Study of Commodity Market

Report
On
“Study of Commodity Derivatives Market”
Prepared
By
Rahul Chauhan
Under the Guidance of
Rachna Vidya
Seva Sadan College of Arts, Science and Commerce

(Seva Sadan Marg, Ulhasnagar –421 003)
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Certificate
This is to certify that Miss /Mr.Rahul Chauhan worked and duly completed his Project Work for
the degree of Bachelor of Commerce (Financial Markets) under the Faculty of Commerce in the subject of
Project Work and her/his project is entitled, “Project Title”, under my supervision.
I further certify that the entire work has been done by the learner under my guidance and that no part of it
has been submitted previously for any Degree or Diploma of any University.
It is his own work and facts reported by his personal findings and investigations.
(Prof.Guide Name)
Date of submission:
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Declaration by learner
I the undersigned Miss / Mr. Student Name here by, declare that the work embodied in this project work
titled “Project Title”, forms my own contribution to the research work carried out under the guidance of
Prof. Guide Name is a result of my own search work and has not been previously submitted to any other
University for any other Degree / Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the bibliography.
I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.
(Student Name)
Certified by
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Acknowledgement
To list who all have helped me is difficult because they are so numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do this project.
I would like to thankPrincipal, Dr.Gulabchand K. Guptafor providing the necessary facilities required for
completion of this project.
I take this opportunity to thank our Coordinator Coordinator Namefor her moral support and guidance.
I would also like to express my sincere gratitude towards my project guide Prof. Guide Namewhose
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guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books and magazines
related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the
project especially my Parents and Peers who supported me throughout my project.
INDEX
Chapter No. Chapter Name Page No.
1 Introduction
2 Literature Review
3 Research Methodology
4 Data Analysis, Interpretation and presentation
5 Conclusions and Suggestions
References
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Acknowledgement
“Knowledge is an experience gained in life, it is the choicest possession, which
should not be shelved but should be happily shared with others. It is the
supreme art of the teacher to awaken joy in creative expression and
knowledge.”
The feeling of a task well done is incomplete without giving the
acknowledgment where due, so before I proceed further I wish to spend some
time in expressing my gratitude to all those who have been involved in guiding
me and helping me out during my report.
First and foremost I would like thank Dr. Madhukar Angur, Honorary
Chancellor, Alliance University Bangalore, for granting me the opportunity to
be the part of this renowned institution.
I would like to give special thanks to Mr. Younus Saleem P, Team leader –
Commodities, Bonanza Portfolio Limited, Bangalore, for his guidance during
the report. Despite of his demanding schedule, he bestowed every possible
support to us, so as to carry on the report work without any hindrance.
I have a deep sense of gratitude for Dr. Mihir Dash, Associate Professor,
Alliance University Bangalore, my faculty guide, who helped me throughout
the project and gave me ideas and direction to complete my project in a
systemic manner.
I would like to thank valuable works of publishers and authors whose work
helped me during the project.
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-:Table of Contents:-
Particulars Page no.
Executive Summary 1
Chapter : 1 Introduction & Industry Analysis

1.1 Introduction 3
1.2 Historical Background 5
1.3 Industry Overview
1.3.1 Market Structure 6
1.3.2 Description of various market 7
1.3.3 Markets Rational 12
1.3.4 Commodity Trading & its Mechanism 14
1.3.5 Regulatory issues 17
1.3.6 Indian Scenario 20
1.3.7 Global Scenario 27
Chapter : 2 Company Overview

2.1 Introduction of the Company 30
2.2 Vision and Mission 32
2.3 Organisational Structure 33
2.4 Global & Indian Operation & Market share 34
2.5 Products & Services 36
2.6 SWOT Analysis 38
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Chapter : 3 Research Methodology
3.1 Objectives of the study 40
3.2 Scope of the study 40
3.3 Research design 41
3.4 Sources of data 41
3.5 Sampling plan 42
3.6 Limitations of the study 43
Chapter : 4 Observation & Analysis 44 – 56
Chapter : 5 Findings & Recommendations 57 – 61
Chapter : 6 Conclusion 62
Chapter : 7 Learning outcome 65
Chapter : 8 Annexure 67
Bibliography 77
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EXECUTIVE SUMMARY
Investing is both Arts as well as Science. It is an Art because every individual

has some specific need and expectation based on the resources he/she has, so
how and where to invest the resources or in financial terms funds in order to
maximize the return on investment is not less than an Art. It is Science because,
there are lot of investment options are available, hence before investing in any
of these options, one need to do proper research about that particular option.
Now as far as the investment options are concerned, there are many options are
available in market, for example, one can invest in mutual funds, stock market,
commodities market, term & fixed deposits, derivatives etc. All of these options
posses’ different rate of return, different risks etc. over the last few years
{especially after global recession of 2008-09}, some of the above mentioned
options like mutual funds, stock markets etc. has witnessed lot of fluctuations
on return on investment, but at the same time some of the options like
commodities has shown a stable and positive performance over the years. For
example, in today’s world Gold & silver has been considered as one of the
safest investment, because these options have given a stable and expected return
in last few years, that is one of the reason behind the increasing demand of these
things in the global market. So how these options especially commodities has
maintained the stable performance is the crux of the matter of this report. Apart
from this, the reports also contains the details about the types of commodities,
how trading happens in the commodities market and major exchanges in the
country as well rest of the world. In addition to this, the report also explains
about the different regulatory aspects regarding commodity trading in both India
as well as rest of the world. Finally at the end, a survey has been done in order
to know basically the awareness level of people regarding commodity markets.
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Chapter-1
Introduction &
Industry
overview
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1.1 Introduction:
Commodities are the physical substance, such as food grains, metals, crude oil
etc. which are interchangeable with another product of the same type, and which
investors buy or sell in a market, usually through futures contracts. The price of
the commodities is subject to supply and demand.
Indian markets have recently thrown open a new avenue for retail investors and
traders to participate through commodity derivatives. For those who want to
diversify their portfolios beyond shares, bonds and real estate, commodities are
the best option.
Till few months ago, this wouldn't have made sense. For retail investors could
have done very little to actually invest in commodities such as gold and silver --
or oilseeds in the futures market. This was nearly impossible in commodities
except for gold and silver as there was practically no retail avenue for punting in
commodities. But after setting up of three multi-commodity exchanges in the
country, retail investors can now trade in commodity futures without having
physical stocks.
Commodities actually offer immense potential to become a separate asset class

for market-savvy investors, arbitrageurs and speculators. Retail investors, who
claim to understand the equity markets, may find commodities an unfathomable
market. But commodities are easy to understand as far as fundamentals of
demand and supply are concerned. Retail investors should understand the risks
and advantages of trading in commodities futures before taking a leap.
Historically, pricing in commodities futures has been less volatile compared
with equity and bonds, thus providing an efficient portfolio diversification
option.
As far as the size of commodity market of India is concerned, of the country's

GDP of Rs 13, 20,730 crores (Rs 13,207.3 billion), commodities related (and
dependent) industries constitute about 58 per cent. Currently, the various
commodities across the country clock an annual turnover of Rs 1, 40,000 crores
(Rs 1,400 billion). With the introduction of futures trading, the size of the
commodities market grows many folds here on.
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Like any other market, the one for commodity futures plays a valuable role in
information pooling and risk sharing. The market mediates between buyers and
sellers of commodities, and facilitates decisions related to storage and
consumption of commodities. In the process, they make the underlying market
more liquid.
Most people have the impression that commodity markets are very complex and
difficult to understand. Actually, they are not. There are several basic facts that
one must know, and once these are understood one should have little difficulty
understanding the nature of futures markets and how they function. So by
considering these myths, this report aims at know-how of the commodities
market and how the commodities traded on the exchange. The idea is to
understand the importance of commodity derivatives and learn about the market
from both global as well as Indian point of view.
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1.2 Historical Background:
The modern commodity markets have their roots in the trading of agricultural
products. While wheat and corn, cattle and pigs, were widely traded using
standard instruments in the 19th century in the United States, other basic
foodstuffs such as soybeans were only added quite recently in most markets.
Historically, dating from ancient Sumerian use of sheep or goats, other peoples
using pigs, rare seashells, or other items as commodity money, people have
sought ways to standardize and trade contracts in the delivery of such items, to
render trade itself more smooth and predictable. Commodity money and
Commodity markets in a crude early form are believed to have originated
in Sumer where small baked clay tokens in the shape of sheep or goats were
used in trade. Sealed in clay vessels with a certain number of such tokens, with
that number written on the outside, they represented a promise to deliver that
number. This made them a form of commodity money - more than an I.O.U. but
less than a guarantee by a nation-state or bank. However, they were also known
to contain promises of time and date of delivery - this made them like a
modern futures contract. Regardless of the details, it was only possible to verify
the number of tokens inside by shaking the vessel or by breaking it, at which
point the number or terms written on the outside became subject to doubt.
Eventually the tokens disappeared, but the contracts remained on flat tablets.
This represented the first system of commodity accounting.
Classical civilizations built complex global markets trading gold or silver for
spices, cloth, wood and weapons, most of which had standards of quality and
timeliness. Considering the many hazards of climate, piracy, theft and abuse
of military fiat by rulers of kingdoms along the trade routes, it was a major
focus of these civilizations to keep markets open and trading in these scarce
commodities. Reputation and clearing became central concerns, and the states
which could handle them most effectively became very powerful empires,
trusted by many peoples to manage and mediate trade and commerce.
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1.3 Industry overview:
Commodity markets are markets where raw or primary products are
exchanged. These raw commodities are traded on regulated commodities
exchanges, in which they are bought and sold in standardized contracts.
Usually Commodity markets cover physical assets such as precious metals, base
metals, energy {oil, electricity etc.}, food {rice, wheat, pulses etc.}, agricultural
products etc. Most of the trading is done using futures. However, over the last
few years, an OTC market has also been growing, as an increasing number of
market participants are trading in exotic options. The purpose of a commodity
exchange is to provide an organized marketplace in which members can freely
buy and sell various commodities in which they have an interest. The exchange
itself does not operate for profit. It merely provides the facilities and ground
rules for its members to trade in commodity futures and for non-members also
to trade by dealing through a member broker and paying a brokerage
commission.
1.3.1 Market structure:
Quality
Certification
Agency
Warehouses Hedger
Clearing Commodities
Bank Market Producers
Transporte
rs/support Traders
Consumers
agencies (Speculators)
(Retail/
Institutional)
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1.3.2 Description of the various Markets:
Commodities markets cover the assets under following categories:
 Energy:
 Mainly oil and gas like crude oil, jet fuel, gasoline, fuel oil, heating
oil, Natural gas & propane etc
 Electricity as well as renewable forms of energies like solar and

