which my thesis has been successfully
completed.
I owe everything in this life to my parents who are a constant source of inspiration
and pillars of support.

(Sunil Kumar)


PGP/SS/2009-11 DS/09/11-F220 xii
TABLE OF CONTENT
ABSTRACT ii
CERTIFICATE OF ORIGINALITY iv
CERTIFICATE FROM GUIDE v
THESIS TOPIC APPROVAL LETTER vi
THESIS SYNOPSIS vii
ACKNOWLEDGEMENT xi
CHAPTER-1 INTRODUCTION 1
CHAPTER-2 RESEARCH OBJECTIVE AND METHODOLOGY 3
CHAPTER-3 CONCEPTUAL FRAMEWORK 6
CHAPTER-4 ANALYSIS AND INTERPRETATION OF DATA 51
CHAPTER-5 SUMMARY OF FINDINGS AND SUGGESTIONS 95
CHAPTER-6 CONCLUSION 98
BIBILOGRAPHY 99
ANNEXURE 101



PGP/SS/2009-11 DS/09/11-F220 1
Chapter-1
INTRODUCTION
Organized futures markets in India are now 134 years old, with the first such
organization the Bombay Cotton Trade Association Ltd. been set up in 1875.
While India was gradually becoming the largest consumer of gold in the world, a
position it still enjoys, futures markets in bullion were inevitable and began to emerge
in Mumbai in 1920.
The vast geographical extent of India and her huge population is aptly complemented
by the size of her market. The broadest classification of the Indian Market can be
made in terms of the commodity market and the bond market.
The commodity market in India comprises of all palpable markets that we come
across in our daily lives. Such markets are social institutions that facilitate exchange
of goods for money. The cost of goods is estimated in terms of domestic currency.
India Commodity Market can be subdivided into the following two categories:
Wholesale Market
Retail Market
Considering the present growth rate, the total valuation of the Indian Retail Market is
estimated to cross Rs. 10,000 billion by the year 2014. Demand for commodities is
likely to become four times by 2014 than what it was in 2009.
MARKET
A market is conventionally defined as a place where buyers and sellers meet to
exchange goods or services for a consideration. This consideration is usually money.
In an Information Technology-enabled environment, buyers and sellers from different
locations can transact business in an electronic marketplace. Hence the physical
marketplace is not necessary for the exchange of goods or services for a
consideration. Electronic trading and settlement of transactions has created a
revolution in global financial and commodity markets.

PGP/SS/2009-11 DS/09/11-F220 2
COMMODITY
A commodity is a product that has commercial value, which can be produced, bought,
sold, and consumed. Commodities are basically the products of the primary sector of
an economy. The primary sector of an economy is concerned with agriculture and
extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which
serve as basic inputs for the secondary sector of the economy.
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.

PGP/SS/2009-11 DS/09/11-F220 3
Chapter-2
RESEARCH OBJECTIVE AND METHODOLOGY
RESEARCH OBJECTIVE
RESEARCH OBJECTIVE
o To provide a introduction to commodity derivative products, including pricing,
hedging and structuring commodity derivatives.
o This study will cover both exchange traded and over the counter commodity
derivatives in addition to commodity derivative securities
Sub Objectives:
Special features of the underlying commodity as it relates to derivatives
Commodity structures from issuer and investor / hedger perspective
Structuring, pricing, hedging and basic management of commodity derivatives
Commodity derivative structures designed to optimise risk / return profiles for
both issuer and purchaser
Structuring, pricing and hedging of OTC commodity derivatives
Structured securities with commodity linkage
HYPOTHESIS
The processors, manufacturers, exporters and other market functionaries, entering into
forward sale commitments in either the domestic or export markets, are exposed to
heavy risks from adverse price changes
RESEARCH METHODOLOGY
Primary Data
Primary data are those which the researcher collects directly by himself. In this
project work, primary data is collected by giving questionnaires. Respondents were
given Questionnaires and data were collected.

PGP/SS/2009-11 DS/09/11-F220 4
Secondary Data
Secondary data are those, which are got through reviewing primary data. The
various secondary data used in this work includes
1. Internet
2. Periodicals
3. Journals
4. Books related to Commodity Market etc.
Sampling:
Sampling Technique:
Convenient sampling- Researcher focuses on selected few commodities to study the
topic Convenience Sampling is being used. Under Convenience Sampling the
researcher will be taking sampling according to his or her convenience.
Sample Area: Mumbai city is Sample area for this project.
Population: All commodity traded in exchanges will form as the population of the
study
Sample size: Sample size of 40 stock brokers is used for this study.
Tools for Data Collection:
Data has been collected from two main sources:
Primary data:
The study is based on data collected from brokers of various companies with the help
of structured questionnaire. Questionnaire is included in appendix. Data on various
parameters was included like number of years in business, increase in number of
clients from past year, turnover per day were collected to access information
regarding growth in commodity market. Informal discussion is also carried with few
brokers to know their opinion.

PGP/SS/2009-11 DS/09/11-F220 5
Secondary data:
Websites:
www.karvy.com
www.karvycomtrade.com
www.mcxindia.com
www.ncdex.com
www.indianmba.com
www.icfaipress.org/books/commoditiesmarket
www.finance.indiamart.com/markets/commodity/traders_derivatives_market.html
Books and Magazines related to the study etc.
Method of Analysis:
Statistical Tools:
Statistical Tools like t-test and correlation are going to be used in addition to bar / pie
diagram using SPSS package to analyze the questionnaire and Excel sheet is used to
calculate Beta and Volatility calculations.
Limitations of the Study:
Man has done everything to make it come true but everything has its own limitation.
A uniform across risk model cannot be derived
The historical data available is in the date of the expiry of the contract.
In this study, only Futures are taken due to time and cost constraints.
One month data was taken for analysis.
The survey has been done within Mumbai city, which might fail to be
representative of total market.
A thorough in depth interview was not completely possible because of time
constraints of the respondents

PGP/SS/2009-11 DS/09/11-F220 6
Chapter-3
CONCEPTUAL FRAMEWORK
BRIEF HISTORY
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 19th century Chicago in United States had merged 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; Whereby the producer
would agree to sell his produce to the buyer at a future delivery date at an agreed upon
price.
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. Thats 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.
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.

PGP/SS/2009-11 DS/09/11-F220 7
COMMODITY MARKETS OF WORLD
Some of the exchanges of the world are:
Global Commodity Exchanges
1. New York Mercantile Exchange (NYMEX)
2. London Metal Exchange (LME)
3. Chicago Board of Trade (CBOT)
4. New York Board of Trade (NYBOT)
5. Kansas Board of Trade
6. Winnipeg Commodity Exchange, Manitoba
7. Dalian Commodity Exchange, China
8. Bursa Malaysia Derivatives exchange
9. Singapore Commodity Exchange (SICOM)
10. Chicago Mercantile Exchange (CME), US
11. London Metal Exchange
12. Tokyo Commodity Exchange (TOCOM)
13. Shanghai Futures Exchange
14. Sydney Futures Exchange
15. London International Financial Futures and Options Exchange (LIFFE)
16. Dubai Gold & Commodity Exchange (DGCX)
17. Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and
the New York Mercantile Exchange (NYMEX))

PGP/SS/2009-11 DS/09/11-F220 8
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 derivatives 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:
a) Exchange which organizes forward trading in commodities can regulate
trading on day-to-day basis;
b) Forward Markets Commission provides regulatory oversight under the powers
delegated to it by the central Government.
c) The Central Government- Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution- is the ultimate regulatory
authority.
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

PGP/SS/2009-11 DS/09/11-F220 9
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.
PRESENT COMMODITY MARKET IN INDIA
Today, commodity exchanges are purely speculative in nature. Before discovering the
price, they reach to the producers, endusers, and even the retail investors, at a
grassroots level. It brings a price transparency and risk management in the vital
market. By Exchange rules and by law, no one can bid under a higher bid, and no one
can offer to sell higher than someone elses 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.
In India there are 25 recognized future exchanges, of which there are four 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 four exchanges are:
a) National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai,
b) Multi Commodity Exchange of India Limited (MCX) Mumbai and
c) National Multi- Commodity Exchange of India Limited (NMCEIL)
Ahmedabad.
d) Indian Commodity Exchange Limited (ICEX), Gurgaon

PGP/SS/2009-11 DS/09/11-F220 10
There are other regional commodity exchanges situated in different parts of India.
EXIHIBIT: INDIAN COMMODITY MARKET STRUCTURE


PGP/SS/2009-11 DS/09/11-F220 11
NATIONAL LEVEL COMMODITY EXCHANGES IN
INDIA
NMCE (NATIONAL MULTI COMMODITY EXCHANGE OF
INDIA LTD.)
NMCE is the first demutualised electronic commodity exchange of India granted the
National exchange on Govt. of India and operational since 26th Nov, 2002.
Promoters of NMCE are, Central warehousing corporation (CWC), National
Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-
Industries Corporation Limited (GAICL), Gujarat state agricultural Marketing Board
(GSAMB), National Institute of Agricultural Marketing (NIAM) and Neptune
Overseas Ltd. (NOL). Main equity holders are PNB.
The Head Office of NMCE is located in Ahmedabad. There are various commodity
trades on NMCE Platform including Agro and non-agro commodities.
NCDEX (NATIONAL COMMODITY & DERIVATES EXCHANGE
LTD.)
NCDEX is a public limited co. incorporated on April 2003 under the Companies Act
1956, It obtained its certificate for commencement of Business on May 9, 2003. It
commenced its operational on Dec 15, 2003.
Promoters shareholders are: Life Insurance Corporation of India (LIC), National Bank
for Agriculture and Rural Development (NABARD) and National Stock Exchange of
India (NSE) other shareholder of NCDEX are: Canara Bank, CRISIL limited,
Goldman Sachs, Intercontinental Exchange (ICE), Indian farmers fertilizer
corporation Ltd (IFFCO) and Punjab National Bank (PNB).
NCDEX is located in Mumbai and currently facilitates trading in 57 commodities
mainly in Agro product.
MCX (MULTI COMMODITY EXCHANGE OF INDIA LTD.)
Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity
future exchange. Set up by Financial Technologies (India) Ltd. permanent recognition

PGP/SS/2009-11 DS/09/11-F220 12
from government of India for facilitating online trading, clearing and settlement
operations for future market across the country. The exchange started operation in
Nov, 2003.
MCX equity partners include, NYSE Euronext,, State Bank of India and its
associated, NABARD NSE, SBI Life Insurance Co. Ltd. , Bank of India, Bank of
Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc.
MCX is well known for bullion and metal trading platform.
ICEX (INDIAN COMMODITY EXCHANGE LTD.)
ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is
jointly promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has Indian
Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office
located at Gurgaon (Haryana).
BSE is also planning to set up a Commodity exchange.
UNIQUE FEATURES OF NATIONAL LEVEL COMMODITY EXCHANGES
The unique features of national level commodity exchanges are:
They are demutualized, meaning thereby that they are run professionally and
there is separation of management from ownership. The independent
management does not have any trading interest in the commodities dealt with
on the exchange.
They provide online platforms or screen based trading as distinct from the
open outcry systems (ring trading) seen on conventional exchanges. This
ensures transparency in operations as everyone has access to the same
information.
They allow trading in a number of commodities and are hence multi-
commodity exchanges.
They are national level exchanges which facilitate trading from anywhere in
the country. This corollary of being an online exchange.

PGP/SS/2009-11 DS/09/11-F220 13
MAJOR REGIONAL COMMODITY EXCHANGES IN INDIA
a) BATINDA COMMODITY & OIL EXCHANGE LTD.
b) THE BOMBAY COMMODITY EXCHANGE
c) THE RAJKOT SEEDS OIL AND BULLION MERCHAT
d) THE KANPUR COMMODITY EXCHANGE
e) THE MEERUT AGRO COMMODITY EXCHANGE THE SPICES AND
OILSEEDS EXCHANGE (SANGI)
f) AHEMDABAD COMMODITY EXCHANGE
g) VIJAY BEOPAR CHAMBER LTD. (MUZAFFARNAGAR)
h) INDIA PEPPERS AND SPICE TRADE ASSOCIATION ( KOCHI )
i) RAJDHANI OILS AND SEEDS EXCHANGE ( DELHI )
j) THE CHAMBER OF COMMERCE (HAPUR)
k) THE EAST INDIA COTTON ASSOCIATION (MUMBAI)
l) THE CENTRAL COMMERCIAL EXCHANGE ( GWALIOR )
m) THE EAST INDIA JUTE & HESSIAN EXCHANGE OF INDIA
(KOLKATA)
n) FIRST COMMODITY EXCHANGE OF INDIA ( KOCHI )
o) BIKANER COMMODITY EXCHANGE LTD. ( BIKANER )
p) THE COFEE FUTURE EXCHANGE LTD. ( BANGALORE )
q) E SUGAR INDIA LTD. (MUMBAI)

PGP/SS/2009-11 DS/09/11-F220 14
COMMODITIES TRADED IN INDIA
EXHIBIT: COMMODITIES IN WHICH FUTURES TRADING IS BEING
CONDUCTED IN INDIA

FIBRES AND MANUFACTURERS
1. Kapas
.V797Kapas
2. Hessian
3. IndianCotton

PGP/SS/2009-11 DS/09/11-F220 15
S06LSCottonAhmedabad
CottonKadi
Indian31mmcotton
indian28mmcotton
J34MSCottonBhatinda
CottonAbohar
4. SttapleFibreYarn
5. Sacking
Jute(Btwill-665Gms)-Kollata
6. Gram
Gram(Chana)-NewDelhi
7. cottonbales
8. cottonseeds
undecorticatedcottonseedoilcake
9. LongStapleCotton
10. MediumStappleCotton
NEWMEDIUMSTAPLECOTTON
11. Silk
MulberryRawSilk-Bangalore
MulberryGreenCocoons-Ramnagar
12. MulberryRawSilk
13. MulberryGreenCocoons
14. Coffee-Arabica
15. CottonLongKadi
16. CottonMedAbohar

