Agri Price Risk Management 701 v1

Agri Price Risk Management
Sub Code - 701
Developed by
Prof. Ajay Prabhu
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

Printed and Published on behalf of Prin. L.N. Welingkar Institute of Management Development & Research, L.N. Road, Matunga (CR), Mumbai - 400 019.
ALL RIGHTS RESERVED. No part of this work covered by the copyright here on may be reproduced or used in any form or by any means – graphic,
electronic or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems – without the written
permission of the publisher.
NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.
1st Edition, January 2020

CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Agri Commodities at a glance 4-24

2 Importance of Pricing of Agri Commodities 25-52
3 Challenges in Pricing of Agri Commodities 53-81
4 Agri Commodities Markets 82-115
5 Indian Agri Commodity Exchanges 116-166
6 Global Agri Commodity Exchanges 167-188
7 Different types of Agri Commodities Derivatives 189-218
8 Basics of Options contract and Option Pricing 219-249
9 Agri Price Risk Management Strategies 250-286
10 Hedging as a tool for Agri Price Risk Management 287-308
3
AGRICULTURE COMMODITIES AT A GLANCE
Chapter 1
Agriculture Commodities At A Glance
Source :https://pixabay.com
Objectives: This chapter will help you understand the various types of
agriculture commodities that are grown and traded in India.
Structure:
1.1 Introduction on Indian Agriculture
1.2 What is an Agriculture Commodities?
1.3 Agriculture Commodities on eNAM
1.4 Agriculture Commodities on NCDEX
1.5 Agriculture Commodities on MCX
1.6 Agriculture Commodities on ICEX
1.7 Activities for students
1.8 Self-assessment questions
1.9 Multiple Choice questions
1.10 References
4
1.1 INTRODUCTION ON INDIAN AGRICULTURE
Agriculture, with its allied sectors plays a vital role in Indian economy and
is the largest livelihood provider in India. India agriculture sector employs
over 50% of the Indian work force and contributes over 17% to country's
GDP.
India's agriculture is composed of many crops due to high proportion of

agriculture land, diverse agro-climatic conditions and different cropping
systems. The growth in gross area under all crops has increased.
Agriculture sector has shown tremendous transformation on yield per
hectare of all crops due to modern agricultural technique, adoption of
hybrid seeds, extension of irrigation facilities, application of intensive
method of cultivation, increase in storage facilities. Agriculture credit has
also shown consistent uptrend year after year. The increase in agricultural
production has an important impact on the economic development.
Demand for agricultural inputs and allied services like warehousing and
marketing of agri-produce is also increasing. Agriculture credit to farmers
at concessional rates is strengthening and developing both input and
output markets in agriculture. Newer technologies are emerging at a faster
pace to alert the farmers in advance against weather and climate risks.
Research and Development efforts are focused on demand driven
innovations which can be useful for aggressive commercialization of
agriculture.
Government of India is aiming to increase the capacity of food processing

sector, reform agriculture land policy, promote research for developing new
varieties, ensure effective utilization of farm resource and raise
productivity, promote organic farming to reduce the burden of chemical
fertilizers, increase the minimum support price and other relief measures,
protect farmers from losses with innovative crop insurance schemes,
reform existing market structure to provide remunerative prices for famers,
double farmers income by 2022 and has also encouraged startups to
develop abilities and to connect with potential investors in agriculture
sector.
5
Recently the Government has increased the Minimum Support Price(MSP)

for kharif crops of 2018-19 season. The main objective of the MSP is to
incentivize the farmers and encourage them to increase the food grains
production in the country. Such initiatives not only give sufficient
remuneration to the farmers but it also protects them against excessive fall
in price during bumper production years. Government in creates food
grains buffer stocks and supports welfare programme thus ensuring
adequate and affordable food grains to all the people. The minimum
support prices covers over 20 crops such as cereals (paddy, wheat, barley,
jowar, bajra, maize and ragi); pulses (gram, arhar/tur, moong, urad and
lentil); oilseeds (groundnut, rapeseed/mustard, toria, soyabean, sunflower
seed, sesamum, safflower seed and nigerseed); copra, raw cotton, raw jute
and virginia flu cured (VFC) tobacco. Procurement of agricultural crops is
also made by the FCI, state agencies and cooperatives.
The Government of India’s National Agriculture Policy has been described

as a Rainbow Revolution as it includes various colour revolutions such as
Green(food grain),White (Milk), Yellow(oil seeds), Red (tomato), Golden
(Fruits), Grey (fertilizer), Black (Nonconventional energy sources) etc.
The Indian food industry is successful in increasing its contribution

to the world food trade with the increase in exports of India’s agri-
products. India is a major player in the world commodity market in jute,
tea, coffee, cashew, fruits, vegetables, rice, wheat, sugarcane, ground
nuts, cotton and spices. Indian agricultural and processed foods are
exported to more than 100 countries. Indian food processing industry is
also attracting increasing numbers of Foreign Direct Investment equity
inflow in marketing of food products and in food product e-commerce.
Agricultural products and commodities is going to play a major role in
India’s international trade in the decades ahead.
6
1.2 WHAT IS AN AGRICULTURE COMMODITY?
India’s agricultural production comprises of food crops such as rice, wheat,

pulses, coarse cereals etc and commercial crops or non-food crops such as
raw cotton, tea, coffee, raw jute, sugarcane, oil seeds etc. Crops are
grown in two cropping seasons (a) kharif (July to October) and (b) rabi
(October to March). Summer crops are grown during March and June. The
kharif crops include rice, maize, bajra, ragi, soyabeen, groundnut, cotton
etc. The rabi crops include wheat, barley, oats, linseed, mustard etc.
The structure of agriculture market was of unorganized nature. A

larger part of India’s cultivated farmland is held by small and marginal
farmers. Since their holdings is less than two hectares of land, they don’t
get the benefit of economies of scale and access to a wider market to
negotiate a good price for their agriculture produce.
Farmers follow various methods of buying and selling agriculture

produce. The traditional methods include under cover of cloth where in
the prices of produce are settled by buyer and seller by pressing/twisting
the fingers of each other or through mutual agreements.
Later the markets were regulated by implementation of the open

auction method in which buyers examine the agriculture produce near the
heaps gathered by the seller and then bid for the required agriculture
produce. Commission agents acted as middlemen by taking the sample
of the agriculture produce to the shops of the buyer and settles for a bid
that is communicated to the seller. The seller sells his agriculture produce
to the highest bidder.
The modern methods of selling agriculture produce includes selling the

agriculture produce at a mandi (farmers market) hosted by the Agriculture
Produce Market Committee (APMCs). Farmers market eliminates all middle
man and culminates into direct marketing. It provides better price
realization to the farmers and good quality of agriculture produce to the
buyers. The Electronic National Agriculture Market (eNAM) has successfully
created a unified national market for agricultural commodities by
networking with existing APMC.
7
The latest in the line is trading of agriculture commodities through wide

range of agriculture commodities exchanges by executing the derivatives
contracts such as futures and options where sellers and buyers save
themselves from price fluctuations and managing risks. Such derivatives
contracts are entered right at the time of sowing based on the then
prevailing prices and clearly specify the quantity, quality and price of the
agriculture produce that would be delivered for sale or acquired. at a pre-
decided date in the future.
The trading in agriculture commodities is done through the national

level commodity exchanges namely, the National Commodities and
Derivatives Exchange of India (NCDEX), Multi Commodity Exchange (MCX)
and the Indian Commodity Exchange(ICEX). The commodity exchanges has
facilitated a competitive price discovery of agriculture commodities by
providing accurate information to all market players, reduced the
middlemen and increased transparency in trading. The commodity
exchanges provides a platform for both demand(buyers) and
supply(sellers) factors to determine the prices for a particular commodity.
Famers/stakeholders can not only get the best price for their agriculture
produce but can also avail risk hedging platforms to manage their risks.
Farmers can now decide as to which crop to grow to reap better prices by
studying the markets and the crop potential in their region.
Securities and Exchange Board of India (SEBI) now regulates the

commodities derivatives market after merging the Forward Markets
Commission (FMC), the then chief regulator of commodity futures markets
in India into it. In order to participate in the agriculture produce futures
market, agriculture produce had to be defined as agriculture commodities
in terms of the Forward Contract (Regulation) Act,1952. The Government
has repealed the Forward Contracts Regulation Act (FCRA) 1952 and have
made Securities and Exchange Board of India (SEBI) as a sole regulator of
commodity derivatives market under Securities Contracts Regulation Act
(SCRA) 1956. SEBI has recently allowed for the option trading in
Commodity Future market.
8
1.3 AGRICULTURE COMMODITIES ON eNAM
The Electronic National Agriculture Market (eNAM) has successfully created

a unified national market for agricultural commodities by networking with
existing Agriculture Produce Market Committee(APMC).
Over 20 major wholesale agri markets have been integrated electronically.

These network of regulated markets promote organized marketing of
agriculture commodities, minimize price differentials, enable better price
discovery and curb malpractices.
The following agriculture commodities are traded on eNAM:
1. Food grains / Cereals

2. Oil seeds
3. Vegetables
4. Fruits
5. Spices
6. Miscellaneous
1. Food grains / Cereals
1. Arhar
2. Arhar Dal Split
3. Bajra
4. Barley
5. Basmati rice
6. Buck Wheat
7. Chana Dal Split
8. Chana whole
9. Horse Gram
10.Jowar
11.Kabuli Chana Whole
12.Lobia
13.Maize
14.Masoor whole
15.Moong Dal Split
16.Moong whole
17.Moth
18.Oats Raw
9
19.Paddy
20.Ragi
21.Rajma
22.Urad Dal Split
23.Urad whole
24.Wheat
25.White Peas
2. Oil seeds
1. Castor seed
2. Cotton Seed
3. Kusum seed
4. Linseed
5. Mustard seed
6. Neem Seeds
7. Nigar Seed
8. Peanut kernel
9. Pongam seeds
10.Sal Seed
11.Sesame seed
12.Soyabean
13.Sunflower seed
3. Vegetables
1. Banana Raw
2. Beetroot
3. Bhindi/Okra
4. Bitter gourd
5. Bottle gourd
6. Brinjal
7. Cabbage
8. Capsicum
9. Carrots
10.Cauliflower
11.Cluster beans
12.Colocasia vegetable
13.Coriander leaves
14.Cucumber
10
15.Drumstick
16.Fenugreek Leaves
17.Garlic
18.Ginger
19.Green chillies
20.Ivy gourd
21.Jimikand (Suran)
22.Lobia Pods
23.Mustard leaf
24.Onion
25.Pea
26.Pointed gourd
27.Potato
28.Pumpkin
29.Reddish
30.Ribbed celery
31.Ridge Gourd
32.Safed Petha
33.Sem
34.Snake Guard
35.Spinach
36.Sweet Corn
37.Sweet potato
38.Tapioca
39.Tinda
40.Tomato
4. Fruits
1. Amla
2. Apple
3. Apricot
4. Banana
5. Ber
6. Cherry Red / Black
7. Custard apple
8. Grapes
9. Guava
10. Jackfruit
11. Jamun
11
12. Kinnow
13. Lemon
14. Litchi
15. Mango
16. Musk melon
17. Orange
18. Papaya
19. Papaya Raw
20. Peach
21. Pear
22. Pineapple
23. Plum
24. Pomegranate
25. Raw Mango
26. Sapota
27. Stawberries
28. Sweet orange
29. Watermelon
5.Spices
1. Ajwain
2. Black Pepper Whole
3. Cardamoms Whole
4. Cloves Whole
5. Coriander whole
6. Cumin
7. Dried Raw Mango Slices
8. Dry Ginger
9. Fennel seed
10. Fenugreek seed
11. Large cardamom
12. Red chilli
13. Tejpata
14. Turmeric
12
6. Miscellaneous
1. Areca nut (betel nut)

2. Bamboo
3. Betel leaves
4. Carnation
5. Chhappan Kaddu
6. Coconut
7. Coconut with Husk
8. Cotton
9. Gladiolus
10. Groundnut with pods
11. Guar seed
12. Isabgol
13. Jaggery
14. Jute Seeds
15. Mahua flower
16. Mahua Seed
17. Marigold
18. Nutmeg Whole
19. Persimmon
20. Raisins
21. Raw Cashew nut
22. Raw Jute
23. Rittha
24. Rose Cut Flower
25. Saffron
26. Tamarind
27. Tender coconut
28. Tuberose
29. Walnuts Inshell
13
Source :https://enam.gov.in/web/commodity/commodity-list
1.4 AGRICULTURE COMMODITIES ON NCDEX
Commodities exchanges are trying to improve trading in agriculture

commodities by inclusion of more commodities on commodities exchanges.
National Commodity & Derivatives Exchange Limited (NCDEX) is a

nation level multi commodity exchange and serves as an important connect
between the farmers and the process of optimum price realization on
agriculture produce. It also helps the farmers with better know how on
agriculture price risk management and for creating a better ecosystem for
agri stake holders. NCDEX also conducts awareness amongst the
agriculture producing companies to reap the benefits of the Futures
market. NCDEX latest developed Agriculture commodity option product
provides a great level of comfort in dealing with price of the crops much
before the crop is harvested. NCDEX has designed a value weighted index
“NKrishi” which is computed in real time using the prices of the 10 most
liquid commodity futures traded on the NCDEX platform.
14
NCDEX deals with the following agriculture commodities:
Cereals and Pulses

Barley
Chana
Maize Kharif/ South
Maize Rabi
Wheat
Moong
Paddy (Basmati)
Fibres
Kapas
29 mm Cotton
Guar Complex
Guar Seed 10 MT
Guar Gum
Oil and Oil seeds

Castor Seed
Cotton seed oilcake
Soy Bean
Refined soy oil
Mustard Seed
Crude Palm Oil
Soft
Sugar M
Spices
Pepper
Turmeric
Jeera
Coriander
15
Source :https://www.ncdex.com
1.5 AGRICULTURE COMMODITIES ON MCX
Multi Commodity Exchange of India Limited (MCX) is also a nation

level multi commodity exchange facilitating trading in commodity
derivatives across agricultural commodities and non-agricultural
commodities segments. It also provides an effective mechanism for price
risk management.
The Exchange provides neutral, secure and transparent trade mechanisms.

The Exchange has developed its flagship index series “ iCOMDEX” provides
a series of real-time commodity futures price indices.
MCX deals with the following agriculture commodities:

Black Pepper
Cardamom
Castor Seed
Cotton
Crude Palm Oil
Mentha Oil
RBD Palmolein
Rubber
16
Source :https://www.mcxindia.com
17
1.6 AGRICULTURE COMMODITIES ON ICEX
Indian Commodity Exchange (ICEX) is the third largest commodities

exchange in India. It merged with the National Multi-Commodity Exchange
(NMCE) in 2018.
The exchange provides nationwide trading platform for agricultural

commodities and non-agricultural commodities and aims to provide futures
trading products in India’s all economically relevant commodity. The
exchange encourages participation of actual users to benefit from the
opportunities of hedging, risk management and supply chain management
in the commodities markets.
ICEX deals with the following agriculture commodities:
Spices
Cardamom
Pepper
Cereals
Basmati Paddy 1121
Oils and Seeds

Castor Seed
Guar Seed
Isabgul Seed
Rapeseed
Mustard seed
Refined Soy Oil
Fiber
Rubber
Raw Jute
Sacking
Plantations
Copra
Other
18
Source :https://www.icexindia.com
1.7 ACTIVITIES FOR STUDENTS
1. Based on the list of agriculture commodities provided in this chapter

prepare a commodity profile for each of these commodities.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
2. Based on the various parameters related with growth of Agriculture

commodities, prepare a statistics table on Indian Agriculture and
Agriculture commodities.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
19
1.8 SELF-ASSESSMENT QUESTIONS

1. Write a short note on Indian Agriculture
2. What is an Agriculture Commodity?
3. List out various Agriculture Commodities traded on eNAM
4. List out various Agriculture Commodities traded on NCDEX
5. List out various Agriculture Commodities traded on MCX
6. List out various Agriculture Commodities traded on ICEX
1.9 MULTIPLE CHOICE QUESTIONS
1. India's agriculture is composed of many crops due to high proportion of

agriculture land, diverse agro-climatic conditions and different cropping
systems. State whether the above statement is true or false.
a) True
b) False
2. The Indian food industry is successful in increasing its contribution to

the world food trade with the increase in exports of India’s agri-
products. India is a major player in which of the following commodities?
a) Jute & Cotton
b) Tea and coffee
c) Sugarcane and spices
d) All of the options
3. Commodities exchanges are trying to improve trading in agriculture

commodities by inclusion of more commodities on commodities
exchanges. Which of the following is not a agriculture commodity
exchange in India?
a) MCX
b) NCDEX
c) OTCEI
d) ICEX
20
4. National Agriculture Market (eNAM) is a pan-India electronic trading

portal which networks the existing APMC mandis to create a unified
national market for agricultural commodities. Which of the following
commodities are not traded on eNAM?
a) Vegetables
b) Spices
c) Metals
d) Cereals
5. Multi Commodity Exchange of India Limited (MCX) has developed which

of the following flagship index series which provides a series of real-time
commodity futures price indices?
a) iCOMDEX
b) mKRISHI
c) mAgriwatch
d) QuickCom
6. Agriculture commodities are traded on commodities exchanges. These

commodities exchange stimulates which of the following activities in
favour of the farmers, who produce the agriculture commodities?
a) Price speculation
b) Price discovery
c) Restriction on monopoly
d) Encourages oligopoly
Answers
1.(a), 2.(d), 3.(c), 4.(c), 5.(a), 6.(b)
21
1.10 REFERENCES
1. Indian Commodity Year Book 2019 by National Collateral Management
Services Limited
2. Guide to Indian Commodity Market by Jitendra Gala and Ankit Gala
3. Indian Agriculture and Agri-Business Management by Dr. Smita Diwase
4. Agriculture Current Affairs by New Vishal Publications
5. Pratiyogita Darpan General Studies Indian Economy
6. Indian Agriculture Yesterday, Today & Tomorrow by Dr. R.B. Thakare
7. India 2019 a reference annual by Ministry of Information and

Broadcasting, Government of India
22
https://www.ibef.org
https://enam.gov.in
https://www.ncdex.com
https://www.mcxindia.com
https://www.icexindia.com
https://commodity.com
http://www.agmarknet.gov.in
http://www.agriwatch.com
https://en.wikipedia.org
23
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2
24
IMPORTANCE OF PRICING OF AGRI COMMODITIES
Chapter 2
Importance Of Pricing Of Agri Commodities
Source: https://pixabay.com
Objectives: This chapter will help you understand the various concepts of
agriculture commodities pricing and valuation.
Structure:
2.1 Introduction on Pricing and Valuation of Agri Commodities
2.2 Agriculture production in India
2.3 Pricing of agriculture commodities
2.4 Factors influencing pricing of agriculture commodities
2.5 Pricing of agriculture commodity with a Spot, Forward and Future
2.9 References
25
2.1 INTRODUCTION ON PRICING OF AGRI COMMODITIES
Warren Buffet says “Price is what you pay; Value is what you get”
Lord Krishna in Bhagavad Gita says "Even a leaf, flower, or a fruit

offered with love and devotion shall be accepted with great appreciation as
it will have great value."
Both the above statements are important for understanding the pricing and
valuation of Agri Commodities. Infact if we have to understand the
relationship between pricing and valuation of agri commodities, we will
have to understand the various factors on which the pricing and valuation
is dependent on. Obviously these factors are input output management of
agri seeds and accessories as well as a good harvest management. Since
the agri crops are to be cultivated and nurtured, a good price also depends
on producing excellent crops. A farmer may not get the best price unless
he has a good partnering with marketing channels/agencies/organizations
who are actually going to sell the farm produce. Pricing can also improve
with appropriate grading, transportation and storing facilities. There can be
always a price war, risk of not getting the best buyer, but here again the
farmer can produce what he wants keeping the end use and value in mind,
based on the Government intervention schemes, minimum price support
programs and subsidy incentives.
Inspite of all the above natural factors a farmer is also expected to know
core pricing skills and strategies, the economics of the market at various
stages of the product life cycle of an agri commodity. A well informed
farmer is also expected to embrace the ubiquitous and seamless power of
Information and Communication Technology, the various farmer friendly
support services for analyzing the soil , weather forecasts, seeds etc if he
needs to get the best value out of his farm produce. Commoditization of
products and pressure on price margins have forced the modern farmer to
find new ways of hedging the price risks through derivatives. New buyers
have entered the markets and new formats of agri commerce such as B2B,
B2C, B2B2C, B2G etc have emerged.
A modern farmer has indeed understood very well that pricing is a

rewarding business lever while value is based on excellence in out put.
26
2.2 AGRICULTURE PRODUCTION IN INDIA
Agriculture and allied sector has been a very dynamic factor of Indian
economy as it engages more than 50% of the workforce and contributes
about 17% to the country’s Gross Value Added (GVA). Food grain
production has increased from 50.82 million tonnes in 1951-52 to 284.95
million tonnes in 2018-19. The food grains target for both Kharif and Rabi
crops for 2019-20 is 291.10 million tonnes. Since independence India’s
food grain production has increased by 5.6 times due to increase in
irrigation land.
The first advance estimates of area and production of kharif crops are
prepared in September every year, when south-west monsoon season is
about to be over and kharif crops are at an advanced stage of maturity.
The assessment is made by the State Governments based on the reports
from the field offices of the State Department of Agriculture. The second
advance estimates are made in the month of January every year. The third
advance estimates are prepared towards the end of March/beginning of
April every year. The fourth advance estimates are prepared in the month
of June/July every year. The fourth advance estimates are followed by final
estimates in December / January of the following agricultural year. The
estimates are taken at different periods due to the large variations in
climatic conditions, crop seasons, soil structure, crop cutting patterns and
yield estimates across the country.
Area, Production, Yield of some major states during 2017-18:
Area Production
% to All Yield
State million Million
India Kg/ Hectare
hectares tonnes
Uttar Pradesh 19.83 51.25 17.99 2585
Madhya 17.04 33.45 11.74 1963
Pradesh
Rajasthan 14.24 19.60 6.88 1377
Maharashtra 10.90 13.73 4.82 1259
Punjab 6.73 31.71 11.13 4715
West Bengal 5.94 16.88 5.93 2839
27
Three largest producing States of major crops during 2017-18:
Total Food Grains: 1. Uttar Pradesh 2. Madhya Pradesh 3. Punjab
Rice: 1. West Bengal 2. Punjab 3. Uttar Pradesh
Wheat : 1. Uttar Pradesh 2. Punjab 3. Madhya Pradesh
Maize: 1. Karnataka 2. Maharashtra 3. Madhya Pradesh
Oilseeds: Soyabean : 1. Madhya Pradesh 2. Maharashtra Rajasthan
Sugarcane: 1. Uttar Pradesh 2. Maharashtra 3.Karnataka
Cotton: 1. Gujarat 2. Maharashtra 3.Telangana
India contributes handsomely to the world food production

interalia pulses, paddy, wheat, maize, sugarcane, groundnuts etc.
India's Imports and Exports of Principal Agricultural Commodities:

Value in Rupees Crores
Year Agri Total % of Agricultu Total % of

Imports National Agri ral National Agri
imports Imports Exports Exports exports
to to
National National
imports exports
1990-91 1205.86 43170.82 2.79 6012.76 32527.28 18.49
2000-01 12086.23 228306.64 5.29 28657.37 201356.45 14.23
2017-18 152095.20 3001033.43 5.07 251563.94 1956514.53 12.86
The First Advance Estimates of production of major Kharif crops for

2019-20 have been released by the Department of Agriculture,
Cooperation and Farmers Welfare. As per First Advance Estimates, the
estimated production of major crops during Kharif 2019-20 is as under:
28
Foodgrains – 140.57 million tonnes.
Rice – 100.35 million tonnes.
Nutri / Coarse Cereals– 32.00 million tonnes.
Maize – 19.89 million tonnes.
Pulses– 8.23 million tonnes.
Tur – 3.54 million tonnes.
Oilseeds – 22.39 million tonnes.
Soyabean – 13.50 million tonnes
Groundnut – 6.31 million tonnes
Cotton – 32.27 million bales (of 170 kg each)
Jute & Mesta - 9.96 million bales (of 180 kg each)
Sugarcane – 377.77 million tonnes
The production of most of the crops for the agricultural year 2019-20 has
been estimated higher than their normal production. As per First Advance
Estimates for 2019-20 (Kharif Only), total food grain production in the
country which is estimated at 140.57million tonnes is higher by 8.44
million tonnes than the average food grain production of previous five
years’ (2013-14 to 2017-18).
Per Capita Net Availability of Foodgrains (Per Day) in India
Year Food grains grams per day

1951 394.90
2001 416.20
2018 494.10
29
Cost Estimates of Principal Crops
Paddy Rs.30000 to 50000 per hectare

Wheat Rs.20000 to 40000 per hectare
Maize Rs.20000 to 60000 per hectare
Jowar Rs.15000 to 25000 per hectare
Sesamum Rs.12000 to 25000 per hectare
Sugarcane Rs.50000 to 150000 per hectare
Wholesale Price Index of Foodgrains (Base: 2011-12=100)
Commodity Weight 2012-13 2017-18

All 100.00 106.9 114.9
Foodgrains 3.46 115.1 142.6
(Cereals+Pulses)
Food Articles 15.26 110.9 143.2
Consumer Price Index (Combined) of Food and Beverages

(Base:2012=100)
Group/ Sub-Group Weight 2012- 13 2017-18

Food and Beverages 45.86 103.3 138.1
Cereals & Products 9.67 103.8 134.7
Vegetables 6.04 105.7 149.3
Fruits 2.89 103.0 141.9
Pulses and products 2.38 102.9 132.1
Consumer Food PriceIndex 39.06 103.4 137.1
30
Minimum Support Prices of few Agricultural Commodities

(According to Crop Year) Rs/quintal(As on 26.11.2018)
Commodity Variety 2014-15 2018-19

Paddy Common 1360 1750
Jowar Maldand 1550 2450
Cotton Long Staple 4050 5450
Copra (Calendar Year) Milling 5250 7511
Recently the Cabinet Committee on Economic Affairs (CCEA) has

approved an increase in the minimum support prices (MSP) for all
mandated rabi crops of 2019-20. The increase in MSP of crops for rabi
marketing season 2020-21 is based on the principle of fixing the MSPs at
least 1.5 times the all India weighted average cost of production (CoP).
Farmers are likely to get a return over all India weighted average cost of
production of 66 per cent for barley, 74 per cent for gram, 76 per cent for
lentil, 90 per cent for rapeseed and mustard and 50 per cent for safflower.
This MSP policy whereby the farmers are assured of a minimum of 50
percent as margin of profit is one of the important and progressive steps
towards doubling farmers' income by 2022 and improving their welfare
substantively.
Based on the above facts it can be easily established that not only the area
of cultivation has increased but the cost of production, wholesale price
index and the consumer price index has also increased. Government is also
putting in its efforts to support the farmers with various agriculture
incentives and minimum support prices. The modern farmer plans his
produce keeping in mind the cost of product as well as the value he
procures from the harvest. Well before initiating cultivation. The agriculture
sector is also growing due to better infrastructure driven by technology.
The yield has also improved due to usage of genetically modified crops.
31
2.3 PRICING OF AGRICULTURE COMMODITIES
The price of an agriculture commodity is determined on the basis of

cost of production, demand and supply of the commodity and
trends of market prices. Demand factors include the consumers
preferences and spending capacity. The supply side includes the farm
produce, government procurement and distribution as well as imports.
Agriculture commodity prices are also affected by the area under
cultivation, availability of irrigation and other infrastructure, climatic,
social, economical, political changes and specialization in producing certain
commodities. Higher efficiency at lower cost can generate surplus and
create opportunity for exports at competitive rates. Prices are also
influenced by competition, which decides how to produce and distribute at
what price. Market access also plays a key role in price determination and,
increase in production. Small and marginal famers were at times impacted
by price volatility as they had to sell their produce at a lower price inorder
to protect themselves against further downfall. In modern times they have
also learnt to avoid such losses by leveraging on commodity derivatives
markets and earn better returns at the harvest time.
Prices are also determined on the type of markets. For e.g monopoly
market can lead to lower output and higher prices and profits while a
oligopoly market comprising of few large firms will influence the price
through forcing output decisions. In a perfect competition farmers will try
to reduce cost, enhance values for competing with larger number of buyers
and sellers.
32
Basic objectives of pricing:
Pricing objectives can vary from the perspective of a farmer and

consumer. A farmer would like to not only recover his cost but also earn
good profits from his produce. A consumer would like to pay only that
much amount which is equivalent to the satisfaction provided to him in the
form of taste, nutrients etc.
In general the basic objectives of pricing can be as follows:

1. Recover the original cost of production
2. Make good profits
3. Compete with other farmers
4. Capture a larger market share
5. Generate regular cash flows to take care about the entire product life
cycle of a crop
6. Enhance quality of the produce by uses science and technology
7. Sustain a good image as providing value at a reasonable price
Farmers can nowadays get better prices for their produce through
transparent bidding at eNAM, with increased number of buyers from
different markets for greater negotiation power. eNAM also facilitates the
assaying process inorder to determine the price commensurate to the
quality of produce.
33
2.4 FACTORS INFLUENCING PRICING OF AGRICULTURE

COMMODITIES
Agriculture commodities pricing can be influenced by various factors such

as area under cultivation, climate, availability of skilled labour, automated
tools for agriculture, quality of seeds and the yield per hectare,
government interventions, investment in market infrastructure,
competition, consumer behavior, objectives of the farmer to earn profit,
usefulness, durability and grade of the agri commodity, bargaining power
of marketing agencies who take produce to the retail markets etc.
Consumers may have to pay different prices at different locations for the
same product due to the difference in the degree of impact on prices.
Specific factors will influence with specific type of agriculture

commodity
For e.g.
Factors influencing Rice
Rice is a staple food across the globe and most countries cultivate rice for
self consumption as well as for commercial purpose. The Basmati-Indian
rice also known as paddy is grown in precise climatic conditions, soil
fertility, irrigation water and temperature such as Indo-Gangetic plains.
• Weather
• Rainfall
• Soil quality
• Government policy on minimum support price
• Demand for exports
• Local consumption
• Trend of increase/decrease in price in a given period
34
Factors influencing Barley

Barley is a cereal grain grown in rabi season. It is used in soups and for
making bread. It is also used as a animal fodder and for preparation of
beer and beverages. It can survive every weather conditions and is suitable
for temperate areas(summer crop) and tropical areas(winter crop)
• Usage by health food industries
• Change in seasons
• Global production especially in the climate that suits barley
• Demand of the crop vis a vis other subsitutes
• Price received for other crops
Barley spot prices is on the rise as shown in the following graph.
Source: https://www.ncdex.com
Factors influencing Chana

Chickpea or chana is a pulse crop which is used as an edible seed and for
making flour. It is available in two flavors i.e Desi and Kabuli. It requires
relatively cooler climatic conditions, low level of rainfall and sandy, loam
soils. India is the largest producer of desi type chana in the world with
maximum production from Madhya Pradesh. Inspite of such large
production India has to import chana inorder to meet its consumption
requriements in the form of Chana Dal and Besan.
35
• Rainfall level
• Level of moisture in the soil
• Import price of chana into India
• Exchange rate
• Changes in production
Chana Future are effectively used for price risk management.
Factors influencing Maize

Maize is cereal grain grown in major states of India in both kharif and rabi
seasons. It requires moderate climate for growth. India ranks among the
top 10 maize growing countries in the world. It is mainly used as a feed
crop and even as a fuel.
• Excess or deficit rain fall can adversely affect the yields
• Weather is very important factor
• Cheaper price of substitutes
• Government policies on exports and imports
• Global prices
The maize prices hit a low in 2018 but since then it is on a uptrend.
Factors influencing Wheat
Wheat is a cereal grain Rabi crop grown to be consumed as a floor and for
making breads and other bakery products. It requires a cooler weather
(temperate climate)and a good level of moisture in the early plantation
period. The consumption of wheat in the world is a huge and the yield of
wheat in kilograms per hectare has also risen significantly to such rising
needs. Uttar Pradesh is the leading producer state in India and India is also
one of the largest producers of wheat in the world.
36
• Weather conditions and production

• Government policies on imports and exports
• Modern technology used in farming
• Prices of substitutes
• Crop size and yield per hectare
• Global demand and price
Wheat prices were decreasing since 2018 due to higher production

estimates. However the prices have recovered in 2019 and are on an
uptrend.
Source: https://www.ncdex.com
Factors influencing Cotton

Cotton is majorly grown in Gujarat followed by Maharashtra, Andhra
Pradesh, Madhya Pradesh and Karnataka. It has a 2 month sowing window,
around June-July and is a 4 month long crop. Its seeds are used to extract
oil and as cattle feed. Cotton is the ginned fibrous substance extracted
from the cotton plant for manufacturing of yarn and for exports. Its
demand is increasing due to heavy consumption worldwide.
37
• Monsoons
• Production
• Prices of Cotton worldwide
• Direct procurement by the government agencies and storage in
warehouses.
• Prices of Cotton seed and oil cake
Cotton spot market generally shows a firm trend in the month of April till
June and thereafter drops due to onset of sowing season. The demand
improves from September and continues till January due price swings and
export demands.
Factors influencing Soybean