wind energy.
 Weather: weather is obviously not a tradable asset but we include

them here because, over the last years, many derivative products
whose underlying is weather (temperature, wind, precipitation)
have been forth and traded.
 Metals:
 Base metals: Aluminum, Copper, Zinc, Nickel, Lead, Tin, Iron &
Steel.
 Precious metals: Gold, Silver, Platinum, Palladium & Titanium.
 Agricultural:
 Grains: Wheat, Rice, Maize, Barley, Soya beans, Sunflower,
Refined Soya oil, Crude Palm oil.
 Livestock: Live hogs, Cattle and Pork bellies.
 Spices: Cardamom, Coriander, Turmeric, Jeera, Pepper.
 Foodstuffs: Cocoa, Coffee, Potato, Sugar, Cheddar, Almond.
 Forest products: Plywood, Rubber.
 Pulse: Chana, Tur, Urad.
 Fiber: Cotton {Kapas}.
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Spot Markets:
Spot markets are the organized exchanges where commodity products can be
traded on the daily basis in large amount. In such types of markets, delivery of
the products either takes place immediately, or with a minimum lag between the
trade and delivery due to technical constraints, that is the reason, they are
known as Spot markets. Major examples of Spot markets are as under:
 MCX {Multi Commodity Exchange}.
 NCDEX {National Commodity & Derivatives Exchange limited}.
 National Spot Exchange.
 CME {Chicago Mercantile Exchange}.
 MCE {Mid America Commodity Exchange} etc.
Future Markets:
Future commodity market is the market, where commodities are contracted for
purchase or sell in standardized contractual agreements. These agreements
(usually known as futures contracts) provide for delivery of a specified amount
of a particular commodity during a specified future month, but involve no
immediate transfer of ownership of the commodity involved. In other words,
one can buy and sell commodities in a futures market regardless of whether or
not one has, or owns, the particular Commodity involved. When one deals in
futures one need not be concerned about having to receive delivery (for the
buyer) or having to make delivery (for the seller) of the actual commodity,
providing of course that one does not buy or sell a future during its delivery
month. One may at any time cancel out a previous sale by an equal offsetting
purchase or a previous purchase by an equal offsetting sale. If done prior to the
delivery month the trades cancel out and thus there is no receipt or delivery of
the commodity. Actually, only a very small percentage, usually less than 2 % of
the total future contracts that are entered into are ever settled through deliveries.
For the most part they are cancelled out prior to the delivery month in the
manner just described.
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Commodity Future Contract:
Futures contracts are an improved variant of forward contracts. They are

agreements to purchase or sell a given quantity of a commodity at a
predetermined price, with settlement expected to take place at a future date.
While forward contracts are mainly over-the-counter and tailor-made which
physical delivery futures settlement standardized contracts whose transactions
are made in formal exchanges through clearing houses and generally closed out
before delivery. The closing out involves buying a different times of two
identical contracts for the purchase and sale o the commodity in question, with
each cancelling the other out. The futures contracts are standardized in terms of
quality and quantity, and place and date of delivery of the commodity. The
commodity futures contracts in India as defined by the FMC has the following
features:
(a) Trading in futures is necessarily organized under the auspices of a

recognized association so that such trading is confined to or conducted
through members of the association in accordance with the procedure
laid down in the Rules and Bye-laws of the association.
(b) It is invariably entered into for a standard variety known as the “basis
variety” with permission to deliver other identified varieties known as
“tender able varieties”.
(c) The units of price quotation and trading are fixed in these contracts,
parties to the contracts not being capable of altering these units.
(d) The seller in a futures market has the choice to decide whether to deliver
goods against outstanding sale contracts. In case he decides to deliver
goods, he can do so not only at the location of the Association through
which trading is organized but also at a number of other pre-specified
delivery centers.
(e) In futures market actual delivery of goods takes place only in a very few
cases. Transactions are mostly squared up before the due date of the
contract and contracts are settled by payment of differences without any
physical delivery of goods taking place. The terms and specifications of
futures contracts vary depending on the commodity and the exchange in
which it is traded.
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Participants in the Commodity Future Market:
The participants in the Commodity futures are as under:
 Farmers/Producers.
 Merchandisers/Traders.
 Importers.
 Exporters.
 Consumers/Industry.
 Commodity financers.
 Agriculture credit providing agencies.
 Corporate having price risk exposure in commodities.
Hedging in the Future Commodity Market:

The justification for futures trading is that it provides the means for those who
produce or deal in cash commodities to hedge, or insure, against unpredictable
price changes. There are many kinds of hedge, let us take an example to
understand the principle of hedging in future trading.
Let us take the case of a firm that is in the business of storing and
merchandising wheat. By early June, just ahead of the new crop harvest, the
firm’s storage bins will be relatively empty. As the new crop becomes available
In June, July and August, these bins will again be filled and the wheat will
remain in storage throughout the season until it is sold, lot-by-lot, to those
needing wheat. During the crop movement when the firm’s inventory of cash
wheat is being replenished, these cash wheat purchases (to the extent that they
are in excess of merchandising sales) will be hedged by selling an equivalent
amount of futures short. Then as the cash wheat is sold the hedges will be
removed by covering (with an offsetting purchase) the futures that were
previously sold short. In this manner the storage firm’s inventory of cash wheat
will be constantly hedged, avoiding the risk of a possible price decline – one
that could more than wipe out the storage and merchandising profits necessary
for the firm to remain in business. But if the storage firm buys cash wheat at $4
a bushel, and hedges this purchase with an equivalent sale of December wheat
at $4.05, a 10-cent break in prices between the time the hedge is placed and the
time it is taken off would result in a 10-cent loss on the cash wheat and a 10-
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cent profit on the futures trade. In the event of a 10-cent advance there would be
a 10-cent profit on the cash and a 10-cent loss on the futures trade. In any case,
the firm would be protected against losses resulting from price fluctuations, due
to offsetting profits and losses, unless of course cash and futures prices should
fail to advance or decline by the same amount. Usually, however, this price
relationship is sufficiently close to make hedging a relatively safe and practical
Undertaking. In fact, if the future is selling at a normal carrying charge
premium at the time the future is sold as a hedge, the future should slowly but
Steadily decline in relation to the cash as it approaches the delivery month, thus
giving to the storage interest his normal carrying charge profit in his hedging
transaction. In connection with hedging, it must be remembered that there are
unavoidable risks when large stocks of any commodity subject to price
fluctuation must be owned and stored for extended periods. Someone must
assume these risks. Usually those in the business of storing, merchandising and
processing cash commodities in large volume are not in a position to assume
them. They are in a competitive business dependent upon relatively narrow
profit margins, profit margins that can be wiped out by unpredictable price
changes. These risks of price fluctuation cannot be eliminated, but they can be
transferred to others by means of a futures market hedge.
Speculations and its functions in Commodity market:
The primary function of the commodity trader, or speculator, is to assume the

risks that are hedged in the futures market. To a certain extent these hedges
offset one another, but for the most part speculative traders carry the hedging
load. Although speculation in commodity futures is sometimes referred to as
gambling, this is an inaccurate reference. The generally accepted difference
between gambling and speculation is that in gambling new risks are created
which in no way contribute to the general economic good, whereas in
speculation there is an assumption of risks that exist and that are a necessary
part of the economy. Commodity trading falls into the latter category. Everyone
who trades in commodities becomes a party to an enforceable, legal contract
providing for delivery of a cash commodity. Whether the commodity is finally
delivered, or whether the futures contract is subsequently cancelled by an
offsetting purchase or sale, is of no real consequence. The futures contract is a
legitimate contract tied to an actual commodity, and those who trade in these
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Contracts perform the economic function of establishing a market price for the
commodity. While speculative traders assume the risks that are passed on in the
form of hedges, this does not mean that traders have no choice as to the risks
they assume – or that all of the risks passed on are bad risks. The commodity
trader has complete freedom of choice and at no time is there any reason to
assume a risk that he doesn’t think is a good one. One’s skill in selecting good
risks and avoiding poor risks is what determine one’s success or failure as a
commodity trader.
1.3.3 Markets Rational:

Although the primary reason of being of commodity markets was to have
efficient markets for agricultural and energy goods, where producers and
consumers can transact deals, commodity markets have been growing to offer
Commodity - linked trading and speculative instruments. Compared to other
assets like equity stock or bonds, commodities exhibit strong seasonality as well
as high level of volatility (cf. the spike in oil prices in 1973, 1979 or the Gulf
war), making hedging strategies a true challenge for the various market
participants. The arrival of news (especially ones relating to local wars or
political crises) can have a very high impact on commodity prices, especially
oil. In addition, commodities present negative correlation with stocks and bonds
(around –15% to –30% over the last ten years, if one looks at the correlation
between the GSCI and the SP 500 for instance), making them valuable
diversification investment instruments to other assets like equity stocks and
bonds. With the growing volume of futures contracts, commodity futures
contracts have become a very liquid instrument besides being an easy one to
trade.
Standard arbitrage theory provides that the price of futures contracts is equal to:
[Spot Price] + [Cost of Carry] = [Futures Price]-------------(1.1)
Where the cost of carry is equal to:
[Cost of Carry] = [Interest Rate Cost] - [Reinvestment Costs] like coupon or
dividends + [Storage cost]--------------------(1.2)
Where under [Reinvestment costs] one should understand [coupons] and/or
[dividends],
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However, for commodity products, the cash and carry arbitrage is very difficult
to put in place and the theoretical price is often an upper bound of the traded
price. In practice, commodity futures trade often at a substantial discount to
their fair value. This premium is referred to as the convenience yield. From an
economic point of view, this stems from the fact that the global demand is in
excess of the supplies and that the cash-and-carry arbitrage is not easily put
forward, especially in view of storage problems associated with certain
commodities. Put another way, market participants are ready to pay a premium
for readily available commodities, reflected by the convenience yield. When the
spot trades above futures prices, one then says that the market is in
Backwardation while when spot trade below futures prices, the market is in
Contango. The degree of contango is limited by the fair value of the futures
prices whilst there is no limit to the degree of backwardation. Backwardation is
the most frequent state of the market, although, both states can occur.
Backwardation and contango
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Big players in the commodity markets comprise not only raw material
producers, who try to hedge their risk, but also
 Airlines companies that face the risk of unfavorable jet fuel price
fluctuations.
 Utility companies, facing important risk due to the deregulation of the
energy market.
 Various hedge funds interested in risk diversification.
Moreover, the deregulation of the energy markets, after year 2000, first in the
US and now in Europe & Asia, has made risk management of commodities a
must for utilities, distributors and suppliers.
1.3.4 Commodity Trading & its Mechanism:

Trading in commodity markets is quite similar to equity markets. The
commodity market also has two constituents’ i.e. spot market and derivative
market. In case of a spot market, the commodities are bought and sold for
immediate delivery. In case of a commodities derivative market, various
financial instruments having commodities as underlying are traded on the
exchanges.
The buy and sell orders for commodity futures are executed on the trading floor
where floor brokers congregate during the trading hours stipulated by the
exchange. The floor brokers/trading members on receipt of orders from clients
or from their office transmits the same to others on the trading floor by hand
signal and by calling out the orders (in an open outcry system they would like to
place and price. After trade is made with another floor broker who takes the
opposite side of the transaction for another customer or for his own account, the
details of transactions are passed on to the clearing house through a transaction
slip on the basis o which the clearinghouse verifies the match and adds to its
records.
Following the experiences of stock exchanges with electronic screen based
trading commodity exchanges are also moving from outdated open outcry
system to automated trading system. Many leading commodity exchanges in the
world including Chicago Mercantile Exchange (CME), Chicago Board of Trade
(CBOT), International Petroleum Exchange (IPE), London, have already
computerized the trading activities. In India, coffee futures exchange, Bangalore
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has already put in place the screen based trading and many others are in the
process of computerization. To add to modernization efforts, the Bombay
Commodity Exchange (BCE) has initiated for a common electronic trading
platform connecting all commodity exchanges to conduct screen based trading.
In electronic trading, trading takes place through a centralized computer
network system to which all buy and sell orders and their respective prices are
keyed in from various terminals of trading members. The deal takes place when
the central computer finds matching price quotes for buy and sell. The entire
procedural steps involved in electronic trading beginning from placing the
buy/sell order to the confirmation of the transaction have been given below:
Order and Execution flow in electronic future trade
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Clearing House:
Clearinghouse is the organizational set up adjunct to the futures exchange which
handles all back-office operations including matching up of each buy and sell
transactions, execution, clearing and reporting of all transactions, settlement of
all transactions on maturity by paying the price difference or by arranging
physical delivery, etc., and assumes all counterparty risk on behalf of buyer and
seller. It is important to understand that the futures market is designed to
provide a proxy for the ready (spot) market and thereby acts as a pricing
mechanism and not as part of, or as a substitute for, the ready market.
The buyer or seller of futures contracts has two options before the maturity of
the contract. First, the buyer (seller) may take (give) physical delivery of the
Commodity at the delivery point approved by the exchange after the contract
matures. The second option, which distinguishes futures from forward contracts
is that, the buyer (seller) can offset the contract by selling (buying) the same
amount of commodity and squaring off his position. For squaring of a position,
the buyer (seller) is not obligated to sell (buy) the original contract. Instead, the
clearinghouse may substitute any contract of the same specifications in the
process of daily matching. As delivery time approaches, virtually all contracts
are settled by offset as those who have bought (long) sell to those who have sold
(short). This offsetting reduces the open position in the account of all traders as
they approach the maturity date of the contract. The contracts, if any, which
remain unsettled by offset until maturity date are settled by physical delivery.
In fact the clearinghouse plays a major role in the process explained
above by intermediating between the buyer and seller. There is no clearinghouse
in a forward market due to which buyers and sellers face counterparty risk. In a
futures exchange all transactions are routed through and guaranteed by the
clearinghouse which automatically becomes a counterpart to each transaction. It
assumes the position of counterpart to both sides of the transaction. It sells
contract to the buyer and buys the identical contract from the seller. Therefore,
traders obtain a position vis-à-vis the clearing house. It ensures default risk-free
transactions and provides financial guarantee on the strength of funds
contributed by its members and through collection of margins marking-to-
market all outstanding contracts, position limits imposed on traders, fixing the
daily price limits and settlement guarantee fund.
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Margins:
Margins (also called clearing margins) are good -faith deposits kept with a
clearinghouse usually in the form of cash. There are two types of margins to be
maintained by the trader with the clearinghouse. These are:
 Initial margin.
 Maintenance or Variation margin.
Initial margin: Initial margin is a fixed amount per contract and does not vary
with the current value of the commodity traded.
Maintenance margin: Maintenance margin is a kind of compensation in order to
compensate the risk borne by the clearinghouse on account of price volatility of
the commodity underlying the contract to which it is a counterparty.
Maintenance margin usually ranges from 60 to 80 percent of Initial margin.
A debit in the margin account due to adverse market conditions and consequent
change in the value of contract would lead to initial margin falling below the
maintenance level. The clearinghouse restores initial margin through margin
calls to the client for collecting variation margin. In case of an increase in value
of the contract, marking to- market ensures that the holder gets the payment
equivalent to the difference between the initial contract value and its change
over the lifetime of the contract on the basis of its daily price movements. If the
member is not able to pay the variation margin, he is bound to square off his
position or else the clearinghouse will be liquidating the position.
1.3.5 Regulatory issues in Commodity market:

Government policies:
The government policies play a major role in the growth of commodities
markets. Following are the issues related to government policies, which affects
the commodity future markets:
 First issue is taxes. Different tax treatment of speculative gains and losses
discourage many speculators from participating in official futures
exchanges, thereby affecting the liquidity of the markets. Hedgers are
affected as well: the necessary link between futures and physical market
transactions is too rigidly defined. Tax issues need to be clarified so that
futures losses can be offset against profits on the underlying physical
trade and vice versa.
Page | 24
 Second problem is stamp duty. Stamp duties on trade in commodity
futures exchanges should be nil, except when physical delivery is made.
Now, stamp duty can be arbitrarily imposed by the state in which the
futures exchange is located. Clarification from the Indian states in which
there are exchanges that there will be no arbitrary position on stamp duty
is recommended.
 Third, many institutions (particularly financial institutions but also, in a

less direct manner, cooperatives) are not permitted to engage in
commodity futures trade. The rules which prevent such engagement need
to be modified.
 Finally, the role of government entities directly involved in commodity

trade should be reconsidered. The direct purchasing practices of these
entities now damage the potential of commodity exchanges. If a federal
or state government wishes to continue direct interventions in commodity
markets, it could, if it wished, pass through the commodity exchanges.
This would ensure effective market intervention (the effect on prices will
be immediate), and, as long as done within clear policy guidelines, does
not destroy market mechanisms.
Regulatory perspectives:
In order to regulate the market, the regulating authorities like FMC in India,
CFTC in US, needs a new focus, a stronger role, and an improved day-to-day
oversight of exchanges. So for this, the regulating authorities must consider the
following measures:
 The first issue is that the perspective of regulators should move away
from a concern about preventing volatility towards protecting market
integrity. The regulators must set the regulatory template under which
each of the exchanges is permitted to operate and is expected to run its
business. The regulators therefore must satisfy themselves that the
exchange business is being conducted in a proper manner. They are likely
to set guidelines for exchanges and will need to satisfy themselves at all
times that exchanges are conducting their businesses in line with those
guidelines.
Page | 25
 Second, the authorities should change the portfolio of contracts that are
traded. It should abolish NTSD {Non-Transferable Specific Delivery
Contracts} and TSD {Transferable Specific Delivery Contracts}
contracts, and have only tradable futures contracts. The authorities should
also allow exchanges to introduce option contracts. Knowledge has now
sufficiently spread, and technology sufficiently improved, to make this
possible.
 Third, with respect to combating manipulation, the regulators therefore
need to be able to evaluate (proposed) contract specifications, and push
for a change if these specifications are not sound, or have become
inappropriate (e.g., in case the physical market for a well-established
contract changes). Apart from this, Exchange management should form a
first line of defence (and be punished if they do not do their job properly),
but regulators should keep continuous track of market developments too.
 And finally with the changing environment of industry, it is quite

important for regulators to check the brokerage system within their
territory. So in this way, first of all the entry of international broking
houses, either in joint ventures with domestic brokers or independently,
should be stimulated. There should be a transition period (not exceeding
One year), where each exchange sets initial standards for their brokers.
Brokers (after the transition period) should meet the following
requirements:
 Mandated capital adequacy: The regulators should seek to

minimize any risk to investors and threat to the stability of the
market from the failure of an institution because it becomes
unable to meet its liabilities. Currently, a broker's membership
at the exchange is solely dependent upon fulfilling the
financial requirements (in form of upfront payment or equity
participation, membership, admission fees etc.) levied by the
different exchanges. There is a need for mandated capital
adequacy for brokers together with measures to monitor that
the capital is, in fact, maintained.
 Licensing: In most of the countries around the globe including
India, there is no requirement of any form of licensing. A
broker can start trading once he fulfills the exchange
Page | 26
requirements. There is no educational requirement. It is
advisable that anyone dealing in futures for clients is
registered. To be registered, one would need to:
- be a member/employee of an exchange
- pass a character assessment—e.g., no conviction of fraud.
 Customer agreements: Before an exchange member can

operate on behalf of a customer a client agreement should be in
place. The exchange or the regulator may wish to define the
minimum acceptable content of such an agreement.
1.3.6 Commodity market: Indian Scenario