PGP/SS/2009-11 DS/09/11-F220 16
17. CottonShortStaple
18. Sugar(S-30)
19. MuatardseedOilcake
20. PPTQ
21. Cement
22. Mediumcottonyarn
23. Polyvinchlorid
SPICES
1. Pepper Domestic-MG1
2. Turmeric
Turmeric -Nizamabad
3. Pepper Domestic-500g/l
4. Black Pepper Int'l-MLS ASTA
5. Black Pepper Int'l-VB ASTA
6. Black pepper Int'l FAQ
7. Pepper
Pepper Dommestic-MG1.
Black Pepper Int'l VB ASTA.
Black Pepper Int'l-MLS ASTA.
Black Pepper Int'l FAQ.
Pepper Dommestic-500g/L.
Pepper -Kochi
8. Cardamom
9. Pepper 550 G/L
10. Red Chilly

PGP/SS/2009-11 DS/09/11-F220 17
Chilli (Paala) Guntur
Chilli (Paala) LCA 334
11. Jeera
12. Rubber RSS4
13. Jeera Unjha
14. CUMINSEED
15. Arecanut
EDIBLE OILSEEDS AND OIL
1. RBD Pamolein
RBD P'Olein -Kakinada
2. Groundnut Oil
Groundnut Expeller Oil
3. Sunflower Oil
4. Rapeseed/Mustardseed
Rapeseed -42
Rape/Mustard seed -Jaipur
5. Rapeseed/Mustardseed Oil
EXP R/M oil -Jaipur
Expeller mustard oil -Sri Ganganagar
6. Rapeseed/Mustardseed oil-Cake
7. Soy bean
Soy bean -Indore
8. Soy Meal
Soy Meal -Indore
Yellow Soybean Meal (Export)

PGP/SS/2009-11 DS/09/11-F220 18
9. Soy Oil
Ref Soya oil -Indore
10. Copra
11. CottonSeed
Cottonbales
12. Safflower
13. Groundnut
Groundnut(shell)
14. Castor oil-Int'l
15. Coconut oil
16. Copra cake
17. Groundnut oilCack
18. Cottonseed oil
19. Sesamum (Til or Jiljili)
Whitish Sesame Seed Rajkot
20. Sesamum oil
21. Sesamum OilCake
22. Safflower OilCake
23. Rice Bran
24. Rice Bran Oil
25. Rice Bran OilCake
26. Safflower Oil
27. Sanflower OilCake
28. Sunflower Seed
29. Crude Palm Oil

PGP/SS/2009-11 DS/09/11-F220 19
Crude Palm oil Kandla
30. Cottonseed Oilcake
Cotton Seed Oilcake Akola
31. Vanaspati
32. Soybean Oilcake
33. Linseed
34. Linseed Oil
35. Linseed Oilcake
36. Coconut Oilcake
37. Mustard Seed
38. Mustard Seed Jaipur
39. Sesame Seed ( Natural 99.1)
40. Castorseed-Disa
41. Mustardseed Oilcake
42. KAPASKHALI
43. Middle east crude oil
44. Refined sunflower oil
PULSES
1. Masoor
masoor grain bold
2. Urad
Urad -Mumbai
3. Tur / Arhar
Lemon Tur -Mumbai
Maharashtra Lal Tur -Akola

PGP/SS/2009-11 DS/09/11-F220 20
4. Moong
5. Yellow Peas
Yellow Peas -Mumbai
6. Chana
ENERGY PRODUCTS
1. Crude Oil
2. Brent Crude Oil
3. Furnace Oil
4. Natural Gas
VEGETABLES
1. Potato
METALS
1. Aluminium Ingots
2. Nickel
3. Copper
Copper Cathode
4. Zinc
5. Lead
6. Tin
7. Gold
Gold-M
Pure Gold -Mumbai
Kilo -Gold
Gold -HNI

PGP/SS/2009-11 DS/09/11-F220 21
SONA995MUM
Pure Gold -Mumbai -1 Kg
8. Silver
Silver-M
Pure Silver -New Delhi -30 Kg (Mega)
Pure Silver -New Delhi
Silver -HNI
CHANDIDEL
9. Steel
Steel -Long
Steel -Flat
Mild Steel Ingots -Ghaziabad
10. Steel Long Bhavnagar
11. Steel Long Govindgarh
12. sponge iron
13. GOLD AHMEDABAD
14. GOLD DELHI
15. GOLD KOLKATA
16. GOLD MUMBAI
17. GOLD MINI DELHI
18. GOLD MINI KOLKATA
19. GOLD MINI MUMBAI
20. GOLD MINI AHMEDABAD
OTHERS
1. Gur

PGP/SS/2009-11 DS/09/11-F220 22
Gur-chaku -Muzaffarnagar
2. Coffee-Plantation A
3. Potato
4. Sugar
Sugar M Grade -Muzaffarnagar
Sugar S Grade -Vashi
Sugar S Grade
Sugar Grade -M
Sugar Grade -S
5. Coffee-Robusta Cherry AB
6. Raw Coffee Arabica Parchment
7. Raw Coffee Robusta Cherry
8. Castorseed
Castorseed-5
Castorseed -Disa
9. Castor-oil
10. Coffee
Coffee-Plantation A.
Coffee-Robusta Cherry AB.
Raw Coffee Robusta Cherry.
Raw Coffee Arabica Parchment.
Arabica Coffee -Hassan
Robusta Coffee -Kushalnagar
Arabica Coffee -Hassan (New)
Robusta Coffee -Kushalnagar (New)

PGP/SS/2009-11 DS/09/11-F220 23
11. Guarseed
Guarseed -Jodhpur
Guarseed -BND
12. CastorOil Cake
13. Rubber
Rubber -Kottayam
14. Rice
Basmati Rice
Grade A Parboiled Rice Delhi
Common Parboiled Rice Delhi
Indian Raw Rice Parmal
Indian Parboiled Rice IR-36/IR-64
Grade A Raw Rice Delhi
Common Raw Rice Delhi
15. Wheat
Wheat -New Delhi SMQ
Wheat Delhi (New)
16. Raw Jute
Raw Jute -Kolkata
17. GuarGum
GuarGum -Jodhpur
18. Guarseed Bandhani
19. Maize
Yellow Red Maize -Nizamabad
20. Guar Gum Bandhani

PGP/SS/2009-11 DS/09/11-F220 24
21. CASHEW KERNEL W320
Cashew W 320 -Kollam
22. Sugar S
23. Sugar M
24. Sarbati Rice
25. Coffee-Arabica Plantation A
26. Cashews W-320-Kollam
27. Mentha Oil
28. Sugar (S30)
29. HIGH DENSITY POL
30. Gurchaku
31. cardamom
32. ISABGULSEED
33. Isabgul

PGP/SS/2009-11 DS/09/11-F220 25
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.


PGP/SS/2009-11 DS/09/11-F220 26
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

PGP/SS/2009-11 DS/09/11-F220 27
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.
PRICING COMMODITY FUTURES

The process of arriving a figure at which a person buys and another sells a futures
contract for a specific expiration date is called price discovery. The process of price
discovery continues from the market's opening until its close and also free flow of
information is also very important in an active future market. Futures exchanges act as
a focal point for the collection and distribution of statistics on supplies, transportation,
storage, purchases, exports, imports, currency values, interest rates and other relevant
formation. As a result of this free flow of information, the market determines the best
estimate of today and tomorrow's prices and it is considered to be the accurate
reflection of the supply and demand for the underlying commodity. Price discovery
facilitates this free flow of information, which is essential to the effective functioning
of futures market.
We try to understand the pricing of commodity futures contracts and look at how the
futures price is related to the spot price of the underlying asset. We study the cost - of
- carry model to understand the dynamics of pricing that constitute the estimation of
fair value of futures.
Investment assets versus consumption assets
When we are studying futures contracts, it is essential to distinguish between
investment assets and consumption assets. An investment asset is an asset that is held
for investment purposes by most investors. Stocks, bonds, Gold and silver are
examples of investment assets. However investment assets do not always have to be
held entirely for investment. As we saw earlier silver for example, have a number of
industrial uses. However to classify as investment assets, these assets have to satisfy
the requirement that they are held by a large number of investors solely for
investment. A consumption asset is an asset that is held primarily for consumption. It
is not usually held for investment. Examples of consumption assets are commodities
such as copper, oil, and pork bellies.

PGP/SS/2009-11 DS/09/11-F220 28
We can use arbitrage arguments to determine the futures prices of an investment asset
from its spot price and other observable market variables. For pricing consumption
assets, we need to review the arbitrage arguments a little differently. We look at the
cost of carry model and try to understand the pricing of futures contracts on
investment assets.
The cost of carry model:-
For pricing purposes we treat the forward and the futures market as one and the same.
A futures contract is nothing but a forward contract that is exchange traded and that is
settled at the end of each day. The buyer who needs an asset in the future has the
choice between buying the underlying asset today in the spot market and holding it, or
buying it in the forward market. If he buys it in the spot market today it involves
opportunity costs. He incurs the cash outlay for buying the asset and he also incurs
costs for storing it. If instead he buys the asset in the forward market, he does not
incur an initial outlay.
The basis for the cost of carry model where the price of the futures contract is
defined as:

Eq (1)
Where
F = Future price C = Holding cost or carrying cost S = Spot price


The fair value of future contracts can also be expressed as:

. Eq (2)

Where:
R = percentage cost of financing
T = time till expiration
Whenever the futures price moves away from the fair value, there
would be opportunities for arbitrage. If F > S (1+r)
t
or F < S (1+r)
t
arbitrage would
exit. We know that what is Spot price and what are future price. We should know that
F = S + C
F = S (1+r)
t

PGP/SS/2009-11 DS/09/11-F220 29
what are the components of the holding cost? The components of holding cost vary
with contracts on different assets. Sometimes holding cost may even be negative. In
case of commodity futures, the holding cost is the cost of financing plus cost of
storage and insurance purchased. In case of equity futures, the holding cost is the cost
of financing minus the dividends returns.
Equation (2) uses the concept of discrete compounding, i.e. where
interest rates are compounded at discrete intervals like annually or semiannually.
Pricing of options and other complex derivative securities requires the use of
continuously compounded interest rates. Most books on derivatives use continuous
compounding for pricing futures too.

When we use continuous compounding, equation (2) is expressed as:



Eq (3)

Where:
r = Cost of financing (Using continuously compounding interest rate)
T = Time till expiration
e = 2.71828
Let us take an example of a future contract on commodity and we work
out the price of the contract. Let the spot price of gold is RS. 1376310gms. If the
cost of financing is 15% annually, then what should be the future price of 10gms of
gold one month later? Let us assume that we are on 1 Jan 2009. How would we
compute the price of gold future contract expiring on 30 January? Let us first try to
work out the components of cost of carry model.
1. What is the spot price of gold?
The spot price of gold, S = 13763/ 10gms.
2. What is the cost of financing for month?
e
0.15 30/365
3. What are the holding costs?
F = S e
rT

PGP/SS/2009-11 DS/09/11-F220 30
Let us assume that the storage cost = 0
F = S e
rT
= 13763 e
0.15 30/365
= 13933.73
If the contract was for a three months period i.e. expiring on 30th March, the
cost of financing would increase the futures price. Therefore, the futures price would
be F = 13763 e
0.15 90/365
= Rs 14281.58

Pricing futures contracts on investment commodities
In the example above we saw how a futures contract on gold could be
raised using cost of carry model. In the example we considered, the gold contract
was for 10 grams of gold, hence we ignored the storage costs. However, if the one
month contract was for a 100kgs of gold instead of 10gms, then it would involve non-
zero holding costs which would include storage and insurance costs. The price of the
futures contract would then be Rs.14281.58 plus the holding costs.
The above table gives the indicative warehouse charges for qualified
warehouses that will function as delivery centers for contracts that trade on the
NCDEX. Warehouse charges include a fixed charge per deposit of commodity into
the warehouse, and as per unit per week charge. Per unit charges include storage costs
and insurance charges. We saw that in the absence of storage costs, the futures price
of a commodity that is an investment asset is given by F = S e
rT
Storage
Costs add to the cost of carry. If U is the present value of all the storage costs that will
be incurred during the life of a futures contract, it follows that the futures price will be
equal to


Eq (4)

Where:
r = Cost of financing (annualized)
T = Time till expiration
U = Present value of all storage costs
For understanding the above formula let us consider a one year future
contract of gold. Suppose the fixed charge is Rs.310 per deposit up to 500kgs and the
F = (S+U) e
rT


PGP/SS/2009-11 DS/09/11-F220 31
variable storage costs are Rs.55 per week, it costs Rs.3170 to store one kg of gold for
a year (52 weeks). Assume that the payment is made at the beginning of the year.
Assume further that the spot gold price is Rs.13763 per 10 grams and the risk free
rate is 7% per annum. What would the price of one year gold futures be if the delivery
unit
F = (S+U) e
rT

= (1376300 + 310 + 2860) e
0.07 1

= 1379470 e
0.07 1

= 1379470 1.072508
= 1479493
We see that the one year futures price of a kg of gold would be Rs.1479493. The one
year futures price for 10 grams of gold would be about Rs.14794.93.
Now let us consider a three month futures contract on gold. We make
the same assumptions that the fixed charge is Rs.310 per deposit up to 500kgs, and
the variable storage costs are Rs.55 per week. It costs Rs.1025 to store one kg of gold
for three months (13 weeks). Assume that the storage costs are paid at the time of
deposit. Assume further that the spot gold price is Rs 13763per 10 grams and the risk
free rate is 7% per annum. What would the price of three month gold futures if the
delivery unit is one kg?
F = (S+U) e
rT

= (1376300 + 310 + 715) e
0.07 0.25

= 1377325 1.017654
= 1401640.30
We see that the three month futures price of a kg of gold would be Rs. 1401640.30.
The three month futures price for 10 grams of gold would be about Rs. 14016.40

Pricing futures contracts on consumption commodities
We used the arbitrage argument to price futures on investment commodities. For
commodities that are consumption commodities rather than investment assets, the
arbitrage arguments used to determine futures prices need to be reviewed carefully.
Suppose we have


PGP/SS/2009-11 DS/09/11-F220 32

Eq (5)

To take advantage of this opportunity, an arbitrager can implement the following
strategy:
I. Borrow an amount S + U. at the risk free interest rate and use
it to purchase one unit of the commodity.
II. Short a forward contract on one unit of the commodity.
If we regard the futures contract as a forward contract, this strategy leads to a profit of
F - (S+U) e
rT
at the expiration of the futures contract. As arbitragers exploit this
opportunity, the spot price will increase and the futures price will decrease until
Equation (5) does not hold good.
Suppose next that