Soybean (golden bean) oilseed is largest grown oilseeds in the world. It is
largely used as a soy meal and soy oil. Soybean products are also used in
processed foods. It is cultivated in climates with hot summers, in moist
alluvial soils with a good organic content.
• Weather
• Area under cultivation
• Pests and diseases
• Global soybean price
Prices tend to rise during October and November and follow the seasonal
down trend between June and July.
38
Factors influencing Sugarcane
Sugarcane produces sugar which is largely produced as well as consumed

in India. India is the second largest producer of sugar. Sugarcane crop
takes about 12 to 18 months to mature from its plantation from January to
March. It harvested from November to March. Sugar comes in Large
crystals, Medium crystals and Small crystals.
• acreage and yield
• sugarcane availability
• recovery percentage
• duration of crushing
• Fair and Remunerative Price fixed by Central Government
• State Advised Prices
• Government policy on import and export of sugar
• Value of by-products after sugarcane processing
Sugar prices drops during peak production months from January to March.
Government is using buffer stock and Minimum Selling Price policy to
control sugar prices.
Factors influencing Black pepper
Black pepper (Black Gold) is one of the most popular spices in the world
which is used for both its flavour and medicinal properties. Harvesting
starts from December and it arrives in the markets from February. Kerala
and Karnataka accounts for majority of the total Indian pepper production.
The major players in the value chain such as Planters. Traders, Importers,
Exporters, Processors, Wholesaler, Retailer, etc are exposed to price risk
due to domestic & international factors. Due to its heavy demand, India
imports Pepper from Vietnam, Sri Lanka and Indonesia.
• Soil Moisture and Rainfall
• Local and global demand
• Time of arrival of new crop in the market
39
• Climatic conditions
• Global price
• Sowing and Harvesting of all producing nations
Factors influencing Turmeric
Turmeric is a Kharif crop and grows in light black, black clayey loams and
red soils in irrigated and rainfed conditions with temperature ranging
between 20 to 30 degrees. It is used to flavour and to colour foodstuffs
and also in cosmetics and in medicines. It is sown in may end and is ready
for harvesting in 7-9 months. India is the largest turmeric producer in the
world. Andhra Pradesh is a leading producer followed by Tamil Nadu,
Karnataka and Orissa.
• Water logging or alkalinity
• Global trading price
• Carry forward stocks
• Sowing and Harvesting
• Domestic and Global demand
Turmeric prices have shown a declining trend from 2016 onwards due to
higher domestic production and higher supplies in markets.
40
Factors influencing Cardamom
Cardamom is an important constituent in many medicines grown as a

plantation at moderately high altitudes in the evergreen forests of the
Western Ghats. India is the second major producer of cardamom in the
world. Cardamom is widely used as spice, renowned for its flavour and
aroma and in traditional Indian sweets and in the making of tea. It is also
used in the treatment of teeth and gum infections, digestive disorders,
throat trouble, and skin problems. Cardamom Futures’, can improve
efficiencies and consolidate competitiveness through price risk
management.
• Freshness, colour, aroma,
• Size of the crop
• Domestic and Global production
• Year-ending stocks
• Seasonal variations
• Time of arrival of new crop
• Demand in India especially during festivals
Factors influencing Cumin(Jeera)

Cumin seed is used in add aroma and flavor in a variety of cuisines. It is is
sown from October on rich, well-drained sandy loam soil with day time
temperatures of around 30 degrees, takes over 100 days to reach maturity
and harvested in February. India is the largest producer of Jeera in the
world. Gujarat and Rajasthan are the major producers of cumin seed in
India.
• Domestic consumption
• Global production and price
41
Jeera is one of our highest traded Agriculture commodities. Its prices are
on the rise since April 2018 due to increase in exports and domestic
demand.
Factors influencing Coriander

Coriander requires good exposure to sunlight with medium to heavy loamy
soil, sound drainage and well distributed moisture. The sowing period is
from October and harvesting done in January. The crop duration is of 90
days. Its leaf and seed is used in food stuff for aroma and flavor and also
used in or its medicines.
• Domestic consumption
• Global production and price
The export demand has been increasing constantly both in terms of

quantity and value. The supply fluctuations can leads to high price
volatility. Speculators can take advantage of the fluctuations while
Arbitragers can make use of the Coriander futures to make riskless profits.
42
2.5 PRICING OF AGRICULTURE COMMODITY WITH A SPOT,

FORWARD AND FUTURE
Lets us first understand how does a farmer deal with his Agriculture
commodities.
Who sends Sends Agri

Agri Further sent Further sent
Agri Commodities
Commodity to to
Commodities to
Barley Farmer Mandi Industrial use Exports
Wholesaler/
Chana Farmer Mandi Retailer
Mill
Industrial use/
Manufacturers
Maize Farmer Mandi Exports
/Human
consumption
Food
Corporation of
Fair Price APL/BPL
Wheat Farmer India/
Shops families
Wholesalers/
Mill
Textile
Cotton: Fiber/ Wholesaler/
Farmer industry/ Retailer
Seed Mill
Manufacturer
Industrial use/
Soybean Farmer Manufacturers Human Exports
consumption
Sugarcane Farmer Sugar Mill Retailer Consumer
Before the APMC Act a farmer had to sell the produce at the nearest
available Mandi or were forced to sell only to the cartel. There agri
cartels have a strong information system on mismatch in demand/supply
and could thus transport to markets which can fetch high price and
generate huge profits.
43
The Agricultural Produce Market Committee (APMC) Act enabled

establishment of private agriculture markets and provision of direct
marketing licence to bulk buyers and contract farming ventures
and gave farmers more freedom to sell their produce. It defines each
State/Union Territory as a single unified market area. The main objective of
the APMC Act was to ensure that farmers get regulated markets close to
their farms, removal of malpractices and imperfections in agricultural
markets, creation of orderly and transparent marketing conditions and get
a good price for their produce and to protect farmers from getting
exploited by traders and middlemen. The State/UT Agricultural Produce
and Livestocks Marketing (promotion and facilitation) Act, 2017 allows
existing APMC mandis to enforce regulation only in their market yard which
would allow private sector players to set up mandis. The marketing of
agricultural produce had been fragmented and deprived farmer to sell his
produce to multiple buyers. Howver with the enactment of Agricultural
Produce Market Committee (APMC) Act, farmers have various options of
several marketing channels to sell agricultural produce. The Director of
agricultural marketing will be the sole authority to grant licence for
establishment of a new market yard within the state.
Most of the Indian States haves their own APMC Act, as agriculture is a
state subject. India has over 2,400 principal APMC-regulated markets and
4,500 sub-markets. The membership of each APMC comprises farmers in
that specified market area, and licensed commission agents and traders.
APMC markets are licensed to carry out transactions in all farm

commodities including purchase farm produce from farmers , except milk
and sugarcane. At APMC markets, farmers do not sell directly to consumers
but the produce is handled at multiple levels. From the APMC market,
vegetables and fruits travel to consumer through a multi-tier distribution
system. The produce is received by the commission agents at the APMC,
who auction it by negotiating the price with the buyers who are traders.
The final price is determined by the commission agent and farmers are
paid after the auction by the transaction agent. The transaction agent also
charges a service charge. The traders licensed by APMC take the auctioned
farm produce to APMC-regulated wholesale markets. Retail buyers and
hawkers buy the vegetables and fruits from the wholesale markets to sell it
to the consumer. Thus the consumer has to pay more than the price
negotiated by the commission agents as the farm produce passes through
different layers before it reaches the consumer. Over and above the whole
44
sale price the consumer has to pay the proportionate mandi fee,
commission of the agent/broker, transportation cost and taxes. In reality
farmers get a very less price which is based on the auction.
The farmers have to pay 10-20% of the value of their produce as market
fees, commission, and charges for loading, unloading, and weighing. The
APMC Act mandates provision of important facilities by APMC such as
auction halls, warehouses, weigh bridges, shops for retailers, police
station, post office, bore-wells, farmer amenity centres and a soil-testing
laboratory. It is not mandatory on farmers to bring their produce to APMC
markets only.
Agritech companies can bypass the APMCs by entering into an

agreement with a group of farmers to buy the produce at a
particular price. This arrangement is known as contract farming.
Such agreement may also include farmers producing a specific crop in
specific quantity with prescribed quality as per the mutual agreement
between the farmer and the agritech company. Farmers will be paid an
assured price for the crop which is agreed upon even before cultivation of
the crop. Farmers are thus saved from price volatility and market finding
and fluctuations. The agritech company encourages farmers to utilize both
primitive and advanced technologies. It also provides technical help in
order to enable the farmer to produce the desired output both in quantity
and quality. The agritech company also manages the supply chain which
further saves the transportation costs of the farmers and safeguards him
from any risk due to transportation. Governament plays an important role
in regulating and enforcing the terms between the farmer and the agritech
companies.
The Electronic National Agriculture Market (eNAM) has successfully

created a unified national market for agricultural commodities by
networking with existing Agriculture Produce Market
Committee(APMC).
45
The agri commodity exchanges such as NCDEX, MCX and ICEX came into
existence with an aim of providing farmers a neutral market place where
farmers could make a fair and transparent price discovery for their farm
produce. The exchange provide the platform for the farmers to disseminate
both the spot and futures price for various agri commodities. Since small
and marginal farmers are not able to participate in the large future
volumes transactions a new concept of Farmers Producers Organizations
(FPOs) has empowered small and marginal farmers to come together as a
group leverage the futures platform. FPOs can not only serve the small and
marginal farmers in an efficient and effective manner but can also them to
link seamlessly to local regional, national, and international markets
Farmers Producer Organizations (FPOs) are set up as Farmer Producer

Companies (FPCs) are setup to enable their members( mostly small and
marginal farmers) to access financial, technical, marketing, logistics
services, access to agricultural inputs and implements, crop grading facility
for higher farm productivity. The FPCs main function is to organize collect,
process, store and market their members’ produce in high-value markets
to obtain a best price at a much lesser cost than that which could have
been incurred by its members if they would have done it individually.
The FPO has to take membership of the agri commodity exchange in order
to perform the buy/ sell trade. This arrangement has strongly cemented a
fact that there is a future of farmers through the futures contracts in agri
commodities.
The agriculture ministry has been urging states to carry out changes in
their APMC acts to enable the private sector to set up wholesale markets,
facilitate single point of levy of mandi fee across state and provide licence
for allowing electronic trading
Farmers can also spread their fresh produce at the stalls put up by
farmers’ groups such as farm produce companies or farm produce
cooperatives or Farmers Producers Organizations (FPOs) and sell
produce directly to the consumers which is popularly known as
farmer-consumer markets. Due to direct selling to consumers the
farmers saves a lot, which other would have been paid to the APMC. Some
farmers even directly sell their farm produce directly to big cities such as
Mumbai by transporting it directly with a transport arrangement on
weekend. Consumers are delighted to buy the fresh from the farm produce
46
at a much lesser price than they would have to pay to the retailer or local
vendor.
A farmer has three main choices to get the best price for his agri
commodity.
1. Sell at Spot price : Sell at spot price means selling the farm produce at
the available price as soon as the harvest is done
2. Enter into a Forward/Futures Contract: A forward contract enables the

farmer to sell at a price today that the market is bidding for future
delivery. This method can be beneficial as the farmer can choose his
price and be certain of a chosen price even before the crop is produced.
Such contracts obligates the farmer to deliver the product and the buyer
to pay the agreed upon price. To hedge his risk the same farmer may
buy at a price today which is lower than the price he is going to sell at a
future date and can thus make profits without even delivery.
3. Store his crops and wait for the best price: In this method the farmer
may have to face the risk of shrink and spoilage in storing and even
have to bear the storage charges.
A lot more needs to be done to enable the farmers get better access to
market with right infrastructure/supply chain with competition and fair
trade. Farmers’ profitability can be enhanced by introducing more traders
and more choices to sell.
47
Activity 1: Visit your nearest APMC market and make a report on which
agri commodities are entering the APMC market and how are actually
reaching the consumers.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2: Study some more agri commodites other than those mentioned
in this chapter and note the factors affecting the pricing of these
commodities
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

1. Write a note on AMCs
2. Write a note on Agritech companies
3. Write a note on Farmers Produce Organizations
4. Write a note on India contribution of production of agri commodities to

the world
5. Which are the main choices to get the best price for his agri commodity?
48
1. Commoditization of products and pressure on price margins have forced

the modern farmer to find new ways of hedging the price risks through
derivatives
a) Bitcoins
b) Derivatives
c) Kisan Credit Card
d) Crop Insurance
2. The food grains target for both Kharif and Rabi crops for 2019-20 is
291.10 million tonnes. Since independence India’s food grain production
has increased by how many times due to increase in irrigation land.
a) 3.3
b) 4.5
c) 5.6
d) 6.7
3. As per First Advance Estimates for 2019-20 (Kharif Only), total

foodgrain production in the country which is estimated at
a) 110.23million tonnes
b) 121.46million tonnes
c) 135.86million tonnes
d) 140.57million tonnes
4. Cardamom is an important constituent in many medicines grown as a

plantation at moderately high altitudes in the evergreen forests of the
Western Ghats. Which of the following affect the pricing of cardamom?
a) Climatic conditions
b) Carry forward stocks
c) Sowing and Harvesting
5. Agritech companies can bypass the APMCs by entering into an

agreement with a group of farmers to buy the produce at a particular
price. This arrangement is known as
a) contract farming
b) cooperative farming
c) agritech farming
d) farmers welfare farming
49
Answers: 1. (b), 2.(c), 3.(d), 4.(d), 5.(a)
2.9 REFERENCES
1. Agricultural Statistics at a Glance 2018 by Government of India, Ministry

of Agriculture & Farmers Welfare, Department of Agriculture,
Cooperation & Farmers Welfare, Directorate of Economics and Statistics

Services Limited

50
https://www.ibef.org
https://enam.gov.in
https://commodity.com
http://www.agmarknet.gov.in
http://www.agriwatch.com
51
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
52
CHALLENGES IN PRICING OF AGRI COMMODITIES
Chapter 3
Challenges In Pricing Of Agri Commodities
Objectives: This chapter will help you understand the various challenges
of pricing agriculture commodities.
Structure:
3.1 Introduction on challenges in pricing of agri commodities
3.2 Challenges faced by farmers
3.3 Impact of various factors on pricing of agri commodities
3.4 Government support to cope with impact of various factors on pricing
of agri commodities
3.5 Farm income to double by 2022
3.9 References
53
3.1 INTRODUCTION ON CHALLENGES IN PRICING OF AGRI

COMMODITIES
Most progressive nations including India aim for providing a conducive

environment for the Agriculture sector and deploy all possible strategies to
ensure the farmers get the best price for their produce. The entire Nation
depends on farmers to produce food for its citizen by effective harnessing
of natural resources such as land, water and technology. The agriculture
sector not only provides food for the people but it also provides raw
materials for the large scale, medium scale and small scale agri processing
companies. India has progressed from once upon a time a heavy food
importing country to a food self sufficiency country. Indian farm sector
cultivates produces over 250 different crops in its varied agro-climatic
regions.
Indian Government is always eager to support technically sound,

economically viable, environmentally non degrading and socially acceptable
use of country’s resources for growth and development of agriculture.
Government also encourages cultivation of untapped growth potential in
agriculture, strengthening rural infrastructure, setting up agriculture
research institute to design quality seeds and enhance value of the crops in
order help the farmer to produce a good harvest and generate decent
returns.
The National Policy for Farmers has provided a holistic approach to

development of farm sector as well as the economic well being of the
farmers, in addition to the boosting the productivity of the farm sector.
Agriculture can sustain only if the farmer survives and prospers. Even
today, agriculture is a main source of livelihoods for over 50% of Indian
population. If anything goes wrong in agriculture the entire Nation will
have to suffer. Indian farmers have to deal with both controllable and
uncontrollable challenges for producing a quality graded harvest inorder to
get the best price for his crops.
54
3.2 CHALLENGES FACED BY FARMERS
India has a large arable land(second largest in the world) and its
agricultural productivity per hectare has also increased post independence
(largest producers of some commodities in the world), but still the crop
yields are in the range of 30% to 50% of the best crop yields achievable on
farm. The losses after harvest are also amongst the highest in the world
due to inadequate infrastructure. And to add more to the problem, the
massive population has reduced the per capita land and water resources.
A larger portion of our farmers belong to the small and marginal farmers
category who find it very difficult to sustain agriculture first for their own
survival followed by sale to others which included local sale and exports.
Infact due to a smaller hand holding a small farm has to bear all the
working members of the farmers family which in turn creates disguised
unemployment and lower productivity per farmer.
Many farmer are still using old agricultural practices without embracing
modern technology which culminates into deficient productivity and
excessive wastages. Illiteracy, social backwardness, mounting pressures
due to default in paying farm loans due to droughts and floods has
worsened the farmers problems. Inadequate irrigation facilities, inadequate
timely agriculture credit at a cheaper rate with rehabilitation and insurance
and inadequate marketing arrangements are coming in a big way between
creating a good harvest and ensuring a best price for the farm produce. In
some case the middlemen are eating most of the farm produce
compensation and give only a paltry sum to the deserving farmers. Lack of
good and sufficient storage facilities is also forcing some of the farmers to
sell their farm produce at a very low price to the visiting agri processing
companies.
Increasing farm productivity within the limited arable land mass is the
biggest challenge for todays farmers. They also need to match the farm
produce with the ever increasing Indian population.
55
A list of reasons responsible for farmers getting less price:

• Dependency of farm produce on monsoon creates uneven farm
production
• Inadequate grading mechanisms for farm produce does not enable the
farmer to get the best price for his produce
• Yield of major crops and livestock is much lower than that in the rest of
the world
• Inadequate cheap and efficient transportation facilities causes delay in
transport of farm produce at the right time and place
• Inadequate storage & warehousing arrangements causes huge wastages
of farm produce
• Inadequate cheaper finance and rehabilitation programs in case of floods
and droughts for farmers increases cost of cultivation
• Most of the farmers money is locked in his farm and hence he always
requires new modes of finance. Such additional finances are generally
provided at a higher rate of interest
• Rather than a wider delivery market in commodities, exchange contracts
are cash settled
• Small land holdings due to increase in population. India farm holding is
likely to get sub fragments with 200 million farm holdings by 2040 thus
reducing the average farm size to less than 0.75 hectares
• Irrigation becomes difficult on such small and fragmented fields
• Time and labour is wasted in moving seeds, manure, cattle, implements
from one farm area to another
• Requirement of skilled labour is likely to decrease in agriculture. This will
force farmers to find jobs in non-farm sector
• Diminishing per capita land and water resources, due to use of land for
habitat, roads, buildings , water channels, gas pipe lines, urbanization
• Shrinking natural resources and ever increasing demand for larger food,
fuel and fodder
• Proportion and percentage of household makes farming uneconomical
56
• Good quality seeds are not easily available for small and marginal
farmers due to its higher prices
• Climate and weather change : wet drought was unheard before:
deterioration and degradation of quality of environment
• Deterioration of soil health and soil fragmentation
• Soils have been used for growing crops for a longer period without
replenishing with good soil
• Soil erosion by wind and water and import of societal waste in the soil
• Soil losing its strength and resulting in low productivity
• Genuine difficulties in providing sufficient manures and fertilizers to the
needy farmers at a cheaper rate
• Over use of fertilizers resulting into contamination of ground water and
soil acidification
• Reduction in soil microorganism such as beneficial fungi, bacteria, viruses
useful for cultural the soil due to use of heavy machinery such as tractors
• Inadequate timely recognition of plant nutrient deficiencies in the soil
• Increase in cost of cultivation, farm holdings becoming uneconomic and
difficult to sustain
• Inadequate marketing facilities and Post-harvest losses
• Dependence on local traders/ middlemen/ money lender from whom they
borrow money for disposal of farm produce at a very low price and
unfavourable terms
• Farmers are not able to transport their farm produce to larger market
due to weak roads and have to make distress sale in local markets
• Inability of the small and marginal farmers to store their farm produce
and wait for a good price after harvesting their crops.
• Inadequate waste management and increase in pollution
• Isolated agronomic techniques and plant protection measures
• Inadequate prompt settlement of insurance claims
57
• Wastages due to inappropriate transport and marketing arrangements

• Inadequate subsidies against social hunger
• Low scale and low productivity
• Shrinkage in Kharif output brings in decline of farmers’ profits by
10%-12%
• Price volatility in global market
• Genetic biodiversity as farm area is getting shorter
• Changing farming practices due to climate change
• Decline in insect pollinators who could be used as beneficial predators
and parasites due to overuse of pesticides and ,herbicides
• Improper crop disease management
• Pests, germs and weeds cause heavy loss to crops
• Improper use of biocides has caused environmental pollution
• Rise in sub-soil water level, leading to water-logging, soil salinity and
alkalinity due to improper irrigation systems
• Inadequate methods to recycle natural resources
• Heavy input cost
• Heavy mono cropping
• Limited value additions and bye products useful for agri processing
companies
• Limited use of mechanization in ploughing, sowing, irrigating, thinning
and pruning, weeding, harvesting threshing and transporting the crops.
This has caused low yields per capita labour force and huge wastages
• Vanishing of some important plants from Indian markets
• Extinction of some crop varieties
• Limited affordable and climate resilient technologies
58
• Uneven monsoons / untimely monsoons have impacted suffiency of

water and its distribution to those areas requiring rain water for Kharif
crops
• Traders are exposed to price risk due to fluctuations in global prices and
imports at a cheaper price
• Some educated farm graduates are migrating to cities and do not support
and guide their rural family members
• We all including the larger portions of the youth, we have in our country
are sensitized through seminars, workshops and awareness programs to
cooperate in not only protecting the land and its natural resources but
also to preserve the bio diversity gifted by the nature in order to secure a
efficient and effective farming capable of producing sufficient grains for
the future. India and most other developed countries one day will
certainly be measured in terms of the number of grains it produces for
itself as well as the world. All our actions should be planned and
strategized for the well being of the population we have today as well as
those who are going to take birth in our country in the future.
3.3 IMPACT OF VARIOUS FACTORS ON PRICING OF AGRI

COMMODITIES
The Kharif food crops depends on the southwest monsoons received in the
country from June onwards. The monsoons not only exerts a strong
influence on Kharif food grains production but also on the farmers’ income
and price stability. A timely monsoon can put life in the crops while a
monsoon at a wrong time can even spoil a good crop and create shortage
of food grains and increase in price of the crops and reduction in farmers
income.
Just like the monsoons temperature and climate plays an important role for
a Rabi crop. With the increasing in global warming and temperature, the
decrease in cereal production is likely to reduce the Rabi crop with every
abnormal increase in temperature.
Under both the above scenarios agriculture produce prices can be seriously
impacted due to shortage and destruction of crops due to abnormal rains
and temperature.
59
If farmers don’t adopt improved and modern methods of farming, they

would be able to generate the targeted out put and utilize government
incentives towards improvement of farm and receive good price for their
produce.
More demand for food grains due to increase in population and rise in
prices due to shortage in production than the targeted output can cause
price volatility and rise in inflation. The price volatility in onions, potatoes,
tomato, garlic etc has caused a big spurt in these commodities in the
recent past due to wet droughts. These wet droughts have eaten up a good
income which otherwise could have been earned under normal conditions.
The weak direct linkages between the farmers and the consumers lack of
sufficient good storage facilities and absence of comprehensive delivery
types of derivative contracts have resulted into substantial wastages of agri
produce which have culminated into crops produced without any income
and thus adds on to the cost for inputs spent on it.
Small and marginal farmers as well as large farmers based on the duration
of crop and other requirements for a good harvest, and socio economic
conditions learn to manage different types of risks associated with
agriculture. The returns are commensurate with the risk and thus large
farmers tend to get good return on their investments due to better price
for their farm produce than small and marginal famers. Infact small and
marginal farmer suffer more due to the servicing cost on farm loans. These
small and marginal farmer also suffer due to small produce, weak
economic condition and low holding capacity of the produce.
The prices of agri commodities have a tendency to go up during the

monsoons. If the farmer has used his own assumptions on the basis of last
crop cycle without paying attention to government advisory and aid in
selection of crop, value addition and linkage with agri produce processing
companies then he may not get the best price for his produce. This can
result into shortage and imports from other States/Countries at a higher
price.
60
3.4 GOVERNMENT SUPPORT TO COPE WITH IMPACT OF

VARIOUS FACTORS ON PRICING OF AGRI COMMODITIES
The minimum support price scheme of the Government encourages

farmers for initiating the price discovery mechanism in Mandis for quality
and graded crops and gives more bargaining power for their farm produce.
In case of more production, the government schemes of minimum support
prices and the procurement of excess food grains by government agencies
such as Food Corporation of India/ NAFED have helped stabilization of
prices to a larger extent. Legislation for consolidation of holdings has been
enacted by almost some states to tackle the problem of fragmented land
holdings. Some States have also encouraged cooperative farming in which
farmers can pool their resources and share the profit based on resources
utilized.
National Seeds Corporation and State Seed Corporations enable provision

of high quality seeds to farmers based on various agro-climatic zones at
the right time and place and at an affordable price High Yielding Variety
Programme are planned to increase the production of food grains. All kinds
of seeds such as Breeder seed (basic seed required for the first stage in
seed production), Foundation seed (second stage in seed production) and
Certified seed (final stage in seed production) are provided to suit farmers
requirements. Some governments have given incentives to farmers for
using chemical fertilizers to prosper in agriculture and using biocides
inorder to save the crops and to avoid losses. Biocides includes pesticides,
herbicides and weedicides.
Usage of Agricultural implements and machinery is encouraged to facilitate

multiple cropping. Some States have also facilitated replacement of
traditional and inefficient implements by improved ones such as power
tillers, tractors, combine harvesters, irrigation pumps and increased power
availability for carrying out various agricultural operations. The
Government is also providing storage facilities to the farmers near their
fields. NABARD meets the credit needs of all types of agricultural and rural
development by providing short term, medium term and long term credits.
It also maintains research and development fund to promote research in
agriculture and rural economy.
61
Government has introduced regulated markets to save the farmer from

middlemen and to eliminate malpractices. Government has also
reintroduced the commodity futures in India based on the
recommendations of various committees like the Khusro committee,
Dantwala committee, K.N.Kabra committee etc. Such efforts have resulted
into competitive buying, efficient price discovery, speedy settlement of
disputes and risk management through futures exchanges. In addition to
futures contract, some buyers also intend to buy forwards involving
physical delivery. Information of price information helps the farmers to get
the best prices from the traders of agri produce. Farmers can make their
cropping decision based on the price discovery happening at the
commodity exchanges.
With the reforms in the Model Agricultural Produce & Market (Promotion
&Facilitation) Act, 2017 private capital in agriculture is encouraged for
creating more competition inorder to enable the farmer to get better price
for his farm produce and reduce his dependence on Minimum Support
Price. The Government has also introduced soil health card and neem
coating of urea to reduce input costs.
The National Project On Soil Health and Fertility of Department of

Agriculture, Cooperation and Farmers’ Welfare (Ministry of Agriculture &
Farmers Welfare) focuses on strengthening of Soil Testing Laboratories,
promotes use of Integrated Nutrient Management and encourages balanced
use of fertilizers.
The Market Intervention Scheme (MIS) and Price Support Scheme(PSS) of

the Department of Agriculture, Cooperation and Farmers’ Welfare (Ministry
of Agriculture & Farmers Welfare) protect the farmers from making distress
sale especially in times of good harvest and when prices fall to very low
level by providing minimum support prices to the farmers.
The Pandit Deendayal Upadhyay Unnat Krishi Shiksha Scheme of

Department of Agriculture, Cooperation and Farmers’ Welfare (Ministry of
Agriculture & Farmers Welfare) launched for giving the agricultural
education to students to make their career in the agricultural field.
62
Increase in rural literacy and increased thrust of Government in social

development programs, with improvement in transportation and
communication and wage rates has increased the rural non-farm
employment and income generation.
Organised industry are brought to rural regions for generating village

based production of nutrients, bio-pesticides, bio-fertilizers, seed
production and agro-processing are increasing the non-farm rural
economy. The multiple income sources are helping rural farmers to
mitigate some of the risks associated with agriculture.
The Rashtriya Krishi Vikas Yojna (RKVY) of the Department of

Agriculture, Cooperation and Farmers’ Welfare (Ministry of Agriculture &
Farmers Welfare) ensures holistic development of agriculture and allied
sectors by allowing states to choose their own agriculture and allied sector
development activities as per the district/state agriculture plan. The
Agriculture Plans for the districts and the states are based on agro-climatic
conditions, availability of technology and natural resources, local needs etc.
RKVY scheme incentivizes States to increase public investment in

Agriculture & allied sectors.The scheme works on Central financial
assistance to State with broad objectives of making farming a
remunerative economic activity through strengthening the farmer’s effort,
risk mitigation and promoting agri-business entrepreneurship.
The National Project on Organic Farming and Paramparagat Krishi

Vikas Yojana of the Department of Agriculture, Cooperation and Farmers’
Welfare (Ministry of Agriculture & Farmers Welfare) promote organic
farming practices and improvement of soil health. The objective is to
produce agricultural products free from chemicals and pesticides residues
by adopting eco- friendly, low- cost technologies.
63
Key Thrust areas:

• Promote organic farming among rural youth/ farmers/ consumers/
traders
• Disseminate latest technologies in organic farming
• Utilize the services of experts from public agricultural research system in
India
The scheme promotes Participatory Guarantee System (PGS), a form of

organic certification that is built on mutual trust. PGS Certification
facilitates farmers to certify their organic produce, label and market their
products domestically.
The National Project on Agro-forestry of Department of Agriculture,

Cooperation and Farmers’ Welfare (Ministry of Agriculture & Farmers
Welfare) main objective is to integrate tree plantation with crops and
livestock inorder to enhance farm productivity, incomes and livelihood
opportunities of rural households, especially the small holder farmers
through agroforestry. Agroforestry research and development (R&D),
including capacity development and pilot studies / testing and action
research is done by the ICAR.
The National Mission on Horticulture of Department of Agriculture,

Cooperation and Farmers’ Welfare (Ministry of Agriculture & Farmers
Welfare) provides holistic growth of the horticulture sector covering fruits,
vegetables, root & tuber crops, mushroom, spices, flowers, aromatic
plants, cashew and cocoa through an area based regionally differentiated
strategies which include research, technology promotion, extension, post
harvest management, processing and marketing, in consonance with
comparative advantage of each State/region and its diverse agro-climatic
feature inorder to enhance horticulture production, improve nutritional
security and income support to farm households. The main objectives also
include to establish convergence and synergy among multiple on-going and
planned programmes for horticulture development, promote, develop and
disseminate technologies, through a seamless blend of traditional wisdom
and modern scientific knowledge and create opportunities for employment
generation for skilled and unskilled persons, especially unemployed youth.
64
To achieve the above objectives, the mission would adopt the following
strategies:
• Ensure an end-to-end holistic approach covering production, post harvest
management, processing and marketing to assure appropriate returns to
growers/producers
• Promote R&D technologies for production, post-harvest management and
processing
• Enhance acreage, coverage, and productivity through: (a) Diversification,
from traditional crops to plantations, orchards, vineyards, flower and
vegetable gardens (b) Extension of appropriate technology to the
farmers for high-tech horticulture cultivation and precision farming.
• Assist setting up post harvest facilities such as pack house, ripening
chamber, cold storages, Controlled Atmosphere (CA) storages etc,
processing units for value addition and marketing infrastructure;
• Adopt a coordinated approach and promotion of partnership,
convergence and synergy among R&D, processing and marketing
agencies in public as well as private sectors, at the National, Regional,
State and sub-State levels;
• Where appropriate and feasible, promote National Dairy Development
Board (NDDB) model of cooperatives to ensure support and adequate
returns to farmers;
• Promote capacity-building and Human Resource Development at all
levels.
The National Mission For Sustainable Agriculture (NMSA) of

Department of Agriculture, Cooperation and Farmers’ Welfare (Ministry of
Agriculture & Farmers Welfare) has been formulated for enhancing
agricultural productivity especially in rainfed areas focusing on integrated
farming, water use efficiency, soil health management and synergizing
resource conservation. NMSA derives its mandate from Sustainable
Agriculture Mission. The strategies and programmers of actions aim at
promoting sustainable agriculture through a series of adaptation measures
focusing on ten key dimensions encompassing Indian agriculture namely;
‘Improved crop seeds, livestock and fish cultures’, ‘Water Use Efficiency’,
‘Pest Management’, ‘Improved Farm Practices’, ‘Nutrient Management’,
65
‘Agricultural insurance’, ‘Credit support’, ‘Markets’, ‘Access to Information’

and ‘Livelihood diversification’
The Small Farmers’ Agri-Business Consortium (SFAC) of Department

of Agriculture, Cooperation and Farmers Welfare (Ministry of Agriculture &
Farmers Welfare) is pioneer in organising small and marginal farmers as
Farmers Interest Groups, Farmers Producers Organisation and Farmers
Producers Company for endowing them with bargaining power and
economies of scale. The Government is planning to form 10000 farmers
producer organisations to ensure that farmers get the right price for their
produce. Such initiatives help the farmers to switch form APMC to eNAM
PAN India electronic trading portal for agriculture commodities. It provides
a platform for increased accessibility and cheaper availability of agricultural
inputs to small and marginal farmers and in establishing forward and
backward linkages in supply chain management.
The MSME Market Development Assistance of Ministry of Micro, Small

& Medium Enterprises offers funding for participation by manufacturing
Small & Micro Enterprises in International Trade Fairs/ Exhibitions and
encourage small & micro exporters to tapping and developing overseas
markets. It also offers funding for sector specific market studies by
Industry Associations/ Export Promotion Councils/ Federation of Indian
Export Organization.
The National Skill Development Mission (NSDM) of Ministry of Skill

Development and Entrepreneurship (MSDE) has initiated skill development
programs to train youths of India inorder to meet and align with the
demands of the employers. India has 65% of its youth in the working age
group. The National Skill Development Mission main focus is on skilling at
scale with speed and standards.
66
The Deendayal Upadhyay Swaniyojan Yojana (DUSY) of Ministry of

Rural Development provide skill sets for self-employment to rural masses,
give incentives to rural poor pursuing self-employment and provide
financial assistance to self-employed or poor rural entrepreneurs.
Key Features of the Deen Dayal Upadhyay Swaniyojan Yojana:

• Self Employment Opportunities and Fixed Salaried Job: for people coming
from Rural areas inorder to help people generate better livelihood
opportunities
• Supported by Innovative credit linkages and MUDRA Bank Loans for
financial assistance through SHGs (Self help groups),
• Private entities to be roped in to provide entrepreneurship opportunities
under the scheme.
The Deendayal Upadhyay Grameen Kaushal Yojana (DUGKY) of

Ministry of Rural Development is a part of the National Rural Livelihood
Mission (NRLM) aims at providing entrepreneurship opportunities for rural
youth between the ages of 15 and 35 years from poor families and plays
an instrumental role in supporting the social and economic programs of the
government like the Make In India, Digital India, Smart Cities and Start-Up
India. Such opportunities encourages rural youth in stay connected with
micro and cottage industries in the villages and discourage distress
migration of rural people to urban centres in search of jobs.
The Pradhan Mantri Krishi Sinchan Yojana has been formulated with
the vision of extending the coverage of irrigation ‘Har Khet ko pani’ and
improving water use efficiency ‘More crop per drop'. PMKSY has been
formulated amalgamating ongoing schemes viz. Accelerated Irrigation
Benefit Programme (AIBP) of the Ministry of Water Resources, River
Development & Ganga Rejuvenation (MoWR,RD&GR), Integrated
Watershed Management Programme (IWMP) of Department of Land
Resources (DoLR) and the On Farm Water Management (OFWM) of
Department of Agriculture and Cooperation (DAC).
67
The Pradhan Mantri Kisan Samman Nidhi (PM Kisan) is a Central