Organized futures market evolved in India by the setting up of "Bombay Cotton
Trade Association Ltd." in 1875. In 1893, following widespread discontent
amongst leading cotton mill owners and merchants over the functioning of the
Bombay Cotton Trade Association, a separate association by the name
"Bombay Cotton Exchange Ltd." was constituted. Futures trading in oil seeds
were organized in India for the first time with the setting up of Gujarat Vyapari
Mandali in 1900, which carried on futures trading in groundnut, castor seed and
cotton. Before the Second World War broke out in 1939 several futures markets
in oilseeds were functioning in Gujarat and Punjab. After independence, a three-
pronged approach has been adopted to revive and revitalize the market.
Firstly, on policy front many legal and administrative hurdles in the functioning
of the market have been removed. Forward trading was permitted in cotton and
jute goods in 1998, followed by some oilseeds and their derivatives, such as
groundnut, mustard seed, sesame, cottonseed etc. in 1999. A statement in the
first ever National Agriculture Policy, issued in July, 2000 by the government
that futures trading will be encouraged in increasing number of agricultural
commodities was indicative of welcome change in the government policy
towards forward trading. Secondly, strengthening of infrastructure and
institutional capabilities of the regulator and the existing exchanges received
priority. Thirdly, as the existing exchanges are slow to adopt reforms due to
legacy or lack of resources, new promoters with resources and professional
approach were being attracted with a clear mandate to set up dematerialized,
technology driven exchanges with nationwide reach and adopting best
international practices.
Page | 27
But the turning point came in 2003, when the government issued notifications
for withdrawing all prohibitions and opening up forward trading in all the
commodities. This period also witnessed other reforms, such as, amendments to
the Essential Commodities Act, Securities (Contract) Rules, which have
reduced bottlenecks in the development and growth of commodity markets. Of
the country's total GDP, commodities related (and dependent) industries
constitute about roughly 50-60 %, which itself cannot be ignored.
Most of the existing Indian commodity exchanges are single commodity
platforms; are regional in nature, run mainly by entities which trade on them
resulting in substantial conflict of interests, opaque in their functioning and have
not used technology to scale up their operations and reach to bring down their
costs. But with the strong emergence of: National Multi-commodity Exchange
Ltd., Ahmadabad (NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX),
National Commodities and Derivatives Exchange, Mumbai (NCDEX), and
National Board of Trade, Indore (NBOT), all these shortcomings will be
addressed rapidly. These exchanges are expected to be role model to other
exchanges and are likely to compete for trade not only among themselves but
also with the existing exchanges.
Structure of market:
Ministry of Consumer
FM
Commodity Exchanges
National Regional Exchanges

MCX NCDEX
Source: Sebi Bulletin NMCE NBOT 20 Other
Regional
Page | 28
Leading Commodity Market of India:
The government has now allowed national commodity exchanges, similar to the
BSE & NSE, to come up and let them deal in commodity derivatives in an
electronic trading environment. So far there are 25 commodity derivative
exchange are available and dealing with around 100 commodities for trade.
These exchanges are expected to offer a nation-wide anonymous, order driven;
screen based trading system for trading. The Forward Markets Commission
(FMC) will regulate these exchanges. Some of the leading commodity
exchanges across the country with their recent turnover are given as under:
 Multi Commodity Exchange {MCX}:

Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art
electronic commodity futures exchange. It is headquartered in Mumbai.
The demutualised Exchange set up by Financial Technologies (India) Ltd
(FTIL) has permanent recognition from the Government of India to
facilitate online trading, and clearing and settlement operations for
commodity futures across the country. Having started operations in
November 2003, today, MCX holds a market share of over 80% of the
Indian commodity futures market, and has more than 2100 registered
members operating through over 1, 80,000 trading terminals, across
India. MCX offers more than 40 commodities across various segments
such as bullion, ferrous and non-ferrous metals, energy, weather and a
number of agri – commodities on its platform. The Exchange is the
world's largest exchange in Silver, the second largest in Gold, Copper and
Natural Gas and the third largest in Crude Oil futures, with respect to the
number of futures contracts traded. MCX has been certified to three ISO
standards including ISO 9001:2008 Quality Management System
standard, ISO 14001:2004 Environmental Management System standard
and ISO 27001:2005 Information Security Management System
standard. Promoted by FTIL, MCX enjoys the confidence of blue chips in
the Indian and international financial sectors. MCX's broad-based
strategic equity partners include State Bank of India and its associates,
NABARD, NSE, SBI Life Insurance Co Ltd, Bank of India (BOI), Bank
of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank,
HDFC Bank, Fid Fund (Mauritius) Ltd. an affiliate of Fidelity
International, Merrill Lynch, Euronext N.V. and others.
Page | 29
Average turnover:
Volume {In lakh tonnes} Value {in Rs lakh}

6149.034 6393302.17
Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India
Note: The above mentioned figures are for financial year 2009-10.
 National Commodity & Derivative Exchange Ltd. {NCDEX}:

National Commodity & Derivatives Exchange Limited (NCDEX) is a
professionally managed on-line multi commodity exchange. Like MCX,
it is also headquartered in Mumbai & offers facilities to its members from
the centers located throughout India. NCDEX is the only commodity
exchange in the country promoted by national level institutions. This
unique parentage enables it to offer a bouquet of benefits, which are
currently in short supply in the commodity markets. The institutional
promoters and shareholders of NCDEX are prominent players in their
respective fields and bring with them institutional building experience,
trust, nationwide reach, technology and risk management skills. It became
a public limited company on April 23, 2003 under the companies act,
1956 and started its operation since December 15. 2003.
The Exchange, as on May 21, 2009 when Wheat Contracts were re-
launched on the Exchange platform, offered contracts in 59 commodities
- comprising 39 agricultural commodities, 5 base metals, 6 precious
metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5
commodities, in terms of volume traded at the Exchange, were
Rape/Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera.
Key promoters:
Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance
Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India
Limited.(NSE).
Other shareholders: Canara Bank, Punjab National Bank (PNB),
CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO),
Goldman Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars
Limited and Jaypee Capital Services Limited.
Page | 30
Average turnover:
Volume {In lakh tonnes} Value {In Rs. Crore}

3137.44 917584.71
Note: The above mentioned figures are for financial year 2009-10
 National Multi Commodity Exchange {NMCE}.

National Multi Commodity Exchange of India Ltd. (NMCE) was
promoted by commodity-relevant public institutions, viz., 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 Limited (NOL). NMCE has many unique features,
like it is a zero-debt company; following widely accepted prudent
accounting and auditing practices. It is the only Commodity Exchange in
the world to have received ISO 9001:2000 certification from British
Standard Institutions (BSI).
NMCE commenced futures trading in 24 commodities on 26th
November, 2002 on a national scale and the basket of commodities has
grown substantially since then to include cash crops, food grains,
plantations, spices, oil seeds, metals & bullion among others. It was the
first Exchange to complete the contractual groundwork for
dematerialization of the warehouse receipts.
Average turnover:
Volume {In lakh tonnes} Value {In Rs. Crore}

495.91 227901.48
Note: The above figures are for financial year 2009-10.
Page | 31
 Indian Commodity Exchange {ICEX}:
Indian Commodity Exchange Limited is a screen based on-line
derivatives exchange for commodities and has established a reliable, time
tested, and a transparent trading platform. It is also in the process of
putting in place robust assaying and warehousing facilities in order to
facilitate deliveries. It has Reliance Exchangenext Ltd. as anchor investor
and has MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash
Ltd., KRIBHCO and IDFC among others, as its partners. The exchange is
headquartered at Gurgaon.
Average turnover:
Volume {In lakh tonnes} Value {In Rs crores}

122.104 136425.36
Note: The above mentioned figures are for financial year 2009-10.
Problems of Indian Commodity Market:

Even though the commodity derivatives market has made good progress in the
last few years, but still there are lot issues, which are yet to be resolved. Some
of them are discussed below:
 Cash Vs Physical settlement: this is one of the major problem of
commodity market in India. It is probably due to the inefficiencies in the
present warehousing system that only about 1% to 5% of the total
commodity derivatives trades in the country are 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 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.
Page | 32
 Lack of economy of scale: There are too many (3 national level and 25
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.
 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.
 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.
Page | 33
1.3.7 Commodity Market: Global Scenario
Most commodity prices reached historical highs in mid-2008, giving rise to the
longest and broadest commodity boom of the post-WWII period. Apart from
strong and sustained economic growth, the boom was fuelled by numerous
factors including years of low prices and low investment; a weak dollar; and
investment fund activity. Rapid economic growth caused global stocks of many
commodities to fall to levels not seen since the early 1970s, in turn accelerating
the price increases that peaked in 2008. Further exacerbating the demand and
supply mismatch were the diversion of some food commodities to the
production of bio-fuels, adverse weather conditions, and government policies
such as export bans and prohibitive taxes.
The financial crisis that erupted in September 2008 and the subsequent global
economic downturn relieved most of the demand-side pressures and induced
sharp price declines across most commodity sectors. The largest declines
occurred in industrial commodities such as metals (which had also registered
the greatest gains in the early 2000s).
Commodity prices {nominal, 2000 = 100}
Page | 34
Between July 2008 and February 2009, prices of energy declined by two-thirds
while those of metals dropped by more than half. Prices of agricultural goods
retreated by more than 30 percent, with prices of edible oils dropping by 42
percent. The troughs in energy and non-energy indices broadly coincided with
troughs in global economic activity (particularly in China and East Asia). Prices
of energy and metals commodities began to recover in March 2009, in part
responding to recovery in industrial production and other factors including
strong import demand from China, large-scale production restraint in the
extractive commodities, tight scrap markets, and strike-related disruptions in the
case of metals. Prices of some agricultural commodities also started to rebound
in 2009:Q2, in response to demand increases and, in some cases (for example,
sugar and rice), the effects of adverse weather. Dollar price increases also
reflected the depreciation of the dollar against major currencies. Yet, expressed
in trade-weighted local currency indices, prices raised my much less.
Global Commodity Exchanges:
Chicago Board of Trade:

Chicago Board of Trade was established in 1948 and has trading in agricultural
produce, interests, Dow, metals and US treasuries. Soya complex, wheat and
corn prices across the world are referenced here. It has both electronic as well as
open cry. It trades both in futures as well as options. In 2005 it became a public
traded NYSE listed company.
New York Board of Trade (NYBOT):
New York Board of Trade (NYBOT) is the world's largest commodities
exchange for Coffee, Sugar, Cotton and Frozen Concentrated Orange Juice. The
exchange was founded as the New York Cotton Exchange in 1870. NYBOT
also facilitates trades in foreign currencies and derivative indices for equities.
Kansas Board of Trade:
Kansas Board of Trade in US specializes in hard red winter wheat. Hard winter
wheat constitutes the maximum of US production. This exchange is benchmark
for bread wheat prices.
Page | 35
Winnipeg Commodity Exchange:
Winnipeg Commodity Exchange is located in Manitoba and trades only in
futures and options of canola, wheat and barley.
Dalian Commodity Exchange:

Dalian Commodity Exchange in China trades in corn and soybean. The
exchange is planning to introduce futures and options in crude oil, power, steel
and plastic.
Bursa Malaysia Derivatives exchange:

Bursa Malaysia Derivatives exchange trades in crude palm oil futures, crude
palm kernel oil futures, Index futures and options and government securities.
Singapore Commodity Exchange (SICOM):
Singapore Commodity Exchange (SICOM) specializes in rubber and Robusta
coffee.
Chicago Mercantile Exchange (CME):
Chicago Mercantile Exchange (CME) is the largest futures exchange in US. The
exchange trades on interest rates, equities, foreign exchange and agricultural
commodities. It has both open cry as well as electronic trading. Agricultural
commodities traded on the exchange include dairy products (butter, milk
cheese) and live stock futures (cattle and pork).
London Metal Exchange:
London Metal Exchange trades in Metals and non ferrous metals like aluminum,
copper, lead, nickel, tin and zinc. Consumers as well as producers of metals use
the official prices of LME for their long term contracts pricing. There are over
400 LME approved warehouse in some 32 locations covering USA, Europe, the
middle & the Far East. (At the moment there is none in India) has both open
outcries as well as electronic.
New York Mercantile Exchange (NYMEX):
New York Mercantile Exchange in its current form was created in 1994 by the
merger of the former New York Mercantile Exchange and the Commodity
Exchange of New York (COMEX). Together they represent one of world’s
largest exchanges for precious metals and energy.
Page | 36
Tokyo Commodity Exchange (TOCOM):
Tokyo Commodity Exchange (TOCOM) is the largest exchange in Japan and
second largest commodity exchange in the world for futures and options. Crude
oil, gasoline, kerosene, gas oil, gold, silver, aluminum, platinum and rubber are
the commodities that are actively traded.
Shanghai Futures Exchange:
Shanghai Futures Exchange is one of biggest exchange for copper price
determination. It also deals in aluminum, fuel oil, rubber, etc.
Sydney Futures Exchange:
Sydney Futures Exchange deals in interest rates, equities, currencies and
commodities. Wool and cattle futures are its specialty.
London International Financial Futures and Options Exchange (LIFFE):
London International Financial Futures and Options Exchange (LIFFE) also
know as Euro next. Among actively commodities trades are cocoa, robusta
coffee, corn, potato, rapeseed, sugar and wheat. Robusta coffee prices are
determined through this exchange.
Multi Commodity Exchange of India Limited (MCX):
Multi Commodity Exchange of India Limited (MCX). Formed in Nov 10,
2003.The exchange has developed its reputation for trading in bullion, crude oil
and mentha oil.
Dubai Gold & Commodity Exchange (DGCX):
Dubai Gold & Commodity Exchange (DGCX) was formed in Dubai. It is
developed jointly by Dubai government as well as MCX and FTIL. At the
moment it is trading in Gold but plans to trade in others also. Dubai has an
advantage of its location of serving all time zones.
Dubai Mercantile Exchange (DME):
Dubai Mercantile Exchange (DME) is a joint venture between Dubai holding
and the New York Mercantile Exchange (NYMEX). It is still to be launched
and is likely to be an active exchange for oil futures as it is in the centre of oil
producing nations.
Page | 37
Chapter-2
Company overview
Page | 38
2.1 Introduction of the Company:
“Bonanza Portfolio Limited” is one of the leading brokerage firm in India.
Established in the year 1994, Bonanza developed into one of the largest
financial services and broking house in India within a short span of time. Today,
Bonanza is the fastest growing financial service with 5 mega group companies
under it. With diligent effort, acknowledged industry leadership and experience,
Bonanza has spread its trustworthy tentacles all over the country with pan-India
presence across more than 1611 outlets spread across 550 cities.
With a smorgasbord of services across all verticals in finance, Bonanzas offers
the perfect blend of financial services right from Equity Broking, Advisory
Services that cover Portfolio Management Services, Mutual Fund Investments,
and Insurance to exceptional Depository Services. The company is affiliated
with the best in the industry – right from the NSE, BSE MCX, MCX - SX to
CDSL, NSDL, etc. These affiliations prove the worth in the market and make
Bonanza a name to reckon with.
Bonanza believes in being technologically advanced so that it can offer an
integrated and innovative platform to trade online as well as offline to its tech-
savvy customers. Besides, the company has one of the finest and most dedicated
research teams with experts who have in-depth, unsurpassed knowledge of the
market place. All this and more makes Bonanza the perfect place for the people
to take their first step in the direction of financial success.
2.2 Mission & Vision:

Vision:
 To be one of the most trusted and globally reputed financial distribution
company.
Mission:
 To be a Customer-centric organization.
 To generate client’s wealth through professional advice, backed by

thorough research and in-depth analysis.
Page | 39
2.3 Organizational Structure:
B
Bonanza
Bonanza Portfolio Limited Bonanza Bonanza Bonanza Fin invest Pvt. Limite
Commodity Brokers Insurance Brokers

Pvt. Limited Pvt. Limited
Stock Broking & Retail Wealth Management Venture Capital

Commodity Broking Insurance Broking
& Investment Banking
Board of Directors:
 Mr. S. P. Goel.
 Mr. Shiv Kumar Goel.
 Mr. S. K. Goel.
 Mr. Vishnu Kumar Agarwal.
 Mr. Anand Prakash Goel.
Page | 40
Affiliations:
 Equity:
 National Stock Exchange of India Ltd. (NSEIL).
 The Bombay Stock Exchange Ltd. (BSE).
 OTC Exchange of India Ltd (OTCEIL).
 Commodities:
 Multi Commodity Exchange (MCX).
 National Commodity & Derivative Exchange Ltd. (NCDEX).
 National Multi Commodity Exchange (NMCE).
 Dubai Gold Commodities Exchange (DGCX).
 Currency:
 National Stock Exchange of India Ltd. (NSEIL).
 The Bombay Stock Exchange Ltd. (BSE).
 MCX-SX Ltd.
 United Stock Exchange.
 Depository participant with CDSL and NSDL.
2.4 Global & Indian Operations and Market share:

As far as the operations and presence of Bonanza is concerned, it is the 4rth
largest brokerage firm in the country. The company has more than 1632 outlets
spread across 535 cities in the country.
Corporate Office:
Bonanza House
Plot No. M-2, Cama Industrial Estate, Walbhat Road,
Behind the Hub, Goregaon {E}, Mumbai – 400063.
Registered Office:
4353/4-C, Madan Mohan Street,
Ansari Road, Daryaganj, New Delhi – 110002.
Page | 41
The state wise presence of the company is given as under:
Name of the state City
Hyderabad, Anantpur,
Andhra Pradesh Kurnool, Tirupati,
Visakhapatnam
Bihar Patna, Arah
Chhattisgarh Bhilai
Delhi Delhi
Ahmadabad, Rajkot, Nadiad,
Gujrat Surat, Anand, Baroda, Gandhi nagar,
Jamnagar, Junagadh,
Haryana Panchkula
Himachal Pradesh Sirmour
Jammu & Kashmir Srinagar, Jammu
Jharkhand Ranchi
Karnataka Bangalore, Hubli, Mangalore
Kochi, Angamalay, Calicut,
Kamjirappaly, Kattapana, Kottayam,
Kerela Kumily, Muttom, Nedumkandam,
Pala, Thodupuzha, Truchur,
Moovattupuzha, Tellicherry,
Trivandrum, Vadakara
Madhya Pradesh Indore, Bhopal
Maharashtra Mumbai, Nagpur, Pune, Jalna, Thane,
Orissa Bhubaneswar,
Jaipur, Ajmer, Alwar,
Rajasthan Bikaner, Jodhpur, Kota, Sujangarh,
Uaipur.
Chennai, Tirupur, Coimbatore,
Tamilnadu Madurai, Nagarcoil, Pondicherry,
Salem, Theni, Thirunelveli, Tuticorin
Uttar Pradesh Lucknow, Gorakhpur, Kanpur,
Allahabad, Varanasi,
Uttarakhand Dehradun, Haridwar.
West Bengal Kolkata, Siliguri
Page | 42
Market Share:
3.50%
3.00%
2.50%
2.00%
NSE & BSE
1.50% F&O
MCX & NCDEX

1.00%
0.50%
0.00%
FY 04FY 05FY 06FY 07FY Source:
08FY 09FY 10H1 FY 11
bonanzonline.com
2.5 Product & Services:

 Brokerage Services:
Brokerage Services
Equity Derivatives Commodity Currency
Online Offline
Page | 43
 Distribution:
Distribution
Insurance Funds Fixed Deposits IPO
Life Non-Life Mutual Venture

Funds Capital Funds
 Wealth Management:
Wealth Management
PMS Advisory Structured Product
 De-mat:
Demat
NSDL CDSL
Page | 44
2.6 SWOT Analysis:
Strengths: Weaknesses:
A diverse product range.  Higher brokerage charge as

Compare to other companies
in the industry.
 State-of-the-art technology.
 Lesser presence in the eastern
part of the country.
 A vast network across India.
 A young dynamic team.
Opportunities: Threats:
 Growing financial services  Execution Risk.

Industry’s share of wallet for
disposable income.  Slowdown in global liquidity
flows.
 Regulatory reforms would aid
greater participation by all class of  Increased intensity of competitors
Investors. from local and global players.
 Leveraging technology to enable
best practices and processes.  Unfavorable economic condition.
 Increased appetite of Indian
Corporate for growth capital.
Page | 45
Chapter-3
Research Methodology
Page | 46
3.1 Objectives of the study:
 To understand the structure and functioning of Commodity market in
India & rest of the world.
 To gain an idea about the people’s preference regarding investment in

commodities over the other financial products like equity, currency etc.
 To clearly state the awareness level of people about commodities.
 To know about the trading/demat account for trading in different

financial markets and its benefits.
 To study how to build a relationship marketing in Capital market.
 To understand the importance of the role of a brokerage firm in various

financial market.
3.2 Scope of the study:

Globalization of the financial market has led to a manifold increase in
investment. New markets have been opened; new instruments have been
developed; and new services have been launched. But at the same time, a
number of opportunities and challenges have also been thrown open. For
example the rapidly advancing technology, particularly the Internet, has
drastically changed the social and economic landscapes and every aspect of our
daily lives. In the Securities Industry & Futures Commodities, the Internet has
facilitated on-line trading, changing the way the market works, as well as the
way the investors access the market. Having taken advantage of information
technology at an opportune time, India has emerged as a front-running country
of on-line trading in the global securities & commodities markets. Online
Commodities trading is new as compared to Equity market in India. Mainly
three exchanges are involved in online commodities trading MCX, NCDEX &
NMCE. Apart from this, after equity, commodity is the market on which
investors have shown their faith and invested in commodities like gold, silver,
crude oil etc. in order to get the maximum return on their investment.
Page | 47
3.3 Research design of the study:
The study is based on survey technique. The study consists of analysis about
customer’s awareness and satisfaction of Bonanza commodities Ltd. For the
purpose of the study 100 customers were picked up at random and their views
solicited on different parameters. The methodology adopted includes:
 Questionnaire.
 Random sample survey of customers.
 Discussions with the concerned.
Personal interviews and informal discussions were held when I was interacting
with new customers through phone and sometimes personally to ascertain the
awareness and existing consumers’ satisfaction level. Further applying simple
statistical techniques has processed the data collected.
3.4 Sources of Data:

 Primary data:
 Collected through the structured questionnaire.
 Secondary data:
 I had made phone calls to the clients from the data base that I was
given by the company in order to get the accurate information
regarding their investment and their preference.
 Another method to get the information was a direct approach in
which I approached the clients and got a direct response from
them.
 Official websites of MCX, NCDEX, Ministry of Consumer Affairs,
Food & Public distribution, Published materials of Bonanza
Portfolio & finally Newspapers.
Page | 48
3.5 Sampling plan:
 Sampling: Since Bonanza Portfolio Ltd. has many segments I selected
commodities segment as per my profile to do the survey. 100% coverage
was difficult within the limited period of time. Hence sampling survey
method was adopted for the purpose of the study.
 Population: Universe {Existed as well as Non-existed Clients of

Bonanza Portfolio Ltd.}.
 Sample size: A sample size of 100 was chosen for the purpose of the
study. Sample consists of both small as well as large investors.
 Sampling unit: To define sample unit, one must answer the question that
who is to be surveyed. In this project sampling units are government as
well as private firm’s employees, small & large businessmen,
shopkeepers etc.
 Sampling methods: Since probability sampling requires complete

knowledge of all sampling units in the universe which was not possible
due to time constraint, so non-probability sampling was chosen for the
study.
 Sampling procedure: From a large number of client {existed & non-

existed of Bonanza Portfolio Ltd.}, sample lot were randomly picked by
me.
 Field study: Directly approached respondents. The group of respondents

consists of businessmen, small as well as large shopkeepers, physical
commodity traders & service class people.
Page | 49
3.6 Limitations of the study:
 The survey was restricted to Bangalore city.
 The sample size of the survey was limited to 100 respondents, which
might not be representing the whole country.
 The results are totally derived from the respondent’s answers. There
might be a difference between the actual and projected results.
 Information is partly based on secondary data and hence the authenticity

of the study can be visualized and is measurable.
Page | 50
Chapter – 4
Observation & Analysis
Page | 51
 Occupation:
Total no. of person = 100
30
43
Bussinessman
23 Prefessionals
Employed {both govt. as well as pv
Interpretation & Analysis: From the above chart it is crystal clear that, there
are majority of service class people participated in the survey. They are the key
investors. After that, businessmen and others which mainly consist of small
shopkeepers have participated. And finally professionals comes which
constitutes around 4 percent.
Page | 52
 Annual Income:

40 38
35
31
30
25
22
20
15
10 9
0
< 2 lakh 2 - 5 lakh 5 - 10 lakh > 10 lakh
Interpretation & Analysis: As per the occupation’s chart, most of the people in
my survey are from service class people & businessman, and majority of them
earn between 2 to 10 lakhs per annum, which shows that there are a majority of
medium class people. As far as the higher income group is concerned, they are
less in number as compare to middle income group. Their less number
indirectly indicates that, they are less interested in investing in various
investment avenues as compare to their middle counterpart.
Page | 53
 Investment Objective:
30
39
8
23
To enhance the income level For futur

Tax benefit
Interpretation & Analysis: In my survey, I found that, most of the people want
to invest their money for increasing their current income level, it is also clear
from the above chart, apart from this; another major objective of investment is
to avail the tax benefit, as we have seen in the previous chart, most of the people
in my survey are from service class, so it is obvious that they would try to
maximise the tax benefit. And finally a reasonable number of people want to
secure their future through investment in various options.
Page | 54
 Investment portion of Income:

50
47
45
40
35
30 29
25
20
15 14
10
10
0
< 25 % 25 - 50 % 50 - 75 % >75 %
Interpretation & Analysis: From the above chart it is clear that, people are less
interested in investing the bigger part of their income. Avery few number who
have invested more than ¾ rth of their income indicates that, people usually
believe on saving their income rather than investing in several investment
avenues.
Page | 55
 Preference to various investment avenues:
Insurance 11%
Debentures 10%
Bank deposits 33%
Mutual funds 13%
Commodities 14%
Shares 19%
Interpretation & Analysis: This was one of the important segment of my

survey. As it is clear from the above chart, bank deposits are still considered as
the one of the safest investment among all financial avenues of investment, but
after the emergence of Indian economy, people are showing their interest
towards other options like shares, debentures, commodities etc. in order to
enhance their portfolio. However it will take some time, but with the time, I am
confident that it will play a key role among all investment avenues.
Page | 56
 Most preferred commodities:
Total no. of persons = 100
45
45
40
35
30
29
25
20 19
17
15
10
5
0
Precious Metals Energy Base Metals Agricultural Products
Interpretation & Analysis:
The above graph clearly describes that, commodities of precious metals