Eq (6)
In case of investment assets such as gold and silver, many investors hold the
commodity purely for investment. When they observe the inequality in equation 6,
they will find it profitable to trade in the following manner:
I. Sell the commodity, save the storage costs, and invest the proceeds at
the risk free interest rate.
II. Take a long position in a forward contract.
This would result in a profit at maturity of (S+U) e
rT
F relative to the position that
the investors would have been in had they held the underlying commodity. As
arbitragers exploit this opportunity, the spot price will decrease and the futures price
will increase until equation 6 does not hold well. This means that for investment
assets, equation 4 holds good. However, for commodities like cotton or wheat that are
held for consumption purpose, this argument cannot be used. Individuals and
companies who keep such a commodity in inventory, do so, because of its
consumption value not because of its value as an investment. They are reluctant to
sell these commodities and buy forward or futures contracts because these contracts
cannot be consumed. Therefore there is unlikely to be arbitrage when equation 6 holds
good. In short, for a consumption commodity therefore
F > (S+U) e
rT

F < (S+U) e
rT


PGP/SS/2009-11 DS/09/11-F220 33

Eq (7)
That is the futures price is less than or equal to the spot price plus the cost of carry.
CLEARING, SETTLEMENT AND RISK MANAGEMENT
Clearing and settlement
Most futures contracts do not lead to the actual physical delivery of the
underlying asset. The settlement is done by closing out open positions, physical
delivery or cash settlement. All these settlement functions are taken care of by an
entity called clearing house or clearing corporation. National Securities Clearing
Corporation Limited (NSCCL) undertakes clearing of trades executed on the
NCDEX. The settlement guarantee fund is maintained and managed by NCDEX.
Clearing
Clearing of trades that take place on an exchange happens through the exchange
clearing house. A clearing house is a system by which exchanges guarantee the
faithful compliance of all trade commitments undertaken on the trading floor or
electronically over the electronic trading systems. The main task of the clearing house
is to keep track of all the transactions that take place during a day so that the net
position of each of its members can be calculated. It guarantees the performance of
the parties to each transaction.
Typically it is responsible for the following:
Effecting timely settlement
Trade registration and follow up.
Control of the evolution of open interest.
Financial clearing of the payment flow.
Physical settlement (by delivery) or financial settlement (by price
difference) of contracts.
Administration of financial guarantees demanded by the participants.
The clearing house has a number of members, who are mostly financial institutions
responsible for the clearing and settlement of commodities traded on the exchange.
The margin accounts for the clearing house members are adjusted for gains and losses
at the end of each day (in the same way as the individual traders keep margin accounts
with the broker). On the NCDEX, in the case of clearing house members only the
F (S+U) e
rT


PGP/SS/2009-11 DS/09/11-F220 34
original margin is required (and not maintenance margin), Every day the account
balance for each contract must be maintained at an amount equal to the original
margin times the number of contracts outstanding. Thus depending on a day's
transactions and price movement, the members either need to add funds or can
withdraw funds from their margin accounts at the end of the day. The brokers who are
not the clearing members need to maintain a margin account with the clearing house
member through whom they trade in the clearing house.
Clearing banks: NCDEX has designated clearing banks
Through whom funds to be paid and / or to be received must be settled. Every
clearing member is required to maintain and operate a clearing account with any one
of the designated clearing bank branches. The clearing account is to be used
exclusively for clearing operations i.e., for settling funds and other obligations to
NCDEX including payments of margins and penal charges. A clearing member can
deposit funds into this account, but can withdraw funds from this account only in his
self-name. A clearing member having funds obligation to pay is required to have clear
balance in his clearing account on or before the stipulated pay in day and the
stipulated time. Clearing members must authorize their clearing bank to access their
clearing account for debiting and crediting their accounts as per the instructions of
NCDEX, reporting of balances and other operations as may be required by NCDEX
from time to time. The clearing bank will debit/ credit the clearing account of clearing
members as per instructions received from NCDEX. The following banks have been
designated as clearing banks. ICICI Bank Limited, Canarabank, UTI Bank Limited
and HDFC Bank ltd
Depository participants: Every clearing member is required to maintain and operate
a CM pool account with any one of the empanelled depository participants. The CM
pool account is to be used exclusively for clearing operations i.e., for effecting and
receiving deliveries from NCDEX.
Settlement
Futures contracts have two types of settlements,
The MTM settlement which happens on a continuous basis at the end of each day
And the final settlement which happens on the last trading day of the futures
contract.

PGP/SS/2009-11 DS/09/11-F220 35
On the NCDEX, daily MTM settlement and final MTM settlement in respect of
admitted deals in futures contracts are cash settled by debiting/ crediting the clearing
accounts of CMs with the respective clearing bank. All positions of a CM, either
brought forward created during the day or closed out during the day, are marked to
market at the daily settlement price or the final settlement price at the close of trading
hours on a day.
Daily settlement price: Daily settlement price is the consensus closing price as
arrived after closing session of the relevant futures contract for the trading
day. However, in the absence of trading for a contract during closing session,
daily settlement price is computed as per the methods prescribed by the
exchange from time to time.
Final settlement price: Final settlement price is the closing price of the
underlying commodity on the last trading day of the futures contract. All open
positions in a futures contract cease to exist after its expiration day.
Settlement Methods: Settlement of futures contracts on the NCDEX can be done in
three ways. By physical delivery of the underlying asset, by closing out open
positions and by cash settlement. We shall look at each of these in some detail. On the
NCDEX all contracts settling in cash are settled on the following day after the
contract expiry date. All contracts materialising into deliveries are settled in a period
2.7 days after expiry. The exact settlement day for each commodity is specified by the
exchange.
When a contract comes to settlement, the exchange provides alternatives like delivery
place, month and quality specifications. Trading period, delivery date etc. are all
defined as per the settlement calendar. A member is bound to provide delivery
information. If he fails to give information, it is closed out with penalty as decided by
the exchange. A member can choose an alternative mode of settlement by providing
counter party clearing member and constituent. The exchange is however not
responsible for, nor guarantees settlement of such deals. The settlement price is
calculated and notified by the exchange. The delivery place is very important for
commodities with significant transportation costs. The exchange also specifies the
accurate period (date and time) during which the delivery can be made.

PGP/SS/2009-11 DS/09/11-F220 36
Closing out by offsetting positions
Most of the contracts are settled by closing out open positions. In closing out, the
opposite transaction is effected to close out the original futures position. A buy
contract is closed out by a sale and a sale contract is closed out by a buy. For example,
an investor who took a long position in two gold futures contracts on the January 30,
2009 at 14402 can close his position by selling two gold futures contracts on February
27, 2004 at Rs.15445. In this case, over the period of holding the position, he has
gained an amount of Rs.1043 per unit. This loss would have been debited from his
margin account over the holding period by way of MTM at the end of each day, and
finally at the price that he closes his position, that is Rs. 15445 in this case.
Cash settlement
Contracts held till the last day of trading can be cash settled. When a contract is
settled in cash, it is marked to the market at the end of the last trading day and all
positions are declared closed. The settlement price on the last trading day is set equal
to the closing spot price of the underlying asset ensuring the convergence of future
prices and the spot prices. For example an investor took a short position in five long
staple cotton futures contracts on December 15 at Rs.6950. On 20
th
February, the last
trading day of the contract, the spot price of long staple cotton is Rs.6725. This is the
settlement price for his contract. As a holder of a short position on cotton, he does not
have to actually deliver the underlying cotton, but simply takes away the profit of
Rs.225 per trading unit of cotton in the form of cash.
Risk management
NCDEX has developed a comprehensive risk containment mechanism for its
commodity futures market. The salient features of risk containment mechanism are:
The financial reliability of the members is the key to risk management. Therefore,
the requirements for membership in terms of capital adequacy (net worth, security
deposits) are quite stringent.
NCDEX charges an open initial margin for all the open positions of a member. It
specifies the initial margin requirements for each futures contract on a daily basis.
It also follows value-at-risk (VAR) based margining through SPAN. The PCMs
and TCMs in turn collect the initial margin from the TCMs and their clients
respectively.

PGP/SS/2009-11 DS/09/11-F220 37
The open positions of the members are marked to market based on contract
settlement price for each contract. The difference is settled in cash on a T+1 basis.
A member is alerted of his position to enable him to adjust his exposure or bring
in additional capital. Position violations result in withdrawal of trading facility for
all TCMs of a PCM in case of a violation by the PCM.
A separate settlement guarantee fund for this segment has been created out of the
capital of members.
UNRESOLVED ISSUES
Even though the commodity derivatives market has made good progress in the last
few years, the real issues facing the future of the market have not been resolved.
Agreed, the number of commodities allowed for derivative trading have increased, the
volume and the value of business has zoomed, but the objectives of setting up
commodity derivative exchanges may not be achieved and the growth rates witnessed
may not be sustainable unless these real issues are sorted out as soon as possible.
Some of the main unresolved issues are discussed below.
a. Commodity Options: Trading in commodity options contracts has been
banned since 1952. The market for commodity derivatives cannot be called
complete without the presence of this important derivative. Both futures and
options are necessary for the healthy growth of the market. While futures
contracts help a participant (say a farmer) to hedge against downside price
movements, it does not allow him to reap the benefits of an increase in prices.
No doubt there is an immediate need to bring about the necessary legal and
regulatory changes to introduce commodity options trading in the country. The
matter is said to be under the active consideration of the Government and the
options trading may be introduced in the near future.
b. The Warehousing and Standardization: For commodity derivatives market to
work efficiently, it is necessary to have a sophisticated, cost-effective, reliable
and convenient warehousing system in the country. The Habibullah (2003)
task force admitted, A sophisticated warehousing industry has yet to come
about. Further, independent labs or quality testing centers should be set up in
each region to certify the quality, grade and quantity of commodities so that

PGP/SS/2009-11 DS/09/11-F220 38
they are appropriately standardized and there are no shocks waiting for the
ultimate buyer who takes the physical delivery. Warehouses also need to be
conveniently located. Central Warehousing Corporation of India (CWC:
www.fieo.com) is operating 500 Warehouses across the country with a storage
capacity of 10.4 million tonnes. This is obviously not adequate for a vast
country. To resolve the problem, a Gramin Bhandaran Yojana (Rural
Warehousing Plan) has been introduced to construct new and expand the
existing rural godowns. Large scale privatization of state warehouses is also
being examined.
c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the
present warehousing system that only about 1% to 5% of the total commodity
derivatives trade in the country is settled in physical delivery. Therefore the
warehousing problem obviously has to be handled on a war footing, as a good
delivery system is the backbone of any commodity trade. A International
Research Journal of Finance and Economics - Issue 2 (2006) 161 particularly
difficult problem in cash settlement of commodity derivative contracts is that
at present, under the Forward Contracts (Regulation) Act 1952, cash
settlement of outstanding contracts at maturity is not allowed. In other words,
all outstanding contracts at maturity should be settled in physical delivery. To
avoid this, participants square off their positions before maturity. So, in
practice, most contracts are settled in cash but before maturity. There is a need
to modify the law to bring it closer to the widespread practice and save the
participants from unnecessary hassles.
d. The Regulator: As the market activity pick-up and the volumes rise, the
market will definitely need a strong and independent regular, similar to the
Securities and Exchange Board of India (SEBI) that regulates the securities
markets. Unlike SEBI which is an independent body, the Forwards Markets
Commission (FMC) is under the Department of Consumer Affairs (Ministry of
Consumer Affairs, Food and Public Distribution) and depends on it for funds.
It is imperative that the Government should grant more powers to the FMC to
ensure an orderly development of the commodity markets. The SEBI and

PGP/SS/2009-11 DS/09/11-F220 39
FMC also need to work closely with each other due to the inter-relationship
between the two markets.
e. Lack of Economy of Scale: There are too many (3 national level and 21
regional) commodity exchanges. Though over 80 commodities are allowed for
derivatives trading, in practice derivatives are popular for only a few
commodities. Again, most of the trade takes place only on a few exchanges.
All this splits volumes and makes some exchanges unviable. This problem can
possibly be addressed by consolidating some exchanges. Also, the question of
convergence of securities and commodities derivatives markets has been
debated for a long time now. The Government of India has announced its
intention to integrate the two markets. It is felt that convergence of these
derivative markets would bring in economies of scale and scope without
having to duplicate the efforts, thereby giving a boost to the growth of
commodity derivatives market. It would also help in resolving some of the
issues concerning regulation of the derivative markets. However, this would
necessitate complete coordination among various regulating authorities such
as Reserve Bank of India, Forward Markets commission, the Securities and
Exchange Board of India, and the Department of Company affairs etc.
f. Tax and Legal bottlenecks: There are at present restrictions on the movement
of certain goods from one state to another. These need to be removed so that a
truly national market could develop for commodities and derivatives. Also,
regulatory changes are required to bring about uniformity in octroi and sales
taxes etc. VAT has been introduced in the country in 2005, but has not yet
been uniformly implemented by all states.
Following are some of applications, which can utilize the power of the commodity
market and create a win-win situation for all the involved parties:-
Regulatory approval/permission to FIIS to trading in the commodity market.
Active Involvement of mutual fund industry of India.
Permission to Banks for acting as Aggregators and traders.
Active involvement of small Regional stock exchanges.

PGP/SS/2009-11 DS/09/11-F220 40
Newer Avenues for trading in Foreign Derivatives Exchanges.
Convergence of variance market.
Amendment of the commodities Act and Implementers of VAT.
Introduction of option contract.