Sector scheme with 100% funding from Government of India to provide
income support to all landholding farmers' families irrespective of the srze
of their landholdings to supplement their financial needs for procuring
various inputs related to agriculture and allied activities as well as domestic
needs. A landholder farmer's family is defined as "a family comprising of
husband, wife and minor children who own cultivable land as per the land
records of the concerned State/Union Territory.
Under the Scheme an income support of Rs.6000/- per year is provided to

all farmer families across the country in three equal installments of
Rs.2000/- each every four months.
The Pradhan Mantri Fasal Bima Yojana (PMFBY) is an insurance

service for farmers for their yields formulated in line with One Nation–One
Scheme theme by replacing earlier two schemes National Agricultural
Insurance Scheme (NAIS) and Modified National Agricultural Insurance
Scheme (MNAIS). Pradhan Mantri Fasal Bima Yojana (PMFBY) aims at
supporting sustainable production in agriculture sector by way of - a)
providing financial support to farmers suffering crop loss/damage arising
out of unforeseen events b) stabilizing the income of farmers to ensure
their continuance in farming c) encouraging farmers to adopt innovative
and modern agricultural practices d) ensuring flow of credit to the
agriculture sector; which will contribute to food security, crop
diversification and enhancing growth and competitiveness of agriculture
sector besides protecting farmers from production risks.
Coverage of Crops: 1) Food crops (Cereals, Millets and Pulses), 2)

Oilseeds, 3) Annual Commercial / Annual Horticultural crops.
All the farmers growing notified crops in a notified area during the season
who have insurable interest in the crop are eligible.
68
Actuarial Premium Rate (APR)
Season Crops Maximum Insurance charges

payable by farmer (% of Sum
Insured)
Kharif All foodgrain and Oilseeds 2.0% of SI or Actuarial rate,
crops(all Cereals, Millets, whichever is less
Pulses and Oilseeds crops)
Rabi All foodgrain and Oilseeds 1.5% of SI or Actuarial rate,
crops(all Cereals, Millets, whichever is less
Pulses and Oilseeds crops)
Kharif and Rabi Annual Commercial / 5% of SI or Actuarial rate,
Annual Horticultural crops whichever is less
Insurance companies providing Crop Insurance:

• Agriculture Insurance Company
• Cholamandalam MS General Insurance Company
• Reliance General Insurance Co. Ltd.
• Bajaj Allianz
• Future Generali India Insurance Co. Ltd.
• HDFC ERGO General Insurance Co. Ltd.
• IFFCO Tokio General Insurance Co. Ltd.
• Universal Sompo General Insurance Company
• ICICI Lombard General Insurance Co. Ltd.
• Tata AIG General Insurance Co. Ltd.
• SBI General Insurance
• United India Insurance Co
69
Risks to be covered
1. YIELD LOSSES standing crops, on notified area basis): Comprehensive

risk insurance is provided to cover yield losses due to non-preventable
risks, such as (i) Natural Fire and Lightning (ii) Storm, Hailstorm,
Cyclone, Typhoon, Tempest, Hurricane, Tornado etc. (iii) Flood,
Inundation and Landslide (iv) Drought, Dry spells (v) Pests/ Diseases
etc.
2. PREVENTED SOWING (on notified area basis):- In cases where

majority of the insured farmers of a notified area, having intent to sow/
plant and incurred expenditure for the purpose, are prevented from
sowing/planting the insured crop due to adverse weather conditions,
shall be eligible for indemnity claims upto a maximum of 25% of the
sum-insured
3. POST-HARVEST LOSSES (individual farm basis): Coverage is available
upto a maximum period of 14 days from harvesting for those crops
which are kept in “cut & spread” condition to dry in the field after
harvesting, against specific perils of cyclone / cyclonic rains, unseasonal
rains throughout the country.
4. LOCALISED CALAMITIES (individual farm basis): Loss / damage

resulting from occurrence of identified localized risks i.e. hailstorm,
landslide, and Inundation affecting isolated farms in the notified area
EXCLUSIONS: Risks and Losses arising out of following perils shall be

excluded:- War & kindred perils, nuclear risks, riots, malicious damage,
theft, act of enmity, grazed and/or destroyed by domestic and/or wild
animals, In case of Post–Harvest losses the harvested crop bundled and
heaped at a place before threshing, other preventable risks.
The Model Land Leasing Act, 2016 is aimed to facilitate tenants to lease
land for cultivation.
Short term crisis and sudden price spikes due to climate changes have
heavy impacts on the daily routine of the consumers. Such an impact is
more in States having lesser share of farm produce. Due to these crisis
farmers are exposed to short term volatility of agri commodity prices which
also culminates into long term decline on the agri revenue as farmers
cannot increase or decrease its farm production quickly, when prices
change suddenly. Lower prices of agri commodities benefit the urban
70
consumers but seriously impact the lives of rural farmers as they suffer
losses in revenue.
World Trade Organisation(WTO) members including India have taken steps

to reform the agriculture sector. The reforms aims at addressing the
subsidies and high trade barriers that distort agricultural trade and to
establish a fairer trading system that will increase market access and
improve the livelihoods of farmers. The WTO Agreement on Agriculture
plans to reform agricultural trade inorder to make it fairer and more
competitive.
The WTO Agreement on Agriculture covers:

• Market access : the use of trade restrictions, such as tariffs on imports
• Domestic support : the use of subsidies and other support programmes
that directly stimulate production and distort trade
• Export competition — the use of export subsidies and other
government support programmes that subsidize exports
The Agriculture Committee oversees implementation of the Agreement.
Members continue to conduct negotiations for further reform. Developing

countries do not have to cut their subsidies or lower their tariffs as much
as developed countries. They are given extra time to complete their
obligations. Developing countries actively raise their issues on trade
facilitation and public stockholding for food security especially when the
agreements are likely to benefit the developing countries.
71
3.5 FARM INCOME TO DOUBLE BY 2022
The Central Government has made grand plans to catapult India into the
$5 trillion economy bracket by 2024. In order to accomplish such grand
plans the Central Government has also made plans to double the farm
income by 2022 by the year of India’s 75th Independence Day celebrations
by building a strong rural economy with a holistic approach.
A Report of the Committee on Doubling Farmers’ Income (Volume IX),

Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry of
Agriculture & Farmers’ Welfare suggests self-sustainable models
empowered with improved market linkage as the basis for income growth
of farmers. It intends to add value to primary produce and build
agricultural enterprises in rural India. The Committee has adopted three
institutes, namely, NIAP, NCAER and NCCD to help collage, analyse and
interpret inputs. The Committee has adopted a basic equation of
Economics to draw up its strategy, which says that net return is a function
of gross return minus the cost of production. The strategy to double
farmers income is based on three parameters namely productivity gains,
reduction in cost of cultivation and remunerative price.
The strategy platform is built by following four concerns:

• Sustainability of production
• Monetisation of farmers’ produce
• Re-strengthening of extension services
• Recognising agriculture as an enterprise and enabling it to operate as
such, by addressing various structural weaknesses
The Committee report prioritizes post-production interventions inclusive of

agri-logistics, agricultural marketing and sustainability issues over
production strategy. The Committee has taken hand holding from the
honorable Prime Ministers ‘Seven Point Agenda’.
72
Honorable Prime Ministers 7-Point Strategy To Double Farmers'

Income
1. Big focus on irrigation with large budgets, with the aim of "per drop,
more crop."
2. Provision of quality seeds and nutrients based on soil health of each

field
3. Large investments in warehousing and cold chains to prevent post-

harvest crop losses.
4. Promotion of value addition through food processing
5. Creation of a national farm market, removing distortions and e-platform

across 585 stations
6. Introduction of a new crop insurance scheme to mitigate risks at

affordable cost
7. Promotion of ancillary activities like poultry, beekeeping and fisheries
Source: https://www.ndtv.com/
The Committee on Doubling Farmers’ Income (DFI) examines the need and
the scope to develop additional economic activities at farm and village
levels in the agrarian rural economy which can benefit the farming
communities by way of gainful employment and additional incomes.
With rapid urbanization and infusion of modern technologies, India has

been witnessing a transformation in employment and income from agro
based rural economy to industry based urban economy. The Committee on
Doubling Farmers’ Income (DFI) has recommended various interventions to
make farmer centric policies inorder to strengthen and grow the
contribution of agriculture to the economy with new income streams.
The Committee on Doubling Farmers’ Income (DFI) also draws attention to

the intrinsic value contained in every biological output and provides
suggestions on ways to optimally use all the biological generated produce
from the farm and in the neighbourhood, as useful raw materials. The
Committee is of the opinion that by monetising every crop, drop and ounce
produced, the farmer can rightfully optimise on the productive use of all
production from farming activities.
73
The Central Government is working with a holistic approach to deal with

the challenges faced by the farmers. It has constituted a new Jal Shakti
ministry to conserve water and address irrigation-related problems. The
Gramin Bhandaran Yojana is expected to provide storage facilities to
farmers near villages and minimize the farm wastages. A special fund has
been created by the Government to increase farmer incomes through
marine and inland fisheries.
The Central Government is aiming to boost farm export inorder to allow

farmers to receive better prices for their farm produce. The Central
Government plans to create awareness about latest technological
developments in agriculture for generating quality farm produce with
increase in production.
The policy to double farmers incomes plans to increase India’s agricultural

exports to $60 billion by 2022. India’s agriculture exports for 43 items in
2018-19 were $38 billion. Farmers are expected to earn more from exports
of processed agricultural items than raw produce as there is a great
demand for India processed agricultural foods from USA and Europe. The
Central Government also plans to link the rural mandis to APMC markets
which in turn will be linked to global markets to get the best price for
farmers produce. The reforms in agriculture marketing and introduction of
e-marketing portal for organic products is also providing huge benefits to
farmers to marking organic products in a new way.
The State Governments are also expected to improve the supply chain
processes which connects the farms with food processing and storage and
right up to the retail consumer.
India’s top 10 Agriculture Exports:

1. Marine products
2. Basmati Rice
3. Meat
4. Spices
5. Regular Rice
6. Raw Cotton
7. Oil Meals
8. Sugar
9. Castor Oil
10. Tea
74
India’s Agriculture Exports to top 10 countries

1. US
2. Vietnam
3. Iran
4. China
5. UAE
6. Bangladesh
7. Saudi Arabia
8. Malaysia
9. Indonesia
10. Nepal
Source: https://economictimes.indiatimes.com
Various methods which can boost Indian Agriculture
1. Using scientific methods of cultivation and multiple cropping for

maximizing production per unit of land by cultivating multiple crops in a
year.
2. Increasing Irrigation facilities
3. Use of High Yield Seeds and balanced use of nutrients. Provide reliable
and quality inputs at reasonable prices
4. Protect the crops from the insects and pests
5. Use of modern machinery and equipments. Convert grey areas into

green with watershed management, hybrid value-addition technologies
and small farm mechanisation.
6. Encourage the use of cow-dung as manure rather than as fuel
7. Develop agricultural land by leveling of land, terracing of fields and

contour building
8. More Land Reforms for Land consolidation
9. Improving farm efficiency and technology adoption by increasing literacy

levels of farmers and providing information about the availability of new
and improved seed varieties
10.Increase crop diversification and improve allied activities
75
11.Giving more attention to climate change and ensuring efforts for

limiting global warming,
12.Formulation of integrated water use, nutrient management, pest and

weed management policy
13.Adoption of sustainable crop cultivation and management practices
14.Increasing genetic yield potential of a large number of vegetables,

fruits, food crops, livestock and fisheries products
15.Provide support and motivation to small and marginal farmers with

Improved institutional and credit support and increased rural
employment opportunities
16.Setting up of modern agricultural research institutes and updation of

the curricula of agricultural education. Facilitate easy technology
transfers and sharing of research in science and technology through
partnerships involving national and international research institutions
17.Provide adequate credit facilities at a minimal rate with flexibility in

repayments
18.Widening and deepening of market infrastructure to help the farmers to

sell their products at better prices
19.Effective methods should be used to develop appropriate technologies

for increasing preparedness to predict and to manage the disasters.
20.Trade agreements must be aligned with operationally effective

measures to take care and support small and marginal farmers
21.Remote sensing and GIS technologies should be mapped at micro and

macro levels for effective use of land and water, crop planning, harvest
forecasting, market intelligence, contingency planning and prediction of
disease and pest incidences.
22.Provide primary education, health care, clean drinking water, safe

sanitation, adequate nutrition for the entire farmers family by
supporting community level programs by private voluntary organizations
76
Activity 1. Study the Annual report of various agriculture institution and

government organizations and list out various challenges and solutions for
growth and development of agriculture commodities
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2. Based on the recent World Trade Organization meeting identify

which of the negotiations are favorable for Indian farmers.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

1. Write a short on Challenges faced by farmers
2. What is the Impact of various factors on pricing of agri commodities
3. List out the Government support schemes to help farmers to cope with
impact of
various factors on pricing of agri commodities
4. Write a note on Farm income to double by 2022
5. Make a list of reasons responsible for farmers getting less price
77
1. A larger portion of our farmers belong to the small and marginal farmers
category who find it very difficult to sustain agriculture first for their
own survival followed by sale to others which included local sale and
exports. State whether the above statement is true or false.
a) True
b) False
2. Which of the following Government schemes has been formulated with

the vision of extending the coverage of irrigation ‘Har Khet ko pani’ and
improving water use efficiency
a) The Pradhan Mantri Bima Yojana
b) he Pradhan Mantri Krishi Sinchan Yojana
c) The Pradhan Mantri Fasal Bima Yojana
d) The Pradhan Mantri Kisan Samman Nidhi
3. Increasing farm productivity within the limited arable land mass is the
biggest challenge for todays farmers. Which of the following can be
considered as a reason responsible for farmers getting less price?
a) Dependency of farm produce on monsoon
b) Inadequate cheap and efficient transportation facilities
c) Inadequate storage & warehousing arrangements
4. The Central Government also plans to link the rural mandis to APMC
markets which in turn will be linked to global markets to get the best
price for farmers produce. Which country ranks first in receiving Indian
agricultural exports?
a] China
b] Australia
c] USA
d] South Africa
78
5. The Central Government has made grand plans to catapult India into
the $5 trillion economy bracket by 2024. In order accomplish such
grand plans the Central Government has also made plans to double the
farm income by
a] 2020
b] 2022
c] 2024
d] 2026
Answers: 1.(a), 2.(b), 3.(d), 4.(c), 5.(b)
3.9 REFERENCES

Services Limited

8. NITI Aayog model road map crafted in 2017
9. Agriculture Policy Vision 2020 by Indian Agricultural Research Institute
10.Annual Report 2018-19 by Department of Agriculture, Cooperation and

Farmers Welfare (Ministry of Agriculture & Farmers Welfare)
11.Report of the Committee on Doubling Farmers’ Income (Volume IX),

Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry
of Agriculture & Farmers’ Welfare
12.DFI Strategy Report of NITI Aayog
79
NSS-SAS survey of agricultural households

NASSO survey
https://economictimes.indiatimes.com
https://www.wto.org/
http://agriculture.gov.in/
http://www.agricoop.nic.in/
https://ruralmarketing.in/
https://farmer.gov.in/
https://en.wikipedia.org/
https://pmfby.gov.in/
https://pmkisan.gov.in/
https://www.pmksy.gov.in/
https://pradhanmantriyojana.co.in/
http://ddugky.gov.in/
https://www.msde.gov.in/
http://www.msmedildh.gov.in/
http://sfacindia.com/
http://vikaspedia.in/
https://www.pmawasyojana.co.in/
https://www.rkvy.nic.in/
80
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
81
AGRI COMMODITIES MARKETS
Chapter 4
Agri Commodities Markets
Agri Commodities Markets.
Structure:
4.1 Introduction to Agri Commodities Markets and Exchanges
4.2 Evolution of Commodity exchanges
4.3 Merger of Forward Markets Commission with SEBI
4.4 SEBI’s contribution to the growth of commodities market
4.5 United Nations Conference on Trade and Development and
International Organization of Securities Commissions
4.9 References
82
4.1 INTRODUCTION TO AGRI COMMODITIES MARKETS

AND EXCHANGES
It is believed that the Commodities Markets are as old as civilization itself.

Commodity markets were found in Sumer between 4500 and 4000
BCE(modern day Iraq). Citizens would use clay tokens for trading /
exchanging specified number of goats with the merchants. History also
makes mentions of pigs, seashells, grains etc used as “commodity money”.
Over a period of time gold and silver emerged as a preferred medium of
exchange to pay for buying commodities. Metallic coins and other scales
soon emerged with the invention of weights measuring devices. The stock
exchanges emerged in the 14th century. The Amsterdam Stock Exchange is
believed to be the world’s first stock exchange established in 1530, which
infact was converted into a stock exchange from the market for the
exchange of commodities. With urbanization and growth in cities more
commodities exchanges emerged in 1500-1600.
The Chicago Board of Trade (CBOT) was established in America in 1864.

Commodities such as wheat, corn, cattle, and pigs were traded on CBOT.
New commodities such as rice, mill feeds, butter, eggs, soybeans, and
potatoes could be traded on the CBOT with the enactment of the
Commodity Exchange Act in America. CBOT is believed to be the world’s
oldest futures and options exchange. A Commodity Price Index was also
created by US government in 1934 to track 22 sensitive basic commodities
whose markets could be influenced by changes in economic conditions.
A new concept of Commodity Index Fund emerged In 1990’s where the

assets are invested into financial hedge instruments based on the
commodity index. Commodity exchanges emerged in various cities of
America during the 20th century.
83
Commodities exchanges across the world:,
Exchange name Abbreviation Commodities traded

Agricultural Commodity Exchange Agricultural
ACE
for Africa
Chicago Board of Trade Grains, Treasuries, Equity,
CBOT
Index, Metals
Chicago Mercantile Exchange CME Meats, Currencies, Index
Intercontinental Exchange ICE Energy, Emissions, Biofuels
New York Mercantile Exchange Precious Metals, Industrial
NYMEX
Metals
Manila Commodity Exchange Base metals, agricultural,
MCX
energy, and currencies
Agricultural Futures Exchange of Agricultural
AFET
Thailand
Bursa Malaysia MDEX Biofuels
Cambodian Mercantile Exchange Energy, Industrial Metals,
CMEX Rubber, Precious Metals,
Agricultural
Central Japan Commodity Energy, Industrial Metals,
Exchange Rubber
Dalian Commodity Exchange DCE Agricultural, Plastics, Energy
Dubai Mercantile Exchange DME Energy
Hong Kong Mercantile Exchange HKMEx Gold, Silver
Indonesia Commodity and Agricultural, Base Metals,
ICDX
Derivatives Exchange Financial Products
Iran Mercantile Exchange Industrial and Mineral
Products, Oil by-products
IME
and Petrochemicals,
Agricultural
Kansai Commodities Exchange KANEX Agricultural
Nepal Derivative Exchange Agricultural, Precious Metals,
NDEX
Limited Base Metals, Energy
84
Singapore Commodity Exchange SICOM Agricultural, Rubber

Uzbek Commodity Exchange Crude oil products, base oils,
UZEX
sugar, agricultural, etc
Tokyo Commodity Exchange Energy, Precious Metals,
TOCOM Industrial Metals,
Agricultural
Zhengzhou Commodity Exchange CZCE Agricultural, PTA
Vietnam Commodity Exchange VNX Coffee, Rubber, Steel
Mongolian Agricultural Commodity Agricultural
MCE
Exchange
Deutsche Börse/Eurex Agricultural, Metals, ETCs,
DBAG/EUREX
Commodities Index
Energy Exchange Austria EXAA Energy, Emissions
London Commodity Exchange LCE Agricultural
NYSE Liffe LIFFE Agricultural
Belarusian Universal Commodity Metals, Agricultural, Timber
BUCE
Exchange etc.
Saint-Petersburg International Crude oil, Petrochemicals,
Mercantile Exchange[ SPIMEX Natural gas, Metals,
Agricultural, Timber
Australian Securities Exchange Agricultural, Energy, Interest
ASX
Rate Future
Source: https://en.wikipedia.org/wiki/List_of_commodities_exchanges
With the technology disruption of the internet and online services in the
21st century, Commodity markets and commodity trading underwent a
huge transformation with the introduction of online screen based trading,
which brought into new type of traders, speculators and investors into the
commodity trading business.
85
Modern commodity exchanges have made a comprehensive list of

commodities that can be traded on the commodities exchanges as follows:
Agriculture: Rice, Wheat, Maize , Oats, Chana, Barley, Moong, Soybean
Livestock: Hogs, Pork bellies, Livecattle
Energy: Crude oil, ethanol, natural gas, gasoline, propane, uranium,

electricity
Precious Metals: Gold, Platinum, Palladium, Silver
Industrial Metals: Aluminum, Steel, Copper
Financial derivatives : Stock indexes, Currencies
Soft Commodities: Sugar, Cocoa, Coffee
Spices : Pepper, Turmeric, Jeera, Coriander
Oil Seeds : Cator seed, Mustard seed, Refined Soy Oil , Crude Palm Oil,
Cotton seed Oil Cakes, Mentha oil
Fibres : Cotton
Pulp : Lumber, Rubber
Commodity prices are volatile and can be affected by various reasons such
as climate change ,natural disasters, epidemics, demand of consumers,
supply chain mechanisms etc. In order to deal with and hedge the risk in
commodities trading traders use various type of commodity trading
instruments such as forward contract, futures contract and options
contracts.
86
4.2 EVOLUTION OF COMMODITY EXCHANGES
It is believed that commodity trading in India started many many years

before in India, than it started in other countries. The commodity business
then could not grow/survive due to its existence under foreign rule for
several years. Cotton Trade Association started futures trading in
nineteenth century i.e 1875 in India. Commodities trading started in
oilseed in Mumbai in 1900, raw jute and jute goods in Kolkata in 1912,
Wheat in Hapur in 1913 and Bullion in Mumbai in 1920. Several futures
market in oilseeds were functioning in Gujarat and Punjab till the start of
Second World War in 1939. Several exchanges were created to trade in
other commodities also namely pepper, turmeric, potato, sugar and gur. A
great depression was globally observed after end of World War II
(1939-45). This phenomenon brought a great down trend in the future
exchange operations. Various commodity exchanges covering several
commodities such as cotton, jute, oilseeds, groundnut, wheat, rice, sugar,
silver and gold existed at various locations across the country. However,
during the Second World War the British Government enforced Defence of
India Act, 1943 under which trading in majority of commodities were
prohibited inorder to impose control over the prices and to recover from
the deteriorations of the economy and the markets.
After Independence Stock Exchanges and Futures Market were placed in

Union list of the Constitution. Central Government was vested with the
powers on making regulations on Stock Exchanges and Futures Market.
The Forward Contracts (Regulation) Act, 1952 was enacted to regulate
commodities contracts in India. It prohibited options trading in Goods along
with cash settlement of forward trades. In 1960’s there were defaults in
forward trades due to droughts. Commodity options trading and cash
settlement of commodities futures were banned in India due to a fear of
speculation activities.
Government was in a dilemma on whether to allow trading in commodities

after its banning. Hence Government decided to appoint various
committees from time to time in order to carve out a clearer picture on
futures trading in commodities.
87
Shri A.D. Shroff Committee was constituted by the Government of

India with the following responsibilities:
a. to scrutinise and submit report on the Futures Markets (Regulation) Bill
b. to suggest model rules for preventing and curbing the possible abuses
in Futures Markets
Shroff Committee recommended the introduction of forward trading inorder

to help in hedging, price stabilization and reduce speculation. It also
recommended to establish the trading rules and regulations, approved and
managed by Government
Prof. M.L.Dantwalla Committee 1966: A Forward Markets Review

Committee was constituted by the Government of India under the
Chairmanship of Prof. M.L.Dantwalla in 1966 to review the working of the
Forward Markets Commission and assess the role ofthe forward markets in
the future based on changed economic conditions.
The Dantwala Committee recognized the benefits of commodity trading.

However its recommendation were ignored and the banning process
continued till end 70s.
Prof. A. M. Khusro Committee 1979 : was constituted by the

Government of India to review the role of forward trading in changed
economic conditions and marketing distribution systems and also suggest
how forward trading can help in maintaining prices within reasonable
limits, and promote exports.
The Khusro Committee had recommended introduction of future trading in

most of the major commodities namely cotton, raw jute etc and also
suggested introducing future trading in other commodities namely
potatoes, onions etc.
Prof. K.N. Kabra Committee 1993: With the waves of Liberalization and
Globalization impacting India also in 1990, the Government set up a
committee headed by Prof. K.N. Kabra in 1993 to examine the role of
futures trading.
88
The Kabra Committee Report advised to strengthen the Forward Market

Commission (FMC) and Forward Contract Act, 1952 by means of improving
infrastructure, telecommunication, functioning of the exchanges, adequate
norms, automation of trading in exchanges, regulation to designing and
trading of futures contracts, establishing strong vigilance committee. It
also recommended futures trading in 17 commodity groups namely
basmati rice, ground nuts, sesame seed, sunflower seed, raw jute cotton,
oil seeds and oil cakes, onion etc. The Government accepted the
recommendations of the Kabra Committee Report and allowed futures
trading in all recommended commodities in 1994.
SEBI set up a committee under the chairmanship of Dr L. C. Gupta

on November 18, 1996, to develop a regulatory framework for
derivatives trading in India. Based on the committee recommendation the
definition of securities was expanded in the Securities Contract Regulation
Act, Amendment Bill, 1998. The Dr. L.C Gupta Committee on Derivatives
had permitted existing stock exchanges having cash trading to trade in
derivative contracts through a separate segment with separate
membership.
In June 1998, the SEBI constituted a group under the

Chairmanship of Prof. J. R. Verma to recommend measures for risk
containment in the derivatives market to be followed by all exchanges and
to inter alia review the recommendation of Dr. L.C Gupta Committee in the
present context. The Advisory Committee gave its recommendation in its
report on "Development and Regulation of Derivative Markets in India".
SEBI decided that the following norms for market structure and
governance shall be adopted by Derivative Segment and its Clearing
House/Corporation
1. Separation of Cash and Derivative Segment of an Exchange and its

Clearing House/Corporation. Trade Guarantee Fund (TGF) /Settlement
Guarantee Fund (SGF) of the derivative segment shall be separate from
the TGF/SGF of cash market segment. Membership of the derivative
segment shall be separate from the cash market segment
2. The Governing Council / Clearing Council / Executive Committees of the

derivative segment shall be separate from the cash market segment.
3. Executive Director or the Managing Director of the Exchange and the

clearing house/corporation, as the case may be, shall assume all
89
responsibility for the duties specified for CEO’s in SEBI Circular No. IES/
DC/ 8726/00 dated May 31, 2002.
4. The quantum of members to be inspected may be linked to the cost and

benefit of inspections and the level of activity of members.
5. The Derivative Exchange/Segment shall work out an appropriate policy

and plan for selecting members to be inspected. The inspection strategy
should lay down: The criteria for identifying the top members (in terms
of level of activity) to be taken up for compulsory inspection; The
percentage of remaining members to be inspected selected on a
sampling basis; Mechanisms should ensure that active members do not
go un-inspected for several years in succession. The inspection policy
and plan for the year shall be submitted to SEBI for approval
On March 1, 2000, the government lifted the three-decade-old prohibition

on forward trading in securities by rescinding the 1969 notification.
Derivatives trading formally commenced in June 2000 on the two major

stock exchanges, the BSE and the NSE Futures trading based on the
Sensex and S&P CNX Nifty
The trading in index options commenced in June 2001 and trading in

options on individual securities commenced in July 2001. Trading in stock
futures commenced in January 2002.
New products such as interest rate futures contracts and futures and
options contracts were introduced in June 2003 and August 2003
respectively.
National level multi commodity exchanges took birth in 2003

inorder to develop and grow the commodity futures trading in
India.
In the present times India has five national commodity exchanges namely,
Multi Commodity Exchange (MCX), National Commodity and Derivatives
Exchange (NCDEX), Indian Commodity Exchange (ICEX), National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE).
90
In 2007, an Expert Committee was set up under the Chairmanship

of Prof. Abhijit Sen, Member, Planning Commission to examine the
impact of futures trading on the unexpected rise in the prices of
agricultural commodities. The committee was of the opinion that the rise in
the agricultural price can not be attributed only to the trading of futures
contracts in agricultural commodities.
During post-financial crises in 2008, Indian commodity market

witnessed an exponential growth in their trading volumes due to switch
over from equity market.
Besides Government efforts to improve the future trading in

commodities various experts gave opinions/ suggestions on the
futures trading / commodities markets for e.g. Ahuja, N. L. (2006)
made a study on Commodity Derivatives Market in India: Development,
Regulation and Future Prospects; Bose, S (2008) made a study on
Commodity Futures Market in India specifically on the trends in the
notional multi-commodity indices, Chng (2009) made a study between
linkage of commodity and equity markets, Sen and Paul (2010) made a
study on price discovery and volatility in food prices with respect to future
trading in agricultural commodities, Sehgal (2012) made a study on the
price discovery relationship on certain agricultural commodities which was
useful for policy makers, hedgers and investors to understand the role of
futures market, Chauhan, Singh and Arora (2013) made a study on
commodity futures markets and the price discovery function in the spot
market, Goswami and Mukherjee (2015) made a study of risk-return based
on the performance of agricultural commodity futures, Singh (2015) made
a study useful to understand the suitability of futures contract in
developing agricultural commodity market in agricultural based Indian
economy, Masood and Chary (2015) made a research on the Indian
commodity futures market to determine the price discovery, long-run
market efficiency and short-run dynamics in futures market, Raghavendra
(2016) made a research on the relationship between spot and futures
markets of selected agricultural commodities in India.
91
4.3 MERGER OF FORWARD MARKETS COMMISSION WITH

SEBI
The Forward Markets Commission (FMC) which was regulating the

trading of derivatives contracts of agriculture and metal commodities was
merged into SEBI in October 2015 by the Government of India. SEBI is
controlled by the Ministry of Finance, Department of Economic Affairs,
Government of India. In the Union Budget for FY 2015-16, the Hon’ble
Union Finance Minister proposed merger of Forward Markets Commission
(FMC) with the Securities and Exchange Board of India (SEBI). The merger
was supposed to bring convergence of regulations, harnessing economies
of scope and economies of scale for the exchanges, financial firms, and
other stakeholders. It was also expected that under SEBI the commodity
derivatives market will be brought at par with the securities market in all
aspects such as technology, new products and participants, regulation/code
of conduct for intermediaries, risk management, regulations, supervision,
surveillance, investor protection and the enforcement framework.
Pursuant to Central Government notifications F. No. 1/9/SM/2015 S.O.