category {basically gold & silver} are considered as the most preferred
commodities by respondents. 45 out of 100 people have shown their interest in
trading in gold, silver & other precious metals. Then after, agricultural products
are in demand. From the above chart, it can be inferred that, people usually
trade in bullions and agricultural commodities as compare to the other two
categories, i.e. energy & base metals.
Page | 57
 Awareness of Commodity market:
Fully aware 21%
Not aware 42%
Partially aware 37%
Interpretation & Analysis: This was the main part of my survey. From the
above chart one can easily observe that, a large number of people are not aware
about the markets like commodity. If some of them know, then their knowledge
is incomplete. From this information it can be said that, the commodity market
are yet to become a major destination of investment in the country. But I hope
with the time it will become a hot spot market for both large as well small
investors.
Page | 58
 Sources of Investment advice:
27.5
27
27
26.5
26
25.5
25
25
24.5
24 24
24
23.5
23
22.5
Friends Family Consultants Others
Interpretation & Analysis: In the survey, I found that, most of the respondent
revealed that, their investment decision depends upon various sources like by
keeping track of market or through Ads/ SMS alerts. Around ¼ rth of the
respondents said they take advice from professional consultants, while around
half of them said they take any decision after consulting with their family &
friends.
Page | 59
 Risk taking capacity:
60 55
50
40
30
30
20 15
10
0
Low Medium High
Interpretation & Analysis: Risk is one of the important factor while making
investment in any financial market. In fact the return on investment depends
upon it. Here in my survey, I found that, around more than half of them are
moderate while investing in the markets like Commodities & Equities. More
than ¼ rth of them are not willing to take any kind of risk, only 15 % of people,
I surveyed, prefers to take higher risk. Hence in a nutshell, it can be said that
people do not want to take too much risk while investing in the different kind of
financial markets like equities & commodities.
Page | 60
 Re – investment of the income earned by the
Investment Portfolio:
39 33
28
Re - invest at least 75 % of earnings

Re - invest at between 25 to 75 % of earnings Receive at least 75 % of e
Interpretation & Analysis: This was one of interesting but important part of the
survey. As per the above mentioned chart, it can be infer that, a majority of the
people re-invest their earnings, while around ¼ rth of them keeps some part of
their earnings and again around 1/3rd of the people I surveyed prefers to keep
their earnings as income. Such kind of attitude also shows the risk taking nature
of the people while making an investment.
Page | 61
 Return on Investment:

35
35
29
30
25
21
20
15
15
10
0
<5% 5 - 10 % 10 - 15 % > 15 %
Interpretation & Analysis: As per the above mentioned graph, most of the
respondents are getting 5-10 % of their investment as return, while another 29
% are getting return between 10-15 % of their investment. Only 21 % are
getting a good return on their investment. One of the probable reason for this
could be the risk taking nature and the unstable movement of market in last few
months, because the respondents have given their responses on the return they
got in the last 3-4 months.
Page | 62
 Satisfaction level with the services of Bonanza
Portfolio Ltd.:
23%
10%
67%
Satisfied unsatisfied Neither satisfied nor unsatisfied

Interpretation & Analysis: From the above chart it is quite clear that, around
2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd.,
Which is not a bad figure for a brokerage firm. Around ¼ rth of the respondents
rated the company as neither satisfied nor unsatisfied, which could be a
considerable issue for the company, while 10 % said that they are not happy
with the services of the company, which is may be due to past inconvenience.
Page | 63
Chapter - 5
Findings & Recommendations
Page | 64
Findings:
 Commodity derivatives have a crucial role to play in the price risk
management process. Especially in any agriculture dominated economy.
Derivatives like forwards, futures, options, swaps etc are extensively used
in many developed as well as developing countries in the world.
However, they have been utilized in a very limited scale in India.
 The most important thing that I have observed is the unawareness of

future commodity trading. Most of the people do not know what even the
meaning of commodity is, and if some of them know by the way, they
believe that operators and big players drive the market.
 The depository participants will allow an investor to trade through any

broker of his/her choice registered with the commodity exchange MCX,
NCDEX, NMCE.
 People have many motives for investing. Some people invest in order to
increase their income level while some wants to gain tax benefit. It is also
followed by the savings and safety in return.
 Among the investors, investment in banks deposits is the most preferred

investment option. After this they prefer to invest in equities. However
they have other investment avenues like derivatives and commodity
trading, but they are not interested too much in these options.
 Investors can be classified on the basis of their bearing capacity. Investors

in the financial market have different attitudes towards risk and hence
varying levels of risk-bearing capacity. Some investors are risk averse,
while some may have an affinity for risk.
 The physical delivery centers of commodities are very less in India as

compare to developed countries. In fact it is not evenly distributed
throughout the country.
Page | 65
 Around half of the commodity traded at various exchanges in the country,
are from base & precious metals, especially gold & silver.
 It was understood during the study that good services provided by the
company to the clients play an important role while assessing the worth
of the company. Not only this but brand name and the research work
done by the broking house also affects the investment decision of the
client.
Page | 66
Recommendations:
The company “Bonanza Portfolio Ltd.” is one of the largest brokerage firm in
the country and performing exceptionally well since its inception in 1994. The
following recommendations may help the company to enhance its functioning
and customer base:
 The survey that I have done during my project reveals that most of the
customers are not aware about the commodities market. I found that the
normal tendency of customers was to prefer equity as compared to
commodity. So here my first recommendation to Bonanza Portfolio Ltd.
as well as the FMC - the regulatory body of commodity market in India-
should take some initiative in order to make commodities market as one
the most preferred destination of investment.
 During trading, I found the network problem at many occasions. The

company must take it seriously & improve its infrastructure so that it can,
it can attract customers.
 Many brokerage firms maintain a research library in which their clients

can check those companies which are interested in them. Such facilities
are important to an investor, therefore, Bonanza Portfolio Ltd. Should
also go for such service.
 As a brokerage firm, the company must keep a watch on the different

strategies adopted by its competitors. This will not only help them to keep
them updated about the new trends but will also help them in order to
retain their customers & to find new one.
 In order to sustain in the market and to face cut throat competition, it is

essential for a brokerage firm to update its technology as well as
methodology.
 Finally this is the most important recommendation; I would like to give

here to all investors. There are abundant investment opportunities in the
Page | 67
commodities market. It is for the investor to use the available information
and analyze it to make meaningful as well as fruitful investment decisions
by using numerous tools & techniques available.
Page | 68
hapter – 6
Conclusion
Page | 69
Conclusion:
Commodity markets, contrary to the beliefs of many people, have been in
existence in India through the ages and still have to go a long way ahead.
Perceptions of investors towards commodity trading might change quite a lot
with time.
The project reveals that the commodity market works in delivery base and intra-
day base. In addition to this, it also works in future and derivative, in which
investors invest money through the contracts given i.e. 2 months contracts, 3
months contracts which expire last Thursday of every month. The future market
also provide the benefits for the traders who want investment but they do not
have enough money at particular time they can invest with margin money in
commodities and pay later to earn profits. The investors can avail the benefits
by opting different options, forward contracting, apply hedging to minimize the
loss if occur in the commodity market. It also provides the facility of the
hedging in the commodity market by which a customer can minimize the losses
which he is facing and ultimately save the principle amount for future
investment.
The brokerage firms play an important role in trading in any type of financial
market. The guidance and tips provided by them have a significant role in
trading. Apart from this, the research done by them not only help in analyzing
the performance of a particular stock/commodity, but also reveals the clear
picture of the particular stock/commodity, which further helps in making
investment in that stock/commodity. Hence it is necessary for the brokerage
firms that they must maintain the dignity and trust of their clients in order to
build a long term relation.
The project also explains about the awareness and satisfaction level of the
customers who are trading in various commodity exchanges. As far as the
awareness level of the people is concerned, then it is clear from the survey that
was done by during the project, most of the people are still not aware about the
Page | 70
commodity market and how to trade in it, but I hope with the time it will
become one of the attractive destination of investment.
At last, overall, the reforms and liberalization have transformed India’s financial
market in terms of altering market practices, improving market efficiency,
expanding the size of the market and liquidity, and significantly improving the
trading infrastructure. The capital markets have become transparent and more
uniformly accessible to all, but at the same time, there is still limited
information and transparency and the system continues to be dealer based, with
limited price discovery.
Page | 71
Chapter – 7
Learning Outcome
Page | 72
Learning Outcome:
The IIP was one of the most precious and fruitful period of my life. In fact it
was a practical application of whatever I had studied in the classroom. Here is
the snapshot of my learning during the IIP:
 First of all, first time I experienced the atmosphere & culture of corporate
world during the ten weeks of my Internship.
 Then I learnt the basic concept of stock broking and role of a brokerage
firm in financial market.
 After that I came to know about the structure & functioning of

commodity markets in India as well as rest of the world.
 How to open a trading/de-mat account for trading in different financial

markets like equities, commodities, currencies etc.
 Got the basic concepts about how to trade in commodities market. In

addition to this, I also got to know about the practical exposure of
different kind of trading aspects like short-selling, buying on margin etc.
this was the crux of my whole learning.
 During the internship, I learnt how to pitch the customer, in other words,
how to convince the customer in order to sell your product. It was one of
the toughest experiences of my life.
 And finally I learnt about the importance of money as Bonanza Portfolio