PGP/SS/2009-11 DS/09/11-F220 41
COMMODITY MARKET RISK MANAGEMENT
Need For Futures Trading In Commodities
Futures trading plays a key role in the marketing of a number of important agricultural
and nonagricultural commodities as it provides the industrial and farming
communities with a transparent price discovery platform, which also enables them to
hedge their price risk and price volatility. The growth of Indian commodities futures
trading towards an efficient, transparent and well-organised market has thrown open a
window of benefits and opportunities to Indian producers and traders. Besides the
primary benefits of its twin economic functions of price discovery and price risk
management, commodity futures trading has also played an instrumental role in
integrating various fragmented components of the commodity ecosystem, thus
developing the overall infrastructure of agricultural commodities marketing in the
country.
Commodity Futures, which forms an essential component of Commodity Exchange,
can be broadly classified into precious metals, agriculture, energy and other metals.
Current futures volumes are miniscule compared to underlying spot market volumes
and thus have a tremendous potential in the near future.
Futures trading in commodities results in transparent and fair price discovery on
account of large-scale participations of entities associated with different value chains.
It reflects views and expectations of a wider section of people related to a particular
commodity. It also provides effective platform for price risk management for all
segments of players ranging from producers, traders and processors to
exporters/importers and end-users of a commodity.
It also helps in improving the cropping pattern for the farmers, thus minimizing the
losses to the farmers. It acts as a smart investment choice by providing hedging,
trading and arbitrage opportunities to market players. Historically, pricing in
commodities futures has been less volatile compared with equity and bonds, thus
providing an efficient portfolio diversification option.
Raw materials form the most key element of most of the industries. The significance
of raw materials can further be strengthened by the fact that the "increase in raw

PGP/SS/2009-11 DS/09/11-F220 42
material cost means reduction in share prices". In other words "Share prices mimic the
commodity price movements".
Industry in India today runs the raw material price risk; hence going forward the
industry can hedge this risk by trading in the commodities market.
The commodity markets being cyclical in nature have inherent risks involved. Due to
this, banks have kept away. The exchanges have brought expertise, control, and
transparency of prices. Once the commodities are deemed negotiable and transferable,
warehouse receipts can be an effective tool in the hands of farmers.
They can then wait for prices to soar up before selling their produce. To encourage
and assist farmers to use warehouse receipts, banks like ICICI are providing up to 70
per cent loans against de-mat receipts which are obtained from the exchange against
physical produce. The idea is to transfer risk from the entity to the commodity, by
aligning repayment of the loan to actual use of the commodity.
Thus, the need for risk management strategies in this growth phase is very essential
because most companies do not have a policy for managing commodity risk.
Development of scientific tools for price discovery, promotion of contract farming
and better weather forecasts will help increase confidence and attract investors to
commodities.
Some of the other benefits of having an exchange in commodity trading are:
Hedging - price risk management by risk mitigation
Speculation - take advantage of favorable price movement
Leverage - pay low margin to enjoy large exposure
Liquidity - ease of entry and exit of market
Price stabilization along with balancing demand and supply position
Flexibility, certainty and transparency in purchasing commodities facilitate
bank financing.



PGP/SS/2009-11 DS/09/11-F220 43
HEDGING
Hedging is a sophisticated mechanism, which provides the necessary immunity to the
above interests in the marketing of commodities from the risk of adverse price
fluctuations.
A Hedge is a countervailing contract transacted in a futures market through which
those who have bought in the ready market will sell in the futures market and those
who have sold in the ready market would buy in the futures market. In each of these
two cases, a purchase in the ready market is off-set by an opposite sale in the futures
market and a sale in the ready market is off-set by purchase in the futures market.
When the purchase or sale commitment in the ready market is fulfilled, the sale or
purchase hedge contract is closed out by an offsetting reverse purchase or sale
contract in the futures market.
The practice of hedging is based on the assumption that the ready and futures prices
of the commodity move more or less parallel to each other. The ready and futures
prices of a commodity ordinarily do move together in sympathy with each other
because both ready and futures prices are basically determined by the demand and
supply factors of that particular commodity.
When the price of a commodity has declined in the ready market, its price in the
futures market would normally have also declined so that the loss incurred in the
ready market would be recovered by the profit made in the futures market.
Similarly, if the price rises in the ready market after the hedge sale had been entered
into the futures market, there would be a loss in the futures market, which would,
however, be made up with the profit made in the ready market. But, in certain
circumstance, the ready and futures prices may not move together or the spread
between the two may increase or decrease sharply. To the extent that they do not
move together by the same extent, hedging itself may be a source of minor gains or
losses. But a dealer, manufacturer or exporter is not, per se, interested in such
speculative losses or gains. His only interest is to ensure that he gets the necessary
insurance against unforeseen fluctuation in prices. By and large, hedging in a futures
market does afford such a protection to the various functionaries.

PGP/SS/2009-11 DS/09/11-F220 44
Hedging on futures markets cannot be practiced unless there are operators willing to
assume the risk of adverse price fluctuations which the hedgers desire to transfer.
These operators are called speculators. They, thus provide the much needed breadth
and liquidity to the futures markets which in their absence would remain narrow and
unstable.
The hedger is a trader who enters the futures market in order to reduce a pre-existing
risk position. Having a position does not mean that the trader must actually own a
commodity. An individual or a firm who anticipates the need for a certain commodity
in the future or a person who plans to acquire a certain commodity later also has a
position in that commodity. In many cases, the hedger has a certain hedging horizon
the future date when the hedge will terminate. The hedge can be a long hedge or a
short hedge. If the hedger buys futures contract to hedge, it will be a long hedge.
For example, a roller flourmill owner may like to lock-in the price of the wheat that
he wants to purchase three months later by purchasing wheat futures. If three months
later the wheat prices rise, carrying futures prices along with them, the flourmill
owner will purchase wheat from the spot market at a higher price. The loss that he
may suffer in the cash market will be compensated by sale of futures at a higher price.
Similarly, a farmer can sell three-month futures at the prevailing price and lock-in his
profits at that level. If the prices fall, the loss suffered by the farmer in the cash
market will be compensated by the profit that the farmer will earn by squaring the
transaction in the futures market.
In practice, hedging solutions are not as neat as the ones described above. In the
above example, the goods in question were exactly the same both in the cash and the
futures market, the amounts purchased / sold in the cash market matched the futures
contract amounts, and the hedging horizons of the farmer and the mill owner matched
the delivery dates of the futures contracts. It will be rare for all factors to match
perfectly; they will differ in time span covered, the amount of commodity or the
physical characteristics of the commodity that are traded in the cash and the futures
markets. Such hedges are known as cross-hedges. In such cases, the hedger must
trade the right number and kind of futures contract to control the risk in hedged
positions as much as possible. There can be situations where the hedger does not have

PGP/SS/2009-11 DS/09/11-F220 45
any definite hedging horizon and may enter into what is known as risk-minimizing
hedge.
The hedger has many incentives. Tax is a major incentive. In an un-hedged situation,
the profits fluctuate widely and the person / firm may have to pay taxes in the high
profit years while he is not able to utilize the tax credits when he runs into losses.
Hedging also serves to minimize the cost of financial distress. Widely fluctuating
profits may drive many persons / firms to bankruptcy. In an idealized world with no
transaction costs, which is inhabited by homo-economics this may not be a factor. In
the real world, bankruptcy involves avoidable human misery and prolonged winding
up procedures.
A speculator operating in a futures market is the one who buys or sells futures
contracts without any countervailing commitments or transactions in the actual
commodity with a view to making profit from the fluctuations in the prices.
The basic distinction between a hedge and speculative transaction on a futures market
is that while in the case of a hedge transaction there is a corresponding opposite
transaction in the ready market, in the case of a speculative transaction, there is no
corresponding transaction in the ready market.
While the motives of the speculator in entering into futures trans actions are different
from a hedger, the form or nature of transactions entered into by both in the futures
market is similar. When a transaction takes place in a futures market, the transaction
may well be between two hedgers or two speculators or between a hedger and a
speculator.
While it is possible for the individual parties to enter into futures contracts, such
contracts are generally entered under the auspices of commercial bodies known as
commodity exchanges or associations.
The need for organizing futures trading under the auspices of such commodity
exchanges or associations arises mainly in order to ensure that payment of differences
arising from settlement of purchase and sale contracts entered into by the members of
such exchanges or associations take place in a smooth and orderly manner and thus
defaults on account of non-payment of such differences are avoided. Futures trading

PGP/SS/2009-11 DS/09/11-F220 46
in these commodity exchanges/associations are confined to or conducted through its
members in accordance with the procedure laid down in its rules members in
accordance with the procedure laid down in its rules and bye-laws.
Further, these exchanges/associations also help in evolving standard terms of
contracts in which the quantity and quality of the goods traded, period of delivery and
all other terms are pre-determined, the only variable being the price at which the
contracts helps the members of associations in entering into uniform types of
contracts in which the quantity and quality of goods, period of delivery etc. are pre-
determined so that they can be entered into primarily for the purpose of exchange of
money differences.
No risk can be eliminated, but the same can be transferred to someone who can handle
it better or to someone who has the appetite for risk. Commodity enterprises primarily
face the following classes of risks, namely: the price risk, the quantity risk, the
yield/output risk and the political risk. Talking about the nationwide commodity
exchanges, the risk of the counter party (trading member, client, vendors etc) not
fulfilling his obligations on due date or at any time thereafter is the most common
risk.
Commodity risk refers to the uncertainties of future market values and of the size of
the future income, caused by the fluctuation in the prices of commodities. These
commodities may be grains, metals, gas, electricity etc. A commodity enterprise
needs to deal with the following kinds of risks:
Price risk (Risk arising out of adverse movements in the world prices,
exchange rates, basis between local and world prices)
Quantity risk
Cost risk (Input price risk)
Political risk
There are broadly four categories of agents who face the commodities risk:
Producers (farmers, plantation companies, and mining companies) face price
risk, cost risk (on the prices of their inputs) and quantity risk

PGP/SS/2009-11 DS/09/11-F220 47
Buyers (cooperatives, commercial traders and trait ants) face price risk
between the time of up-country purchase buying and sale, typically at the port,
to an exporter.
Exporters face the same risk between purchase at the port and sale in the
destination market; and may also face political risks with regard to export
licenses or foreign exchange conversion.
Governments face price and quantity risk with regard to tax revenues,
particularly where tax rates rise as commodity prices rise (generally the case
with metals and energy exports) or if support or other payments depend on the
level of commodity prices.
This risk is mitigated by collection of the following margins: -
Initial Margins
Exposure margins
Market to market of positions on a daily basis
Position Limits and Intra day price limits
Surveillance
Commodity price risks include: -
Increase in purchase cost vis--vis commitment on sales price
Change in value of inventory
Counter party risk translating into commodity price risk
KEY FACTORS FOR SUCCESS OF COMMODITIES MARKET
The following are some of the key factors for the success of the commodities markets:
How one can make the business grow?
How many products are covered?
How many people participate on the platform?

PGP/SS/2009-11 DS/09/11-F220 48
KEY FACTORS FOR SUCCESS OF COMMODITIES EXCHANGES
The following are some of the key factors for the success of the commodities
exchanges: -
Strategy, method of execution, background of promoters, credibility of the institution,
transparency of platforms, scaleable technology, robustness of settlement structures,
wider participation of Hedgers, Speculators and Arbitrageurs, acceptable clearing
mechanism, financial soundness and capability, covering a wide range of
commodities, size of the trade guarantee fund, reach of the organization and adding
value on the ground. In addition to this, if the Indian Commodity Exchange needs to
be competitive in the Global Market, then it should be backed with proper "Capital
Account Convertibility".
The interests of Indian consumers, households and producers are most important, as
these are the people who are exposed to risk and price fluctuations.
KEY EXPECTATIONS OF COMMODITIES EXCHANGES
The following are some of the key expectations of the investor's w.r.t. any commodity
exchange: -
To get in place the right regulatory structure to even out the differences that
may exist in various fields.
Proper Product Conceptualization and Design.
Fair and Transparent Price Discovery & Dissemination.
Robust Trading & Settlement systems.
Effective Management of Counter party Credit Risk.
Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and
review of Members, Enforcement of Exchange rules.


PGP/SS/2009-11 DS/09/11-F220 49
FUTURE PROSPECTS
With the gradual withdrawal of the government from various sectors in the post-
liberalization era, the need has been felt that various operators in the commodities
market be provided with a mechanism to hedge and transfer their risks. India's
obligation under WTO to open agriculture sector to world trade would require futures
trade in a wide variety of primary commodities and their products to enable diverse
market functionaries to cope with the price volatility prevailing in the world markets.
Government subsidy may go down as a result of WTO. The MSP programme will not
be sustainable in such a scenario. The farmer will have to look at ways of being in a
position to trade on commodity exchanges in future. Also, corporate will feel the
pressure to hedge their price risk once the frontiers open up for free trade.
Indian markets have recently thrown open a new avenue for retail investors and
traders to participate: commodity derivatives. For those who want to diversify their
portfolios beyond shares, bonds and real estate, commodities are the best option.
Following are some of the applications, which can utilize the power of the commodity
markets and create a win-win situation for all the involved parties: -
REGULATORY APPROVAL / PERMISSION TO FII'S FOR TRADING IN
THE COMMODITY MARKETS
FII's are currently not allowed nor disallowed under any law. As, they have added
depth to the equity markets; they will add depth to the commodities markets, since
they globally know the commodities.
ACTIVE INVOLVEMENT OF MUTUAL FUND INDUSTRY IN INDIA
Currently Mutual Funds are prohibited from not using derivatives apart from hedging.
Mutual Funds as investors can invest in gold and get returns as they get from debt
instruments, equity markets. AMFI & SEBI need to collectively work towards the
same. Launch of the "Commodity Funds", by the Mutual Funds in India, can serve as
a newer investment avenue for investors.
ONLINE COMMODITY TRADING
Online commodity trading offers a way for an open, many-to-many system, where
every user has equal access to price quotes and trading functionality. It provides a

PGP/SS/2009-11 DS/09/11-F220 50
level playing field for all, without favoritism or control by a chosen few, where any
user can view all quotes posted by other users in real time, act or trade on quotes
posted by others, post their own prices and quantities for others to trade
The Online commodity trading site usually lists a large number of unique products
covering a variety of commodities, structures, and settlement terms ranging from Oil,
Natural Gas, Electric Power, Precious Metals, Emissions and Weather. It provides for
various media ranging from Physical Delivery and Financial Cash Settlement. There
are further derivative options available ranging from Forwards, Swaps, Options,
Spreads, Differentials, Complex Derivatives.
Liquidity, or trade activity, is perhaps the best measure of success of an online trading
commodity trading system. With most online commodity trading systems, traders can
be sure of finding an interesting market development or trading opportunity almost
every time they log on.
All quotes posted by users on any online commodity trading systems are live and
firm. They can be acted on with full assurance of a completed transaction. The
greatest advantage of an online system for trading is that just a click can be used to hit
a bid or lift an offer.
The Online trading system operates almost continuously around the clock, 24 hours a
day, seven days a week. This allows any user to extend the trading day, and easily
pass the trading objectives to others in companies in different times zones.
The online commodity trading system in India is only an emerging segment yet. This
is because the Internet boom in Indian is on the rise only now. The Internet charges
are becoming minimal and the Internet is soon becoming a way of life in India. It is in
this scenario that online trading is becoming more the way of trading in India.