2362 (E) and F. No. 1/9/SM/2015 S.O. 2363 (E) under the powers
conferred by Finance Act, 2015, the FMC was merged with SEBI on
September 28, 2015 and the Securities Contracts (Regulation) Act, 1956
was amended to include commodity derivatives within the definition of
securities and Forward Contracts (Regulation) Act, 1952 (FCRA) was
repealed.
92
In order to ensure smooth transition and merger process SEBI initiated the
following actions:
• Commodity Cell for preparing road map and successful execution of the
merger process
• Initiated interaction international regulators/exchanges to understand the
regulatory framework for commodity derivatives markets in other
countries
• Carried out the gap analysis of SEBI Regulations/norms in equity/equity
derivatives market vis-à-vis norms in commodity derivatives markets
• Necessary changes in various regulations especially the Securities
Contracts (Regulation) (Stock Exchanges and Clearing Corporations)
(Amendment) Regulations, 2015 and SEBI (Stock Brokers and Sub-
brokers) (Amendment) Regulations, 2015 were brought in
• A separate department ‘Commodity Derivatives Market Regulation
Department (CDMRD)’ was created for focusing on the policy issues in
Commodity Derivatives market
• In other departments such as Market Intermediaries Regulation &
Supervision Department (MIRSD), Integrated Surveillance Department
(ISD), Investigations Department (IVD), Department of Economic Policy
and Analysis (DEPA), Legal Affairs Department (LAD), Enforcement
Department (EFD) the work related to commodity derivatives market was
completely merged at department level by creating dedicated divisions
• In order to increase robustness and to streamline the Risk management
and margining framework across National Commodity Derivatives
Exchanges, norms were issued by SEBI right after the merger which inter
alia prescribed guidelines for margin calculations, margin collection, Base
Minimum Capital, acceptable forms of Liquid Asset deposits with
appropriate haircuts and concentration limits etc. Subsequently, Risk
management norms for regional commodity derivatives exchanges were
also prescribed by SEBI.
• To bring the surveillance of the commodity derivatives market at par with
Equity markets, data acquisition equipment’s were installed and
connectivity was established with national commodity derivatives
exchanges thereby integrating trading data with IMSS (Integrated Market
Surveillance System) and DWBIS (Data Warehousing and Business
93
Intelligence System) surveillance systems of SEBI. Data Integration

facilitated in generation of commodity market reports and alerts in
DWBIS and IMSS systems.
• Various presentations/workshops were held with FMC/Commodity
Derivatives Exchanges/Commodity Derivatives Brokers/Market experts/
Consultants for understanding the nuances of commodity derivatives
market and its ecosystem.
• Various teams of SEBI officials visited commodity market ecosystem such
as exchanges, warehouses, mandis, and vaults etc. to understand the
process of deposit, delivery and storage of commodities
• SEBI officials were also provided training on the commodity derivatives
market by market expert
• The guidelines on a comprehensive risk management framework were
issued to streamline the risk management framework across the national
commodity derivatives exchanges in India. This framework has been
operationalised from January 01, 2016. The risk management norms for
regional commodity derivatives exchanges were prescribed by SEBI.
• The Guidelines were also issued wherein existing members of commodity
derivatives exchanges were mandated to obtain registration from SEBI
under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
• SEBI prescribed timelines for commodity derivatives exchanges to
comply with the provisions of the SC(R) Act, 1956 and the regulations,
the rules and the guidelines made under the SC(R) Act, 1956 for e.g.
Corporatisation and demutualisation of regional commodity derivatives
exchanges: Three years from the date of the merger, Setting up of a
clearing corporation: Three years from the date of the merger, Net-worth
requirements: By May 05, 2017 for national commodity derivatives
exchanges and within three years from the date of the merger for
regional commodity derivatives exchanges etc.
• SEBI prescribed the minimum criteria (for example, for national level
commodity derivatives exchanges a minimum turnover of Rs1,000 crore
per annum and for regional commodity derivatives exchanges a minimum
of 5 per cent of the nation-wide turnover of the commodity, principally
traded on the regional commodity derivatives exchanges) and also
specified the various terms and conditions that the commodity
derivatives exchanges have to comply, failing which they need to
94
surrender their recognition either voluntarily or as a result of withdrawal

of the recognition as proposed by SEBI
• With a view to curbing speculative participation and consequent volatility
in the prices of agricultural commodities, SEBI revised price limits and
position limits for agricultural commodity derivatives for e.g. Reduction in
position limits for near-month contracts for both the member and the
client level from the present 50 per cent to 25 per cent of the overall
position limits for all contracts expiring in March 2016 and onwards,
Reduction in the daily price limits (DPL) from 6 per cent to 4 per cent
with effect from February 01, 2016 etc.
• SEBI reviewed the performance and operations of the forward contracts
being traded on the commodity derivatives exchanges and decided (as a
risk management measure) that the participants in the forward segment
will not be allowed to enter into fresh contracts till further orders.
• SEBI has advised commodity derivatives exchanges to submit monthly
development reports, as per a prescribed format from April 2016
onwards and ensure that these reach SEBI by the 7th of the succeeding
month.
• SEBI has aligned and streamlined the norms governing commodity
derivatives exchanges with those of the stock exchanges on the following
issues : Annual system audit, business continuity plan (BCP) and disaster
recovery (DR) for the national commodity derivatives exchanges,
Investor grievance redressal system and arbitration mechanism, testing
of the software used in or related to trading and risk management,
modification of client codes post execution of the trades on the national
and regional commodity derivatives exchanges, cyber security and cyber
resilience frameworks of national commodity derivatives exchanges
• The Commodity Derivatives Advisory Committee (CDAC) was constituted
under the chairmanship of Professor Ramesh Chand, member, NITI
Aayog, to advise SEBI for effectively regulating and developing the
commodity derivatives market. The committee will advise SEBI on
various aspects related to the commodity derivatives market, which,
inter-alia, include measures for improving the market structure, market
safety, efficiency, transparency, aspects related to the regulation of
intermediaries, investor protection, contract design and new products,
warehouses and delivery mechanisms and governance of commodity
derivatives exchanges. The Commodity Derivatives Advisory Committee
95
(CDAC) provides a platform for interaction and deliberation on issues

related to the commodity derivatives market and also acts as a platform
for SEBI to evaluate its regulatory and development activities.
Source:https://www.sebi.gov.in/reports/annual-reports/aug-2016/annual-
report-2015 16_33014.html
4.4 SEBI’S CONTRIBUTION TO THE GROWTH OF

COMMODITIES MARKET
The Indian commodity derivatives segment witnessed mixed trends during

2016-17 in the midst of turnaround in global commodity markets, robust
domestic macroeconomic indicators, price stability and unprecedented
demonetization. The metal segment exhibited gains but the volumes and
value traded of energy, bullion and the agricultural commodity derivatives
segment declined during the year. The underlying markets in the
agricultural futures segment witnessed intermittent price fluctuations
triggered by demand-supply mismatches during 2016-17. In 2016-17,
global commodity prices recovered from the sharp declining trend
witnessed in the last two years. As per the commodity price data released
by the World Bank Global food prices increased by 5.0 per cent during
2016-17. During 2016-17, the total number of permitted commodities
remained unchanged at all the commodity exchanges. As on March 31,
2017, NCDEX had the highest number of permitted commodities at 25,
followed by MCX (16) and NMCE (13). At MCX, the share of agricultural
(agri) commodities in the total turnover was 2.4 per cent in 2016-17. The
top-10 agriculture commodities contributed 93.2 per cent to NCDEX’s
turnover in 2016-17. At NMCE, rape/mustard seeds were the most traded
agri commodity with a percentage share of 24.0 per cent in the
consolidated turnover of the exchange, followed by isabgul seeds at 22.3
per cent and raw jute (19.1 per cent).
report-2016-17_35618.html
In 2017-18, the Indian commodity derivative markets were affected by

demand and supply imbalances, changes in domestic policies relating to
tax, trade and tariffs, geopolitical tensions and commodity-specific factors,
including weather conditions.
96
On the regulatory front, SEBI continued to further reform, support and

deepen the commodity derivative markets through various initiatives in
2017-18, which included introduction of commodity options, expansion of
futures into more commodities, permission to category III AIFs to
participate in commodity derivative trading, principle based methodology to
fix open position limits for agricultural commodities vis-à-vis ‘deliverable
supply’ etc. The permission granted by SEBI to trade diamond futures and
brass futures has resulted in India becoming pioneer in these products in
the global commodity derivative trading map.
Trading activity at commodity derivatives exchanges eased down in

2017-18 as compared to previous year. The aggregate turnover at the
commodity exchanges witnessed a fall due to lower trading volumes in
Bullion, Energy and Agriculture segment during the year. However, trading
in metal segment exhibited significant increase in 2017-18. Among
commodities traded at exchange platform, Crude oil was the highest traded
commodity in terms of both volume and value. Trading in agriculture
segment exhibited marginal increase in aggregate trading volumes of all
exchanges during the year, however, turnover de-clined due to lower
commodity prices in 2017-18 as compared to previous year.
MCX Comdex and NCDEX Dhaanya, are the two benchmark indices in
Indian commodities derivatives market, which reflect the broad movement
in the commodity prices. While MCX Comdex is a composite index of three
sub- indices viz., MCX Metal, MCX Energy, and MCX Agriculture, NCDEX
Dhaanya is represented by 10 agri commodities. During 2017-18, MCX
Comdex increased by 12.9 per cent to close at 3,663 on March 31, 2018.
NCDEX Dhaanya declined by 1.4 per cent and closed at 3,037 on March 31,
2018, due to fall in prices of Chana, Castor seed, Jeera, Cotton seed oil
cake and Coriander.
As per the commodity price data released by World Bank, the index
(annual average) for Energy prices (based on nominal US dollars)
increased by 17.0 per cent in 2017-18, as compared to 4 per cent in
previous year; while the Metal & Minerals index (annual average) recorded
a growth of 19.6 per cent during the year against 6.9 per cent recorded in
2016-17. The global food price and agriculture commodity price indices
(annual average) declined by 1.4 per cent and 2.4 per cent, respectively in
2017-18, as compared to an increase of 7.1 per cent and 4.2 per cent,
97
respectively in previous year. World agricultural (agri) commodities prices

softened in 2017-18 amid sufficient supplies in most of the market.
During 2017-18, the total number of commodities permitted for trading at

MCX increased to 19 due to inclusion of two new commodities in
Agriculture and one commodity in Metal segment. At NCDEX, the total
number of permitted commodities increased to 26 in 2017-18 from 25 in
previous year. NCDEX reported addition of two commodities in agriculture
segment, along with reduction of one in Bullion segment. ICEX launched
the world’s first diamond derivatives contracts on August 28, 2018 and
recorded a turnover of Rs 2,158 crore during 2017-18. At Hapur
commodity exchange, the commodity specific exchange for Rape/Mustard
seed, the total turnover in 2017-18 was Rs 2,934 crore, lower by 63.0 per
cent from Rs 7,923 crore in previous year
The aggregate turnover at all the exchanges in commodity derivative

segment decreased by 7.3 per cent to Rs 60,22,530 crore in 2017-18 from
Rs 64,99,637 crore in 2016-17. The lions’ share in the all-India turn-over
was recorded at MCX (89.6 per cent), followed by NCDEX (9.8 per cent)
and NMCE (0.6 per cent).
In a major development in commodities derivatives market, SEBI

permitted trading in options in 2017-18. MCX, launched India’s first
commodity options in Gold on October 17, 2017. The Gold option contract
at MCX are European styled options with Gold futures as the underlying
asset. On Jan 14, 2018 NCDEX launched the options trading in Guar seed,
which is the first agri-commodity options in India.
As compared to previous year, share of agri commodities increased to 12.3

per cent in 2017-18 from 11.9 per cent in 2016-17. Of the aggregate all
India turnover in commodity derivatives, 87.7 per cent was contributed by
non-agri commodities. At MCX, the share of agricultural (agri) commodities
in the total turnover at the exchange was 2.1 per cent. At NCDEX, Guar
Seed was the most traded agri commodity with a percentage share of 22.2
per cent in the total turnover at the exchange. Soybean with a share of
13.0 per cent, followed by Soy Oil (12.6) per cent), Guargum (11.0 per
cent) and Chana (9.6 per cent) were the other most traded commodities at
NCDEX during the year. The top 5 agri commodities contributed 68.2 per
cent of the turnover at NCDEX. At NMCE, Rape/Mustard Seed was the most
traded agri commodity with a percentage share of 25.6 per cent in the
98
total turnover of the exchange, followed by Raw Jute at 24.2 per cent and
Isabgul seed (20.7 per cent). The top 3 commodities accounted for 70.6
per cent share of total turnover at NMCE.
During 2018-19, Government of India raised the Minimum Support

Price(MSP) to provide 50 per cent return over the cost of production. To
support theagricultural sector, Government also launched PM-KISAN
scheme during the year, which aims to provide direct monetary support to
farmers. At regulatory front, SEBI permitted eligible foreign entities having
actual exposure to Indian commodity markets to hedge their price risk by
participating in commodity derivatives trading. Market was further
broadened by permitting mutual funds to participate in commodity
derivatives market. The accelerating economic activity of 2017-18, started
displaying signs of slowdown receding growth rates, in almost all regions of
the World in the year 2018-19. However the Indian economy still holds the
potential toregister strong growth rates.
The broker turnover fees for agri-commodity derivatives was reduced by

93.3 per cent to Rupee One per crore turnover from Rs 15 per crore
turnover. The reduced cost of trading is expected to boost the participation
in agri-commodity derivatives in India.
Pursuant to the Central Government’s notifications and under the powers

conferred by the Finance Act, 2015, the Securities Contracts (Regulation)
Act, 1956 (SCRA) was amended to include commodity derivatives within
the definition of securities.
SEBI permitted setting up of universal exchanges (enabling trading of

commodity derivatives and other segments of securities market on single
exchange) with effect from October 01, 2018. During the year, the
universal exchange principle was operationalized when BSE and NSE
commenced their commodity derivatives trading platform. NSE and BSE
have launched commodity derivatives segments effective from October 12,
2018 and October 01, 2018, respectively on their Exchange platform. On
the other hand, NMCE which had a presence in agricultural space, was
merged with ICEX on September 24, 2018. New products, viz., Steel long
(ICEX) and Oman Crude Oil (BSE) were also introduced during the year.
99
In different orders passed on June 29, 2018 and December 31, 2018, SEBI
provided exit to the Hapur Commodity Exchange Limited (HCEL) and ACE
Derivatives and Commodity Exchange Limited respectively.
SEBI has granted recognition to Multi Commodity Clearing Corporation

Limited (MCXCCL) for a period of one year commencing on July 31, 2018
and ending on July 30, 2019 and to National Commodity Clearing Limited
(NCCL) as a Clearing Corporation from September 10, 2018 to September
09, 2019. SEBI vide letter dated September 27, 2018 granted approval to
ICEX to transfer it’s clearing and settlement functions to Metropolitan
Clearing Corporation of India Limited (MCCIL).
A review of market operations, organisational structure and administrative

control of the commodity derivatives exchanges was conducted by SEBI
through periodic reporting as well as carrying out inspections to ascertain
as to : whether it provides a fair, equitable, transparent and growing
market to investors; whether its organisation system and practices are in
accordance with the SCRA and the rules framed thereunder; whether it has
implemented the directions, guidelines and instructions issued by SEBI /
Government of India from time to time; whether it has complied with the
conditions, if any, imposed on it at the time of renewal/ grant of its
recognition under Section 4 of the SC(R) Act, 1956/grant of its recognition
under Section 4 of the SC(R) Act, 1956.
During 2018-19, MCX, ICEX and NCDEX added 64, 58 and 20 new brokers/
trading members in their commodity segment. As SEBI allowed launch of
Universal Exchanges in Indian capital market in 2018-19, BSE and NSE
added 258 and 242 trading members respectively in their newly launched
commodity segment. The number of corporate brokers was highest in MCX
(583) followed by NCDEX (336), BSE (242), NSE (224) and ICEX (103).
The number of stock brokers in ‘proprietorship’ category was highest at
MCX (57), followed by ICEX (20), NCDEX (17), BSE (4) and NSE (3). The
number of stock brokers in ‘partnership’ category was highest in MCX (53)
followed by NCDEX (28), ICEX (14), NSE (9) and BSE (5).
SEBI has been undertaking measures to create more awareness about the
commodities derivatives traded in Indian market, benefits of derivatives
contracts on commodities etc. With theintent of increasing awareness
about commodities derivative segment, specifically among farmers, traders
etc. so as to increase their participation in this market segment, SEBI has
100
developed a Scheme for conduct of Awareness Programmes for

Commodities Derivatives in 2017-18. The target audience for such
programmes are farmers / producers, farmers’ cooperatives/ groups,
processors etc.
SEBI also actively participates in several conferences and symposiums

organised by international organisations like IOSCO, OECD etc to shares its
experiences in the areas of financial education, investor education, etc. and
also draws experiences from other regulators. Such initiatives promotes
and facilitates international cooperation between policy makers and other
stakeholders for financial education initiatives worldwide. IOSCO has been
organising every year a week long global campaign referred to as World
Investor Week (WIW). SEBI participated in IOSCO WIW by organising
various financial literacy and investor awareness programmes during this
week across the country. SEBI was the national coordinator of WIW -2018
for India and conducted and co-ordinated various investor and financial
education activities throughout the nation in association with stock
exchanges viz. National Stock Exchange of India Ltd (NSE) and Bombay
Stock Exchange Ltd. (BSE); commodities derivative exchanges viz. Multi
Commodity Exchange of India Ltd (MCX) and National Commodity &
Derivatives Exchange Limited (NCDEX); depositories viz. National
Securities Depository Limited (NSDL) and Central Depository Services
(India) Ltd,(CDSL)
In 2018-19 SEBI took various measures for integration and harmonious

development of commodity derivatives market with an aim to build a
regulatory ecosystem as advanced as the securities market. SEBI has
opened up to domestic as well as foreign institutional participants in a
phased manner to further broaden the commodity derivatives market.
101
The major policy initiatives taken by SEBI relating to this commodity

derivatives segment during 2018-19:
Pursuant to recommendations of the Commodity Derivatives Advisory

Committee (CDAC) and feedback received from market participants, SEBI
vide its circular dated October 09, 2018 permitted foreign entities having
actual exposure to Indian commodity markets, known as EFEs, to
participate in the commodity derivatives market and laid down the
requisite regulatory framework for the same.
In order to enable the participation of institutional investors in commodity

derivatives market, SEBI Board in its meeting held on December 12, 2018
approved the proposal for allowing custodians to provide custodial services
in goods underlying commodity derivative contracts. Pursuant to the
above, amendments to relevant provisions in the SEBI (Custodian)
Regulations, 1996 have been notified.
Pursuant to the goal of integration of commodity derivatives market with

rest of the securities market, necessary amendments to Securities
Contracts (Regulation) (Stock Exchanges) and Clearing Corporations)
Regulations, 2012 were carried out to permit universal exchanges
(enabling trading of commodity derivatives and other segments of
securities market on single exchange) with effect from October 01, 2018.
Subsequently, two exchanges namely NSE and BSE have launched
Commodity derivatives segment and thus are universal exchanges offering
trading in all segments.
On the basis of consultations and recommendations of CDAC, vide circular

dated November 30, 2018, SEBI decided to extend the trade time within
which recognized stock exchanges can set their trading hours for their
commodity derivatives segment as follows:
102
Commodity
Trade Start Time Trade End time
Category
After Start of US After End of US
Day light Savings Day light Savings
in Spring Season in Fall Season
Non-Agricultural 09:00 AM 11:30 PM 11:55 PM
Commodities
Agricultural and 09:00 AM 09:00 PM
Agri-processed
Commodities
Taking into account the feedback received from stakeholders, exchanges

have decided to keep trading hours for agri-commodity derivatives
contracts (other than internationally referenceable agri-commodities) from
9:00 am to 5:00 pm.
In the commodity derivatives market, differential “trading lot size” and

“delivery lot size” of some commodity derivatives contract, at times, puts
participants in disadvantageous positions. Based on the recommendation of
CDAC, SEBI vide its circular dated January 23, 2019 directed that the
exchanges shall follow the policy of having uniform trading and delivery lot
size for the commodity derivatives contracts and provided for exemption
from the same only on stock exchange submitting detailed rationale for
keeping different lot size for trading and delivery with respect to any
contract.
To encourage the participation by Farmers / Farmer Producer Organizations

in agricultural commodity derivatives market, SEBI has reduced the
regulatory fee on Stock Exchanges with respect to turnover in agricultural
commodity derivatives. Vide circular dated March 20, 2019, SEBI has
specified that exchanges shall create an earmarked fund out of the
regulatory fee foregone by SEBI and has given guiding principles for
exchanges to follow for the purpose of utilisation of the fund.
SEBI vide circular dated September 27, 2016 had prescribed certain norms
regarding disclosures by Stock Exchanges on their website for commodity
derivatives. In order to further enhance transparency to the public in
commodity derivatives market, on recommendation of the CDAC, SEBI vide
its circular dated January 04, 2019 has directed all recognized stock
103
exchanges to make additional disclosures on their website regarding

commodity wise and category wise open interest and turnover.
In order to rationalize security deposit and after consultation with WDRA &
exchanges/ clearing corporations, SEBI vide its circular dated February 11,
2019 specified a framework wherein the deposits placed by WSPs with
WDRA for exchange/clearing corporation specific outstanding electronic
negotiable warehousing receipts (eNWRs) shall be considered by clearing
corporations in the calculation of available FSD of the WSP towards
required FSD under SEBI norms. The framework also provides for such
deposits with WDRA to be made available to Clearing Corporation in case
the deposits of WSP available with clearing corporation are insufficient to
compensate for the loss to clients from any action or inaction of WSP or its
warehouses.
In order to bring uniformity in the procedure adopted by the exchanges, in

obtaining samples for the purpose of assaying of goods at exchange
accredited warehouses and to resolve potential quality related disputes,
SEBI vide circular dated October 16, 2018 directed exchanges to ensure
that adequate samples of goods are collected and retained and also
specified the minimum number of samples to be taken.
In 2017-18, SEBI had issued guidelines for deciding appropriate settlement

mode for commodity derivatives contracts stating that first choice of
settlement mode for any commodity future shall be compulsory physical
delivery. Keeping in spirit with the provisions of the circular, SEBI has
directed exchanges to convert, as far as possible, all commodity futures
contracts to compulsory physical delivery. Only those commodities where
physical delivery is not possible because of infrastructure or other
constraints have been allowed to retain other settlement mode.
SEBI, vide its circular dated August 27, 2014 had issued norms related to
core settlement guarantee fund, default water fall, back testing etc. for
recognized clearing corporations and stock exchanges. Vide circular dated
July 11, 2018, SEBI extended those norms to clearing corporations clearing
commodity derivatives transactions. SEBI also prescribed modified
standardized stress testing scenarios and methodology for carrying out
daily stress testing for credit risk for commodity derivatives, in light of the
different features and concerns of commodity derivatives market.
104
CDAC has proposed that “Developmental group” and “Regulatory group”

can be assigned various developmental and regulatory issues for
deliberation and examination from time to time so as to assist CDAC to
advise SEBI on various important policy matters in a better way.
i. Developmental Sub-Group: This group shall deliberate and recommend

on issues related to development of commodity derivatives market
including new products and increasing participation in the commodity
derivative market especially hedgers, awareness programs, new
commodities, etc.
ii. Regulatory Sub-Group: This group shall deliberate and recommend on

issues related to regulation of the commodity derivatives market including
review of spot polling process mechanism, co-location issues, penalty
structure, rationalization of cost of trading and position limits etc
The exchanges recorded increased trading activity in commodity

derivatives in 2018-19 as compared to previous year. The aggregate
turnover increased in Metals, Bullions and Energy segment, but declined in
Agricultural segment. The share of Agricultural segment declined to 8.8 per
cent from 12.3 per cent in aggregate turnover of all exchanges. Crude oil
was the highest traded commodity in terms of both volume and value.
According to provisional estimates of National Income released by CSO, the

growth in Gross Value Added (GVA) for agriculture and allied sectors is
estimated to slowdown to 2.9 per cent in 2018-19 as against 5.0 per cent
in 2017-18. Due to low monsoon and post-monsoon rains, the foodgrain
production in India is projected to decrease in 2018-19. Among the
commodities traded at commodity exchanges, production of Castor Seed,
Cotton, Chana, Barley, Maize and Jute is estimated to decline in 2018-19.
Soybean, Rape/Mustard seed and Wheat are estimated to witness an
increase in production.
The benchmark commodity indices - MCX COMDEX and NKrishi Index

(earlier known as Dhaanya Index), recorded an uptrend in 2018-19. MCX
COMDEX, which is a composite index representing Agriculture, Metal and
Energy segment, increased by 2.1 per cent, while, the NKrishi - the agri
commodity index, moved up by 12.4 per cent during the year. During
2018-19, NKishi Index increased as seven out of 10 constituent
commodities, viz., Chana, Guar Seed, Castor Seed, Cotton Seed Oilcake
105
Coriander and Barley, recorded rise in futures prices. The annualised

volatility for MCX COMDEX in 2018-19 was 13.4 percent as compared to
9.8 percent in previous year. As regards NKrishi Index, the annualised
volatility increased to 12.9 percent during the year, as compared to 10.9
percent in 2017-18.
In 2018-19, majority of agricultural, metal and minerals prices recorded

declining trendsin global markets. The weakness in metal and agricultural
commodities mainly reflected concerns on slower world economic growth,
U.S - China trade tensions and other commodity specific fundamentals.
Agricultural commodities prices were supported by lower soybean
production in U.S. and higher input costs, viz., fuel and fertilizer.
As per the commodity price data released by World Bank, the index
(annual average) for Energy prices (based on nominal US dollars)
increased by 19.7 per cent in 2018-19, as compared to 16.7 per cent in
previous year; while the Metal and Minerals index (annual average)
recorded a fall of 0.5 per cent during the year against 19.6 per cent
increase recorded in 2017-18. The global food prices and agriculture
commodity prices indices (annual average) declined by 1.6 per cent and
1.7 per cent, respectively in 2018-19, as compared to fall of 1.0 per cent
and 2.2 per cent, respectively in previous year.
During 2018-19, the total number of commodities permitted for trading

increased at MCX and ICEX, while it declined for NCDEX, as compared to
previous year. At MCX, the permitted commodities increased to 21 from 19
in previous year as it added Rubber and Diamond to the list of permitted
commodities during the year. NMCE, one of the first commodity derivatives
exchanges, was merged with ICEX in 2018-19. Post-merger, all the agri-
commodity contracts traded at NMCE were migrated to the ICEX platform,
leading to significant increase in number of permitted as well as traded
commodities at ICEX. BSE and NSE launched trading in commodity
derivatives during the year. At BSE, both agri as well as non-agri
commodities are permitted to trade. NSE provides trading in only non-agri
commodities.
106
The aggregate turnover at all the exchanges in commodity derivatives

segment increased by 22.6 percent to Rs 73,77,945 crore in 2018-19 from
Rs 60,19,894 crore in 2017-18. During the year, due to significantly high
trading volumes in energy segment, the MCX’s share in the all-India
commodity derivatives turnover increased to 91.8 per cent from 89.6 per
cent in 2017-18, while the share of NCDEX declined to 7.2 per cent from
9.8 per cent in previous year.
During 2018-19, aggregate commodity derivatives turnover at MCX,

increased by 25.6 per cent to Rs 67,72,373 crore, while that of NCDEX,
declined by 9.9 per cent to Rs 5,31,588 crore. During the year, the futures
turnover at ICEX increased 11 times to Rs 24,061 crore due to higher
trading volumes in Diamond futures, in addition of Steel long futures in
metal segment and migration of agri commodities traded at NMCE to ICEX
platform. In 2018-19, ICEX commenced trading in agricultural and Metals
segment, in addition to Gems and Stones segment, which contributes to
the lion’s share (78.6 per cent) in futures turnover at the exchange. Since
commencement of commodity trading in October 2018, BSE recorded a
turnover of Rs 32,804 crore, while NSE’s turnover stood at Rs 3,444 crore.
In 2018-19, non-agri commodities accounted for 91.2 per cent of the

aggregate commodity derivatives turnover of all the exchanges, while the
balance 8.8 per cent was contributed by agri commodities. Overall
agriculture segment accounted for 8.8 per cent share in total turnover of
all commodity derivative exchanges in 2018-19, as compared to 12.3 per
cent in previous year. Of this, NCDEX and MCX had a share of 81.5 per
cent and 15.5 per cent, respectively. The top five agri commodities had a
share of 55.0 per cent in overall agri commodity derivatives turnover
across exchanges in 2018-19. The top five agri commodity derivatives were
of Guar seed contracts, Castor seed contracts, Soybean contracts ,
Gaurgum contracts and Chana contracts.
Overall, non-agriculture segment accounted for 91.2 percent share in total

turnover of all commodity derivatives exchanges in 2018-19, as compared
to 87.7 per cent in previous year. MCX accounted for lion’s share of 99.2
per cent of non-agri turnover across the commodity derivatives exchanges.
The top five non-agri commodities had a share of 79.6 per cent in overall
non-agri derivatives turnover across commodity derivatives exchanges in
2018-19. The top five non-agri commodity derivatives were of Crude Oil
107
contracts, Zinc contracts, Gold contracts, Silver contracts and Copper

contracts.
During 2018-19, futures prices of commodities traded at commodity

derivatives exchanges witnessed divergent trends. Cotton Seed oil cake,
Cardamom, Maize, Coriander and Mentha Oil were the top gainers in agri
segment, recording an increase in futures prices by 64.6 per cent, 60.3 per
cent, 42.1 per cent, 32.4 per cent and 31.7 per cent, respectively during
the year. Crude Palm Oil, Pepper and Turmeric were the top losers in agri
segment observing a fall of 20.8 per cent, 9.4 per cent and 8.0 per cent,
respectively during 2018-19. At MCX, Natural Gas was the most volatile
commodity during 2018-19 with 3.0 per cent average daily volatility in
futures prices. Guargum, Cotton Seed Oilcake, and Coriander were the
most volatile commodities traded at NCDEX. In 2018-19, Oman Crude Oil,
the newly traded commodity at ICEX, witnessed an average daily volatility
of 2.3 per cent, followed by Cardamom and Guar Seed. The Brent Crude
launched for the first time by NSE was the top volatile commodity at the
exchange.
At MCX, client trades contributed for 61.8 per cent of the turnover in agri
segment in 2018-19, while it was 72.4 per cent for non-agri segment. At
NCDEX, 55.5 per cent of the turnover in 2018-19 was from client trades.
ICEX also recorded higher client turnover in agri segment (92.8 per cent)
as well as non-agri segment (54.5 per cent). At BSE and NSE, majority of
the turnover was accounted for Proprietary trades. During the year, BSE
recorded 93.0 per cent, while NSE witnessed 82.1 per cent of turnover
from proprietary trades.
108
Exchange-wise Share in Commodity Derivatives Turnover in

2018-19
Commodity Exchange Share in Commodity Derivatives Turnover

MCX 91.8%
NCDEX 7.2%
BSE 0.4%
ICEX 0.3%
NMCE 0.2%
NSE 0.0%
Total 100%
Major Indicators of the Commodity Derivatives Market
Percentage
Items 2017-18 2018-19 variation over
previous year
Total Turnover
(Rs Crore)
All-India 60,19,894 73,77,945 22.6
MCX, of which 53,93,350 67,72,373 25.6
Futures 53,82,996 65,91,428 22.4
Options 10,354 1,80,945 1647.6
NCDEX, of which 5,89,795 5,31,588 -9.9
Futures 5,89,497 5,31,414 -9.9
Options 298.31 173.87 -41.7
NMCE 34,591 13,675 -60.5
ICEX 2,158 24,061 1014.7
BSE NA 32,804 NA
NSE NA 3,444 NA
109
No. of Permitted
Commodities in
Commodity
Futures
NCDEX 26 23 -11.5
MCX 19 21 10.5
NMCE 11 11 0.0
ICEX 3 14 366.7
BSE NA 7 NA
NSE NA 4 NA
No. of Permitted
Commodities in
Options
NCDEX 1 5 400.00
MCX 1 5 400.00
Source:https://www.sebi.gov.in/reports/annual-reports/jul-2019/annual-
4.5 UNITED NATIONS CONFERENCE ON TRADE AND

DEVELOPMENT AND INTERNATIONAL ORGANIZATION OF
SECURITIES COMMISSIONS
The United Nations Conference on Trade and Development

(UNCTAD) Study Group on Emerging Commodity Exchanges (comprises
leading exchanges from five developing countries – Brazil, China, India,
Malaysia and South Africa) has been formed to raise awareness about the
role and performance of emerging commodity exchanges, to share
experience and perspectives, to promote innovative practice, and to foster
South–South dialogue. In one of its empirical investigation to study the
development impacts arising from commodity exchanges in developing
countries with a special focus on the agricultural sector, including small-
scale commodity producer, it made an attempt to identify, analyse and
assess the impacts made by commodity exchanges in developing countries
on economic growth, development, and poverty reduction, with a particular
110
focus on the agricultural sector and farmers. The study report suggests
that suggests that a commodity exchange and specific commodity
contracts can be successfully established under a broad range of market
conditions. The study report has also observed that multiple exchanges
have shaped according to specific requirements arising from the local
context, responding to the specific needs of stakeholders along the
respective commodity chains and exchanges have been able to function in
this range of situations by demonstrating significant versatility in purpose,
function, structure, and services offered. It was found by the study report
that exchange services can be accessed and used by farmers to enhance
their marketing and risk management capacity, including through reducing
exposure to price and, potentially, production risks. It has made a specific
note on countries like India where smallholder production is the
predominant pattern.
The study found that exchanges can yield other impacts such as
broadening access to markets; empowering farmers to make better
cropping and selling decisions; reducing information asymmetries that
have previously advantaged more powerful market actors; upgrading
storage, grading and technology infrastructure; and expanding access to
cheaper sources of finance. The study report has emphasized on
appropriate enabling framework, effective ongoing regulatory oversight,
and a commitment by Government to respect the market pricing
mechanism for establishment and development of commodities futures
exchanges and the development of an exchange should be integrated
within a holistic commodity strategy that incorporates complementary
measures to build the productive and marketing capacity of farmers and to
upgrade sectoral infrastructure and institutions. The study report has also
suggested to educate all stakeholders extensively about the markets and
trained in how they may be constructively used.
The International Organization of Securities Commissions (IOSCO)

is the international body that brings together the world's securities
regulators and is recognized as the global standard setter for the securities
sector. IOSCO develops, implements and promotes adherence to
internationally recognized standards for securities regulation. It works
intensively with the G20 and the Financial Stability Board (FSB) on the
global regulatory reform agenda.
111
The UNCTAD and World Bank Joint Mission Report of 1996

highlighted the role of futures markets for managing risks and suggested
the strengthening of regulatory role and the exchanges for efficient
performance of these markets.
Activity 1. Study the different committees appointed by Government to

study the impact of futures trading on Agri commodities prices and make a
detailed note.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2. Read the annual reports of SEBI and make of list of important
regulations and actions taken by SEBI for the growth and development of
agri commodities market.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

1. Write a note on evolution of Commodity Exchanges.
2. List out 5 international Commodity Exchanges.
3. Why was Forward Markets Commission merged with SEBI
4. Write a note on various committees appointed by Government on

futures trading.
5. Explain the role of United Nations Conference on Trade and

Development towards development of commodities market.
112
1. Which stock exchange is believed to be the world’s first stock exchange

established in 1530, which infact was converted into a stock exchange
from the market for the exchange of commodities?
a) Amsterdam Stock Exchange
b) Kansai Commodities Exchange
c] Tokyo Commodity Exchange
d] London Commodity Exchange
2. Under whose chairmanship was a Forward Markets Review Committee

was constituted by the Government of India in 1966 to review the
working of the Forward Markets Commission?
a) A.D. Shroff
b) Prof. M.L.Dantwalla
c) A.M.Khusroo
d) Prof. K.N. Kabra
3. In order to ensure smooth transition and merger process of Forward

Market Commission with SEBI,SEBI initiated which of the following
actions?
a) Commodity Cell for preparing road map and successful execution
of the merger process
b) Initiated interaction international regulators/exchanges to
understand the regulatory framework for commodity derivatives
markets in other countries
c) Carried out the gap analysis of SEBI Regulations/norms in equity/
equity derivatives market vis-à-vis norms in commodity
derivatives markets
4. Which of the following is the international body that brings together the
world's securities regulators and is recognized as the global standard
setter for the securities sector?
a) World Bank
b) UNCTAD
c) International Organization of Securities Commissions
d) IMF
113
5. The Forward Contracts (Regulation) Act, 1952 was enacted to regulate

commodities contracts in India. State whether the above statement is
true or false.
a) True
b) False
Answers: 1.(a), 2.(b), 3.(d), 4.(c), 5.(a)
4.9 REFERENCES
The Indian Financial System: Markets, Institutions and Services by Pathak,
Bharati V
https://bebusinessed.com
https://enrichbroking.in
http://www.managementparadise.com
https://www.jagranjosh.com
https://www.researchgate.net/
https://www.academia.edu/
https://mpra.ub.uni-muenchen.de/
https://www.mbaknol.com
http://www.moneycontrol.com
114
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
115
INDIAN AGRI COMMODITY EXCHANGES
Chapter 5
Indian Agri Commodity Exchanges
Indian Agri Commodities Exchanges. This chapter also intends to make
aware the students about the commodity exchange product specifications
and other information
Structure:
5.1 Introduction to Indian Agri Commodity Exchanges
5.2 Market Participants in the Commodities market
5.3 Members of Commodity Exchanges
5.4 National Commodity & Derivatives Exchange Limited (NCDEX)
5.5 Multi Commodity Exchange of India Limited (MCX)
5.6 Indian Commodity Exchange (ICEX)
5.7 BSE Ltd. (Bombay Stock Exchange)
5.8 National Stock Exchange of India Ltd. (NS
5.12 References
116
5.1 INTRODUCTION TO INDIAN AGRI COMMODITY