Limited - the company from where I did my internship – believe in
making money not mistakes.
Page | 73
Chapter- 8
Annexure
Page | 74
Annexure: 1
-:Questionnaire:-
1) Name :
2) Age:
[ ] 20 – 30 [ ] 30 – 50 [ ] 50 & above
3) Gender:
[ ] Male [ ] Female
4) Occupation:
[ ] Businessman [ ] Professional
[ ] Employed [ ] Others
5) Educational Qualification:
[ ] Under Graduate [ ] Graduate
[ ] Post Graduate
6) Annual Income:
[ ] < 2 lakhs [ ] 2 – 5 lakhs
[ ] 5 – 10 lakhs [ ] > 10 lakhs
Page | 75
7) Investment Objective:
[ ] To enhance the income level
[ ] For future welfare
[ ] Retirement protection
[ ] Tax benefit
8) Investment portion of your income:
[ ] < 25 % [ ] 25 – 50 %
[ ] 50 – 75 % [ ] > 75 %
9) Your most preferred investment avenue:
[ ] Bank deposit [ ] Shares
[ ] Commodities [ ] Mutual funds
[ ] Debentures [ ] Insurance
10)10)
Your awareness about Commodity Market:
[ ] Fully aware [ ] Partially aware
[ ] Not aware
Page | 76
11) From whom you get your investment advice:
[ ] Friends [ ] Family
[ ] Consultants [ ] Others
12) Your risk taking capacity:
[ ] Low [ ] Medium
[ ] High
13) How do you intend to use the income earned by your investment
Portfolio:
[ ] Re – invest at least 75 % of earnings
[ ] Re – invest between 25 – 75 % of earnings
[ ] Receive at least 75 % of earnings as
income
14) How much return usually you get on your investment:

[ ]<5% [ ] 5 – 10 %
[ ] 10 – 15 % [ ] > 15 %
Page | 77
15) Your satisfaction level with the services of Bonanza Portfolio
Limited: [ ] Satisfied
[ ] Unsatisfied
[ ] Neither satisfied nor unsatisfied
Page | 78
Annexure – 2:
:-Frequently Asked Questions:-
 Where do I need to go to trade in commodity futures?
You have three options - the National Commodity and Derivative

Exchange, the Multi Commodity Exchange of India Ltd and the National
Multi Commodity Exchange of India Ltd. All three have electronic
trading and settlement systems and a national presence.
 How do I choose my broker?
Several already-established equity brokers have sought membership with

NCDEX and MCX. For example, Bonanza commodities Ltd., ICICI
Securities, Sherkhan etc. Some of them also offer trading through
Internet just like the way they offer equities. You can also get a list of
more members from the respective exchanges and decide upon the broker
you want to choose from.
 What is the minimum investment needed?
You can have an amount as low as Rs 5,000. All you need is money for
margins payable upfront to exchanges through brokers. The margins
range from 5-10 per cent of the value of the commodity contract. For
trading in bullion, that is, gold and silver, the minimum amount required
is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00
for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one
kg). The prices and trading lots in agricultural commodities vary from
exchange to exchange (in kg, quintals or tonnes), but again the minimum
funds required to begin will be approximately Rs 5,000.
 Do I have to give delivery or settle in cash?
You can do both. All the exchanges have both systems - cash and
delivery mechanisms. The choice is yours. If you want your contract to be
Page | 79
cash settled, you have to indicate at the time of placing the order that you
don't intend to deliver the item. If you plan to take or make delivery, you
eed to have the required warehouse receipts. The option to settle in cash
or through delivery can be changed as many times as one wants till the
last day of the expiry of the contract.
 What do I need to start trading in commodity futures?
As of now you will need only one bank account. You will need a separate
commodity de-mat account from the National Securities Depository Ltd
to trade on the NCDEX just like in stocks.
 What are the other requirements at broker level?
You will have to enter into a normal account agreements with the broker.
These include the procedure of the Know Your Client format that exist in
equity trading and terms of conditions of the exchanges and broker.
Besides you will need to give you details such as PAN no., bank account
no, etc.
 What are the brokerage and transaction charges?
The brokerage charges range from 0.10-0.25 per cent of the contract
value. Transaction charges range between Rs 6 and Rs 10 per lakh/per
contract. The brokerage will be different for different commodities. It will
also differ based on trading transactions and delivery transactions. In case
of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent
of the contract value. The brokerage cannot exceed the maximum limit
specified by the exchanges.
 Where do I look for information on commodities?
Daily financial newspapers carry spot prices and relevant news and
articles on most commodities. Besides, there are specialized magazines
on agricultural commodities and metals available for subscription.
Brokers also provide research and analysis support. But the information
easiest to access is from websites. Though many websites are
subscription-based, a few also offer information for free. You can surf the
web and narrow down you search.
Page | 80
 In which commodities can I trade?
Though the government has essentially made almost all commodities

eligible for futures trading, the nationwide exchanges have earmarked
only a select few for starters. While the NMCE has most major
agricultural commodities and metals under its fold, the NCDEX, has a
large number of agriculture, metal and energy commodities. MCX also
offers many commodities for futures trading.
 Do I have to pay sales tax on all trades? Is registration mandatory?
No. If the trade is squared off no sales tax is applicable. The sales tax is
applicable only in case of trade resulting into delivery. Normally it is the
seller's responsibility to collect and pay sales tax. The sales tax is
applicable at the place of delivery. Those who are willing to opt for
physical delivery need to have sales tax registration number.
 What happens if there is any default?
Both the exchanges, NCDEX and MCX, maintain settlement guarantee

funds. The exchanges have a penalty clause in case of any default by any
member. There is also a separate arbitration panel of exchanges.
 Are any additional margin/brokerage/charges imposed in case I want

to take delivery of goods?
Yes. In case of delivery, the margin during the delivery period increases
to 20-25 per cent of the contract value. The member/ broker will levy
extra charges in case of trades resulting in delivery.
 Is stamp duty levied in commodity contracts? What are the stamp

duty rates?
As of now, there is no stamp duty applicable for commodity futures that

have contract notes generated in electronic form. However, in case of
delivery, the stamp duty will be applicable according to the prescribed
laws of the state the investor trades in. This is applicable in similar
fashion as in stock market.
Page | 81
 How much margin is applicable in the commodities market?
As in stocks, in commodities also the margin is calculated by (value at

risk) VaR system. Normally it is between 5 per cent and 10 per cent of
the contract value. The margin is different for each commodity. Just like
in equities, in commodities also there is a system of initial margin and
mark-to-market margin. The margin keeps changing depending on the
change in price and volatility.
 Are there circuit filters?

Yes the exchanges have circuit filters in place. The filters vary from
commodity to commodity but the maximum individual commodity circuit
filter is 6 per cent. The price of any commodity that fluctuates either way
beyond its limit will immediately call for circuit breaker.
Page | 82
Bibliography
Page | 83
Websites:
 www. mcx. com
 www. ncdex. com
 www. fmc. gov. in
 www. commodityonline.com
 www. bonanzaonline.com
 www. sebi. gov. in
 www.fcamin. nic. in
Articles & Journals:
 Commodity insight yearbook – 2010.

 Commodity Derivatives Market in India: Development, Regulation and
Future prospects, International Research Journal of Finance and
Economics - Issue 2 (2006), Narendra L. Aahuja, Institute of Integrated
learning in Management, New Delhi.
 Annual Report: 2009 – 10, Forward Market Commission & Ministry of
Consumer affairs and Public distribution, Govt. of India.
 Global Commodity Markets: Review & Price forecast, The World Bank.
 The Mechanics of Commodity Future markets: What they are & How they
function, Robert L. Lerner.
Page | 84

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“Study of Commodity Derivatives Market”

Under the Guidance of

Seva Sadan College of Arts, Science and Commerce

(Prof. Guide Name)

Particulars Page no.

Chapter : 1 Introduction & Industry Analysis

Chapter : 2 Company Overview

Chapter : 4 Observation & Analysis 44 – 56

Chapter : 5 Findings & Recommendations 57 – 61

Chapter : 7 Learning outcome 65

Investing is both Arts as well as Science. It is an Art because every individual

Commodities actually offer immense potential to become a separate asset class

As far as the size of commodity market of India is concerned, of the country's

1.3.1 Market structure:

 Electricity as well as renewable forms of energies like solar and

 Weather: weather is obviously not a tradable asset but we include

Futures contracts are an improved variant of forward contracts. They are

(a) Trading in futures is necessarily organized under the auspices of a

Hedging in the Future Commodity Market:

Speculations and its functions in Commodity market:

The primary function of the commodity trader, or speculator, is to assume the

1.3.3 Markets Rational:

Backwardation and contango

1.3.4 Commodity Trading & its Mechanism:

Order and Execution flow in electronic future trade

1.3.5 Regulatory issues in Commodity market:

 Third, many institutions (particularly financial institutions but also, in a

 Finally, the role of government entities directly involved in commodity

 And finally with the changing environment of industry, it is quite

 Mandated capital adequacy: The regulators should seek to

- pass a character assessment—e.g., no conviction of fraud.

 Customer agreements: Before an exchange member can

1.3.6 Commodity market: Indian Scenario

National Regional Exchanges

 Multi Commodity Exchange {MCX}:

Volume {In lakh tonnes} Value {in Rs lakh}

 National Commodity & Derivative Exchange Ltd. {NCDEX}:

Volume {In lakh tonnes} Value {In Rs. Crore}

 National Multi Commodity Exchange {NMCE}.

Volume {In lakh tonnes} Value {In Rs. Crore}

Volume {In lakh tonnes} Value {In Rs crores}

Problems of Indian Commodity Market:

 Tax and legal bottlenecks: There are at present restrictions on the

Commodity prices {nominal, 2000 = 100}

Global Commodity Exchanges:

Chicago Board of Trade:

Dalian Commodity Exchange:

Bursa Malaysia Derivatives exchange:

2.2 Mission & Vision:

 To generate client’s wealth through professional advice, backed by

Commodity Brokers Insurance Brokers

Stock Broking & Retail Wealth Management Venture Capital

 Depository participant with CDSL and NSDL.

2.4 Global & Indian Operations and Market share:

Name of the state City

NSE & BSE

MCX & NCDEX

2.5 Product & Services:

Equity Derivatives Commodity Currency

Insurance Funds Fixed Deposits IPO

Life Non-Life Mutual Venture