PGP/SS/2009-11 DS/09/11-F220 51
Chapter - 4
ANALYSIS AND INTERPRETATION OF DATA

4.1 Analysis and Interpretation of Data through Questionnaire using SPSS
Package:

Table 1: Showing Respondents Experience in Business
Source: question No. 1 from Questionnaire

Statistics

RESPONDENTS EXPERIENCE IN BUSINESS

Valid
40
N

Missing
0

RESPONDENTS EXPERIENCE IN BUSINESS

Frequency Percent Valid Percent
Cumulative
Percent
Less than 1 year
9 22.5 22.5 22.5

1- 2 years
12 30.0 30.0 52.5

More than 3 years
19 47.5 47.5 100.0
Valid

Total
40 100.0 100.0

Graph 1:
More than 3 years 1- 2 years Less than 1 year
RESPONDENTS EXPERIENCE IN BUSINESS
20
15
10
5
0
F
r
e
q
u
e
n
c
y
RESPONDENTS EXPERIENCE IN BUSINESS


PGP/SS/2009-11 DS/09/11-F220 52
Analysis:

The Indian financial sector plays an important role in canalizing household savings to
corporate as well government sector primarily for investment in industrial,
infrastructure as well as agriculture and services sectors. Since the process of
liberalization began in 1991, the Indian financial services sector has been transformed
in a vibrant and competitive industry. The introduction of new instruments and
relaxation of investment limits for Foreign Direct Investment (FDI) and Foreign
Institutional Investment (FII) has helped broaden the financial services sector. There
has-been an introduction of new financial products over the years. Many sectors have
been opened up for new private players. The entry of new players has resulted in a
more sophisticated range of financial services being offered corporate and retail
customers which has forced the existing players to upgrade their products and
distribution channels. This is particularly witnessed in the non-banking financial
services sector such as the brokerage industry.

From the above data it is clear that 47.5% of the respondents are settled in brokerage
business more than 3 years.


PGP/SS/2009-11 DS/09/11-F220 53
Table 2: Showing the no of respondents dealing in commodity market
Source: question No2 from Questionnaire

Statistics

NO OF RESPONDENTS DEALING IN COMMODITY MARKET

Valid
40
N

Missing
0


NO OF RESPONDENTS DEALING IN COMMODITY MARKET

Frequency Percent Valid Percent
Cumulative
Percent
Yes
21 52.5 52.5 52.5

No
19 47.5 47.5 100.0
Valid

Total
40 100.0 100.0

Graph 2:
No
Yes
NO OF RESPONDENTS DEALING IN COMMODITY MARKET



PGP/SS/2009-11 DS/09/11-F220 54
Analysis:

Global commodity market is 5 times in volume as compared to stock market. Yet the
percentage of investments in commodities in India is only 23% of the stock market. It
is clear from the above table that more than 50% of respondents are involved only in
stocks. The ones dealing with commodities have very low percentage of business in
commodities.


PGP/SS/2009-11 DS/09/11-F220 55
Table 3: Showing daily turnover of respondents
Source: question No. 3 from Questionnaire


Statistics

DAILY TURNOVER OF INVESTORS IN COMMODITY TRADING

Valid
21
N

Missing
19

DAILY TURNOVER OF INVESTORS IN COMMODITY TRADING

Frequency Percent Valid Percent
Cumulative
Percent
Less than 25 Lakhs
5 12.5 23.8 23.8

25 Lakhs to 1 Crore
9 22.5 42.9 66.7

More than 1 Crore
7 17.5 33.3 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 3:
More than 1 crore 25 Lakhs to 1 Crore Less than 25 Lakhs
DAILY TURNOVER OF INVESTORS IN COMMODITY TRADING
10
8
6
4
2
0
F
r
e
q
u
e
n
c
y
DAILY TURNOVER OF INVESTORS IN COMMODITY TRADING



PGP/SS/2009-11 DS/09/11-F220 56
Analysis:

The Indian financial services industry is witnessing up the trend, with strong growth
catalysts coinciding at an appropriate time. The growths catalysts are categorized into
cultural, demographic, economic and political developments have changed the
perception of India as an investment destination. With a GDP growth of 8.1% in
2006-07 India is one of the fastest growing free market democracies in the world. A
savings rate of 24.2% and service sector contribution of more than 50% akin to the
developed nations is improving the countrys rating in the world investing
community. It can be seen from table majority of brokers are having daily turnover
between 25 lakhs to one crore.


PGP/SS/2009-11 DS/09/11-F220 57
Table 4: Showing increase volume of trade over last year
Source: question No. 4 from Questionnaire

Statistics

INCREASE IN VOLUME OF TRADE OVER LAST YEAR

Valid
21
N

Missing
19


INCREASE IN VOLUME OF TRADE OVER LAST YEAR

Frequency Percent Valid Percent
Cumulative
Percent
Yes
15 37.5 71.4 71.4

No
6 15.0 28.6 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 4:
No Yes
INCREASE IN VOLUME OF TRADE OVER LAST YEAR
14
12
10
8
6
4
2
0
F
r
e
q
u
e
n
c
y
INCREASE IN VOLUME OF TRADE OVER LAST YEAR



PGP/SS/2009-11 DS/09/11-F220 58
Analysis:

The financial services industry is composed of three primary sectors: banking,
securities and commodities, and insurance. The financial industrys estimated annual
rate of growth is 12% annually between 2002 and 2012. The 2006 Gross Domestic
Product generated by the financial industry was over $7.5 trillion in current dollars, a
20.4% share of the total GDP. The following financial services occupations are
expected to increase in employment by over 18% from 2002 to 2012: personal
financial advisors (34.6%), financial analysts (18.7%), and credit analysts (18.7%). It
is clear from the above table that there is definite increase in the volume of trade due
to increase in number of investors.



PGP/SS/2009-11 DS/09/11-F220 59
Table 5: Showing improvement in number of clients
Source: question No. 5 from Questionnaire


Statistics

IMPROVEMENT IN NO OF CLIENTS

Valid
21
N

Missing
19



IMPROVEMENT IN NO OF CLIENTS

Frequency Percent Valid Percent
Cumulative
Percent
Yes
17 42.5 81.0 81.0

No
4 10.0 19.0 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0

Graph 5:
Missing
No
Yes
IMPROVEMENT IN NO OF CLIENTS



PGP/SS/2009-11 DS/09/11-F220 60
Analysis:

Since 2002 when the first national level commodity exchange started, the exchanges
have conducted brisk business in commodities trading. In the last three years, there
has been a great revival of the commodities trading in India, both in terms of the
number of commodities allowed for futures trading as well as the value of trading.
While in year 2000, trading was allowed in only 8 commodities, the number jumped
to 80 commodities in June 2004. All most all the respondents have said there is drastic
increase in number of investors.


PGP/SS/2009-11 DS/09/11-F220 61
Table 6: Showing investors knowledge about commodity market
Source: question No. 6 from Questionnaire

Statistics

INVESTORS TRADING IN COMMODITIES WITH PROPER KNOWLEDGE

Valid
21
N

Missing
19




INVESTORS TRADING IN COMMODITIES WITH PROPER KNOWLEDGE


Frequency Percent Valid Percent
Cumulative
Percent
Yes
12 30.0 57.1 57.1

No
9 22.5 42.9 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 6:
Missing
No
Yes
INVESTORS TRADING IN COMMODITIES WITH PROPER KNOWLEDGE



PGP/SS/2009-11 DS/09/11-F220 62
Analysis:

Knowledge about the financial sector have grown tremendously in the last few years,
thanks to the structural changes in the market, and the economy is now ripe. Once
India has skills in the core markets, capabilities in commodities can be easily applied
into unexpected areas. From the above we can make out there is a mixed opinion
regarding investors knowledge on commodity market.

PGP/SS/2009-11 DS/09/11-F220 63
Table 7: Showing commodity market is a safe investment avenue for retail investors
Source: question No.7 from Questionnaire

Statistics

COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL INVESTORS

Valid
21
N

Missing
19


COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL INVESTORS

Frequency Percent Valid Percent
Cumulative
Percent
Yes
13 32.5 61.9 61.9

No
8 20.0 38.1 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 7:

Missing
No
Yes
COMMODITY MARKET IS SAFE INVESTMENT AVENUE FOR RETAIL
INVESTORS



PGP/SS/2009-11 DS/09/11-F220 64
Analysis:

Leverage is very important to the commodities markets. Unlike the stock market,
where you might have to invest Rs.10, 000 to leverage Rs.10, 000. A commodities
trader can leverage tens of thousands of rupees worth of a commodity. Also unlike
stocks, Commodities have intrinsic value and will not go bankrupt. From the above
table it is clear that 61.9% of respondents are telling that it is a safe for Investment
Avenue. And 38.1% are telling that not safe for investment.



PGP/SS/2009-11 DS/09/11-F220 65
Table 8: Showing dealings in specific commodity
Source: question No. 8 from Questionnaire


Statistics

RESPONDENT'S DEALING WITH SPECIFIC COMMODITIES

Valid
21
N

Missing
19



RESPONDENT'S DEALING WITH SPECIFIC COMMODITIES

Frequency Percent Valid Percent
Cumulative
Percent
Yes
15 37.5 71.4 71.4

No
6 15.0 28.6 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0

Graph 8:
No Yes
RESPONDENT'S DEALING WITH SPECIFIC COMMODITIES
14
12
10
8
6
4
2
0
F
r
e
q
u
e
n
c
y
RESPONDENT'S DEALING WITH SPECIFIC COMMODITIES


Analysis:

It is clear from above chart that some brokers dealing with specific commodities and
some are not.

PGP/SS/2009-11 DS/09/11-F220 66
Table 9: Showing commodity wise preferences by respondents
Source: question No. 9 from Questionnaire

Statistics

COMMODITY WISE PREFERENCES BY RESPONDENTS

Valid
40
N

Missing
0


COMMODITY WISE PREFERENCES BY RESPONDENTS

Frequency Percent Valid Percent
Cumulative
Percent
Gold
15 37.5 37.5 37.5

Cereals
4 10.0 10.0 47.5

Oil
18 45.0 45.0 92.5

Other
3 7.5 7.5 100.0
Valid

Total
40 100.0 100.0

Graph 9:
Other Oil Cereals Gold
COMMODITY WISE PREFERENCES BY RESPONDENTS
20
15
10
5
0
F
r
e
q
u
e
n
c
y
COMMODITY WISE PREFERENCES BY RESPONDENTS



PGP/SS/2009-11 DS/09/11-F220 67
Analysis:

India is among the top-5 producers of most of the commodities, in addition to being a
major consumer of bullion and energy products. Agriculture contributes about 22% to
the GDP of the Indian economy. It employees around 57% of the labor force on a
total of 163 million hectares of land. Agriculture sector is an important factor in
achieving a GDP growth of 8-10%. But still emphasis is laid on only on gold and oil
trading.


PGP/SS/2009-11 DS/09/11-F220 68
Table 10: Showing reasons for commodity preferences
Source: question No. 10 from Questionnaire


Statistics

REASON FOR COMMODITY PREFERENCES

Valid
40
N

Missing
0


REASON FOR COMMODITY PREFERENCES

Frequency Percent Valid Percent
Cumulative
Percent
More no of Investors
9 22.5 22.5 22.5

Low Risk
12 30.0 30.0 52.5

High Rate of Return
14 35.0 35.0 87.5

Any Other
5 12.5 12.5 100.0
Valid

Total
40 100.0 100.0


Graph 10:
Any Other High Rate of Return Low Risk More no of Investors
REASON FOR COMMODITY PREFERENCES
12.5
10.0
7.5
5.0
2.5
0.0
F
r
e
q
u
e
n
c
y
REASON FOR COMMODITY PREFERENCES


PGP/SS/2009-11 DS/09/11-F220 69

Analysis:
Commodities also give the investor the ability to participate in virtually all sectors of
the world economy and have the potential to produce returns that tend to be
independent of other markets. In fact portfolios that add commodity investments can
actually lower the overall portfolio risk by diversification. From the above table it is
clear that the most of the brokers who prefers specific commodity due to high rate of
return.

PGP/SS/2009-11 DS/09/11-F220 70
Table 11: Showing opinion about commodity market in India
Source: question No. 11 from Questionnaire
Statistics

OPINION ABOUT COMMODITY MARKET IN INDIA

Valid
21
N

Missing
19

OPINION ABOUT COMMODITY MARKET IN INDIA

Frequency Percent Valid Percent
Cumulative
Percent
Highly Volatile
9 22.5 42.9 42.9

Volatile
6 15.0 28.6 71.4

Stable
4 10.0 19.0 90.5

Un Stable
2 5.0 9.5 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 11:

Un Stable Stable Volatile Highly Volatile
OPINION ABOUT COMMODITY MARKET IN INDIA
10
8
6
4
2
0
F
r
e
q
u
e
n
c
y
OPINION ABOUT COMMODITY MARKET IN INDIA


PGP/SS/2009-11 DS/09/11-F220 71
Analysis:

Commodity trading in India remained in a state of hibernation for nearly four decades,
mainly due to doubts about the benefits. Finally a realization that commodities do
perform a role in risk management led the government to change its stance. The
policy changes favouring commodity Trading were also facilitated by the enhanced
role assigned to free market forces under the new liberalization policy of the
Government. Indeed, it was a timely decision too, since internationally the commodity
cycle is on the upswing and the next decade is being touted as the decade of
commodities. Yet there is lack of clarity of factors leading to price changes and the
commodity market being highly responsive to global markets the brokers feel Indian
commodity market is highly volatile. Instability of commodity prices has always
been a major concern of the producers as well as the consumers in an agriculture-
dominated country like India. Farmers direct exposure to price fluctuations, for
instance, makes it too risky for them to invest in otherwise profitable activities.