EXCHANGES
The stock exchange or market is a place where securities are bought or

sold. Similarly the Agri Commodity Exchanges or markets are a place
where agri commodities are bought or sold. The commodity markets began
with the trading of agricultural products such as corn, cattle, wheat, and
pigs in the 19th century.
Commodities exchanges enables trading in commodities in two ways:
a. Pit trading: Open outcry trading, where traders meet face-to-face and
trade. Trade take some time to execute as the buyer has to deal with
floor broker to confirm and execute the orders. Pit trading can be
favorable in case of large and complex orders and requirement of quick
flow of information between the buyer and seller. Floor brokers are likely
to have better feel of trading requirements.
b. Electronic trading: Price discovery and trading happens online through

the exchanges. Traders of commodities enter their orders onto an
electronic trading platform where exchanges match buyers and sellers.
Trades are executed realtime, instantaneously once confirmed by the
exchange. Electronic trading are cheaper and more transparent than Pit
trading.
The exchanges provide increased marketability and price discovery

mechanism. The process of price discovery allows market participants to
view different trade and decide the best trade suiting their requirements on
real time basis which in turn also facilitates the seller to showcase his deal
and thus culminates into creating more efficient markets. Market
participants can easily compare prices of standardized agri products
described in the agri commodities contracts. The exchange also provides
liquidity to both the buyers and the seller and thus control the price swings
which could have been arise due to lack of liquidity.
117
A agri commodity exchange provides a organized market where future

delivery contracts for graded commodities can be bought and sold. The
buyers of these agri commodity contracts agree to accept delivery of a agri
commodity, and the sellers agree to deliver the agri commodity.
The agri commodity traders rarely deliver any physical commodities

through a agri commodities exchange. The commodity delivery future
contracts are usually closed out or traded before their expiration date.
Electronic exchanges are preferred by traders as there is no separate
physical trading floor. The traditional open outcry trading, where traders
meet face-to-face and trade has almost vanished in the modern times due
to various advantages of trading on commodity exchanges. Commodity
investing has gained popularity due to the hedging process. The Agri
Commodity Exchanges provides rules and procedures for trading
standardized commodity contracts.
The main function of a agri commodity exchange is efficient price discovery

and price risk management. The exchange should ensure that the trading
takes place in an open and competitive environment. Only members are
allowed to enter trades on the exchange either for themselves or on behalf
of their clients. After execution of the order the client is notified by the
member of the exchange who in fact acts as a broker for the client. The
exchange do not participate in the process of price discovery but futures
price gets adjusted based on the demand and supply of the commodities.
The exchange just provides a market place for trading, where supply and
demand variables from around the world come together to discover the
price.
The buyers and sellers at the exchange conduct trading based on their
assessment of inputs regarding specific market information, expert views
and comments, the demand and supply equilibrium, government policies,
inflation rates, weather forecasts, market dynamics, hopes and fears which
transform into a continuous price discovery mechanism. When these
markets keep on assimilating and absorbing new information on a
continuous basis throughout the trading day, this information get
transformed into a new price discovery agreed upon by both the buyer and
the seller. The price of a farmers produce can be derived from the spot
price by adding the cost of transportation, storage, interest to be paid on
the borrowings and reduction in price due to difference in the quality of the
actual agri produce with the standards and specifications. On the other
118
hand a farmer cannot change the quality of the produce if the price starts
falling. Infact certain entities that control the value and supply chains bring
down the commodity price and enjoy the share which could have otherwise
earned by the farmers.
Hedging is the strategy of offsetting price risk that is inherent in a

spot market by taking an equal but opposite position in the futures
market. Hedging is often used as a tool by traders for price risk
management inorder to protect their business from adverse price changes.
Hedging benefits all market participants that are involved in trading of agri
commodities namely farmers, processors, merchandisers, manufacturers,
exporter, importers etc
For e.g.
Wheat miller: makes a contract with bread manufacturer to sell flour after
three months at a spot price of today.
Miller worry: Rise in the price of wheat after three months as a rise in the
price of wheat would result in spending more on buying the wheat to make
the floor as contracted.
Miller does hedging: to safeguard against the risk of rising wheat prices by
buying wheat futures contract. The wheat futures contract shall provide
wheat to the miller after three months at an agreed rate. If there is a rise
in the wheat price after three months, the miller will have to purchase the
wheat in the spot market at the prevailing higher price. However, he can
also sell his contract in the futures market that is bought at a lower price at
a profit and gain since there is an increase in the futures market as well.
He thus hedges the risk of the rise in wheat price by offsetting his purchase
of wheat at a higher cost with selling the futures contract. The miller thus
protects him self from the risk of a loss due to rise in wheat price after
three months and generates profit on the sale of the flour.
Universal exchange concept in the 21st century, where in one exchange

provides trading in stock as well as commodities from several markets.
Such a combined form of super-exchanges offer a broader selection of
contracts that can be traded.
119
Information from the commodity exchange provided in this chapter is for

making students aware inorder to help them to popularize commodity
exchanges for the benefit of students and farmers in particular.
5.2 MARKET PARTICIPANTS IN COMMODITIES MARKET
Commodity markets utilizes innovative and wide variety of products and

hence is attracted by different types of traders namely:
a. Hedgers
b. Speculators (Margin traders, Day traders, Position traders)
c. Arbitrageurs
a. Hedgers: Hedge means to protect oneself. Hedgers use futures or

options markets to reduce or eliminate the risk associated with price of
an asset. They try to hedge the price of their assets by undertaking an
exact opposite trade in the derivatives market.
Hedgers include:
1. Farmers who need protection against rise / decline in the price of farm
produce
2. Wholesalers who buy the farm produce from the farmers for their
production and consumption activities. A lower price can enable them to
ascertain a correct selling price for their products and thus earn profits
3. Food processors and agri tech companies needs protection against rise
in prices of raw materials provided by the farmers
4. Exporters needs protection against rise in rice on farm produce they

have promised to export in the future
5. Importers who want protection against decline in the price of agri

commodities in the local market vis a vis similar agri commodities
imported from abroad.
120
Hedging can be done using Forward contracts and Options
Forward contracts helps the investor to get a fixed price from the hedger
and reduce the risk of adverse price movement that the hedger.
Options contracts helps the investors to protect themselves against

adverse price movements in the future while still allowing them to benefit
from favorable price movements
Hedging example:
Investor has 1000 shares of MAST Ltd. Market price is Rs. 110 at present.
Goal: Sell these shares in six months.
Worry: Price of these shares could fall considerably by then.
Problem : Do not want to liquidate the investment today, as the stock has
a possibility of appreciation in the near-term.
Objective of holding : Like to receive a minimum of Rs. 100 per share

and no less. At the same time, in case the price rises above Rs. 100, you
would like to benefit by selling them at the higher price.
Solution : Hedging : By paying a small price, investor can purchase a

derivative contract called an 'option' that incorporates all your above
requirements. Investor is thus, hedging his risks, and transferring them to
someone who is willing to take these risks.
Hedge Ratios
Hedge ratio is defined as the slope of the regression line defined between
the change in the spot price and change in futures. It Indicates the extent
of variation of the future price relative to the variation of spot price.
121
b. Speculators use futures and options contracts to get extra leverage in

betting on future movements in the price of an asset. Speculators
absorb risk keeping in mind the profits they can generate out of the
absorbed risk. Speculators play a balancing act between the bids and
the offers and make the market cost efficient and stable. Speculators
main aim is to profit from price fluctuations.
Different types of Speculators:
A day trader tries to take advantage of intra-day fluctuations in prices. All

their trades are settled by undertaking an opposite trade by the end of the
day. They do not have any overnight exposure to the markets.
A position trader greatly rely on news, tips and technical analysis – the
science of predicting trends and prices, and take a longer view, say a few
weeks or a month in order to realize better profits. They take and carry
position for overnight or a long term.
A Margin trader: Many speculators trade using of the payment

mechanism unique to the derivative markets. This is called margin trading.
When you trade in derivative products, you are not required to pay the
total value of your position up front. . Instead, you are only required to
deposit only a fraction of the total sum called margin. This is why margin
trading results in a high leverage factor in derivative trades.
Speculators use both Futures and Options
In case of Futures, the potential loss as well as the potential gain is very
large.
In case of Options, loss is limited to the amount paid for the options.
c. Arbitrageurs are in business to take advantage of a discrepancy

between prices in two different markets. Very small arbitrage
opportunities are observed in the prices that are quoted in most
financial markets. As soon as an opportunity is seen arbitrageurs get
out of line to take offsetting positions in the two markets to lock in a
profit.
122
An arbitrageur buys from an underpriced market and sells the same agri
commodity in an overpriced market.
5.3 MEMBERS OF COMMODITY EXCHANGES
Members are the primary link which connects the Exchange with its users.
Only registered members can perform transactions on the exchange
platform. If any one else other than registered members have to transact
on the exchange they will have to become a client of registered members
and perform their transactions through their registered member. Hence it is
important that the registered members should have a high standard of
integrity and should comply with the rules and regulation of the exchange
namely capital adequacy requirements, appropriate staff and
infrastructure.
Every Commodity Exchange have rules and regulation for enabling any
entity to take membership on their exchange. Such rules and regulations
also prescribes the eligibility criteria’s, rights and privileges, margins and
fees payable etc. Even though difference exchanges may prescribe their
own requirements, the basic framework remains the same.
NCDEX allows the following persons to become members:
a. Individuals
b. Sole proprietorships
c. Partnership Firms Registered under Indian Partnership Act, 1932

d. Limited Liability Partnership firm(LLP)registered under limited liability
partnership Act,2008
e. Companies, Corporations or institutions incorporated under Companies

Act, 1956 and 2013 or under any central or state legislation and are
permitted under their Memorandum of Association or applicable
constitution document for engaging in production / trading /
consumption / broking in commodities / derivatives.
f. Such other persons / entities as may be permitted by the relevant

authority of NCDEX.
123
The applicant should comply the following requirement:
1. Minimum Age of Individual/proprietor/partner/directors should be 21

years
2. Minimum education qualification of Individual/proprietor/one of the

partner/one of the director should be at least a graduate or having an
equivalent qualification or adequate experience in commodities/
financial markets
3. Two designated directors/partners should be at least HSC or

equivalent qualification and should have minimum 2 years’
experience in commodities market.
4. All corporate members should have minimum paid up capital of Rs.

30 Lakhs.
Trading-cum-Clearing Members(TCMs) shall be the Members admitted

as such by the Exchange who shall be entitled to trade on Exchange on
behalf of their constituents/clients and/or on their own account and shall
also be entitle to clear and settle all such trade done by them. The
minimum networth for the purpose of eligibility is Rs.100 Lakh.
Interest Free Security Deposit (IFSD) (NCDEX) (in the form of cash only)
10 Lakh
Admission Fee (one time, non-refundable) (NCDEX) (With applicable Tax)

5.00 Lakh
Annual Membership Fees (NCDEX) (With applicable Tax) 0.75 Lakh
SEBI Registration Fees Rs. 0.50 Lakh
SEBI Annual Regulatory Fees Rs. 0.50 Lakh
Trading Member (TM) will have rights to trade on the Exchange platform
on their own account as well as on account of clients registered with them
but shall have no right to clear and settle such trades themselves. TMs will
have to get affiliated with any one of PCM/STCM for clearing their trades/
transaction. The minimum networth for the purpose of eligibility for Non
Corporate (Individuals/Partnership Firm/ LLP/HUF) is Rs. 10 Lakh and for
Corporates is Rs.25 Lakh.
124
Rs10 Lakh

Rs5.00 Lakh
Annual Membership Fees (NCDEX) (With applicable Tax) Rs0.20 Lakh

SEBI Annual Regulatory Fees Not Applicable
Strategic Trading-cum-Clearing Members (STCM) registered with the

Exchange may, in addition to existing rights and responsibilities as TCM,
shall be entitled to and liable to settle and clear the trades/transactions
done by the Members affiliated with it viz. TCMs or TMs. The minimum
networth for the purpose of eligibility is Rs.300 lakh.
Rs10 Lakh

Rs5.00 Lakh

Professional Clearing Members (PCMs) shall be the Members admitted

as such by the Exchange who shall be entitled to clear and settle trades/
transactions done by the other members of the Exchange viz. TCMs or TMs
affiliated with them. PCMs are not allowed to trade on the Exchange
platform. The minimum networth for the purpose of eligibility is Rs.1000
Lakh
Not applicable

Rs5.00 Lakh
125

No person shall be admitted as a Member of the Exchange if such

proposed member:
a. Is an individual who has not citizenship of India:
b. Is a body corporate who has committed any act which renders the entity
liable to be wound up under the provisions of the law;
c. Is a body corporate who has had a provisional liquidator or receiver or

official liquidator appointed to the person;
d. Has been adjudged bankrupt or a receiving order in bankruptcy has

been made against the person or the person has been proved to be
insolvent even though he has obtained his final discharge;
e. Has been convicted of an offence involving a fraud or dishonesty;
f. Has compounded with his creditors for less than full discharge of debts;
g. Has been at any time expelled or declared a defaulter by any other

Commodity / Stock Exchange / Clearing Corporation;
h. Has been previously refused admission to membership unless the period

of one year has elapsed since the date of rejection;
i. Incurs such disqualification under the provisions of the Forward

Contracts (Regulation) Act, 1952 or Rules made thereunder as
disentitles such person from seeking membership of a commodity
exchange.
j. Exchange determines that it is not in public interest to admit him as

Member of Exchange
Source :https://www.ncdex.com/Membership/TypeofMembership.aspx
126
Different types of membership at MCX:
Trading-cum-clearing members (“TCM”) are entitled to trade on their

own account as well as on account of their clients. TCMs can also clear and
settle these trades themselves. The minimum networth for the purpose of
eligibility is Rs.100 Lakh
Institutional trading cum clearing members (“ITCM”) are entitled to

trade on their own account as well as on account of their clients, clear and
settle trades executed by themselves as well as of trading members and
trading cum clearing members of our Exchange. The minimum networth for
the purpose of eligibility is Rs.300 Lakh
Professional Clearing Members (“PCM”) are entitled only to clear and

settle trades executed by trading-cum-clearing members or trading
members of our Exchange. The minimum networth for the purpose of
eligibility is Rs.500 Lakh
Trading members (“TM”) are persons who have been admitted as such,
and have rights to trade on their own account as well as on account of their
clients. However, TMs have no right to clear and settle such trades. All TMs
must be affiliated with any one of the institutional trading-cum-clearing
member or professional clearing members having clearing rights on our
Exchange. The minimum networth for the purpose of eligibility is Rs.10
Lakh for Non-Corporates and Rs.25 Lakh for Corporates.
Source :https://www.mcxindia.com/membership
127
Membership Type at ICEX
Stock Broker / Trading Member (TM):

A member with rights to trade on its own account as well as on account of
its clients, but has no right to clear and settle such trades itself. All such
members must be affiliated with any one of the Trading cum Clearing
Member or Professional Clearing Member having clearing rights on the
Exchange.
Self Clearing Member (SCM):

A Member with rights to clear and settle transactions on its own account or
on account of its clients only and not on account of any other Trading
Members or their clients.
Trading cum Clearing Member (TCM):

A member with a right to trade on its own account as well as on account of
its clients. He can clear and settle the trades for self and for others Trading
Members.
Professional Clearing Member (PCM):

A member with a right only to clear and settle trades executed by other
members of the Exchange
Eligibility Criteria:
The followings are eligible to apply for membership subject to the
regulatory norms and provisions of SCRA 1956 and its Rules, SEBI Act
1992 and its Rules & Regulation and as provided in the Rules, Regulations,
Byelaws and Circulars of the Exchange:
• Individuals
• Partnership Firms registered under the Indian Partnership Act, 1932
• Limited Liability Partnerships registered under the Limited Liability
Partnership Act, 2008
• Corporations, Companies or Institutions or subsidiaries of such
Corporations, Companies or Institutions set up for providing financial
services
128
• Such other person as may be permitted under securities Contracts

(Regulation) Act, 1956 read with Rules framed there under
Source: https://www.icexindia.com/membership/membership-type-eligibility-
criteria
Membership of the NSE Exchange/ NSE Clearing is open to corporate

entities, limited liability partnerships, partnership firms and individuals who
fulfill the eligibility criteria laid down by SEBI and NSE.
Two types of memberships are offered:
Normal - Unrestricted business expansion
Alpha - For focused proprietary trading with limited clientele
Types of membership:
Trading Member: This category of membership entitles a member to

execute trades on his own account as well as on account of his clients but,
clearing and settlement of trades executed through the Trading Member
would have to be done through a Trading-cum Clearing Member or
Professional Clearing Member of the Exchange
Trading Cum Self Clearing Member: This category of membership entitles a

member to execute trades and to clear and settle the trades executed on
his own account as well as on account of his clients.
Trading Cum Clearing Member: This category of membership entitles a

member to execute trades on his own account as well as on account of his
clients and to clear and settle trades executed by themselves as well as by
other trading members who choose to use clearing services of the member.
Professional Clearing Member: This category of membership entitles a

member to clear and settle trades of such members of the Exchange who
choose to clear and settle their trades through this member.
Source: https://www.nseindia.com/membership/content/cat_of_mem.htm
129
5.4 NATIONAL COMMODITY & DERIVATIVES EXCHANGE

LIMITED (NCDEX)
The National Commodity & Derivatives Exchange Limited (NCDEX) is a

nation level multi commodity exchange and serves as an important connect
between the farmers and the process of optimum price realization on
agriculture produce.
National Commodity & Derivatives Exchange Limited (NCDEX)is a

professionally managed on-line multi commodity exchange, incorporated as
a public limited company on April 23, 2003.
The shareholders of NCDEX comprises of large national level institutions,

large public sector bank and companies.
Current Shareholders: Life Insurance Corporation of India (LIC), National

Bank for Agriculture and Rural Development (NABARD), National Stock
Exchange of India Limited (NSE), Canara Bank, Punjab National Bank
(PNB), CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited
(IFFCO),Intercontinental Exchange (ICE), Shree Renuka Sugars Limited,
Jaypee Capital Services Limited, Build India Capital Advisors LLP, Oman
India Joint Investment Fund, IDFC Private Equity Fund III, Star
Agriwarehousing and Collateral Management Limited and negligible
shareholding by individuals.
NCDEX is regulated by Securities and Exchange Board of India. NCDEX is

subjected to various laws of the land like the Securities Contracts
(Regulation) Act, 1956, Companies Act, Stamp Act, Contract Act and
various other legislations.
During 2018-19, the permitted commodities in commodity futures declined

from 26 to 23. As per NCDEX Annual Report 2018-19 , NCDEX had offered
22 commodities for trading, through 387 members with a client base of
2.566 million,15078 terminals , 265 warehouses with storage capacity of
0.978 million tonnes.
The highest turnover achieved in a day in FY 2018-19 was INR 4297.94

crore. The average daily traded value for FY 2018-19 was INR 2143 crore.
A total of 8,56,079 tonnes commodities were deposited in FY 2018-19 and
a total of 6,95,990 tonnes commodities were delivered in FY 2018-19.
130
As of March 31, 2019, the Exchange offered futures contracts in 19

agricultural commodities and options contracts in 5 agricultural
commodities. During 2018-19, aggregate commodity derivatives turnover
at NCDEX declined by 9.9 per cent to Rs 5,31,588 crore.
Contract Specifications for Soybean futures contract(Applicable for

contracts expiring in the month of March 2020 and thereafter)
Type of Contract Futures Contract

Name of commodity Soy Bean
Ticker symbol SYBEANIDR
Trading System NCDEX Trading System
Basis Ex-Warehouse Indore exclusive of GST
Unit of trading 10 MT
Delivery unit 10 MT
Maximum Order Size 500 MT
Quotation/base value Rs per quintal
Tick size Rs. 1
131
Quality specification Moisture : 9% basis, 11% Maximum

Foreign Matter : 2 %
Damaged : 2 %
Green Seed : 7 %
Quantity variation +/- 2%
Delivery center Indore (within a radius of 50 km from the municipal
limits)
Additional delivery Akola, Latur (Maharashtra); Mandsaur (MP); and Kota
center (Rajasthan)
Location Premium/Discount as notified by the
Exchange from time to time.
Trading hours As notified by the Exchange from time to time,
currently:
Mondays through Fridays :9:00 AM to 05:00 PM
The Exchange may vary the above timing with due
notice
Due date/Expiry date 20th day of the delivery month. If 20th happens to be
a holiday, a Saturday or a Sunday then the due date
shall be the immediately preceding trading day of the
Exchange, which is not a Saturday.
The settlement of contract would be by a staggered
system of Pay-in and Pay-out including the last pay-in
and pay-out which would be the final settlement of
the contract.
Tender Period Tender Date –T
Tender Period: The tender period would be the last 5
trading days (including expiry day) of the contracts.
Pay-in and Pay-out:
On a T+2 basis. If the tender date is T, then pay-in
and pay-out would happen on T+2 day. If such a T+2
day happens to be a Saturday, a Sunday or a holiday
at the Exchange, Clearing Corporation, clearing banks
or any of the service providers, pay-in and pay-out
would be effected on the next working day.
132
Delivery specification Upon expiry of the contracts all the outstanding open
positions shall result in compulsory delivery.
During the Tender period, if any delivery is tendered
by seller, the corresponding buyer having open
position and matched as per process put in place by
the Exchange, shall be bound
to settle by taking delivery on T + 2 day from the
delivery center where the seller has delivered same.
The penalty structure for failure to meet delivery
obligations will be as per circular no. NCDEX/
CLEARING-020/2016/247 dated September 28, 2016
Delivery Logic Compulsory Delivery
Closing of contract Clearing and settlement of contracts will commence
with the commencement of Tender Period by
compulsory delivery of each open position tendered
by the seller on T + 2 to the
corresponding buyer matched by the process put in
place by the Exchange.
Upon the expiry of the contract all the outstanding
open position shall result in compulsory delivery
Opening of contracts Trading in any contract month will open on the 1st
day of the month. If the 1st day happens to be a non-
trading day, contracts would open on next trading day
No. of active contract As per launch calendar
Price limit Daily price limit is (+/-) 3%. Once the 3% limit is
reached, then after a period of 15 minutes this limit
shall be increased further by 1%. The trading shall be
permitted during the 15 minutes
period within the 3% limit. After the DPL is enhanced,
trades shall be permitted throughout the day within
the enhanced total DPL of 4%.
The DPL on the launch (first) day of new contract
shall be asper the circular no. NCDEX/
RISK-034/2016/209 dated September 08, 2016.
133
Position limits The position limits will be applicable on Exchange

wise basis
Member-wise: 13,50,000 MT or 15% of market wide
open interest in the commodity, whichever is higher.
Client-wise:1,35,000 MT.
Bona fide hedger clients may seek exemption as per
approved Hedge Policy of the Exchange notified vide
Circular No. NCDEX/CLEARING-019/2016/246 dated
September 28, 2016.
For near month contracts:
The following limits would be applicable from 1st of
every month in which the contract is due to expire. If
1st happens to be a non-trading day, the near month
limits would start from the next trading day.
Member-wise: 3,37,500 MT or one-fourth of the
member’s overall position limit in that commodity,
whichever is higher.
Client-wise: 33,750 MT
Quality Allowance(for Quality delivery with variation shall be acceptable
Delivery) with discount as under:
Foreign Matter: From 2-4% accepted at discount of
1:1, from 4-5% accepted with a discount of 1:2.
Above 5% rejected (The term 'foreign matter' would,
in-general, mean anything other than Soy Bean e.g.
sand, silica, pebbles, stalks and other seeds)
Damaged Seed: From 2-5% accepted at 2:1. Above
5% rejected
Green Seed: Above 7% rejected
Free from non-edible seeds such as Mahua, Castor
and Neem and any toxic substances. Should be free
from any foul odour and live infestation.
Special Margin In case of unidirectional price movement/ increased
volatility,an additional/ special margin at such other
percentage, as deemed fit by the Regulator/
Exchange, may be imposed on
the buy and the sell side or on either of the buy or
sell sides in respect of all outstanding positions.
Reduction/ removal of such additional/ special
margins shall be at the discretion of the Regulator/
Exchange.
134
Final Settlement Price FSP shall be arrived at by taking the simple average
of the last polled spot prices of the last three trading
days viz., E0 (expiry day), E-1 and E-2. In the event
the spot price for any one or both of E- 1 and E-2 is
not available; the simple average of the last polled
spot price of E0, E-1, E-2 and E-3, whichever
available, shall be taken as FSP.
Minimum Initial Margin 4%
Tolerance limit of Commodity:

Acceptable quality
Commodity range as per Permissible
Basis
Specifications contract Tolerance
specification
Foreign 2% Basis From 2-4% 0.25%
Matter accepted at 1:1
discount
From 4-5%
accepted at
discount of 1:2.
Above 5% rejected
Damaged 2% Basis From 2-5% 0.25%
accepted at 2:1
discount.
Above 5% rejected
Green Seed 7% Max 0.5%
Max Tolerance (for 0.5%
all characteristics)
Tolerance limit is applicable only for outbound deliveries. Variation in quality
parameters
within the prescribed tolerance limit as above will be treated as good delivery
when
members/clients lift the materials from warehouse. These permissible variations
shall be based on
the parameters found as per the immediate preceding test certificate given by
NCDEX empanelled
assayer.
135
Contract Launch Calendar:
Contract Launch Month Contract Expiry Month

October 2019 March 2020
November 2019 April 2020
December 2019 May 2020
January 2020 June 2020
February 2020 July 2020
March 2020 October 2020
April 2020 November 2020
May 2020 December 2020
Members and market participants who enter into buy and sell transactions
need to be aware of all the factors that go into the mechanism of trading
and clearing, as well as all provisions of the Exchange's Bye Laws, Rules,
Regulations, Product Notes, circulars, directives, notifications of the
Exchange as well as of the Regulators, Governments and other authorities.
It is the sole obligation and responsibility of the Members and market

participants to ensure that apart from the approved quality standards
stipulated by the Exchange, the commodity deposited / traded / delivered
through the approved warehouses of Exchange is in due compliance with
the applicable regulations laid down by authorities like Food Safety and
Standards Authority of India(FSSAI), AGMARK, BIS, Warehousing
Development and Regulatory Authority (WDRA) etc as also other State/
Central laws and authorities issuing such regulations in this behalf from
time to time, including but not limited to compliance of provisions and
rates relating to GST, APMC Tax, Mandi Tax, LBT, Stamp Duty, etc. as
applicable from time to time on the underlying commodity of any contract
offered for deposit / trading / delivery and the Exchange shall not be
responsible or liable on account of any non-compliance thereof.
Source: https://www.ncdex.com/Downloads/ContractSpace/
Contract%20Specifications%20for%20Soybean_09092019.pdf
136
5.5 MULTI COMMODITY EXCHANGE OF INDIA LIMITED

(MCX)
MCX defines a commodity and commodity exchange as follows:

Commodity is any good having commercial value, which can be produced,
bought, sold, and consumed. In other words, commodity is a good used in
commerce that is interchangeable with other commodities of the same
type. Commodities are most often used as inputs in the production of other
goods or services. The quality of a given commodity may differ slightly, but
it is essentially uniform across producers. Notably, when they are traded on
an exchange, commodities must also meet specified minimum standards,
sometime known as the basis grade.
A commodity exchange is a platform for entering into an agreement for

buying and selling standardized commodity futures and options contracts.
It acts as a transparent marketplace where large number of buyers and
sellers participate. Contracts are standardized or pre-defined for variety,
quantity, and quality of a commodity. Identities of participants are not
disclosed.
Products of MCX
During 2018-19, the permitted commodities increased to 21 from 19 in
previous year. During 2018-19, aggregate commodity derivatives turnover
at MCX, increased by 25.6 per cent to Rs 67,72,373 crore.
Agri commodities offered at MCX:

Black Pepper
Cardamon
Castor Seed
Cotton
Crude Palm Oil
Kapas
Mentha Oil
RBD Palmolein
Rubber
137
Source :https://www.mcxindia.com/
Contract Specifications of Black Pepper on https://www.mcxindia.com/

docs/default-source/products/contract-specification/black-pepper/black-
pepper-january-2020-contract-onwards.pdf?sfvrsn=23ebaa90_0
Symbol PEPPER
Description PEPPERMMMYY
Contract Listing Contracts are available as per the Contract Launch

Calendar
Contract Starting Day Contract launch date shall be the 1st day of contract launch
month. If 1st day is a holiday then the following working day
Last Trading Day 20th of the contract expiry month. If 20th is a holiday,
Saturday or Sunday then preceding working day
Trading Period Mondays through Fridays
Trading Session Monday to Friday: 09.00 am to 05.00 pm
Trading Unit 1 MT
Quotation / Base Value Rs. per 100 kg (Rs. per Quintal)
Price Quote (Basis) Malabar garbled 1 Ex-Kochi (Ernakulam), exclusive of Sales

tax/GST
138
Maximum Order Size 50 MT
Tick Size (minimum Rs. 5

price movement)
Daily Price Limits DPL shall have two slabs - Initial and Enhanced Slab.
Once the initial slab limit of 3% is reached in any contract,
then after a period of 15 minutes, this limit shall be
increased further by enhanced slab of 1%, only in that
contract. The trading shall be permitted during the 15
minutes period within the initial slab limit. After the DPL is
enhanced, trades shall be permitted throughout the
daywithin the enhanced total DPL of 4%
Initial Margin Minimum 4% or based on SPAN, whichever is higher
Extreme Loss Margin Minimum 1%
Additional/ or Special In case of additional volatility, an additional margin (on both

Margin buy & sell side) and/ or special margin (on either buy or sell
side) at such percentage, as deemed fit, will be imposed in
respect of all outstanding positions.
Maximum Allowable For individual clients: 460 MT
Open For a member collectively for all clients: 4,600 MT or
Position 15% of the market wide open interest, whichever is higher.
Near Month Limits
For individual clients: 115 MT
Near month member level position limit shall be
equivalent to the one fourth of the overall member level
position limit.
Delivery Unit 1 MT
Quantity Variation +/- 2%
Delivery Period Margin Delivery period margins shall be higher of:

a. 3% + 5 day 99% VaR of spot price volatility or b. 25%
Delivery center(s) Kochi (Ernakulam)
MCX designated warehouses upto radius of 100 kms from
Kochi (Ernakulam) municipal limits
139
Quality Specification Black Pepper, Malabar Garbled 1

Light Pepper (Berries): Not more than 2% by weight
Extraneous Matter (Including insect damaged matter,
pinheads or broken berries) : Not more than 0.5% by weight
Bulk density (gm/litre) : Not less than 560 gm/litre by weight
Non-volatile ether extract on dry basis : Not less than 6% by
weight
Volatile oil content on dry basis : Not less than 2% by v/w
Peperine content on dry basis : Not less than 4% by weight
Moisture: Not more than 11% by weight
The product shall be free from mould, living and dead
insects, insect fragments and rodent contamination.
It shall be free from added color, mineral oil and any other
harmful substance.
Pepper deposited shall conform to all the standards
prescribed and as applicable under the Food Safety and
Standards Regulations as notified by FSSAI, from time to
time.
The packaging of Pepper should be in standard bags of 50 Kg
(Net weight).
Staggered Delivery The staggered delivery tender period would be the last 5
Tender Period trading days (including expiry day) of the contracts.
The seller/buyer having open position shall have an option,
of submitting an intention of giving/taking delivery, on any
day during the staggered delivery period.
On expiry of the contract, all the open positions shall be
marked for compulsory delivery
Delivery allocation Allocation of intentions received to give delivery during the
day to buyers having open long position shall be as per
random allocation methodology to ensure that all buyers
have an equal opportunity of being selected to receive
delivery irrespective of the size or value of the position.
However, preference may be given to buyers who have
marked an intention of taking delivery.
Funds pay-in of the delivery allocated to the buyer will be on
T+2 working days i.e. excluding Saturday, Sunday & Public
Holiday.
The buyer to whom the delivery is allocated will not be
allowed to refuse taking delivery. If the seller fails to deliver,
the penal provisions as specified for seller default shall be
applicable.
140
Delivery order rate On Tender Days:

The delivery order rate (the rate at which delivery will be
allocated) shall be the closing price on the respective tender
day except on the expiry date.
On Expiry:
On expiry date, the delivery order rate or final settlement
price shall be the Due Date Rate (DDR) and not the closing
price.
Due Date Rate The FSP shall be arrived at by taking the simple average of
the last polled spot prices of the last three trading days
viz.,E0 (expiry day), E-1 and E-2.
In the event the spot price for any one or both of E-1 and
E-2 is not available; the simple average of the last polled
spot price of E0, E-1, E-2 and E-3, whichever available, shall
be taken as FSP.
Contract Launch Calendar
September 2019 January 2020

October 2019 February 2020
November 2019
(Reference Circular No. MCX/TRD/477/2019 dated August 30, 2019
Delivery and Settlement procedure for Black Pepper Contract

Staggered Delivery The staggered delivery tender period would be the last 5
Tender Period trading days (including expiry day) of the contracts.
Trading day will be based on availability for trading of the
respective commodity on a trading day and excluding
special sessions like Muhurat Trading day.
Staggered Tender 5 incremental margin for last 5 trading days (including
Period Margin expiry day) of the contract on all outstanding positions in
addition to the Initial, Special and/ or any other additional
margin, if any.
Mode of Intention MCX eXchange
Submission
141
Buyer Delivery Buyer to give intention of taking delivery on any tender

Intention day, during tender period, till 3.00 p.m.
Seller Delivery Seller to give intention of tendering delivery on any tender
Intention day, during tender period, till 3.00 p.m.
Dissemination of Intentions received from the sellers and buyers will be
Intention broadcasted on TWS by the MCX/MCXCCL by 3.30 p.m. on
the respective tender days.
Delivery Period Delivery period margins shall be higher of:
Margin a. 3% + 5 day 99% VaR of spot price volatility
Or b. 25%
Exemption from Sellers are exempted from payment of all types of
Staggered Tender margins, if goods are tendered as early pay-in with all the
Period and documentary evidences. However, MCXCCL shall continue
Delivery Period to collect mark to market margins from Sellers.
Margin
Delivery Allocation Settlement/closing price on the respective tender days
Rate except on expiry date. On expiry date the delivery order
rate shall be the Due Date Rate (DDR) and not the closing
price
Delivery Marking On the respective tender days after the end of the day
Delivery Pay-in The seller will have to do the delivery pay-in through
Repository Account with CDSL Commodity Repository Ltd.
(CCRL) by earmarking his existing valid commodity
balance in the CCRL Repository Account towards the pay-
in obligation.
On Tender Days:
On tender days by 3.00 p.m. except Saturday, Sunday and
Public holiday. Marking of delivery will be done on the
tender days based on the intentions received from the
sellers after the trading hours.
On Expiry:
On expiry all the open positions shall be marked for
delivery.
Delivery pay-in will be on E+2 basis (E- Expiry day) by
12.00 p.m. except Saturday, Sunday and Public holiday.
Funds Pay-in Tender/ Expiry day + 2 basis: 12.00 p.m.
Delivery Pay-out Tender/ Expiry day + 2 basis: 2.00 p.m.
142
Funds Pay-out Tender/ Expiry day + 2 basis: 2.00 p.m.