PGP/SS/2009-11 DS/09/11-F220 72
Table 12: Showing effect of VAT on commodity market
Source: question No. 12 from Questionnaire

Statistics

EFFECT OF VAT ON COMMODITY MARKET

Valid
21
N

Missing
19


EFFECT OF VAT ON COMMODITY MARKET

Frequency Percent Valid Percent
Cumulative
Percent
Positive
13 32.5 61.9 61.9

Negative
6 15.0 28.6 90.5

No impact
2 5.0 9.5 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0

Graph 12:
No impact Negative Positive
EFFECT OF VAT ON COMODITY MARKET
12.5
10.0
7.5
5.0
2.5
0.0
F
r
e
q
u
e
n
c
y
EFFECT OF VAT ON COMODITY MARKET



PGP/SS/2009-11 DS/09/11-F220 73
Analysis:

There are at present restrictions on the movement of certain goods from one state to
another. These need to be removed so that a truly national market could develop for
commodities. Also, regulatory changes are required to bring about uniformity in
octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has
not yet been uniformly implemented by all states. It is clear from the above table that
most of the brokers felt that VAT has a positive effect on commodities market,
because it will help in smooth flow of goods in these markets and enhance the
delivery rate too.


PGP/SS/2009-11 DS/09/11-F220 74
Table 13: Showing highest volume of commodity
Source: question No. 13 from Questionnaire

Statistics

HIGHEST VOLUME OF COMMODITY

Valid
21
N

Missing
19
HIGHEST VOLUME OF COMMODITY

Frequency Percent Valid Percent
Cumulative
Percent
Metals
11 27.5 52.4 52.4

Agro - Based Commodities
10 25.0 47.6 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0

Graph 13:

Missing
Agro - Based
Comodities
Metals
HIGHEST VOLUME OF COMMODITY

Analysis:

It is clear from the above table that most of the brokers have a mixed response.


PGP/SS/2009-11 DS/09/11-F220 75
Table 14: Showing possibilities of Government & Industry would take responsibility
of further growth in commodity market
Source: question No. 14 from Questionnaire

Statistics

FURTHER GROWTH IN COMMODITY MARKET

Valid
21
N

Missing
19

FURTHER GROWTH IN COMMODITY MARKET

Frequency Percent Valid Percent
Cumulative
Percent
Yes
18 45.0 85.7 85.7

No
3 7.5 14.3 100.0
Valid

Total
21 52.5 100.0
Missing System
19 47.5
Total
40 100.0


Graph 14:
No Yes
FURTHER GROWTH IN COMMODITY MARKET
20
15
10
5
0
F
r
e
q
u
e
n
c
y
FURTHER GROWTH IN COMMODITY MARKET



PGP/SS/2009-11 DS/09/11-F220 76
Analysis:

A review of the nature of institutional and policy level constraints facing this segment
calls for more focused and pragmatic approach from government, the regulator and
the exchanges for making the agricultural futures markets a vibrant segment which
can play an important role especially in an agriculture dominated economy of India.
Most of the brokers are feel that commodities market needs positive push from
government and industry.


PGP/SS/2009-11 DS/09/11-F220 77
Table 15: Showing respondents opinion about success ratio of commodity trade in
India.
Source: question No. 15 from Questionnaire
Statistics

SUCESS RATIO OF COMMODITY TRADE IN INDIA AS PER YOUR OPINION

Valid
40
N

Missing
0

SUCESS RATIO OF COMMODITY TRADE IN INDIA AS PER YOUR OPINION

Frequency Percent Valid Percent
Cumulative
Percent
3:10
6 15.0 15.0 15.0

5:10
8 20.0 20.0 35.0

7:10
19 47.5 47.5 82.5

10:10
7 17.5 17.5 100.0
Valid

Total
40 100.0 100.0

Graph 15:
10:10
7:10
5:10
3:10
SUCESS RATIO OF COMMODITY TRADE IN INDIA AS PER YOUR OPINION



PGP/SS/2009-11 DS/09/11-F220 78
Analysis:
Most of the brokers are of the opinion that commodity market in India is in
progressive stage. The Indian economy is witnessing a mini revolution in commodity
market. They feel SEBI and government has to create more awareness among the
investors. From the above table it is clear that success ratio in Commodity Market is
70%
Calculation of Beta and Volatility:
This part of the chapter provides the calculation of Beta and Volatility.
Table 4.2 (1)
Calculation of Beta and Volatility of Gold futures
Date
GOLD
Close
(Rs)
RETURN ON
GOLD % (Y)
INDX
METAL
close
RETURN ON
INDX METAL
(X) X * Y X * X
1/3/2011 9563 -0.881011609 2687.47 -1.376523864 1.2127335 1.894817949
2/3/2011 9288 -2.641509434 2599.96 -3.342900055 8.830302 11.17498078
3/3/2011 9334 0.387180039 2612.61 0.615025572 0.2381256 0.378256454
5/3/2011 9290 -0.407375643 2586.59 -0.850589164 0.3465093 0.723501926
6/3/2011 9383 -0.191468993 2615.51 1.095796163 -0.209811 1.20076923
7/3/2011 9400 0.524008127 2643.16 0.975309727 0.5110702 0.951229063
8/3/2011 9435 0.25502072 2657.42 0.437668189 0.1116145 0.191553443
9/3/2011 9392 -0.402969247 2630.41 -0.994790804 0.4008701 0.989608744
10/3/2011 9383 -0.191468993 2630.74 -0.002280675 0.0004367 5.20148E-06
12/3/2011 9372 -0.149158321 2648.87 0.640192704 -0.09549 0.409846698
13-03-2011 9327 -0.649765658 2629.42 -0.777352624 0.505097 0.604277102
14-03-2011 9251 -0.601697647 2621.04 -0.081961276 0.0493159 0.006717651
15-03-2011 9315 0.463761864 2670.68 1.652672366 0.7664464 2.731325949
16-03-2011 9379 0.65464692 2685.93 0.564990789 0.3698695 0.319214592
17-03-2011 9384 -0.031959092 2685.93 -0.002606106 8.329E-05 6.79179E-06
19-03-2011 9385 -0.085169807 2687.26 -0.034223899 0.0029148 0.001171275
20-03-2011 9391 -0.063850165 2680.96 -0.273035004 0.0174333 0.074548113
21-03-2011 9381 -0.191509735 2667.53 -0.453783833 0.086904 0.205919767
22-03-2011 9440 0.532481363 2696.93 0.684688586 0.3645839 0.46879846
23-03-2011 9341 -1.017272438 2671.93 -1.068209925 1.0866605 1.141072443
24-03-2011 9339 0.06428801 2677.17 0.021295674 0.0013691 0.000453506
26-03-2011 9359 0.096256684 2697.26 0.51163952 0.0492487 0.261774998
27-03-2011 9332 -0.24585783 2654.84 -0.991265822 0.2437105 0.98260793

PGP/SS/2009-11 DS/09/11-F220 79
28-03-2011 9352 0.171379606 2687.1 0.307593529 0.0527153 0.094613779
29-03-2011 9361 -0.032037591 2700.83 0.338818075 -0.010855 0.114797688
30-03-2011 9339 -0.384 2704.74 0.089182298 -0.034246 0.007953482
TOTAL -5.019058869 -2.314649861 11.617364 5.357603979
n = 26


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

n * x
2
-(x)
2



Beta = 26 * 11.617364 (- 2.314649861 * - 5.019058869)

26 * 5.357604 (- 2.314649861)
2



Beta = 302.051 (11.617)
139.297 (5.357)

Beta = 290.434
133.94

Beta = 2.16

Volatility = Standard Deviation of Return on Gold

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

Volatility = 0.656

Inference:

One Percent change in INDX Metal return causes 2% change in the Commodity
return. When there is a decline of 10 % in the index return, the Commodity with a

PGP/SS/2009-11 DS/09/11-F220 80
beta of 2 would give a negative return of 20%. The beta value of Gold is more than 1;
it is cleat that Gold futures were more risky in the month of March 2007.

Table 4.2 (2)
Calculation of Beta and Volatility of Silver futures

Date
Silver
Close
(Rs)
RETURN ON
Silver % (Y)
INDX
METAL
close
RETURN
ON INDX
METAL
(X) X * Y X * X
1/3/2011 19749 -3.5693359 2687.47 -1.3765239 4.913276098 1.8948179
2/3/2011 18609 -6.609455 2599.96 -3.3429001 22.09474743 11.174981
3/3/2011 18842 0.7593583 2612.61 0.61502557 0.467024766 0.3782565
5/3/2011 19734 3.8631579 2586.59 -0.8505892 -3.28596025 0.7235019
6/3/2011 19540 1.8982061 2615.51 1.09579616 2.08004695 1.2007692
7/3/2011 19516 0.3909465 2643.16 0.97530973 0.381293926 0.9512291
8/3/2011 19515 -0.1790281 2657.42 0.43766819 -0.07835492 0.1915534
9/3/2011 19308 -0.9896928 2630.41 -0.9947908 0.984537332 0.9896087
10/3/2011 19333 0.0724675 2630.74 -0.0022807 -0.00016527 5.201E-06
12/3/2011 19452 0.5271318 2648.87 0.6401927 0.337465921 0.4098467
13-03-2011 19266 -0.9460154 2629.42 -0.7773526 0.735387572 0.6042771
14-03-2011 19120 -0.5461638 2621.04 -0.0819613 0.044764286 0.0067177
15-03-2011 19407 1.3367448 2670.68 1.65267237 2.20920122 2.7313259
16-03-2011 19520 0.4063577 2685.93 0.56499079 0.229588356 0.3192146
17-03-2011 19517 -0.0256121 2685.93 -0.0026061 6.67479E-05 6.792E-06
19-03-2011 19552 0.0409333 2687.26 -0.0342239 -0.0014009 0.0011713
20-03-2011 19633 0.3526886 2680.96 -0.273035 -0.09629634 0.0745481
21-03-2011 19571 -0.3513238 2667.53 -0.4537838 0.159425074 0.2059198
22-03-2011 19772 0.9290454 2696.93 0.68468859 0.636106803 0.4687985
23-03-2011 19510 -1.2151899 2671.93 -1.0682099 1.298077883 1.1410724
24-03-2011 19518 0.0358772 2677.17 0.02129567 0.000764029 0.0004535
26-03-2011 19636 0.4912999 2697.26 0.51163952 0.251368444 0.261775
27-03-2011 19499 -0.7684478 2654.84 -0.9912658 0.761736077 0.9826079
28-03-2011 19616 0.5278532 2687.1 0.30759353 0.162364236 0.0946138
29-03-2011 19595 -0.0510074 2700.83 0.33881807 -0.01728223 0.1147977
30-03-2011 19622 0.0867126 2704.74 0.0891823 0.007733227 0.0079535
TOTAL -3.5324914 -2.3146499 34.27551648 24.929823
N = 26


PGP/SS/2009-11 DS/09/11-F220 81

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

n * x
2
-(x)
2



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

26 * 24.929823 (-2.3146499)
2


Beta = 891.1634285 (8.17648)

648.175 5.3576

Beta = 882.987
642.817
Beta = 1.37
Volatility = Standard Deviation of Return on Silver

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

Volatility = 1.826

Inference: One percent change in INDX Metal returns causes exactly one percent
change in the Commodity return. Since the Beta value of Silver is more than 1 it is
considered to be risky.
Table 4.2 (3)
Calculation of Beta and Volatility of Aluminium futures

Date
Aluminium
Close (Rs)
RETURN
ON
Aluminium
% (Y)
INDX
METAL
close
RETURN ON
INDX
METAL (X) X * Y X * X
1/3/2011 124.7 -0.399361 2687.47 -1.3765239 0.54973 1.8948179
2/3/2011 122.35 -1.8451665 2599.96 -3.3429001 6.1682071 11.174981
3/3/2011 122.35 0.2868852 2612.61 0.6150256 0.1764418 0.3782565
5/3/2011 120.45 -1.1083744 2586.59 -0.8505892 0.9427712 0.7235019
6/3/2011 120.25 -0.4964832 2615.51 1.0957962 -0.5440444 1.2007692

PGP/SS/2009-11 DS/09/11-F220 82
7/3/2011 121.45 0.4964832 2643.16 0.9753097 0.4842249 0.9512291
8/3/2011 121.9 0.0410341 2657.42 0.4376682 0.0179593 0.1915534
9/3/2011 120.45 -0.9049774 2630.41 -0.9947908 0.9002632 0.9896087
10/3/2011 120.65 0.166044 2630.74 -0.0022807 -0.0003787 5.201E-06
12/3/2011 122.2 1.4107884 2648.87 0.6401927 0.9031764 0.4098467
13-03-2011 121 -0.7790078 2629.42 -0.7773526 0.6055637 0.6042771
14-03-2011 121.75 0.8699254 2621.04 -0.0819613 -0.0713002 0.0067177
15-03-2011 123.55 1.4367816 2670.68 1.6526724 2.3745293 2.7313259
16-03-2011 124.45 0.5250404 2685.93 0.5649908 0.296643 0.3192146
17-03-2011 124.4 0.0804505 2685.93 -0.0026061 -0.0002097 6.792E-06
19-03-2011 125 0.6441224 2687.26 -0.0342239 -0.0220444 0.0011713
20-03-2011 123.45 -1.0420842 2680.96 -0.273035 0.2845255 0.0745481
21-03-2011 121.25 -1.5428339 2667.53 -0.4537838 0.7001131 0.2059198
22-03-2011 122.35 0.4928131 2696.93 0.6846886 0.3374235 0.4687985
23-03-2011 121.45 -0.4508197 2671.93 -1.0682099 0.48157 1.1410724
24-03-2011 121.25 -0.5740057 2677.17 0.0212957 -0.0122238 0.0004535
26-03-2011 119.15 -2.1355236 2697.26 0.5116395 -1.0926183 0.261775
27-03-2011 118.35 -1.1278195 2654.84 -0.9912658 1.117969 0.9826079
28-03-2011 117.9 -0.169348 2687.1 0.3075935 -0.0520904 0.0946138
29-03-2011 121.25 3.3674339 2700.83 0.3388181 1.1409475 0.1147977
30-03-2011 121.7 0 2704.74 0.0891823 0 0.0079535
TOTAL -2.7580026 -2.3146499 15.687149 24.929823
n = 26

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

n * x
2
-(x)
2


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

26 * 24.929823 - (- 2.3146499)
2

Beta = 401.482

642.81

Beta = 0.624



PGP/SS/2009-11 DS/09/11-F220 83
Volatility = Standard Deviation of Return on Aluminium

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

Volatility = 1.157

Inference:
From the above calculations it clearly indicates that the Beta value of Aluminum is
less than 1, it is considered to be less risky.

Table 4.2 (4)
Calculation of Beta and Volatility of Copper futures

Date
Copper
Close
(Rs)
RETURN
ON Copper
% (Y)
INDX
METAL
close
RETURN ON
INDX METAL
(X) X * Y X * X
1/3/2011 272.3 -0.21986075 2687.47 -1.376523864 0.3026436 1.894817948
2/3/2011 268.45 -1.66666667 2599.96 -3.342900055 5.5715001 11.17498078
3/3/2011 268.8 0.018604651 2612.61 0.615025572 0.0114423 0.378256454
5/3/2011 265.45 -1.20952735 2586.59 -0.850589164 1.0288109 0.723501926
6/3/2011 269.75 1.067815661 2615.51 1.095796163 1.1701083 1.200769231
7/3/2011 276 2.146558105 2643.16 0.975309727 2.093559 0.951229064
8/3/2011 280.25 1.392908828 2657.42 0.437668189 0.6096319 0.191553444
9/3/2011 275.3 -1.60829164 2630.41 -0.994790804 1.5999137 0.989608744
10/3/2011 275.55 0.2 2630.74 -0.002280675 -0.0004561 5.20148E-06
12/3/2011 280.85 1.757246377 2648.87 0.640192704 1.1249763 0.409846698
13-03-2011 278.45 -1.08348135 2629.42 -0.777352624 0.8422471 0.604277102
14-03-2011 279.75 0.629496403 2621.04 -0.081961276 -0.0515943 0.006717651
15-03-2011 291.4 3.811898824 2670.68 1.652672366 6.2998198 2.731325949
16-03-2011 294.25 0.90877915 2685.93 0.564990789 0.5134518 0.319214592
17-03-2011 294.2 -0.11882533 2685.93 -0.002606106 0.0003097 6.79179E-06
19-03-2011 295.35 0.459183673 2687.26 -0.034223899 -0.0157151 0.001171275
20-03-2011 294.55 -0.42258283 2680.96 -0.273035004 0.1153799 0.074548113
21-03-2011 293.3 -0.27201632 2667.53 -0.453783833 0.1234366 0.205919767
22-03-2011 298 1.533219761 2696.93 0.684688586 1.0497781 0.46879846
23-03-2011 298.55 0.184563758 2671.93 -1.068209925 -0.1971528 1.141072444
24-03-2011 298.85 0.167588403 2677.17 0.021295674 0.0035689 0.000453506
26-03-2011 302.95 1.236424394 2697.26 0.51163952 0.6326036 0.261774998

PGP/SS/2009-11 DS/09/11-F220 84
27-03-2011 295.05 -2.78418451 2654.84 -0.991265822 2.759867 0.98260793
28-03-2011 296.1 0.372881356 2687.1 0.307593529 0.1146959 0.094613779
29-03-2011 299.45 1.199729638 2700.83 0.338818075 0.4064901 0.114797688
30-03-2011 302.7 0.967311541 2704.74 0.089182298 0.0862671 0.007953482
TOTAL 8.668773775 -2.314649859 26.195583 24.92982302
n = 26

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

n * x
2
-(x)
2



Beta = 26 * 26.195583 (-2.314649859 * 8.668773775)

26 * 24.92982302 - (- 2.314649859)
2


Beta = 681.085 (-20.065176)

648.175 5.3576

Beta = 701.15
642.817794

Beta = 1.09

Volatility = Standard Deviation of Return on Copper


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

Volatility = 1.363

Inference:
One percent change in INDX Metal returns causes exactly one percent change in the
Commodity return. Since the Beta value of Copper is more than 1 it is considered to
be risky.

PGP/SS/2009-11 DS/09/11-F220 85
Table 4.2 (5)
Calculation of Beta and Volatility of Crude Oil futures


Date
Crude
Oil
Close
(Rs)
RETURN ON
Crude Oil %
(Y)
INDX
Energy
close
RETURN
ON INDX
Energy (X) X * Y X * X
1/3/2011 2721 0.777777778 2222.17 0.004950361 0.003850281 2.45061E-05
2/3/2011 2728 0.110091743 2228.97 0.162671041 0.017908738 0.026461867
3/3/2011 2723 0.036737693 2221.05 -0.12680597 -0.004658559 0.016079755
5/3/2011 2675 -1.582045622 2198.71 -0.52076264 0.823870253 0.271193726
6/3/2011 2691 0.410447761 2218.25 0.771372889 0.316608275 0.595016134
7/3/2011 2738 1.59554731 2246.47 1.0212433 1.629441999 1.042937877
8/3/2011 2734 -0.400728597 2239.67 -0.58503673 0.234440949 0.342267977
9/3/2011 2697 -1.317233809 2213.96 -0.9223251 1.214917805 0.850683591
10/3/2011 2668 -0.854700855 2196.6 1.053038354 -0.900032781 1.108889775
12/3/2011 2621 -1.68792198 2157.34 -1.18449982 1.999343277 1.403039816
13-03-2011 2618 -0.418410042 2163.91 0.186120589 -0.077874724 0.034640874
14-03-2011 2569 -1.268255188 2149.71 0.318261787 -0.403637162 0.101290565
15-03-2011 2567 -0.233190828 2133.54 -0.9581372 0.223428808 0.9180269
16-03-2011 2653 -0.075329567 2128.14 0.316296083 -0.023826447 0.100043212
17-03-2011 2646 0.379362671 2123.12 0.305671698 0.115960432 0.093435187
19-03-2011 2645 -0.075557235 2116.9 -0.32301202 0.024405895 0.104336763
20-03-2011 2614 -1.209372638 2098.13 -0.91662967 1.108546847 0.840209959
21-03-2011 2612 -0.267277587 2104.01 0.128014772 -0.034215479 0.016387782
22-03-2011 2674 2.178066488 2154.51 1.843045681 4.014276035 3.396817384
23-03-2011 2710 1.043997017 2188.11 0.478488674 0.499540748 0.228951411
24-03-2011 2716 0.147492625 2201.23 0.095037151 0.014017279 0.00903206
26-03-2011 2723 0.110294118 2214.55 0.132029318 0.014562057 0.017431741
27-03-2011 295.05 -2.784184514 2188.38 0.135443073 -0.377098506 0.018344826
28-03-2011 2764 1.356802347 2275.91 1.411620021 1.915289358 1.992671084
29-03-2011 2871 3.871201158 2343.85 2.409664875 9.328297455 5.806484811
30-03-2011 2860 -0.659951372 2344.64 -0.58681863 0.387271759 0.344356103
TOTAL -0.816341125 4.648941883 22.06463459 19.67905569
n = 26


PGP/SS/2009-11 DS/09/11-F220 86
Beta = n * xy - (x) (y)

n * x
2
-(x)
2



Beta = 26 * 22.06463459 (4.648941883 * - 0.816341125)

26 * 19.67905569 (4.648941883)
2


Beta = 573.68 (- 3.7951)

511.654 21.61266
Beta = 577.475
490.04
Beta = 1.17

Volatility = Standard Deviation of Return on Crude Oil

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

Volatility = 1.352

Inference:
It is cleared from the above calculations that the beta value of Crude Oil is more than
1 hence it is more volatile and it is considered to be risky.



PGP/SS/2009-11 DS/09/11-F220 87
Table 4.2 (6)
Calculation of Beta and Volatility of Chana futures


Date
Chana
Close
(Rs)
RETURN ON
Chana % (Y)
INDX
AGRI
close
RETURN ON
INDX AGRI(X) X * Y X * X
1/3/2011 2087 -0.713606089 1714.85 0.575942945 -0.41099639 0.331710276
2/3/2011 2055 1.1816839 1691.01 -1.44021169 -1.70187497 2.074209711
3/3/2011 2039 1.392342118 1690.8 0.018929535 0.026356389 0.000358327
5/3/2011 2057 -0.145631068 1687.05 -0.491335276 0.071553681 0.241410353
6/3/2011 2075 0.484261501 1676.01 -0.92981191 -0.45027211 0.864550187
7/3/2011 2130 0.235294118 1680.34 0.212311693 0.049955692 0.045076255
8/3/2011 2129 2.208353337 1693.96 0.759581011 1.67742326 0.576963312
9/3/2011 2161 -0.184757506 1707.91 0.848518488 -0.15677016 0.719983624
10/3/2011 2182 1.018518519 1714.31 0.365912204 0.372688356 0.133891741
12/3/2011 2156 0.279069767 1711.75 -0.273820968 -0.07641515 0.074977922
13-03-2011 2208 0.454959054 1730.63 0.86843501 0.39510237 0.754179367
14-03-2011 2216 2.926149559 1705.48 -1.38256842 -4.04560197 1.911495436
15-03-2011 2258 0.803571429 1709.49 0.441250779 0.354576518 0.19470225
16-03-2011 2233 -1.412803532 1720.36 0.703017532 -0.99322565 0.49423365
17-03-2011 2190 -1.128668172 1723.67 0.241929387 -0.273058 0.058529828
19-03-2011 2152 0.093023256 1701.47 -1.323443272 -0.123111 1.751502095
20-03-2011 2257 2.590909091 1695.46 -0.292865376 -0.75878757 0.085770128
21-03-2011 2182 1.77238806 1702.91 0.408613309 0.72422135 0.166964836
22-03-2011 2216 0.271493213 1701.14 -0.066969006 -0.01818163 0.004484848
23-03-2011 2264 3.143507973 1719.49 0.813785097 2.558139942 0.662246185
24-03-2011 2295 -0.217391304 1729.09 0.355783071 -0.07734415 0.126581594
26-03-2011 2290 1.327433628 1724 -0.510145195 -0.67718389 0.26024812
27-03-2011 2291 -0.391304348 1701.53 -0.623174863 0.243851033 0.38834691
28-03-2011 2330 2.869757174 1740.36 1.079702864 3.09848504 1.165758274
29-03-2011 2352 -0.759493671 1746.32 0.058442675 -0.04438684 0.003415546
30-03-2011 2404 5.207877462 1750.65 0.147591344 0.768637632 0.021783205
TOTAL 23.30693747 0.565400968 0.533781786 13.11337398
n = 26


PGP/SS/2009-11 DS/09/11-F220 88
Beta = n * xy - (x) (y)

n * x
2
-(x)
2



Beta = 26 * 0.533781786 (0.565400968 * 23.30693747)

26 * 13.11337398 (0.565400968)
2


Beta = 13.8762 13.177

340.9458 - 0.3197

Beta = 0.6992
340.626

Beta = 0.002

Volatility = Standard Deviation of Return on Chana


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

Volatility = 1.545



Inference: Since the Beta value of Chana Commodity it is considered to be less risky
and volatility is high due to price fluctuations.








PGP/SS/2009-11 DS/09/11-F220 89
Table 4.2 (7)
Calculation of Beta and Volatility of Pepper futures

Date
Pepper
Close
(Rs)
RETURN ON
Pepper % (Y)
INDX
AGRI
close
RETURN ON
INDX
AGRI(X) X * Y X * X
1/3/2011 12388 1.209150327 1714.85 0.575942945 0.696401601 0.3317103
2/3/2011 12368 2.980849292 1691.01 -1.44021169 -4.293053996 2.0742097
3/3/2011 12199 1.522969374 1690.8 0.018929535 0.028829102 0.0003583
5/3/2011 11752 0.273037543 1687.05 -0.491335276 -0.134152976 0.2414104
6/3/2011 11792 -1.322175732 1676.01 -0.92981191 1.229374742 0.8645502
7/3/2011 11695 -0.042735043 1680.34 0.212311693 -0.009073149 0.0450763
8/3/2011 11697 -0.247313662 1693.96 0.759581011 -0.187854761 0.5769633
9/3/2011 11619 -1.148545176 1707.91 0.848518488 -0.974561816 0.7199836
10/3/2011 11665 0.995670996 1714.31 0.365912204 0.364328169 0.1338917
12/3/2011 11554 -1.332194705 1711.75 -0.273820968 0.364782843 0.0749779
13-03-2011 11614 1.77898519 1730.63 0.86843501 1.544933021 0.7541794
14-03-2011 11572 0.64359019 1705.48 -1.38256842 -0.889807472 1.9114954
15-03-2011 11703 3.566371681 1709.49 0.441250779 1.573664281 0.1947022
16-03-2011 12196 3.355932203 1720.36 0.703017532 2.359279174 0.4942336
17-03-2011 12195 1.388427004 1723.67 0.241929387 0.335901294 0.0585298
19-03-2011 12302 2.516666667 1701.47 -1.323443272 -3.330665569 1.7515021
20-03-2011 12296 -0.437246964 1695.46 -0.292865376 0.128054496 0.0857701
21-03-2011 12651 -0.753118381 1702.91 0.408613309 -0.307734194 0.1669648
22-03-2011 12809 0.541601256 1701.14 -0.066969006 -0.036270498 0.0044848
23-03-2011 12779 3.031524631 1719.49 0.813785097 2.467009567 0.6622462
24-03-2011 12811 -0.070202808 1729.09 0.355783071 -0.024976971 0.1265816
26-03-2011 12873 0.5703125 1724 -0.510145195 -0.290942182 0.2602481
27-03-2011 13163 2.03875969 1701.53 -0.623174863 -1.27050379 0.3883469
28-03-2011 13131 0.236641221 1740.36 1.079702864 0.255502204 1.1657583
29-03-2011 12930 -2.341389728 1746.32 0.058442675 -0.136837078 0.0034155
30-03-2011 13228 0.593155894 1750.65 0.147591344 0.087544675 0.0217832
TOTAL 19.54872346 0.565400968 -0.450829281 13.113374
n = 26



PGP/SS/2009-11 DS/09/11-F220 90
Beta = n * xy - (x) (y)

n * x
2
-(x)
2



Beta = 26 * - 0.4508 (0.5654 * 19.5487)

26 * 13.113 (0.5654)
2


Beta = -11.7208 (11.0528)

340.938 0.3196

Beta = - 22.7736
340.61

Beta = -0.067

Volatility = Standard Deviation of Return on Pepper


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

Volatility = 1.554


Inference: Negative Beta value indicates that the Commodity return moves in the
opposite direction to the Index return. A Commodity with negative beta of -1 would
provide a return on 10 % if the Index return declines by 10% and vice versa. But
usually the negative beta value can be seen rare in the market.