Penal Provision for Seller Default
default of Delivery 3% of Settlement Price + replacement cost (difference
& Settlement between settlement price and average of three highest of
the last spot prices of 5 succeeding days after the
commodity pay-out date, if the average price so
determined is higher than Settlement Price, else this
component will be zero.)
Norms for apportionment of penalty :-
At least 1.75% of Settlement Price shall be deposited in
the Settlement Guarantee Fund (SGF) of the MCXCCL
Up to 0.25% of Settlement Price may be retained by the
MCXCCL towards administration expenses
1% of Settlement Price + replacement cost shall go to
buyer who was entitled to receive delivery.
Over and above the prescribed penalty, MCXCCL shall take
suitable penal/ disciplinary action against any intentional /
wilful delivery default by seller.
Buyer default shall not be permitted.
Delivery Centers Kochi (Ernakulam)
MCXCCL designated warehouses upto radius of 100 kms
from Kochi (Ernakulam) municipal limits.
Taxes, Duties, Cess Malabar garbled 1 Ex-Kochi (Ernakulam), exclusive of Sales
and Levies Tax/GST.
Sales Tax/GST and any other taxes / levies as may become
due and payable under any law, rules or regulations as
applicable from time to time will be on the account of the
Buyer. Post lifting
delivery, all charges-shall be borne by the buyer.
Odd lot Treatment Not applicable
Adjustment of Not applicable
Transportation Cost
Warehouse, Borne by the seller up to commodity pay-out date
fumigation, -Borne by the buyer after commodity pay-out date
insurance and
transportation
Charges
143
Buyer’s option for Buyer will not have any option about choosing the place of
lifting of Delivery delivery and will have to accept the delivery as per
allocation made by the MCXCCL.
Delivery of Goods Each delivery shall be in multiples of delivery lots and shall
be designated for only one delivery center and one location
in such center.
The goods delivered through CCRL Repository Account
should be valid as per contract specifications up to
minimum 15 days’ after the expiry of the contract from the
MCXCCL approved quality certifying agency/s.
Delivery once submitted cannot be withdrawn or cancelled
or changed, unless so agreed by the MCXCCL. Goods
tendered under delivery shall be in conformity with the
contract specifications.
Delivery Grades The members tendering delivery will have the option of
delivering such grades of goods as permitted by the MCX
under the contract specifications. The Buyer will not have
any option to select a particular grade and the delivery
offered by the seller and allocated by the MCXCCL shall be
binding on him.
Legal Obligation Every member delivering and receiving goods through
CCRL Repository Account by way of delivery shall provide
appropriate tax forms, wherever required as per law and
as custom, and neither of the parties shall unreasonably
refuse to do so.
Extension of The MCXCCL may extend the Delivery Period due to either
Delivery Period force majeure or any other reason, as it thinks fit in the
interest of the market
144
Applicability of The general provisions of Byelaws, Rules and Regulations

Regulations of the MCXCCL and decisions taken by SEBI/ the Board of
Directors /Relevant Authority of the MCXCCL in respect of
matters specified in this document shall form an integral
part of this contract. The MCXCCL or SEBI, as the case
may be, may further prescribe additional measures relating
to delivery procedures, warehousing, quality certification,
margining, and risk management from time to time.
Members and market participants who enter into buy and
sell transactions on MCX need to be aware of all the factors
that go into the mechanism of trading and clearing, as well
as all provisions of the MCXCCL’s Bye Laws, Rules,
Regulations, circulars, directives, notifications of the
MCXCCL as well as of the Regulators, Governments and
other authorities.
It is the sole obligation and responsibility of the Members
and market participants to ensure that apart from the
approved quality standards stipulated by the MCX, the
commodity deposited / traded / delivered through the
Approved warehouses of MCXCCL is in due compliance with
the applicable regulations laid down by authorities like
Food Safety Standard Authority of India, AGMARK, BIS,
Warehousing Development and Regulatory Authority
(WDRA), Orders under Packaging and Labelling etc., as
also other State/Central laws and authorities issuing such
regulations in this behalf from time to time, including but
not limited to compliance of provisions and rates relating
to Sales Tax/ GST, etc. as applicable from time to time on
the underlying commodity of any contract offered for
deposit / trading / delivery and that MCX/MCXCCL shall not
be responsible or liable on account of any non-compliance
thereof.
All the Sellers giving delivery of goods and all the buyers
taking delivery of goods shall have the necessary GST
Registration as required under the Goods & Service Tax
(GST) Act and obtain other necessary licenses, if any.
In respect of all contracts executed by the Members on
MCX, it applicable statutory fee, stamp duty, taxes and
levies in respect of all deliveries as well as futures
contracts directly to the concerned Central / State / Local
Government Departments and the MCX/MCXCCL shall not
be held liable or accountable or responsible on account of
any non-compliance thereof.
145
The MCXCCL is not responsible and shall not be held liable

or accountable or responsible for value of the goods/stock
of the commodities stored/lying in MCXCCL designated
warehouse/s, vault agency and which is fully/partially
confiscated / seized by any local or statutory or any other
authority for any reason whatsoever or for any
deterioration in quality of the goods stored due to above
reason or which have passed the Final Expiry date and
continue to remain in the MCXCCL accredited warehouse.
The decision of the MCXCCL shall be final and binding to all
Members and their constituents in this regard. (The
interpretation or clarification given by the MCXCCL on any
terms of this delivery and settlement procedure shall be
final shall be the responsibility of the respective members
to pay all
Reference Circular no. MCXCCL/C&S/201/2019 dated Aug 30, 2019
Source:https://www.mcxindia.com/docs/default-source/products/contract
specification/black-pepper/black-pepper-january-2020-contract-onwards.pdf?
sfvrsn=23ebaa90_0
5.6 INDIAN COMMODITY EXCHANGE LIMITED (ICEX)
Indian Commodity Exchange Limited (ICEX) is SEBI regulated online

Commodity Derivative Exchange, that provide nationwide trading platform
t h r o u g h i t s a p p o i n t e d b r o k e r s . I C E X g o t S E B I a p p r o va l f o r
recommencement of Trading Operations in July 2017.
ICEX aims to provide futures trading products in India’s all economically

relevant commodity and leverage the huge potential of commodities
market and encourage participation of actual users to benefit from the
opportunities of hedging, risk management and supply chain management
in the commodities markets.. The Exchange launched world’s first ever
Diamond derivative contracts.
Some of Prominent shareholders are MMTC Ltd, Central Warehousing

Corporation, Indian Potash Ltd, KRIBHCO, Punjab National Bank, IDFC
Bank Ltd, Gujarat Agro Industries Corporation, Reliance Exchangenext Ltd,
Bajaj Holdings & Investment Ltd, Gujarat State Agricultural Marketing
146
Board, NAFED and Indiabulls Housing Finance Ltd NMCE, India’s oldest
Commodity Exchange was merged with ICEX in September 2018.
Source :https://www.icexindia.com/about-us/organization-profile
Membership Type:
Stock Broker / Trading Member (TM):

A member with rights to trade on its own account as well as on account of
its clients, but has no right to clear and settle such trades itself. All such
members must be affiliated with any one of the Trading cum Clearing
Member or Professional Clearing Member having clearing rights on the
Exchange.
Self Clearing Member (SCM):

A Member with rights to clear and settle transactions on its own account or
on account of its clients only and not on account of any other Trading
Members or their clients.
Trading cum Clearing Member (TCM):

A member with a right to trade on its own account as well as on account of
its clients. He can clear and settle the trades for self and for others Trading
Members.
Professional Clearing Member (PCM):

A member with a right only to clear and settle trades executed by other
members of the Exchange.
Eligibility Criteria:
The followings are eligible to apply for membership subject to the
regulatory norms and provisions of SCRA 1956 and its Rules, SEBI Act
1992 and its Rules & Regulation and as provided in the Rules, Regulations,
Byelaws and Circulars of the Exchange:
• Individuals
• Partnership Firms registered under the Indian Partnership Act, 1932
• Limited Liability Partnerships registered under the Limited Liability
Partnership Act, 2008
147
• Corporations, Companies or Institutions or subsidiaries of such

Corporations, Companies or Institutions set up for providing financial
services
• Such other person as may be permitted under securities Contracts
(Regulation) Act, 1956 read with Rules framed there under
Source :https://www.icexindia.com/membership/membership-process
Products offered by ICEX :
Agriculture Products :
• Cereals : Paddy Basmati
• Plantation
• Spices
• Fiber
• Oil and seeds
• Others : Guar Seed, Isabgul Seed
Non Agri Products

• Diamond
• Steel
The following information on Paddy Basmati Rice is based on the

following
s o u r c e ( h t t p s : / / w w w. i c e x i n d i a . c o m / d o c s / d e f a u l t- s o u r c e / p r o d u c t d o c /
basmati_(paddy)_product_leaflet_english.pdf?sfvrsn=6d2ed4d3_2)
148
Paddy Basmati Rice was a commodity to be traded on commodity futures

exchanges like ICEX on n 27th September 2016 vide Government of India
Gazette notification number S.O. 3068 (E).
Basmati Paddy Rice witnesses extreme price volatility which causes

challenges in business to the stockists, exporters, millers, growers and
traders. There is no major way to ‘insure’ or insulate the business from
price risk arising out of price volatility. Hence ICEX offers futures contracts,
allowing people exposed to price risk to hedge/‘insure’ against price risk or
future price uncertainty. ICEX Basmati Paddy futures contracts will enhance
the competitiveness of Indian exporters by enabling them to create
inventory and hedge the same on the futures market, so as to eliminate
adverse price movement. ICEX Basmati Paddy futures contracts also
enables stockists to seek insurance against falling Basmati Paddy/rice
prices, salvaging the value of their inventory. ICEX Basmati Paddy futures
contract is expected to be a transparent price discovery mechanism for
Basmati prices, reflecting the demand and supply scenario of the entire
market.
149
Process of hedging by value chain participants to hedge their price

risk:
Hedging by Exporter
Day1: Paddy Basmati Rice mill/exporter obtains a firm order on Day 1 but
he has no stock of Paddy Basmati Rice, from any domestic buyer or
international firm tosell Paddy Basmati Rice for forward delivery. The rice
mill/exporter may have to face the risk of prices of Paddy Basmati Rice
going up in the future. Hence on the date of receipt of the order from the
buyer, i.e. Day 1, the rice mill/exporter buys an equivalent quantity of
ICEX Basmati Paddy futures contracts for the future month and thus locks
his buying rate price and profits.
On Day 25 : Paddy Basmati Rice mill/exporter purchases Paddy Basmati

Rice from the spot (physical) market and sells the corresponding quantity
of ICEX Paddy Basmati Rice futures contracts and thus squares of (closes
out) his ICEX hedge position or can take delivery from ICEX at the rate
at which he had bought on Day 1 irrespective of the price movement
thereafter.
Hedging by Stockist:
Stockist has stocks of Paddy Basmati Rice and no pending sale orders for
forward delivery to customersThe stockist/rice mill has stored stocks of
Paddy Basmati Rice in his warehouse and hence is exposed to price risk on
his stocks due to highly volatile Paddy Basmati Rice prices.
Inorder to mitigate his price risk and seek 'insurance' from the downward
price movement, he sells the corresponding quantity of ICEX Basmati
Paddy futures contracts for the forward month and locks his Paddy selling
rate to protect him from falling Paddy Basmati Rice prices.
On receiving an order from the customer the stockist buys the

corresponding quantity of ICEX Basmati Paddy futures contracts
and thus squares of (closes out) his ICEX hedge position.
When the stockist sells his Paddy Basmati Rice to customers in the spot
markets the conversion margin fixed when he sold the ICEX Basmati
Paddy futures contracts, is maintained and thus he is able to seek an
150
insurance against volatile Paddy Basmati Rice prices, irrespective of the

prices going up or down.
Contract Specifications of Paddy Basmati 1121 (Ex- Karnal)
Trading Period Mondays through Fridays

Trading Session Mondays through Fridays: 9:00 a.m. to 5:00 p.m.
Trading Unit 10 MT
Quotation/Base Value Rs. Per Quintal
Price Quote Ex - Karnal (Warehouse excluding GST)
Tick Size (Minimum Re. 1 per Quintal
Price)
Daily Price Limit DPL shall have two slabs- Initial and Enhanced Slab.
Once the initial slab limit of 3% is reached in any
contract, then after a period of 15 minutes this limit
shall be increased further by enhanced slab of 1%, only
in that contract. The trading shall be permitted during
the 15 minutes period within the initial slab limit. After
the DPL is enhanced, trades shall be permitted
throughout the day within the enhanced total DPL of
4%
Delivery Unit 10 MT with tolerance limit of 5%
Quality Specifications Paddy shall a) Be the dried mature grains (with husk)
of Oryza sativa L. variety 1121.
b) have uniform size, shape and color;
c) Not have moisture exceeding 14%;
d) Purity: Min 95%
e) Admixture: max 4% ( Other varieties of Basmati
Paddy)
f) Foreign matter: Max 1%
Delivery Logic Compulsory delivery (Ex- ICEX warehouse, Karnal
The Central Board of Direct Taxes (CBDT) vide its order no: 3528 (E) dated
30th October, 2017 under section 43 (5) of Income Tax Act 1961 allowed
actual users or hedgers to get a tax advantage by treating profit or loss
while trading in ICEX as business income or loss. Accordingly, the value
151
chain participants in the Basmati rice industry could set othe loss/profit
resulting in the ICEX Basmati Paddy contract hedging against their
business operations profit/loss for the purposes of computation of income
tax payment, provided the hedging is done in the same business entity.
5.7 BSE LTD. (BOMBAY STOCK EXCHANGE)
BSE Launched the Commodity segment on October 1, 2018, and became

an Universal Exchange with launch of trading in Commodity Derivatives.
The Company became the first Exchange to provide trading on single
platform across different segments i.e. Equity, Equity Derivatives,
Commodity Derivatives, Currency Derivatives, Interest Rate Futures, Debt
instruments and others.
BSE made various infrastructure changes in their BOLTPlus Trading system,

Realtime Risk Management System (RTRMS), Surveillance System
(EBOSS), Price and Index Calculation (EPIC), Market Operations (SMOPS),
Clearing & Settlement System (CLASS), Compliance Management System
(BEFS) and others.
Most active Commodity Derivatives contracts
Source: https://www.bseindia.com
152
5.8 NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSE)
The National Stock Exchange of India Ltd. (NSE) was established in 1992
as the first demutualized electronic exchange in the country. NSE is also
the first exchange in the country to provide fully automated screen-based
electronic trading system in 1994. It also offered derivatives trading (in the
form of index futures) and internet trading in 2000, which were each the
first of its kind in India. NSE is a leading stock exchange in India and the
key domestic investors include Life Insurance Corporation of India, State
Bank of India, IFCI Limited, Stock Holding Corporation of India Limited .etc
NSE had launched the Derivatives contracts on the benchmark Nifty 50

Index in June 2000.
NSE launched the Commodities derivatives segment on October 12, 2018.

The National Stock Exchange of India Limited (NSE) has commenced
trading in commodities derivatives with the launch of Bullion Futures.
Commodity Derivatives segment of NSE provides trading in Futures. By
establishing prices for futures, the commodity derivatives markets helps
buyers and sellers determine prices of commodities in physical markets,
thus linking the two markets. Commodity derivatives product provide an
effective hedging tool to the advantage of market participants.
The NSE trading system called 'National Exchange for Automated

Trading' (NEAT) is a fully automated screen based trading system, which
adopts the principle of an order driven market
153
Market Timings
Trading on the Commodity Derivatives segment takes place on all days of
the week (except Saturdays and Sundays and holidays declared by the
Exchange in advance). The market timings of the commodity derivatives
segment are:
Normal Market Open: 09:00 hrs
Normal Market Close: 23.55 hrs
Note:- On general holiday as per equity market the commodities market
will be open in second session only i.e. from
Normal Market Open: 17:00 hrs
Normal Market Close: 23:30 hrs/23.55 hrs (wherever applicable)
154
Contract Specification for Bullion Futures:
Product Parameters Gold Futures

Underlying Gold
Instrument Type Futures Contract
Underlying Symbol GOLD
Description GOLDYYMMM
Contract Listing Bimonthly; Monthly contracts in case Gold Mini Futures
Contract 6th day of contract launch month. If 6th day is a
Commencement Day holiday then the following working day. (Expiry Day +
1)
Last Trading Day 5th day of contract expiry month. If 5th day is a
(Contract Expiry) holiday then preceding working day.
On the day of expiry, the trading shall be allowed up to
11:30 pm/11:55 pm*
*based on US daylight saving time period
Trading Period Mondays to Fridays
Trading Session Monday - Friday
09:00 am to 11:30 pm/11:55 pm*
*based on US daylight saving time period
Trading Unit 1 kg; 100 gms in case Gold Mini Futures
Quotation/Base Value Rs. Per 10 grams
Price Quote Ex-Ahmedabad (inclusive of all taxes and levies
relating to import duty, customs but excluding all taxes
and levies relating to GST, any other additional tax or
surcharge on GST)
Maximum Order Size 10 Kg
Tick Size (Minimum Rs.1.00
Price Steps)
155
Daily Price Limits The base price limit shall be 3%. Whenever the base
daily price limit is breached, the relaxation shall be
allowed upto 6% without any cooling off period in the
trade. In case the daily price limit of 6% is also
breached, then after a cooling off period of 15 minutes,
the daily price limit will be relaxed upto 9%.
In case price movement in international markets is
more than the maximum daily price limit (currently
9%), the same may be further relaxed in steps of 3%
beyond the maximum permitted limit, and informed to
the Regulator immediately.
Initial Margin Min. 4 % or based on SPAN whichever is higher
Extreme Loss Margin 1%
Additional and/ or In case of additional volatility, an additional margin (on
Special Margin both buy & sale position) and/ or special margin (on
either buy or sale position) at such percentage, as
deemed fit; will be imposed in respect of all
outstanding positions
Maximum Allowable For a member collectively for all clients: 50 MT or 20%
Open Position of the market wide open position whichever is higher,
for all Gold contracts combined together.
For individual client: 5 MT for all Gold contracts

combined together or 5% of the market wide open
position whichever is higher, for all Gold contracts
combined together.
Delivery Unit 1 kg
Delivery Period Margin Delivery period margins shall be higher of: a. 3% + 5
day 99% VaR of spot price volatility
Or
b. 20%
Delivery Centre(s) Designated clearinghouse facilities at Ahmedabad
Quality Specifications 995 purity.
It should be serially numbered Gold bars supplied by

LBMA approved suppliers or other suppliers as may be
approved by the exchange to be submitted alongwith
supplier's quality certificate.
156
If the Seller offers Seller will get a proportionate premium

delivery of 999 purity
Delivery Logic Compulsory delivery
Settlement of Contract On expiry all the open positions shall be marked for
delivery. Delivery pay-in will be on E + 1 basis by
11.00 a.m. except Saturdays, Sundays and Trading
Holidays.
Delivery Pay-in The seller will have to provide a valid delivery pay-in
instruction through NSE Clearing Interface towards the
pay-in obligation.
Funds Pay-in T+1 working day by 11.00 a.m. ("T" stands for tender
day)
Funds Pay-out T+1 working day by 05.00 p.m
Delivery Pay-out T+1 working day after completion of Funds Pay-in
Delivery Centre(s) Designated vault at Ahmedabad
Verification by the At the time of taking delivery, the buyer can check his
Buyer at the Time of delivery in front of designated vault personnel. If he is
Release of Delivery satisfied with the quantity and quality of material, then
Vault will release the goods.
If buyer is not satisfied with the quality, he can request

for assaying by any of the /CC approved Independent
Assayers. If the buyer chooses for assaying, designated
vault person will carry the goods to the Assayer's
facilities, get it assayed and bring it back to designated
vault along with assayer's certificate. The report shall
be final and binding on both buyer and seller.
In case of variation in quality in the Independent

Assayer's report from the original report submitted, the
buyer and seller will have to mutually negotiate the
final settlement proceeds within one working day from
receipt of assayer's report
157
Taxes, Duties, Cess Ex-Ahmedabad, Inclusive of all taxes / levies relating

and Levies to import duty, customs to be borne by the Seller; but
excluding GST, any other additional tax, cess, or
surcharge etc. as may become due &payable under any
law, rules or regulations, applicable from time to time,
to be borne by the buyer
Vault, Insurance and Borne by the seller up to commodity pay-out date
Transportation Charges Borne by the buyer after commodity pay-out date
Evidence of Stocks in At the time of issuing Delivery Order/ Delivery
Possession Intention / Tender Notice, the Member must satisfy
NSE Clearing Limited that he holds stocks of the
quantity and quality specified in the Delivery Order/
Delivery Intention / Tender Notice at the declared
delivery centre by giving delivery pay-in instruction
through NSE Clearing Interface towards the pay-in
obligation.
Validation Process On receipt of delivery, the designated vault personnel
will do the following validations:
a) Whether the person carrying Gold is the designated
clearing agent of the member b) Whether the selling
member is the bonafide member of the Exchange/
Clearing Corporation c) Whether the quantity being
delivered is from Clearing Corporation approved
refinery d) Whether the serial numbers of all the bars
is mentioned in the packing list provided e) Whether
the individual original quality certificates are
accompanied with the Gold Bars
Any other validation checks, as they may desire.
Delivery Process In case any of the above validation fails, the
designated vault will contact NSE Clearing office and
take any further action only as per instructions
received from the Clearing Corporation in writing.
If all validations are through, then the designated vault

personnel will put the Gold in the vault. Then the
custodian of designated vault will issue appropriate
receipt for having received the goods. Designated vault
in front of the selling member's clearing agent, will
deposit the said metal into their vault and enter the
details of the commodity in NSE Clearing Interface
158
Procedure of Taking For the purpose of taking delivery of goods fully or

Delivery from the Vault partially, the Member shall raise withdraw request in
the NSE Clearing Interface and send an Authority letter
on his letter head to the CC, authorising a
representative on his behalf to take the delivery.
Deliverable Grade of The selling members tendering delivery will have the
Underlying option of delivering such grades as per the contract
Commodities specifications. The buyer has no option to select a
particular grade and the delivery offered by the seller
and allocation by the Exchange/CC shall be binding on
him.
Applicability of The general provisions of Byelaws, Rules and
Regulations Regulations of the Exchange/CC and decisions taken by
Regulator of Commodity Exchanges and Clearing
Corporation, Board of Directors/ Relevant Authority of
the Exchange/CC in respect of matters specified above
will form an integral part of this contract. The
Exchange/CC or Regulator of Commodity Exchanges
and clearing corporation as the case may be further
prescribe additional measures relating to delivery
procedures, vaulting, quality certification, margining,
and risk management from time to time.
Members and market participants who enter into buy

and sell transactions need to be aware of all the factors
that go into the mechanism of trading and clearing, as
well as all provisions of the Exchange/CC's Bye Laws,
Rules, Regulations, circulars, directives, and
notifications of the Exchange/CC as well as of the
Regulators, Government and other authorities.
159
It is the sole obligation and responsibility of the

Members and market participants to ensure that apart
from the approved quality standards stipulated by the
Exchange, the commodity deposited / traded /
delivered through the Approved warehouses/Vaults of
Exchange/CC is in due compliance with the applicable
regulations laid down by authorities like Food Safety
Standard Authority of India , BIS, Orders under
Packaging and Labelling etc., as also other State/
Central laws and authorities issuing such regulations in
this behalf from time to time, including but not limited
to compliance of provisions and rates relating to GST,
APMC Tax, Mandi Tax, LBT, octroi, stamp duty, etc. as
may become due & payable under any law, rules or
regulations, applicable from time to time on the
underlying commodity of any contract offered for
deposit / trading / delivery and the Exchange/CC shall
not be responsible or liable on account of any non-
compliance thereof.
All the sellers giving delivery of goods/ commodities

and all the buyers taking delivery of goods/
commodities shall have the necessary GST Registration
as required under the Goods & Service Tax (GST) Act
applicable to the jurisdiction of the delivery centres and
obtain other necessary licenses, if any.
In respect of all contracts executed by the Members of

the Exchange, it shall be the responsibility of the
respective members to pay all applicable statutory fee,
stamp duty, taxes and levies in respect of all deliveries
as well as futures contracts directly to the concerned
Central/State/Local Government Departments and the
Exchange/CC shall not be held liable or accountable or
responsible on account of any non-compliance thereof.
160
The buyer shall have to lodge their claim against

quality and/or quantity of goods/ delivery allocated to
them while retaining disputed goods in the designated
vault itself (without lifting/withdrawing them out of the
vault), if any, within 48 hours from the date of
scheduled pay out of the Exchange/CC and failing
which, no claim shall be entertained by the Exchange/
CC thereafter.
The Exchange/CC is not responsible and shall not be

held liable or accountable or responsible for value of
the goods/stock of the commodities stored/lying in CC
designated warehouse/s, vault agency/ Clearing House
and which is fully/partially confiscated / seized by any
local or statutory or any other authority for any reason
whatsoever or for any deterioration in quality of the
goods stored due to above reason or which have
passed the Final Expiry date and continue to remain in
the CC accredited warehouse/vault. The decision of the
Exchange shall be final and binding to all Members and
their constituents in this regard. (The interpretation or
clarification given by the Exchange/CC on any terms of
this contract shall be final and binding on the members
and others.)
Source:https://www.nseindia.com/products/content/derivatives/commodity/
com_contract_specifitns.htm
161
Activity 1. Choose any agri commodity from NCDEX exchange and prepare
a complete note right from the description of the commodity till the
standardised specification on the exchange.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
Activity 2. Choose any agri commodity from MCX exchange and prepare a
complete note right from the description of the commodity till the
standardised specification on the exchange.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

1. Differentiate between Pit trading and Electronic trading
2. What is hedging?
3. What is arbitrage?
4. What is the difference between a speculator and trader?
5. Explain the various types of members on a commodity exchange.
162
1. The strategy of offsetting price risk that is inherent in a spot market by

taking an equal but opposite position in the futures market is called:
a) Hedging
b) Arbitrage
c) Strandle
d) Butterfly
2. Which of the following type of market participant buys from an

underpriced market and sells the same agri commodity in an overpriced
market?
a) Speculator
b) Arbitrageur
c) Investor
d) Margin Trader
3. Which of the following is a SEBI regulated online Commodity Derivative

Exchange, that provide nationwide trading platform through its
appointed brokers and got SEBI approval for recommencement of
Trading Operations in July 2017?
a) NCDEX
b) MCX
c) ICEX
d) NMCE
4. Which type of exchange members will have rights to trade on the

Exchange platform on their own account as well as on account of clients
registered with them but shall have no right to clear and settle such
trades themselves.
a) Professional Clearing Members
b) Strategic Clearing Members
c) Trading Members
d) Settlement Clearing Members
163
5. Which of the following entities are eligible to apply for membership

subject to the regulatory norms and provisions of SCRA 1956 and its
Rules, SEBI Act 1992 and its Rules & Regulation and as provided in the
Rules, Regulations, Byelaws and Circulars of the Exchange:
a) Individuals
b) Partnership Firms registered under the Indian Partnership Act,
1932
c) Limited Liability Partnerships registered under the Limited
Liability Partnership Act, 2008
Answers: 1.(a), 2.(b), 3.(c), 4.(c), 5.(d)
5.12 REFERENCES


Services Limited

8. Annual Report 2018-19 by Department of Agriculture, Cooperation and

Farmers Welfare (Ministry of Agriculture & Farmers Welfare)
9. Annual Reports of SEBI
10.Annual Reports of Commodity Exchanges such as NCDEX, MCX, ICEX,

BSE, NSE etc
164
https://www.sebi.gov.in
https://www.bseindia.com
https://www.nseindia.com
http://www.bsebti.com
https://www.academia.edu/
https://mpra.ub.uni-muenchen.de/
https://www.iosco.org
World Investment Report 2019
https://www.scribd.com
http://www.eagri.org
https://www.epw.in
https://mpra.ub.uni-muenchen.de
https://www.worldbank.org/en/research/commodity-markets
http://tradeworldonline.com
https://unctad.org
165
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
166
GLOBAL AGRI COMMODITY EXCHANGES
Chapter 6
Global Agri Commodity Exchanges
Global Agri Commodities Exchanges
167
Structure:
6.1 Introduction to Global Agri Commodity Exchanges
6.2 Chicago Board of Trade
6.3 Chicago Mercantile Exchange
6.4 New York Mercantile Exchange
6.5 Eurex Exchange
6.6 Agricultural Commodity Exchange for Africa
6.7 Agricultural Futures Exchange of Thailand
6.8 Osaka Dojima Commodity Exchange
6.9 Indonesia Commodity & Derivatives Exchange
6.10 Nepal Derivative Exchange Ltd
6.11 Zhengzhou Commodity Exchange
6.12 Ghana Commodity Exchange
6.13 Saint-Petersburg International Mercantile Exchange
6.14 Australian Securities Exchange
6.18 References
168
6.1 INTRODUCTION TO GLOBAL AGRI COMMODITY

EXCHANGES
Agriculture and farming is as old as human civilization and settlement.