PGP/SS/2009-11 DS/09/11-F220 91
Table 4.2 (8)
Calculation of Beta and Volatility of Jeera futures

Date
Jeera
Close
(Rs)
RETURN ON
Jeera % (Y)
INDX
AGRI
close
RETURN ON
INDX AGRI(X) X * Y X * X
1/3/2011 10256 -2.323809524 1714.85 0.575942945 -1.338381701 0.331710276
2/3/2011 10068 1.185929648 1691.01 -1.44021169 -1.707989742 2.074209711
3/3/2011 9876 0.775510204 1690.8 0.018929535 0.014680047 0.000358327
5/3/2011 10116 2.679658952 1687.05 -0.491335276 -1.316610971 0.241410353
6/3/2011 10117 0.059341311 1676.01 -0.92981191 -0.055176258 0.864550187
7/3/2011 10168 -0.31372549 1680.34 0.212311693 -0.06660759 0.045076255
8/3/2011 10448 2.03125 1693.96 0.759581011 1.542898929 0.576963312
9/3/2011 10809 1.971698113 1707.91 0.848518488 1.673022302 0.719983624
10/3/2011 10929 1.194444444 1714.31 0.365912204 0.4370618 0.133891741
12/3/2011 10889 -2.340807175 1711.75 -0.273820968 0.640962086 0.074977922
13-03-2011 10893 2.764150943 1730.63 0.86843501 2.400485453 0.754179367
14-03-2011 10510 0.815347722 1705.48 -1.38256842 -1.127274012 1.911495436
15-03-2011 10621 1.152380952 1709.49 0.441250779 0.508488992 0.19470225
16-03-2011 11040 -0.540540541 1720.36 0.703017532 -0.380009477 0.49423365
17-03-2011 10964 0.03649635 1723.67 0.241929387 0.00882954 0.058529828
19-03-2011 11109 -0.340898897 1701.47 -1.323443272 0.451160351 1.751502095
20-03-2011 11205 1.863636364 1695.46 -0.292865376 -0.545794564 0.085770128
21-03-2011 11366 1.482142857 1702.91 0.408613309 0.605623297 0.166964836
22-03-2011 11508 0.947368421 1701.14 -0.066969006 -0.063444322 0.004484848
23-03-2011 11597 0.406926407 1719.49 0.813785097 0.331150646 0.662246185
24-03-2011 11552 0.147377547 1729.09 0.355783071 0.052434436 0.126581594
26-03-2011 11593 2.140969163 1724 -0.510145195 -1.092205132 0.26024812
27-03-2011 11809 1.061189559 1701.53 -0.623174863 -0.661306658 0.38834691
28-03-2011 11893 0.362869198 1740.36 1.079702864 0.391790913 1.165758274
29-03-2011 11826 -0.946477929 1746.32 0.058442675 -0.055314702 0.003415546
30-03-2011 11888 -0.100840336 1750.65 0.147591344 -0.014883161 0.021783205
TOTAL 16.17158827 0.565400968 0.633590503 13.11337398
n = 26




PGP/SS/2009-11 DS/09/11-F220 92
Beta = n * xy - (x) (y)

n * x
2
-(x)
2


Beta = 26 * 0.6336 (0.5654 *16.171)

26 * 13.11337 (0.5654)
2



Beta = 16.4736 (9.143)

340.94 0.31967

Beta = 7.3306
340.62

Beta = 0.021

Volatility = Standard Deviation of Return on Jeera

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

Volatility = 1.313


Inference: Since the beta value is less than 1 Jeera futures is less risky in the month
of March.



PGP/SS/2009-11 DS/09/11-F220 93
Table 4.2(9)
List of Beta value for 8 Commodity Futures

Commodity Beta Value
Gold
2.16
Silver
1.37
Aluminium
0.624
Copper
1.09
Crude Oil
1.17
Chana
0.002
Pepper
- 0.067
Jeera
0.021


Graph 4.2(9)
Showing the beta values for 8 commodity Futures

Beta Value
-0.5
0
0.5
1
1.5
2
2.5
G
o
l
d
S
i
l
v
e
r
A
l
u
m
i
n
i
u
m
C
o
p
p
e
r
C
r
u
d
e

O
i
l
C
h
a
n
a
P
e
p
p
e
r
J
e
e
r
a
Beta Value




PGP/SS/2009-11 DS/09/11-F220 94
Table 4.2(10)
List of Volatility for 8 Commodity Futures

Commodity Volatility
Gold
0.656
Silver
1.826
Aluminium
1.157
Copper
1.363
Crude Oil
1.352
Chana
1.545
Pepper
1.554
Jeera
1.313


Graph 4.2(10)
Showing the beta values for 8 commodity Futures
















Volatility
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
G
o
l
d
S
i
lv
e
r
A
l
u
m
i
n
i
u
m
C
o
p
p
e
r
C
r
u
d
e

O
i
l
C
h
a
n
a
P
e
p
p
e
r
J
e
e
r
a
Volatility

PGP/SS/2009-11 DS/09/11-F220 95
Chapter - 5
SUMMARY OF FINDINGS AND SUGGESTIONS
Findings:
Farmers, traders, producers, investors lack knowledge about the course of prices and
overall commodities markets.
Prices of Agriculture commodities mostly follow a cyclical pattern, unlike
stocks. Therefore the prices are expected to fall at some point of time, and do
not attract investors.
There is no adequate infrastructure such as roads, railways, waterways or other
means of transport as well as cold storage facilities to haul commodities from
one part of the country to another at the least cost to benefit final consumer.
The present restrictions on the movement of certain goods from one state to
another, affects the prices largely.
Gold, aluminium, copper zinc etc have scaled dizzy heights. This has created
anxiety in the minds of stakeholders such as farmers, traders, producers,
investors and final consumers.
The Beta value is more than 1 in case of Gold and Silver it indicates that the
investors can safely invest when the Beta is high
When Beta value is low Hedging protection will be less
The beta value is less than 1, in case of Aluminium, it shows that the price
variation is high and the return is comparatively low or some times an investor
has to incur a loss due to fluctuation of price.
The beta value is also negative incase of Pepper futures for the month of
March, because of high price fluctuation.
The Crude futures are considered to be risky investment in the month of
March since the beta value is more than 1.
Beta value is less than 1 in case of Jeera futures it is considered to be less risky
in the month of March.


PGP/SS/2009-11 DS/09/11-F220 96
Commodities can be effectively used by Farmers, Procurers etc to hedge their
positions according to the needs. This calls for a scientific understanding of
returns.

Suggestions

The recommendations are based on the suggestions provided by the respondents.
Investor should carefully study the market and risk involved before investing
Corporates and physical market players should participate in the commodity
exchanges, which would streamline trading by bringing into the market
information on the fundamentals and further improving the price discovery
process to make it more efficient
In order to match up with this phenomenal growth and pace, there is always
going to be a need for passionate, trained commodities professionals. In
addition, the fast changing commodities sector demands that professionals
learn new skills, improve their efficiency, learn to compete and think out of
the box. All this requires an education that is intensive, comprehensive and
closely linked to the commodities derivatives market, through experiential
learning.
If transport network and storage facilities improve across the board in the
country it would be easy to cut down on transactions costs and give consumers
quality goods at reasonable prices. That will also help commodity trade.
It is imperative that the Government should grant more powers to the FMC to
ensure an orderly development of the commodity markets. The SEBI and
FMC also need to work closely with each other due to the inter-relationship
between the two markets.
Government can create awareness among investors about commodity market.
For commodity market to work efficiently, it is necessary to have a
sophisticated, cost-effective, reliable and convenient warehousing system in
the country.


PGP/SS/2009-11 DS/09/11-F220 97
Mutual funds companies should come forward and invest more in commodity
market ( i,e percentage of investment should go up)
More brokers should come in commodity market and set their business.
Only few commodities like Gold, Oil, and Silver are getting popularized so,
concentrate on other commodities also to increase volume of trade.
Government and industry should take further steps for future growth of
commodities market.
A review of the nature of institutional and policy level constraints facing this segment
calls for more focused and pragmatic approach from government, the regulator and
the exchanges for making the agricultural commodity markets a vibrant segment for
investment which can play an important role especially in an agriculture dominated
economy of India.
The analysis of data shows that the level of awareness is low among investors and
brokers due to various reasons including lack of knowledge among farmers,
producers, brokers, etc improper information flow, high volatility of the prices of
commodities, lack of proper regulations, etc. Right policies pursued we can strengthen
our commodity base and sustainable investment flow into spot and futures of
commodities which will stabilize it and ensure a fair return to investors. For this to
happen it is imperative that there is a flow of right information to stakeholders.


PGP/SS/2009-11 DS/09/11-F220 98
Chapter-6
CONCLUSION
India is one of the top producers of a large number of commodities, and also has a
long history of trading in commodities. The commodities market has seen ups and
down. The market has made enormous progress in terms of technology, transparency
and the trading activity. The management of price risk is going to assume even greater
importance in future with the promotion of free trade and removal of trade barriers in
the world.
The study is an investigation into the commodities markets in India. The study has
surveyed the brokers. The study has outlined the status of commodities markets in
Bangalore and commodities in the Indian context. The study is aimed to know the
awareness level of commodities market among brokers and investors.
The analysis of data shows that the level of awareness is low among investors and
brokers due to various reasons including lack of knowledge among farmers,
producers, brokers, etc improper information flow, high volatility of the prices of
commodities, lack of information flow.







PGP/SS/2009-11 DS/09/11-F220 99
BIBILOGRAPHY
A) BOOKS:
o Punithavathy Pandian, Security Analysis and Portfolio Management, Vikas
Publishing House.
o Fischer and Jordan, Security Analysis and Portfolio Management.
o Bodie, Kane and Marcus, Investments, 5
th
Edition Tata McGraw-Hill.
o Kaur, Gurbandini and Rao, D. N., Efficiency of Indian Commodities Market:
A Study of Agricultural Commodity Derivatives Traded on NCDEX (May 5,
2010).
B) WEB SITES:
o www.mcxindia.com
o www.ncdex.com
o www.indianmba.com
o www.icfaipress.org/books/commoditiesmarket
o www.finance.indiamart.com/markets/commodity/traders_derivatives_market.h
tml
o http://www.fmc.gov.in/
o http://www.eurojournals.com/finance.htm
o http://www.scribd.com/doc/15961806/Commodity-Market-Report
o http://www.coolavenues.com/know/fin/tushar_3.php3
o http://finance.indiamart.com/markets/commodity/nmceil.html
o http://business.mapsofindia.com/india-market/commodity.html
o http://www.tradingpicks.com/beginners_guide.htm
o http://www.indiancommodity.com/lic.htm
o http://ncdex.com/Aboutus/profile.aspx
o http://www.indiancommodity.com/trader.htm
o http://finance.indiamart.com/markets/commodity/traders_derivatives_market.h
tml
o http://business.mapsofindia.com/india-market/commodity.html
o http://isid.org.in/pdf/WP1003.PDF

PGP/SS/2009-11 DS/09/11-F220 100
o http://www.ftkmc.com/markets-commodities.html
o http://www.banknetindia.com/banking/80628.htm
o http://www.religarecommodities.com/class_roomIntro.asp
o http://www.oxfordfutures.com/futures-education/futures-fundamentals/how-
the-market-works.htm
o http://www.smcindiaonline.com/commo_trading_faq.asp
o http://www.docstoc.com/docs/32951953/Commodity-Futures-Market-in-India
o http://www.fmc.gov.in/htmldocs/Abhijit%20Sen%20Report.pdf


PGP/SS/2009-11 DS/09/11-F220 101
ANNEXURE
Questionnaire:
Dear Sir/ Madam,

I would be grateful if you would answer the following questions. Your valuable time
spared will assist me in collecting relevant data for my project. Information collected
is assured of confidentiality and will be strictly used for the project only.

-------------------------------------------------------------------------------------------------------


PERSONAL DETAILS:

Name : ________________________________________________

E-Mail ID : ________________________________________________

Contact no : ________________________________________________

Designation : ________________________________________________

-------------------------------------------------------------------------------------------------------
(Please put your answer in the box)


1.As a dealer how many years of experience do you have in the trading business(
both stock market or commodity market)

a. Less than 1 year b. 1-2 years c. More than 3 years


2. Are you dealing in commodity market

a. Yes b. No

3. According to your idea what is the daily turnover of investors in commodity
trading

a. Less than 25 lakhs b. 25 lakhs to 1 crore c. More than 1 crore

4. Whether there is increase in volume of trade over last year?

a. Yes b. No



PGP/SS/2009-11 DS/09/11-F220 102
5. Is there any improvement in no of clients at your company?

a. Yes b. No


6. Investors are trading in commodities with proper knowledge?

a. Yes b. No


7. Whether commodity market is a safe investment avenue for retail investors?

a. Yes b. No


8. Are you dealing with specific commodities

a. Yes b. No


9. Give Commodity wise preferences on which investors prefers to invest

a. Gold

b. Cereals

c. Oil

d. Other


10. Give reason why you prefer to invest in specific commodities?

a. More no of investors
b. Low risk
c. High rate of return
d. Any other

11. Give your opinion about commodity market in India

a. Highly volatile
b. Volatile
c. Stable
d. Un Stable

PGP/SS/2009-11 DS/09/11-F220 103

12. What is the effect of VAT on commodity market

a. Positive
b. Negative
c. No impact


13. Show which of the following has the highest volume of commodity

a. Bullion Market
b. Metals
c. Agro - based commodities


14. Does Government or Industry will take responsibility for further growth
in commodity market?

a. Yes b. No


15. What is the success ratio of commodity trade in India as per your opinion?

a. 3:10 b. 5:10 c. 7:10 d. 10:10