Archaeological discoveries indicate that agriculture developed around
10,000 BC and the agricultural revolution started around 8,500 BC, led to
trading agri commodities between settlements.
It is believed by many historians that the adoption of gold coins as a

medium of exchange in medieval Europe seeded the thought of
development of formal markets for trading commodities. However the
commodity markets evolved out of many trading activities that were
carried out since the ancient times. In the 1100s courretiers de change of
France played a role of a modern times broker by managing agricultural
debts on behalf of banks.
In the 12th century European sellers used to execute contracts promising

future delivery of goods sold by them. In the 13th century, we have
references of English Cistercian Monasteries selling wool over 10 years in
advance, to foreign merchants. The merchants of Venice (Venetians) first
start trading government securities in the 13th century. Italian cities of
Pisa, Verona, Genoa, and Florence also began trading government
securities thereafter. With the progress of civilization, commodities got
exchanged with barter system. The popularity of barter system gave birth
to selling of commodities from one place to another out of the producers
geographic region with the sole intention of making profits. Different types
of commodities were grown to suit the requirements of different consumers
across different geographies with different arrangements and contracts.
Over a period of time these arrangement and agreements got converted
into rules, standards, specifications for quality of produce, standard
quantity to produce, transport, storage at warehouse, delivery and
logistics, modes of payment etc. The trading was based on various factors
such as weather, conflict, supply and demand, preference of people,
quality and storage of produce etc.
169
We have also heard about the rise and fall of the 17th-century Holland’s
“tulip mania.” The Tulip Mania leaves behind enormous lessons for modern
readers. According to Bruce Babcock, a noted commodity authority, the
first recorded commodity futures trades occurred in 17th century Japan,
though there is some evidence that rice may have been traded as far back
as 6,000 years ago in China. (Babcock, 2009). A futures market in rice was
developed to protect rice producers from bad weather or warfare at
Dojima, near Osaka(Japan) in the late 17th century. Europe witnessed a
large turnover in both forwards and futures contract in the 18th century in
different kinds of commodities. During the mid 19th century commodities
exchanges were set up in both US and Europe In the form of Chicago
Board of Trade ( 1848) , Argentina’s Bolsa De Cereales(1854), London
Metal Exchange (1877), Chicago Butter and Egg Board(1898), Egypt’s
Alexandria Futures Market(1899) etc. Derivative products were created
from portfolios of risky mortgages in the United States using a procedure
known as securitization. By mid 20th century many countries tried to
consolidate the commodity exchanges by merging into bigger and more
organized commodity exchanges for e.g. in 1999, China merged over 30
commodity exchanges into three main commodity exchanges i.e. Dalian
Commodity Exchange, Zhengzhou Commodity Exchange and Shanghai
Futures Exchange. India also had a large number of commodity exchanges
dealing with single commodities and controlled by the producers and
traders in the mid 20th century.
Agricultural products continued to remain the main commodity of futures

trading for over 100 years. Livestock was added to the trading "block"
during the 1950s. Contracts for precious metals like silver started trading
during the 1960s. Currencies became a tradable commodity in the 1970’s
soon after delinking of currency prices from the gold prices. Stock market
index benchmarks like the S&P 500 and government debt instruments
became tradable commodities through futures contract in the 80s and 90s.
More exchanges were established world wide in 20th century. The online
trading systems introduced in the early 21st century increased the
popularity of trading in commodities through futures contracts. Due to the
entry of large number of market participants Commodities trading was
used to protect the traders by hedging.
170
It is also believed that the first stock exchange emerged in Belgium in

1531. The East India Company is widely recognized as the world’s first
publically traded company in 1600. In 1602, the Dutch East India Company
also became a publically traded company. The first stock exchange in
London was formed in 1773. Germany, France, Netherlands, Switzerland,
South Africa, Hong Kong, Japan, Australia, and Canada also developed
their own stock exchanges. The New York Stock Exchange (NYSE) formed
in 1792 continues to be the largest in terms of stock market capitalization.
The Tokyo Stock Exchange formed in 1878 is the second largest in terms of
stock market capitalization and the largest outside Europe and America.
The Nasdaq is an American stock exchange that serves as a global
electronic marketplace for securities trading. Most countries around the
globe depend on the stock exchanges for economic growth.
The forward contracts emerged in the 1800s from the grain/crops trade in
the United States inorder to allow buyers and farmers to lock in grains/
crops prices prior to delivery. The Farmers of the Midwest had to store their
grains/crops in Chicago prior to shipment to the East Coast. By locking the
future price in advance farmers were protected from the risk of
deterioration in quality of the stored grains/crops or fall in their prices as
the buyer was supposed to take delivery of the agreed quantity at the
agreed price. The farmer used to receive the payment in advance. The
buyer may have to face the risk of default in delivery by the farmer since
these was a bilateral (over the counter) private forward contract, unlike a
futures contract where the settlement is guaranteed by the exchange. Such
a buying and selling system became very popular with the farmers and
buyers and it soon emerged into a standardized contracts, where in the
quality and quantity of agri produce, price, delivery time and place and
other terms and conditions of the contract were defined. A centralized
clearinghouse (commodity exchange) was also created to act as the
counterparty to both parties. The centralized clearinghouse (commodity
exchange) became more popular than the forward contract due to
elimination of risk of default from any of the party. Such standardized
exchange contracts with minimal or almost zero default risk came to be
known as futures contracts.
171
Chicago Board of Trade (CBOT) was the first commodity exchange

established in 1848 in the US. Unlike only two participants in a forward
trade, a large number of participants could deal in future contracts through
the exchange. The exchange has an important role to play with both
buyers and sellers and hence they need to be fair with all market
participants. Chicago Board Options Exchange (CBOE) became the first
marketplace for trading listed options in 1973.
Producers of agri commodities are involved in selling commodities futures

contracts prior to producing the commodity i.e. prior to harvest in order to
protect him from the risk of price volatility in the future. Thus a future
contract enables a producer to lock in a price for future production. The
buyers are depending on the producers to supply commodities either for
consumption or for production. The futures contract enables the buyers to
buy the agri commodities in advance and be assured of its supply in future
at a predetermined price. Thus a futures contract also help the buyer to
make a better forecast of the cost involved in production and ascertain a
stable price for his production/ consumption based on the predetermined
price of the supply from the farmer. It also protects the buyer from the
price hikes in the future due to any unforeseen event. Speculators provide
liquidity to both farmers and buyers by trading in the futures contracts and
booking profits in the bargain. Traders also provide liquidity to both
farmers and buyers and book profits by taking advantages of the
imbalances in the demand and supply of agri commodities.
The United States had the earliest official commodity trading exchange in
the form of the Chicago Board of Trade (CBOT), formed in 1848. Major
stock markets emerged in the 19th and 20th centuries for trading in
trillions of dollars.
The commodity markets began with the trading of agricultural products

such as corn, cattle, wheat, and pigs in the 19th century. Chicago
Mercantile Exchange (CME) Group and the New York Mercantile Exchange
(NYMEX) are considered to be the pioneers in establishing commodity
exchanges. The CME Group is the world's leading and most diverse
derivatives marketplace. Intercontinental Exchange (ICE) is a popular
commodity exchange in Europe.
172
CME Group is the world’s leading and most diverse derivatives

marketplace, made up of four exchanges, CME, CBOT, NYMEX and COMEX.
6.2 CHICAGO BOARD OF TRADE (CBOT)
The Chicago Board of Trade (CBOT) was established on April 3, 1848 where
both agricultural and financial contracts are traded. It is one of the world's
oldest futures and options exchanges created to help farmers and
commodity consumers manage risks by removing price uncertainty from
agricultural products.
Merchants is US were using forward contracts inorder to ensure trading

with adequate buyers and sellers for commodities. Forward contracts posed
‘Credit risk’ for the merchants and hence to deal with this prime concern of
credit risk a group of Chicago businessmen formed the Chicago Board of
Trade (CBOT) in 1848. CBOT provided a centralized commodity exchange
where a large number of buyers and sellers could negotiate forward
contracts. The first ‘exchange traded” derivatives contract was listed on
CBOT in 1865 and since this contract was listed on a commodity exchange
it was called a ‘futures contracts”.
The CBOT originally traded only agricultural commodities such as wheat,

corn, and soybeans. As the CBOT exchange evolved and developed over
time, contracts related to financial products, energy, and precious metals
also traded there. CBOT had replaced the open-outcry trading with the
electronic trading systems.
On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange
(CME) to form CME Group.
173
6.3 CHICAGO MERCANTILE EXCHANGE (CME)
Memberships are available on the Chicago Mercantile Exchange, Inc. (CME)

for getting access to different products at different rates.
Types of Membership:
Individual Membership:
Individual membership enables you to trade specific products at reduced
rates and lower fees. Memberships can be bought, sold, and leased.
Corporate Membership:
Corporate membership allows eligible firms to receive preferential fees on
their proprietary trading of products within the Exchange
Clearing Membership
Clearing members assume full financial and performance responsibility for
all transactions executed through them and cleared by CME Clearing
whether it is for the account of a customer, member, or their own account.
Individual traders, grain elevators, farmers, investors and commercial firms
are among the diverse, global participant base that trade this fully
electronic contract
Popular products used to profit from or hedge against price movements :
Corn , Wheat ,Black Sea Wheat, Oats , Rough Rice, Soybeans , Soybean
Meal, Soybean Oil etc
Corn futures (ticker symbol ZC)

Corn futures offer global price discovery in a market that can shift
frequently based on weather conditions, politics, crop conditions, shipping
and freight issues, and more. USDA World Agricultural Supply and Demand
Estimate (WASDE) Report offers a monthly comprehensive forecast. The
USDA World Agricultural Supply and Demand Estimate (WASDE) report
offers an opportunity for traders to take a market view around the report
release and then take action in the futures market. Weekly U.S. export
report from the world’s largest exporting country for corn offers insights
into global demand. Grain Stocks Reports Issued four times a year by the
National Agricultural Statistics Service (NASS), offer updates on stocks of
corn and other major grain & oilseed crops
174
Corn futures provide the following benefits:

• Liquidity
• Flexible trade execution with central order book
• Safety and security as it helps mitigate counter party credit risk with
central clearing
• Overnight electronic access to understand market-moving global news &
events
• Extended trading hours
• Futures leverage helps to trade a larger notional value with a small
margin
• Different sizes for different needs
Corn Futures Contract Specs
Contract Unit 5,000 bushels

Product Symbol ZC
Contract Month H, K, N, U, Z (Mar, May, Jul, Sep, Dec)
Price Quotation U.S. Dollars and Cents per bushel
Contract Size 5,000 bushels
Minimum Tick 0.0025
Dollar Value of One Tick $12.50
Trading Hours Sunday – Friday, 7:00 p.m. – 7:45 a.m. CT and
Monday – Friday, 8:30 a.m. – 1:20 p.m. CT
TAS: Sunday - Friday 7:00 p.m. - 7:45 a.m. and

?Monday - Friday 8:30 a.m. - 1:15 p.m. CT
Minimum Price 1/4 of one cent (0.0025) per bushel = $12.50
Fluctuation
TAS: Zero or +/- 4 ticks in the minimum tick
increment of the outright
175
Product Code CME Globex: ZC

CME ClearPort: C
Clearing: C
TAS: ZCT
Options Available Yes
Listed Contracts 9 monthly contracts of Mar, May, Sep and 8 monthly
contracts of Jul and Dec listed annually after the
termination of trading in the December contract of
the current year.
Settlement Method Deliverable
Termination Of Trading Trading terminates on the business day prior to the
15th day of the contract month.
Trade At Marker Or Trade Trading at Settlement (TAS) is subject to the
At Settlement Rules requirements of Rule 524.A. TAS trades off a "Base
Price" of zero (equal to the daily settlement price) to
create a differential versus the daily settlement price
in the underlying futures contract month. The TAS
clearing price equals the daily settlement price of
the underlying futures contract month plus or minus
the TAS transaction price.
Settlement Procedures Normal Daily Settlement
CME Group staff determines the daily settlements in
CBOT Corn (ZC) futures on trading activity on CME
Globex between 13:14:00 and 13:15:00 Central
Time (CT), the settlement period.
Deferred Months
Deferred contract months consist of all non-lead
months
Final Settlement Calculation for Expiring Contract
CME Group staff determines the settlement of the
expiring CBOT Corn (ZC) contract based on trading
activity on CME Globex between 12:00:00 and
12:01:00 PM Central Time (CT), the settlement
period, on the day of expiration.
Source :https://www.cmegroup.com/trading
176
6.4 NEW YORK MERCANTILE EXCHANGE (NYMEX)
The New York Mercantile Exchange (NYMEX) started in 1872 is a

commodity futures exchange located in Manhattan, New York City and
owned and operated by CME Group.
The NYMEX started when a group of butter and cheese farmers formed the
Butter and Cheese Exchange of New York in 1872. The exchange was later
expanded to include eggs, and the name changed to the Butter, Cheese
and Egg Exchange. A decade later, the market opened trade in canned
goods, poultry, and dried fruits. The name changed again, to the New York
Mercantile Exchange.
NYMEX is regulated by the Commodity Futures Trading Commission (CFTC).

The company's two principal divisions are the New York Mercantile
Exchange and Commodity Exchange, Inc (COMEX).
Trading on the New York Mercantile Exchange was based on the open
outcry trading system. It was partially replaced with CME’s Globex
electronic trading platform in 2006. NYMEX shut down its open outcry
trading floor in 2016 by completely embracing electronic trading.
Chicago based CME Group acquire NYMEX Holdings, Inc. in August 2008.
6.5 EUREX EXCHANGE
Eurex Exchange is the largest European futures and options market. The
Exchange is headquartered in Eschborn, Germany. Eurex Exchange was
one of the first to offer a fully electronic trading platform. Market
participants connected from 700 locations worldwide.
The Eurex Member Section offers member-specific services related to

releases, simulation, trading and clearing. Eurex Exchange’s offer a broad
product investment portfolio and leading edge T7 trading architecture.
177
6.6 AGRICULTURAL COMMODITY EXCHANGE FOR AFRICA
The Agricultural Commodity Exchange for Africa (ACE ) focuses its

operations on trade facilitation, implementation of a warehouse receipt
system and market information dissemination aims to decrease transaction
costs, mitigate information asymmetries and govern contractual relations
between market participants.
Agricultural Commodity Exchange for Africa overall objective is to create an

efficient and transparent marketing system for agricultural commodities. It
uses mobile technology to collect price information from the rural areas
and disseminate it to farmers, traders and others in the agricultural
industry. SMSs are the most common way to receive ACE Market
Information.
Market Information enables market players to make well-informed

decisions and provides them with increased bargaining power. ACE collects
and disseminates weekly price information from rural and national markets
for key agricultural commodities. ACE sends information on real trade
opportunities that are listed on the ACE trade platform. ACE uses the
trading platform to compile the current (spot) market price for the key
commodities (maize, soya, groundnuts, pigeon peas and rice) in the key
urban centres.
The warehouse receipt system gives a small farmer the ability not to sell
immediately after harvest when prices are traditionaly too low. Farmers
and other clients can deposit and safely store their commodities at ACE
certified warehouses.
ACE facilitates trades to ensure successful and beneficial trading of

agricultural commodities between buyers and sellers. The ACE Rural
Marketing Advisors and ACE Trade Team guide ACE clients through the
trade process, and help them to have access to the best marketing
opportunities for their commodity. On ‘spot trade’ or ‘direct trade’ sellers
and buyers advertise an ‘offer to sell’ (seller) or ‘bid to buy’ (buyer) on the
ACE platform. An Offer Volume Only (OVO) is a traditional auction where
the seller requests ACE to host an auction to sell a certain quantity of
commodity with no specified price. A Bid Volume Only (BVO) is a reverse
auction where the buyer requests ACE to host an auction to buy a certain
quantity of commodity with no specified price.
178
Forward contracts are introduced by ACE to enable a buyer to buy

commodity from a supplier at an agreed spot price. The buyer will have to
pay the forward price to the bank, via ACE for the commodity at a later
agreed upon date. Ownership transfers from the supplier to buyer after
the forward price is paid.
ACE charges a small commission for both direct trade and warehouse
receipt trade but provides various benefits such as provide direct link
between supplier and buyer, more options to trade, transparency,
enforceable contracts, dispute resolution and transport and storage.
6.7 AGRICULTURAL FUTURES EXCHANGE OF THAILAND
The Agricultural Futures Exchange of Thailand (AFET) was established in

2001 and is regulated by the Agricultural Futures Trading Commission of
Thailand. Trading at the AFET is done through an electronic system. The
AFET trades rubber, rice and tapioca.
AFET has two classes of members, "brokers" and "traders", both of which
have direct access to the market.
The AFET has an in-house clearing house which takes care of clearing
transactions, risk management and delivery.
179
6.8 OSAKA DOJIMA COMMODITY EXCHANGE
The Dojima Rice Exchange was the world's first commodity futures
exchange established in 1697 in Osaka, Japan but was it was dissolved in
1939. Commodity exchanges were later established in Japan in 1950 by
the Commodity Exchange Law. The Osaka Grain Exchange, precursor of the
Kansai Commodities Exchange, was established in 1952, inorder to
reconstruct the Dojima Rice Market. Osaka Grain Exchange, Osaka Sugar
Exchange and Kobe Grain Exchange merged into the Kansai Agricultural
Commodities Exchange in October 1993. Kansai Agricultural Commodities
Exchange was later merged with Kobe Raw Silk Exchange to establish
Kansai Commodity Exchange.
Kansai Commodity Exchange (KEX) was established in the year 1997. KEX
resulted from a merger between Kansai Agricultural Commodities Exchange
and Kobe Raw Silk Exchange.
Kansai Commodity Exchange(KEX) carries out commodities futures trading
of commodities like frozen shrimp, raw silk, raw sugar, coffee and corn. The
exchange also aimed at listing rice in order to reconstruct the Dojima Rice
Market.
KEX merged with the Fukuoka Futures Exchange on December 2006. Rice
futures got listed in 2011. After it took over rice futures from the Tokyo
Grain Exchange in 2013, it was renamed as the Osaka Dojima Commodity
Exchange
Listed commodities are:

• Rice
• Yellow Corn
• US Soybeans
• Azuki beans
• Raw Sugar
180
Tokyo Rice Futures specifications:
Launched August, 2011

Standard Grade Tokyo Rice
Price Quotation 60㎏(1 bale)
Delivery Method Physical delivery by warehouse receipt

Delivery Points Designated warehouses
Minimum Price 10 yen
Fluctuation
Contract Size and 1 unit (12,000㎏, 200 bales)
Deliverly Size
Delivery Months (Until March,2019)
Six consecutive months
(After April,2019)
February, April, June, August, October, December within a
12 month period
Delivery Day (Until March,2019)
5th business day following the last trading day
(After April,2019)
2nd business day following the last trading day
Last Trading Day 20th of the delivery month (if the last trading day falls on
a holiday, it shall be moved forward to the preceding
business day)
Trading Hours 9:00 A.M. To 3:00 P.M.(JST)
Fluctuation 300 yen
Source :http://www.ode.or.jp
181
6.9 INDONESIA COMMODITY & DERIVATIVES EXCHANGE

(ICDX)
Indonesia Commodity & Derivatives Exchange (ICDX) receives a good flow

of funds for accessing Indonesian commodities.
With abundant natural resources and home to some of the world's the
largest producers of prime commodities the ICDX exists to serve the
underlying regional economic interest as the global trading hub for
numerous indigenous commodities including Crude Palm Oil (CPO), Olein,
Tin and Gold.
6.10 NEPAL DERIVATIVE EXCHANGE
Nepal Derivative Exchange (NDEX) is a state of art online commodity and

derivative exchange operating in Nepal.
NDEX provides a platform to manage risk across the major commodities

from precious metals to base metals, from agro commodities to energies.
6.11 ZHENGZHOU COMMODITY EXCHANGE
Zhengzhou Commodity Exchange (ZCE) established as a futures exchange

in 1990 as China’s first pilot futures market.
ZCE has listed 18 futures products and 1 options product, including

common wheat, strong gluten wheat, early rice, late indica rice, japonica
rice, cotton, cotton yarn, rapeseed, rapeseed oil, rapeseed meal, white
sugar, apple, thermal coal, methanol, pure terephthalic acid (PTA), flat
glass, manganese silicon, ferrosilicon futures and white sugar options,
covering crucial fields of national economy including agricultural, energy,
chemical, construction materials and metallurgical industries.
182
6.12 GHANA COMMODITY EXCHANGE
Ghana Commodity Exchange (GCX) establish linkages between agricultural

and commodity producers and buyers, to secure competitive prices for
their products, assuring the market quantity and quality as well as timely
settlement of their trade.
Ghana Commodity Exchange is a regulated national and regional market

linking buyers and sellers of agricultural and non- agricultural products to
trade under rules and discover prices while assuring the market quantity
and quality of the products and timely settlement.
GCX is positioned as a national and regional exchange to formalize Ghana’s

and West Africa’s agricultural sector and provide better access to
agricultural and financial markets for participants.
6.13 SAINT-PETERSBURG INTERNATIONAL MERCANTILE

EXCHANGE
Saint-Petersburg International Mercantile Exchange (or SPIMEX) is the

largest commodity exchange in Russia. SPIMEX offers trading both in spot
and derivatives contracts
SPIMEX harnesses cutting-edge software solutions to offer a convenient,

reliable and transparent trading experience. The SPIMEX Electronic Trading
System gives buyers and sellers easy-to-use, remote online access to all
the Exchange’s markets and services. Modern risk management and
settlement procedures, developed in line with international standards,
ensure financial oversight over contract execution and physical delivery.
6.14 AUSTRALIAN SECURITIES EXCHANGE
Australian Securities Exchange (ASX) is one of the world’s leading financial

market exchanges. ASX provides a full suite of services including listings,
trading, clearing, settlement, technical and information services, and other
post-trade services. It operates markets for a wide range of asset classes
including equities, fixed income, commodities and energy.
183
Activity 1. Make a comparison chart on any agri product of your choice on

the basis of commodity contract specification of 3 agri commodity
exchanges.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2. Design a model standard specification for a agri commodity

which is having a largest open interest in a global agri commodity market.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

1. Write a short note on evolution of global commodity exchanges
2. Write a short note on Chicago Mercantile Exchange.
3. Which exchanges were merged into the Chicago Mercantile Exchange

group
4. Zhengzhou Commodity Exchange (ZCE) has listed which futures

products
5. Explain the special features of Agricultural Commodity Exchange for

Africa
184
1. Agriculture and farming is as old as human civilization and settlement.

Archaeological discoveries indicate that agriculture developed around
a] 3000 BC
b] 7000 BC
c] 10,000 BC
d] 15000 BC
2. By mid 20th century many countries tried to consolidate the commodity

exchanges by merging into bigger and more organized commodity
exchanges for e.g. in 1999, China merged over 30 commodity
exchanges into which main commodity exchanges?
a] Dalian Commodity Exchange
b] Zhengzhou Commodity Exchange
c] Shanghai Futures Exchange
d] All of the options
3. The CBOT originally traded only agricultural commodities such as wheat,

corn, and soybeans. The CBOT was merged into CME group in
a] 2002
b] 2007
c] 2011
d] 2015
4. The United States had the earliest official commodity trading exchange
in the form of
a] CBOT
b] CME
c] NYME
d] USCE
5. Eurex Exchange is the largest European futures and options market. The
Exchange is headquartered in
a] England
b] Germany
c] France
d] Italy
Answers:1.(c), 2.(d), 3.(b), 4. (a), 5.(b)
185
6.18 REFERENCES
Services Limited
3. World Stock, Derivative and Commodity Exchanges
4. Commodities Exchanges and Futures Trading Principles and Operating

Methods by Baer, Saxon and Olin Glenn
5. Commodity Markets : Recent Developments by by Dhandapani Alagiri
6. Annual commodity & currency report, 2019 by Karvy
186
https://www.investopedia.com
https://commodityhq.com
https://commodity.com/
http://www.world-stock-exchanges.net/
https://www.universalclass.com/
https://www.cmegroup.com
https://www.eurexchange.com
http://www.aceafrica.org
http://www.marketswiki.com
http://www.ode.or.jp
http://english.czce.com.cn
http://www.ndex.com.np
https://www.icdx.co.id
https://www.gcx.com.gh
https://www.factinate.com
https://www.wisegeek.com
https://www.tfex.co.th
https://spimex.com/en
https://www.asx.com.au/
187
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
188
DIFFERENT TYPES OF AGRI COMMODITIES DERIVATIVES
Chapter 7
Different Types Of Agri Commodities
Derivatives
Learning Objectives: This chapter will help you understand the various
types of Agri Commodities Derivatives
Structure:
7.1 Introduction to Agri Commodity Derivatives
7.2 What is a Derivative?
7.3 Types of Derivative Contract
7.4 Trading of commodities in the Spot Market
7.5 Forward contract
7.6 Futures contract
7.10 Reference
189
7.1 INTRODUCTION TO AGRI COMMODITY DERIVATIVES
The derivatives market plays a useful role in developing economy by

enabling market participants to channelize their savings into derivative
investment with its own perception of the prices in the future, transfer risks
and to create new businesses, new products and new employment
opportunities. Investment in commodities also provide a hedge against
inflation. In the last few decades, derivatives market has seen a
phenomenal growth due to fluctuations in underlying asset prices,
reduction in transaction costs due to leveraging of technology, integration
of global financial markets, usage of risk management tools by market
participants to manage risks, and timely innovations in derivatives
contracts and products. A wide variety of agri commodity derivative
contracts are available in the form of forwards, futures, options and swaps
to cater to the specific requirements of customers. Agri commodities
contracts have evolved from futures, options, swaps to exotic ones like EFP
(Exchange of Futures for Physicals), Tapos (Traded Average Price Options)
and CFDs(Contracts for Differences) etc. Agri commodities contracts
provide various benefits such as price discovery and risk management for a
variety of market participants, from farmers, processors, distributors,
wholesalers, retailers and more.
Derivative contracts can be traded both Over-the-counter i.e. trading

happens over the telephone or through electronic media between two
contracting market participants or organised commodity exchanges. The
OTC derivative markets is represented by the banks, financial institutions,
hedge funds, corporations and high net-worth individuals and is less
regulated in comparison to the agri commodity exchanges. The OTC
derivatives contracts are tailor made to suit specific requirements of
dealing counter parties and has a higher counter party risk in comparison
to the agri commodity exchanges. The OTC derivatives has no formal
centralized limits on individual positions, leverage, or margins nor formal
rules or mechanisms for risk management to safeguard the interest of the
market participants. The commodity exchanges do have a formal
centralized limits on individual positions, leverage, or margins and formal
rules or mechanisms for risk management to safeguard the interest of the
market participants. A clearing house/ clearing corporation of the
commodity exchange guarantees the contract performance and settlement
of transactions.
190
Thus derivatives market helps in improving price discovery, transfer of

various risks, and removes the hassles of cumbersome physical trading of
agri commodities in large volumes. Derivative s have become increasingly
important in finance to financial institutions, fund managers, and
corporate treasurers as well as individuals in the over-the - counter market
and derivative exchanges. Traditional open outcry system of derivative
trading has been replaced by electronic trading which is supplemented by
algorithmic trading, automated trading, high-frequency trading, and robo
trading. Market participants are not bound by standardized exchange
contract and are free to negotiate a mutually attractive contract. The
exchange-traded derivatives are quite liquid and have low transaction costs
in comparison to tailor-made over – the –counter contracts.
Agri commodities are consumption assets as they are purchased for

consumption, unlike investment assets which are purchased for
investment. With increase in population more and more people require agri
commodities and hence the demand for agri commodities always grows,
which in turn culminates into price rise. Since consumption commodities
are held for consumption purpose, traders may not be interested to
undertake arbitrage even if the forward and future price is above or below
the cost of carry. Hence consumption commodities forward price may be
above or below carry.
7.2 WHAT IS A DERIVATIVE?
The word ‘derivative’ comes from the verb ‘to derive.’ It indicates that it
has no independent value. A derivative is a contract whose value is derived
from the value of another asset, known as the underlying, which could be a
share, a stock market index, an interest rate, a commodity, or a currency.
A derivative contract can also be derived from a agriculture commodity. A
derivative is an financial instrument (contract) whose value is derived from
another security or economic variable.
For e.g. a farmer enters into a contract with an agent to sell his sugarcane
after 3 months. The value of that contract would vary with the price of
sugarcane. Contracts of this nature are called derivatives. Sugarcane, in
this example, is referred to as the underlying or the primary asset.
191
Commodity derivatives and financial derivatives are the two major classes
of derivatives traded globally. The underlying in a derivative contract could
be a financial asset such as currency, stock and market index, interest
bearing security or a physical commodity. Commodity derivatives have
commodities agri products, energy products, metals etc as underlying
assets.
Futures contracts are the most important form of derivatives, which are in
existence long before the term ‘derivative’ was coined. The most common
types of derivatives are futures, options, forwards and swaps. The
derivative price may be at a premium or discount to spot price. Various
pricing models based on traditional and modern portfolio theories are
invented to design, create and maintain a derivative portfolio. Derivatives
or derivative securities are contracts written between two parties (counter
parties) for a short period or a longer period e.g. short term interest future
or long term interest future.
According to the Securities Contract Regulation Act, (1956), the

term “derivative” includes:
• a security derived from a debt instrument, share, loan, whether secured

or unsecured, risk instrument or contract for differences or any other
form of security;
• a contract which derives its value from the prices, or index of prices, of
underlying securities.
Accounting Standard SFAS133 defines a derivative as a derivative

instrument is a financial derivative or other contract with all three of the
following characteristics:
i. It has (1) one or more underlying, and (2) one or more notional amount
or payments provisions or both. Those terms determine the amount of
the settlement or settlements.
ii. (ii) It requires no initial net investment or an initial net investment that
is smaller than would be required for other types of contract that would
be expected to have a similar response to changes in market factors.
192
Its terms require or permit net settlement. It can be readily settled net by
a means outside the contract or it provides for delivery of an asset that
puts the recipients in a position not substantially different from net
settlement.
A farmer is engulfed with different types of risk in day to day life in this
modern and complex economy and hence it has become essential for him
to use appropriate risk managing instruments to stay focused on optimum
returns for fulfilling financial goals. Risk averse farmers as well as investors
always look for preventing, transferring, minimizing or accepting nominal
risk. Derivatives are hedging instruments which can be used in all
environments that generate risk. Both farmers and investors use
derivatives to hedge risk and trade. Derivatives can also be used for
speculation or arbitrage. Speculators use price movements to make short
term profits and Arbitrageurs derive profit from differences in prices of an
asset in two different markets. Derivatives can be used to make profits
from the volatility in the prices of agriculture commodities.
Although financial derivatives have been in operation since long, the

following reasons were responsible for Derivatives market emerging as
major force in financial markets in early 1970s:
1. Failure of Brettonwood System
2. Breaking of the fixed exchange rate regime
3. New exchange rate regime, i.e., floating rate (flexible) system based
upon market forces
4. New pressure of demand and supply on different currencies, and

fluctuation in short term interest rates
5. Exchange rates constantly changing
6. Business firms faced a new risk, known as currency or foreign exchange

risk.
7. New financial instrumenting the form of derivative was developed to

overcome this risk in the new financial environment.
193
Derivative market in India is believed to be in existence since the ancient

times, prominently referenced during Chandragupta Maurya’s period in
Kautilya’s Arthasastra. It carried out the operations similar to the modern
day Futures market but Futures market in its organized form appeared only
in the late 19th century, with the advent of the British.
The first organised futures market was established in 1875 by the Bombay
Cotton Trade Association to trade in cotton contracts. Futures trading in
oilseeds was started by the formation of Gujarat Vyapari Mandali, in 1900
in Mumbai. Futures trading in raw jute and jute goods began in Calcutta
with the establishment of the Calcutta Hessian Exchange Ltd., in 1919.
The subject of futures trading was placed in the Union list when the
Constitution of India was framed. The Government of India had banned
futures trading on commodities by enacting two legislations Forward
Contract Regulation 1951 and Securities Contract regulation Act 1952 to
prevent speculation on agri prices. In April 1999, the Government of India
decided to remove all the commodities from the restrictive list for futures
trading. Government also allowed setting up of new modern, demutualized
Nationwide Multi-commodity Exchanges with investment support by public
and private institutions.
Dr. L C Gupta committee set up to study the feasibility of introduction of

derivative contracts in Indian markets in wake of liberalization of Indian
economy in 1991 and abolition of Badla system after Harshad Mehta scam.
An immediate outcome was in the form of:
a. Exchange trading in derivatives started in June 2000 with introduction of

index futures on NSE
b. Index options, Futures and Options on individual securitieswas

introduced in 2001
c. Interest rates futures introduced with notional Treasury Bills and 10

years bonds in 2003 and in Commodities market; Derivatives contracts
in the form of futures were introduced
Indian derivative marketsis considered to be probably among the safest in

the world as the chances of default by any of the exchanges or brokers is
minimal. The derivatives market is bigger than the stock market in terms
of underlying assets.
194
The VAR (Value at Risk) system of margins on derivatives collects up to

50% of the total value of a transaction when markets become volatile.
Derivative products are traded in the electronic form and hence there is no
procedural loss while trading them. The best trading software and trading
tools are also easily available for investors. Both print and electronic media
give various inputs to the investors to make an informed decision. SEBI is
the derivative market regulator and is vigilant to any manipulation by any
mishap players.
The derivative market in India, like its counterparts abroad, is increasingly

gaining significance. The derivatives market is driven by volatility in the
economy, globalization and liberalization of businesses, technology
disruption in all sectors of the economy, scientific tools used for risk
management and hedging, and the positive outlook and policies adopted
by the Government.
7.3 TYPES OF DERIVATIVE CONTRACT
Derivatives are one of the three main categories of financial instruments,

the other two being stocks (i.e., equities or shares) and debt (i.e., bonds
and mortgages).
There are two types of Derivatives:
a. Commodity Derivative
b. Financial Derivative
In a commodity derivatives, the underlying instrument is a commodity

which may be wheat, cotton, pepper, sugar, jute, turmeric, corn,
soyabeans, crude oil, natural gas, gold, silver, copper and so on.
195
Commodity Derivatives can be classified as following underlying:
Agriculture: Rice , Wheat, Maize , Oats, Chana, Barley, Moong, Soybean
Livestock: Hogs, Pork bellies, Livecattle
Energy: Crude oil, ethanol, natural gas, gasoline, propane, uranium,

electricity
Precious Metals: Gold, Platinum, Palladium, Silver
Industrial Metals: Aluminum, Steel, Copper
Financial derivatives: Stock indexes, Currencies
Soft Commodities: Sugar, Cocoa, Coffee
Spices: Pepper, Turmeric, Jeera, Coriander
Oil Seeds: Cator seed, Mustard seed, Refined Soy Oil , Crude Palm Oil,
Cotton seed Oil Cakes, Mentha oil
Fibres: Cotton
Pulp: Lumber, Rubber
Derivatives can be classified into two main types on the basis of

instruments:
a. Basic Derivatives: forward contracts, futures contracts, option

contracts, warrants and convertibles
b. Complex Derivatives: Swaps and other exotic non-standard contracts
196
7.4 TRADING OF COMMODITIES IN THE SPOT MARKET
The spot market means the financial instruments are traded at the current
trading price of financial instruments. This type of trade leads to theoretical
physical delivery of commodities on the date of trading.
Spot trading can happen between two parties or even on exchange. Spot
trading through spot exchanges can be a Cash trade, Spot trade or even a
weekly trade. In a Cash trade delivery of commodities and cash is done on
the trading day. The buyer is given the warehouse receipt in return for cash
paid to the seller.
Spot exchanges appoint trading and clearing members. Market participants

place their buy or sell orders through trading and clearing members. The
electronic trading facilities of the exchange does the order matching
between the buyer and seller leading to better price discovery. Spot
exchange specify the contract specifications for strict adherence by the
market participants. Non standard commodities are procured through
auctions using spot exchange electronic platforms. The executed trades are
settled through the clearing house and the clearing banks. Spot market
transactions are delivery based unlike the other derivative contracts which
are squared off before the delivery. Spot exchanges make it mandatory to
store commodities in the warehouse before trading in commodities on the
spot exchange. Ware house issues warehouse receipt after making the
quantity and quality verification. After the payment is received from the
buyer by debit to the buyers account with the clearing bank the warehouse
receipt is transferred in the name of the buyer. The buyer can then take
delivery of the commodities with the warehouse receipt endorsed in his
favour.
The spot market may range between one day and a week. The spot market
transactions may be settled on a rolling settlement or a fixed settlement.
The rolling settlement can be T+2 rolling settlement means trading entered
on day T will be settled for cash on day T+2 i.e. on the second working day
after the trade day. In case of weekly trades the rolling settlement will be
T+5.
Spot market enables better price discovery due to different flavors

of spot trades.
197
7.5 FORWARD CONTACT
A forward contract is a simple customized contract between two parties to

buy or sell an asset at a certain time in the future for a certain price.
In a Forward contact settlement takes place on a specific date in the future
at today’s pre-agreed price. for e.g a merchant agrees to buy rice at Rs.50
per Kg after 3 months.
They are traded over the counter – OTC (i.e. outside the stock exchanges),
directly between the two parties) usually between two financial institutions
or between a financial institution and one of its client.
May suffer from counterparty risk as they do not come under the purview
of rules and regulations of an exchange.
The payoff of a long forward at maturity is a straight line at 450 indicating

that a rise in the price causes an equal gain and a decline in prices causes
an equal loss.
The basic features of a forward contract are as follows:
a. Forward contracts are bilateral contracts
b. Exposed to counter-party risk
c. Each contract is custom designed
d. One of the parties takes a long position by agreeing to buy the asset at
a certain specified future date where as the other party assumes a short
position by agreeing to sell the same asset at the same date for the
same specified price.
e. Specified price in a forward contract is referred to as the delivery price.
f. Derivative assets can often be contracted from the combination of

underlying assets(synthetic assets)
g. Contract has to be settled by delivery of the asset on expiration date.
198
h. Forward contracts are very popular in foreign exchange market as well

as interest rate bearing instruments.
i. As per the Indian Forward Contract Act-1952, different kinds of forward

contracts can be done like hedge contracts, transferable specific delivery
(TSD) contracts and non-transferable specify delivery (NTSD) contracts.
j. Transacted over-the-counter and is not traded on an exchange.
Forward contracting is very valuable in hedging and speculation.
for e.g. A wheat farmer forward can selli his harvest at a known price in
order to eliminate price risk. Similarly, a bread factory can buy bread
forward in order to assist production planning without the risk of price
fluctuations.
A speculator keep a close watch on the demand and supply situation in the
market and has information or analysis which forecasts an upturn in a
price. Based on his research he can go long on the forward market instead
of the cash market. The speculator would go long on the forward, wait for
the price to rise, and then take a reversing transaction making a profit.
Forward markets have to face certain problems due to the nature of

unstandardized contract such as:
(a) Lack of centralization of trading,

(b) Illiquidity, and
(c) Counterparty risk.
The value of a forward position at maturity depends on the relationship

between the delivery price (K) and the underlying price (ST) at that time.
The forward contract pricing:

Forward contract involves payment of the contract value on the forward
contract maturity date. The pricing of a forward contract is based on the
Cost of Carry model. The spot price of the underlying would be different
from the forward price determined on the contract date. The forward price
depends on the spot price of the underlying and the costs of carry as well
as the benefits availed by the underlying from the contract date till
maturity
199
Cost of Carry is the cost of holding the underlying asset till the maturity
date. Cost of carry includes the storage cost and insurance plus the
interest paid to finance or ‘carry’ the asset till delivery less the income
earned on the asset during the holding period. The cost of carry thus
considers the time value of the underlying exposure along with
adjustments for costs namely storage, insurance etc and benefits namely
accretions, dividends etc The difference between the future price and spot
price is called as basis. The basis is fact the cost of carry from the date of
contract till maturity. The basis reduces as time elapses and becomes zero
on the maturity date as the cost of carry on the maturity date is zero.
Thus forward pricing = Spot price + Net carrying cost of the underlying
from the contract date till its maturity date.
The Cost and Carry model can be expressed as:

F0 = S0 + C
Where,
F0 = Future price on day 0
S0 = Spot price on day 0
C = Cost of Carry
The fair value of a forward contract can be calculated by taking into

account the prevailing spot price, cost of financing and the time
period from the date of contract and maturity of the contract with
the following expression:
Fo = So(1+r)t
Where,
Fo = Future price on day 0
So = Spot price on day 0
r = Rate of cost of financing
t = Time from date of contract till maturity
Pricing of forwards for storable consumption commodities

The traders feel that the ownership of the physical commodity provides
benefits that are not obtained by holders of futures contracts. These
benefits from holding the physical assets are called as convenience yields
provided by the commodity. For investment assets the convenience yield is
zero. Hence the general theory of pricing of futures may not be applicable
as it is in agri commodities.
200
However, the price of a future in case of consumption assets can be

calculated with the following formula:
a. With supply constraint
F0 = S0 e (r+u-y)T
Where,
T = time period
r = rate of interest
u = storage/insurance costs
y = convenience yield
b. Without supply constraint
F0 = S0 e (r+u)T
Where,
Fo = Theoretical Future price on day 0
T = time period
r = rate of interest
u = storage/insurance costs
Payoff of Forward contract:
The payoff from a long position in a forward contract on one unit of its
underlying asset or commodity is:
Payofflong= ST – K
where: ST is the spot price of the underlying at maturity of the contract
and K is the delivery price agreed in the contract.
The holder of the long position is obligated to buy the underlying, trading
at spot price ST, for the delivery price K.
Pay off Charts
Pay off charts of a position indicates the likely profit/ loss that would arise
to a contracting party with change in the price of the underlying asset at
expiry.
201
Source :https://en.wikipedia.org/wiki/Forward_contract
The payoff from a short position in a forward contract (short forward

contract) on one unit of its underlying is:
Payoffshort= K – ST
The holder of the short position is obligated to sell the underlying trading
at spot price ST, for the delivery price K.
202
Source : https://en.wikipedia.org/wiki/Forward_contract
Let us take an example to understand the payoff from a long position and
short position
Suppose a bakery owner wants to buy wheat from a farmer after three
months. Both decide today that the farmer will sell wheat at Rs.10 per kg
to the bakery owner after three months irrespective of the then prevailing
price. Hence the farmer shorts(sells) 3 month forward contract to the
bakery owner who in turn takes a long (buy)position on the same forward
contract. On the fixed day after three months if the spot price is Rs12, then
the farmer will make a loss of Rs.2 per kg. and the loss will continue till the
spot price is more than delivery price
Payoffshort (sell) = K – ST = 10 – 12 = (Rs2 per kg)
203
Maturity date Contract Spot clearing Difference Profit loss lot

delivery price(ST) K-ST size 10
price(K)
30/04/2020 10 12 (2) (20)
The holder of the short position obligated to sell the underlying

( trading at spot price ST), for the delivery price K
Payofflong (buy) = ST – K = 12-10 = Rs.2 per kg
while the bakery owner will make a gain of Rs.2 per kg. and will continue
to gain till the spot price is more than the contract delivery price.
The holder of the long position is obligated to buy the underlying( trading
at spot price ST), for the delivery price K.
Contract
Spot clearing Difference
Maturity date delivery Profit loss
price ST-K
price(K)
30/04/2020 10 12 2 20
Thus we can conclude from the above long and short forward position that:
• One market participant gains at the cost of the other
• Since it is a zero sum game the loss making market participant may
default at the contract expiry day
• There is a potential for unlimited gains and unlimited losses
• Linear pay offs are generally manifested for futures contracts
• Upper side of the graph reflects profits, lower side reflects loss
• Buyer is protected against the rise in the price of the underlying on the
contract expiry day
204
• The buyer immunizes himself against the probability of an adverse rate

movement between the contract and contract expiry or maturity date
7.6 FUTURES CONTRACT
Futures markets were designed to solve the problems faced by forward

contract.
A futures contract is also an agreement between two parties to buy or sell

an asset at a specified time in the future for a specified price but a futures
contract is transacted through an exchange.
The terms of the agreement such as the quantity of the asset, the quality
of the asset, the delivery date or period, and the delivery location are
specified by the exchange.
There is no counterparty risk as all trades are guaranteed due to the

institution of a clearing corporation which becomes counterparty to both
sides of each transaction and guarantees the trade.
The basic features of a future contract are as follows:
a. Standardized specification, i.e., quantity of the asset, quality of the

asset, the date and month of delivery, the units of price quotation,
location of settlement, etc.
b. Exchange clearing house gives the guarantee of the performance of the

contract to each party
c. Settlement price is used to compute the profit or loss on each contract

for that day as each contract is marked to market.
d. Daily settlement and margin requirements to act as a collateral security

and minimize risk of failure of either party
e. Expressed in currency units, with a minimum price movement called a

tick size and rounded to nearest tick
f. Settled in cash by having a short or long position
205
g. Executed on expiry date
h. Counter party with long position are obligated to make delivery to the
exchange
i. Exchange is obligated to make delivery to the longs
j. Regulated through the exchange
Buyers of futures contracts are considered to have a long position,

whereas, sellers are considered to have a short position. Trading in futures
is for speculation and arbitrage. The main purpose of a futures contract is
to mitigate risk default by either party during the contract period. A margin
of 5% to 15% of the contracts value is taken from both the parties and
monitored on a daily basis by the exchange to mitigate risk. As the
contract approaches its expiry, the spot price and futures price would
converge i.e. the basis (Futures price minus Spot price) would become
zero.
Futures terminology
Spot price
The price at which an underlying asset trades in the spot market.
Futures price
The price that is agreed upon at the time of the contract for the delivery of
an asset at a specific future date.
Pricing of Futures
Futures are priced on the basis of cost of carry.
The pricing model for futures can be defined as:
F = S x ern
Where,
F = Futures Price
S = Spot Price
e is exponential function
r is rate of interest and
n is time period.
Higher the interest rate, higher the cost of carry
206
Longer the contract period, higher the cost of carry.

Dividends received will reduce the effective cost of carry.
As the contract approaches its expiry, the spot price and futures price
would converge.
Futures price = Spot price + Cost of Carry – Inflows
Important terms related to a futures contract
Contract Size and Contract Value:
Futures contracts are traded in lots.
Contract Value = Market price X lot size
Tick Size is decided by the exchange in the contract specification. Tick size
is the minimum move allowed in the price quotations
Contract Cycle:
The period during which the commodity contract is traded trades. Contract
cycle can be of three types - the near month (month of trade say April
2020, the next month (May 2020) and the far month (June 2020).
Expiration Day:
A derivative contract ceases to exist on the expiry day i.e. the last trading
day of the contract which is generally the last Thursday of the expiry
month. If the last Thursday is a trading holiday, the contracts expire on the
previous trading day
Margin Account
Margin Account are maintained by brokers with exchanges and in turn
exchange guarantees the settlement of all the trades, to protect itself
against default by either counter party. Brokers generally charge margins
from their customers.
Initial Margin:
In a futures contract both the market participants have to bring initial
margin which is generally upto 10 to 20% of the price of the contract.
Initial margin is effectively used to cover the potential loss due to default
of either parties and is generally equal to the circuit filter applicable to the
underlying. Initial margin is fixed by the exchange based on the volume of
207
business and the size of transactions. Exchange uses the Value at Risk
(VaR) to decide the initial margin. Commodity exchanges levy different
initial margin for different maturity contracts.
The exchange may also demand additional margin from the market
participant to take care of any losses due to volatile conditions and system
breakdown.
Maintenance margin:
If initial margin limits the risk of the exchange due to the price
movements, maintenance margin is also required to be kept with the
broker by the contracting party at any given point of time. In this way the
broker safeguards himself against the loss on behalf of his client due to the
movement in prices of the commodities. If the balance falls below the
predetermined level due to the change in market price, then the
contracting party has to restore the balance with the broker to bring it to
the predetermined level. If the contracting party does not restore the
balance then the broker can close the outstanding position by entering into
a reverse trade.
Mark to Market Margin:

The exchange treats all position as closed at the end of the day. Mark to
Market Margin is levied on both long and short position holder on real time
basis. Each outstanding contract is revalued at the closing price at the end
of each trading day and the difference is adjusted to the margin money
account. Thus the daily profit and lost due to change in market price is
reflected in the contracting party’s account. Profits can be withdrawn but
losses needs to be restored in the margin account.
Mark-to-market enforces the daily discipline of exchanges profit and loss

between open futures positions eliminating any loss or profit carry forwards
that might endanger the clearinghouse. The Clearing house of the
exchange guarantees the execution and settlement of the trade by
enforcing different types of margin on the market participants.
Thus the value of a forward contract is zero at its inception and also reset
to zero at the end of each day by transfers from the margin,
As per Keynes and Hicks, traders will trade in forward or future markets for
profits. Hedgers may even trade at a loss and speculators may focus on
208
buying at a lower price and selling at a higher price. The risk return
relationship will depend upon the expected future spot and the risk
premium accepted by the market participants.
Price band
Price Band is the price range within which a contract is permitted to trade
during a day
Opening a position
Opening a position means either buying or selling a contract from the
broker
Closing a position
Closing a position means either buying or selling a contract to reduce the
open position
Different types of futures markets due do different situations
Contango theory:
Contango (forwardation at a premium) is a situation where the futures
price (or forward price) of a commodity is higher than the anticipated spot
price at maturity of the contract. Trade, hedgers are happy to sell in a :
Contango (forwardation) situation and accept the higher-than-expected
returns. Arbitrageurs/speculators are willing to pay more due to people's
desire to pay a premium to have the commodity in the future rather than
paying the costs of storage and carry costs of buying the commodity today.
A contango market is also known as a normal market, or carrying-cost
market.
Backwardation theory:
The opposite market condition to contango is known as backwardation. In
a Backwardation market, futures price is below the spot price for a
particular commodity. Backwardation situation is good for investors who
have long positions, as they can gain in the future due to rise in price.
If consumption cannot be postponed in case of consumption assets, they

are more prone to Backwardation. Holding the futures contract does not
give the benefit of physical shortages and it cannot help to keep the
production process running.
209
Thus the backwardation situation reflects the majority market view that
spot prices will move down, and contango situation reflects that the spot
prices will move up.
Expectation theory of future pricing:

The Expectation theory of future pricing states that the futures price is a
reflection of the future spot price and not the current spot price. The
expectations theory aims to help investors make decisions based upon a
forecast of future interest rates. The future spot price is based on the
expected demand and supply situation and the perceived risk and not
alone on the cost of carry. The expected rate of return will depend on the
risk free rate of return and the risk premium based on the risk perceived.
The futures price can thus be expressed as follows:

Fo = Soe(r+p)t
where,
r = Risk free interest rate
p = Risk premium rate
t = Time till expiration of contract
e= 2.71828
Order types :
Limit order: Order in which the contracting party specifies a price of his
choice and such order will be executed only at the specified price.
Market order: Order to buy or sell a futures contract
Stop loss order: Order becomes market order on reaching a

predetermined price level
Day orders: Order that if not executed gets expired automatically
Good till date orders: Order is valid at any time during market hors until
executed/cancelled
210
Long position
Outstanding/ unsettled buy position in a contract is called “Long Position”.
Short Position
Outstanding/ unsettled sell position in a contract is called “Short Position”.
Calendar spread position

Calendar spread position Isa combination of two positions in futures on the
same underlying (a long and a short position on different maturity
contracts)
Open interest:
An open interest is the total number of contracts outstanding for an
underlying asset. The number of long futures as well as number of short
futures is equal to the Open Interest. The level of open interest indicates
depth in the market and is also used as an indicator to determine market
sentiment and the strength behind price trends. The number of
outstanding futures contracts varies from day to day. As open interest
increases, more money is moving into the futures contract and as open
interest declines money is moving out of the futures contract.
Volumes
Volumes traded speaks about the market activity on specific contract over
a given period i.e number of contracts that have been bought and sold over
a given time. Volume counts all contracts that have been traded, while
open interest is a total of contracts that remain open in the market.
Volumes can be an important source of information for traders to make
trading decisions as it indicates the acceptable price levels by the market
participants, As volume decreases in the expiring contract, trading will shift
to the next available month contract.
Rollover
Rollover is when a trader moves his position from the front month contract
to a anothercontract further in the future by noting the volumes.
Settlement
If the contract is not rolled over it will get settled on expiry either through
physical delivery or cash settlement depending on the market.
211
Speculators
Speculators are primary participants in the futures market who accepts risk
in order to make a profit by buying at a lower price and selling higher
price.
Hedgers
Hedgers are also primary participants in the futures market who buys or
sells the commodities to off set risk rather than solely to make a profit.
Trading in Futures Contract

Exchange takes over the role of counterparty and absorb default risks. No
need to investigate the credit worthiness of buyer and seller.
The exchange protects itself by means of variations and maintenance

margins held in liquid assets.
Futures Pay Off Matrix

Futures contracts have linear or symmetrical payoffs i.e. the losses as well
as profits for the buyer and the seller of a futures contract follow a straight
line and are unlimited.
The breakeven point for the investor would also involve transaction cost.
Futures are highly geared as it does not require holding of an underlying
instrument
212
Difference between Forward and Future contract:
Basis Forward Future

Traded on Over the Counter Commodity Exchange
Market place Telephone Centralized exchange
electronic platform
Contract size Not standardized Standardized
Valuation No standard valuation Valuation is done on
marked to market
Market participants Bilateral trade between a Any buyer and seller
buyer and seller connected to the
exchange terminal can
trade
Contract Maturity Mutually decided Decided by Commodity
Exchange
Contract Term Customized Standardized
Regulation Self regulatory Exchange imposes
standards and
regulations
Delivery and settlement Mutually decided on any Maturity dates are fixed
date day by Commodity exchange
Counter party guarantee Provided by contracting Provided by clearing
parties house of commodity
exchange
Liquidity Less liquid More liquid
Margin payment Not required Requires margin payment
Settlement At the end of the period. Follows daily settlement
Squaring off Same counter-party with Any member of the
whom it was entered Exchange
into.
Counter party risk Exists Does not exist ;
Guaranteed by exchange
213
Activity 1. Make a case study on a Forwards contract executed for a

agriculture commodity.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2. List out a futures contract specification of a commodity of your

choice on MCX commodity exchange.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

1. Differentiate between a Forward and Futures contract
2. Differentiate between a Future and an Options contract
3. What is the difference between a forwardation and backwardation

market?
4. How is a forward and futures price calculated
5. How is a option price calculated
214
1. Agricultual commodities are generally used for consumption but are also
used for hedging in commodities market. Agricultual commodities are
a) Investment assets
b) Exotic assets
c) Alternate assets
d) Consumption assets
2. A simple customized contract between two parties to buy or sell an

asset at a certain time in the future for a certain price is called which of
the following?
a) Forward
b) Future
c) Option
d] Swap
3. A forward contract is bilateral and is highy customized as per mutual

agreements between two parties. In case of of forward contract the
settlement happens?
a) On the maturity date of the contract
b) Daily settlement
c) Every Thursday of the month
d) There is no settlement in a forward contract
4. The OTC derivatives contracts are standardized and the counterparty

risk is guaranted by the exchange. State whether the above statement
is true or false.
a) True
b) False
5. Although financial derivatives have been in operation since long, which

of the following reasons were responsible for Derivatives market
emerging as major force in financial markets in early 1970s:
a) Failure of Brettonwood System
b) Breaking of the fixed exchange rate regime
c) New exchange rate regime
Answers: 1.(d), 2.(a), 3.(a), 4.(b), 5.(d)
215
7.9 REFERENCES

Services Limited

5. Commodity Markets: Recent Developments by by Dhandapani Alagiri
7. Commodity Derivatives and Risk Management by Rajib, Prabina
216
https://www.wisegeek.com/
217
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
218
BASICS OF OPTIONS CONTRACT AND OPTION PRICING
Chapter 8
Basics Of Options Contract And Option
Pricing
Objectives: This chapter will help you understand the basics of Options
contract and Option Pricing
8.1 Introduction to Options

8.2 What is an Option contract?
8.3 Types of Options
8.4 Options terminology
8.5 Option Styles
8.6 Pricing of Options
8.7 Option Payoffs and Payoff matrix
8.11 Reference
219
8.1 INTRODUCTION TO OPTIONS
Options trading has evolved over thousands of years and has not erupted
from the drawing boards of some financial scientist. The first options were
used in ancient Greece to speculate on the olive harvest. History helps to
trace the first options trading to 332BC when Thales of Miletus bought the
rights to buy olive prior to a harvest. The earliest known options contract is
recorded by Aristotle (an ancient Greek philosopher) in the story of Thales
in his book named "Politics". Thales was great astronomer, philosopher and
mathematician and by observing the stars and weather patterns, he
predicted a huge olive harvest in the coming season. Thales was expecting
a big rise in prices of olive oil. Thales created huge profits by entering into
an agreement with owners of all the olive oil presses to use their mills for
pressing oil during harvest by paying them a small advance. Thales was
correct about the demand and the rise in price and thus made huge profits
from an agreement with the olive oil presses. These agreement can be
easily considered as a modern day option contract. Thales entered
into an agreement with the oil presses in such a way that he had the right
to either use the olive presses himself when harvest time came or to sell
that right to people who would pay more for those rights. So this
agreement with the Olive presses in the era before Christ could clearly give
us an evidence that a Call type of option was indeed effectively used to
create huge profits. The olive presses owner in turn were involved in a
covered call options strategy as they sold the rights to use the underlying
asset i.e olive presses and earned the premium from Thales. These olive
presses owner were not having the knowledge of Thales about the good
harvest and demand for olive, but still they ensured that they would earn
the premium from Thales irrespective of a good olive harvest happening or
not.
Options contracts were used again during the 17th-century Holland’s tulip
mania of 1636. Options contracts with tulips as an underlying were widely
bought in order to speculate on the soaring price of tulips. The tulips prices
were skyrocketing due to its overwhelming demand from all levels of
society. Tulips were then considered as a symbol of affluence and beauty.
The Dutch dealers started using tulip bulb options trading. A sort of Call
Options on tulip bulbs enabled producers to secure a definite
buying price. Since the prices were continuously rising many people tried
to earn profits through speculation which in turn took the rise in prices
tulip bulbs to the zenith. People did not mind taking loans and mortgaging
220
their houses to create money for buying tulip build options with the greed
of making more money. However the entire bubble of price rise of tulip
bulb got burst in 1637,when buyers availability was reduced. Buyers could
find any sensible logic behind price rise and buying. These created a panic
and culminated into selling from those who had previously bought the tulip
bulbs options. Price of tulip bulbs collapsed and most of the speculators
had to suffer heavy losses due to this price bubble burst. The tulip mania
not only wiped out the options speculators but brought in a collapse of the
Dutch economy as people lost their money as well as the security against
which they took loans. A big lesson was learnt in option trading about not
to concentrate money into a single unhedged call or put options position
for speculation.
Inspite of such a big impact due to tulip mania, options trading did
not come to an end. Investors and financers still believed into the
speculative power in option trading and always thought about
innovative ways to progress in options trading. The call and put options
were invented during the late 17th-century in London. Keeping in mind the
losses suffered due to the tulip mania in Holland, and protests made by
people in London due to the fear of bad effects of speculative nature of
options, options tradingwere declared illegal in 1733. The ban on option
trading in London was removed after 100 years i.e. in 1860.
The puts and calls first became well-known trading instruments in the
1690s in London during the reign of William and Mary. The 1688 book
Confusion of Confusions describes the trading of "opsies" on the
Amsterdam stock exchange. The trading of "opsies" manifested limited
risks with unlimited gains.
In 1872,the call and put options were first introduced by Russell Sage of
New York in USA. Russell Sage created the first OTC options which were in
a unstandardized form and thus highly illiquid. He earned a lots of money
in options trading initially but later lost a big amount in the market crash of
1884. Even though Russel Sage exited from option trading the OTC options
trading market continued to trade in an unregulated manner till the
establishment of the SEC after the great depression.
221
The modern options trading through the standardized exchange traded call
options emerged in 1973 with the setting up of the Chicago Board of
Options Exchange (CBOE) and the Options Clearing Corporation (OCC) in
1973. The put options were introduced by the CBOE in 1977. Chicago
Board of Options Exchange (CBOE) brought in standardization of option
contracts, enabled the public to participate into option trading, provided
performance and execution guarantee to the contracting parties, created a
new options trading market and facilitated high liquidity in options trading.
With the success of Chicago Board of Options Exchange (CBOE) many

other commodity exchanges introduced options trading through exchanges.
The options trading methods were subsequently simplified with newer and
better methods of pricing the options contract. Innovative and creative
option trading strategies are helping the investors to make risk free profits.
Options were initially traded in India on the OTC market, but were later
banned under the Forward Contract Regulation Act, 1952. The Securities
Contract Regulations Act, 1969 had also banned trading in options on
common stock but later prohibitions on options in securities were withdran.
Index options and stock options were introduced by both BSE and NSE in
2001. As a part of developing the derivative market in India and adding to
the spectrum of hedge products available to residents and non-residents
for hedging currency exposures, Authorised dealers will be permitted to
offer foreign currency – rupee options in 2003. BSE and NSE introduced
trading in currency options on USD-INR in 2010.
Timeline of introduction of derivative products in India:

Index Futures 2000
Stock Futures 2001
Index Options 2001
Stock Options 2001
Interest rate futures 2003
Currency Futures 2008
Bond Futures 2009
Currency Options 2010
Options trading is getting popular as it has minimal risk and simple to

trade. Options trading enables the trader to make profits irrespective of
market conditions, Options trading can be initiated with a small amount to
cover larger exposure.
222
SEBI has recently allowed commodity exchanges to offer options trading in

commodities for deepening the market. The Commodity derivatives
exchanges offering trading in options contracts will have to take prior
approval of SEBI and follow robust risk management measures.
In consultation with Commodity Derivatives Advisory Committee (CDAC)

SEBI vide Circular SEBI/HO/CDMRD/DMP/CIR/P/104dated September 28,
2016 decided that Commodity Derivatives Exchanges shall be permitted to
introduce trading in options. SEBI has also specified the product design and
risk management framework for trading in options on commodity futures.
Eligibility criteria for selection of underlying Commodity Futures

for Option:
Options would be permitted for trading on a commodity derivatives

exchange only on those commodity futures as underlying, which are traded
on its platform and satisfy both the criteria specified below on the
respective exchange.
a. The underlying 'Futures contracts' on the corresponding commodity

shall be amongst the top five futures contracts in terms of total trading
turnover value of previous twelve month
b. The average daily turnover of underlying futures contracts of the

corresponding commodity during the previous twelve months, shall
be at least :
i. INR 200 crore for agricultural and agri-processed commodities
ii. INR 1000 crore for other commodities.
223
Product Design for Options on Commodity Futures
1. Underlying: Commodity futures contract (of a specified month) traded

on the corresponding exchange.
2. Settlement Method: On exercise, option position shall devolve into

underlying futures position as follows:-
• long call position shall devolve into long position in the underlying
futures contract
• long put position shall devolve into short position in the
underlying futures contract
• short call position shall devolve into short position in the
• short put position shall devolve into long position in the
All such devolved futures positions shall be opened at the strike

price of the exercised option.
3. Exercise Style: To begin with European Style options are permitted.
4. Minimum Strikes: Each option expiry shall have minimum three

strikes available viz., one each for In the Money (ITM), Out of the Money
(OTM) and At the Money (ATM)
5. Exercise Mechanism: On expiry, following mechanism shall be

adopted by Exchanges for exercise of the options contracts:
5.1.Option series having strike price closest to the Daily Settlement Price
(DSP) of Futures shall be termed as At the Money (ATM) option series.
This ATM option series and two option series having strike prices
immediately above this ATM strike and two option series having
strike prices immediately below this ATM strike shall be referred as ‘Close
to the money’ (CTM) option series.
In case the DSP is exactly midway between two strike prices, then
immediate two option series having strike prices just above DSP and
224
immediate two option series having strike prices just below DSP shall be
referred as ‘Close to the money’ (CTM) option series.
5.2. All option contracts belonging to ‘CTM’ option series shall be exercised
only on ‘explicit instruction’ for exercise by the long position holders of
such contracts.
5.3. All In the money (ITM) option contracts, except those belonging to
‘CTM’ option series, shall be exercised automatically, unless ‘contrary
instruction’ has been given by long position holders of such contracts for
not doing so.
5.4. All Out of the money (OTM) option contracts, except those
belonging to ‘CTM’ option series, shall expire worthless.
5.5. All exercised contracts within an option series shall be assigned
to short positions in that series ina fair and non-preferential manner.
6. Trading Hours: Trading hours shall be same as those of corresponding

futures contract.
7. Expiry Day: Expiry day of options contracts shall be decided by

Exchange based upon period of high liquidity of underlying futures
contract and shall be part of option contract specifications.
8. Position Limits:
8.1.SEBI vide Circular SEBI/HO/CDMRD/DMP/CIR/P/2016/96dated

September 27, 2016 prescribed norms for position limits for
commodity futures. Position limits for options shall follow the same norms
as provided in the said circular for future
8.2.Position limits of options would be separate from position limits of

futures contracts and numerical value for client level/member level limits
shall be twice of corresponding numbers applicable for futures contracts
provided in Annexure-A of the SEBI circular dated September 27, 2016.
8.3.Due to separate position limits for options, there is a possibility

that post exercise of options i.e. after devolvement of options into
corresponding futures positions open positions for clients/members
225
may exceed their permissible position limits for future contracts. For
such clients/members Exchanges may permit maximum up to two trading
days post option expiry day to reduce their futures positions to bring
them within the permissible position limits.
B. Risk Management Framework:
9. Exchanges shall adopt risk management framework compliant with the

CPMI-IOSCO Principles for Financial Market Infrastructures, including
the following
9.1. Margining model and quantum of initial margins:

Exchanges shall adopt initial margin models and parameters that are
risk-based and generate margin requirements sufficient to cover
potential future exposure to participants/clients in the interval
between the last margin collection and the close out of positions
following a participant/client default.
The model should

a. use a conservative estimate of the time horizons for close out of the
positions (including in stressed market conditions),
b. have an appropriate method for measuring credit exposure that
accounts for relevant risk factors and portfolio effects, and
c. to the extent practicable and prudent, limit the need for
destabilising, pro-cyclical changes.
Initial margin requirement shall be adequate to cover 99% VaR(Value

at Risk) and Margin Period of Risk (MPOR) shall be at least two days. In
case of portfolio based margining, this requirement applies to each
portfolio’s distribution of future exposure. Accordingly, exchanges shall fix
prudent price scan range, volatility scan range and/or plausible changes in
any other parameters impacting options price. Exchange shall impose
appropriate short option minimum margin, calendar spread charge and
extreme loss margin for option contracts.
9.2.Margining at client level: Exchanges shall impose initial margins at

the level of portfolio of individual client comprising of his positions in
futures and options contracts on each commodity.
226
9.3.Real time computation: Though the margining models may

update various scenarios of parameter changes (underlying price, volatility
etc.) at discrete time points each day (at least every two hours),
the latest available scenarios shall be applied to client portfolios on
a real time basis.
9.4.Mark to market: Exchanges shall mark to market the options

positions by deducting/adding the current market value of options (positive
for long options and negative for short options) times the number of
long/short options in the portfolio from/to the margin requirement.
Thus, mark to market gains and losses would not be settled in cash
for options positions.
9.5.Risks pertaining to options that devolve into futures on expiry:

a. For handling increase in margins on expiry when options devolve into
futures position, specifically for long option positions which are
probable to be exercised, exchanges shall start sensitizing the
option holders of the impending increase in margins (along with
the estimated increase) at least few days in advance, and/or,
based on their risk perception, may also consider gradually
collecting increased margins during the last few days so as to have
adequate margins to cover the risk of futures position that will be
created on devolvement of options into futures.
b. As per the provisions of SEBI circular SEBI/HO/CDMRD/ DRMP/ CIR/P /
2016/80dated September07, 2016, penalty is levied on members for
short-collection/non-collection of the initial margins. Penalty for such
short-collection/non-collection due to increase in initial margins
resulting from devolvement of options into futures may not be levied by
Exchanges for the first day.
Source:https://www.sebi.gov.in/legal/circulars/jun-2017/options-on-
commodity-futures-product-design-and-risk-management-
framework_35096.html
227
8.2 WHAT IS AN OPTION CONTRACT?
An option contract is quite different from a forward or future contract.

Forward and Futures have a strong commitment to buy or sell, whereas in
case of option the option buyer may exercise his right to buy or decline to
exercise his right. There is no obligation to buy or sell in case of an option
contract. Trading in options is based on premium payment, whereas the
trader has to maintain margins in case of forwards and futures.
An Option contract is an agreement between two parties whereby

one party obtains the right, but not the obligation, to buy or sell a
particular asset, at a specified price, on or before a specified date.
The person who acquires the right is known as the option buyer or option
holder.
The person who confers the right is known as option seller or option writer.
The seller of the option for giving such option to the buyer charges an
amount which is known as the option premium.
Thus we can conclude that a option contract is the right but not the
obligation, to buy or sell the underlying at a specified predetermined price
at any time within a specified time period.
Example:
A company wants to export wheat to France and requires 3 months time.

Hence it purchases an option to buy wheat at a rate of Rs.50 per kg after 3
months and pays a small premium to the seller. If the market rate at the
time of export is better than Rs.50per kg, then it has an option to discard
the right to buy and lose only the premium paid to the seller. But if the
market rate moves against the contracted rate and rises to more than
Rs.50 per kg then the company will want to exercise its right to buy at
Rs.50 per kg and can thus profit from the market rate above Rs.50 per kg.
The seller is obliged to sell at the contracted rate irrespective of the market
rate. Seller may have to face unlimited loses and a maximum possible
profit equal to the amount of the premium. The buyer loses only the
premium, in case he does not want to exercise his right to buy.
228
The best part of the option which is not available in a forward or a future is
the rights conferred by an options contract can be enforced by the buyer if
he so desires, but the buyer has no obligation / mandated to buy.
Another important feature of an option contract is it can be of any amount

unlike the insurance policy which has a limit based on the sum assured.
The buyer has an option to buy but if the buyer enforces his right, then the
seller can be subjected to unlimited losses.
Buying an option protects the buyer from the dip in price on a future date,
but if there is an upside in the price the buyer can force the trade on the
seller.
The MCX defines a option contract as follows:

An option is a financial derivative contract that gives its owner the right but
not the obligation to buy or sell an underlying asset for a specific price at a
specific time in the future. Options are of two types, call option and put
option. A call option gives the holder the right, but not the obligation, to
buy the underlying asset by a certain date for a certain price. On the other
hand, a put option gives the holder the right, but not the obligation, to sell
the underlying asset by a certain date for a certain price.
Buyer of an option:
The buyer of an option is one who has a right but not the obligation in the
contract. The option buyer is required to pay a option premium to the seller
of the option.
Seller of an option
The seller of an option receives the option premium and is obliged to sell
the underlying to the buyer of the option.
The seller of the option is also known as the writer of an option. Writer of
an option have a short position. The profit (loss) profile at expiry of a short
option is exactly opposite of a long position. Hence the profit of the buyer
is the loss of the seller and vice versa.
Most of the commodity exchanges offers options on commodity futures

contracts. Once the commodity options are exercised by the buyer it
devolves into the underlying futures contracts and opens at the
strike price of exercised options.
229
An Option on futures contract is the right , but not the obligation to buy or
sell the underlying futures contract at a predetermined price on or before a
given futures date.
Call Option: A Call Option gives the buyer the right but not an obligation
for a limited period to buy or go Long the underlying futures contract at a
predetermined price. When the buyer decides to execute the option, the
exchange registers a long position for the holder and short position for the
seller at the current market price. The difference between the current
market price and the Strike price is debited from the writers account and
credited to the holders account. Since then the positions are carried
forward as futures position.
Put Option: A Put Option gives the buyer a right but not an obligation to
sell the underlying futures contract at a predetermined price i,e Strike
price. When the holder decides to execute the option, the exchange
registers a long position for the writer of the option and short position for
the holder of the option at the current market price. The difference
between the Strike price and the market price is debited to the writers
account and credited to the holders account. Since then the positions are
carried forward as futures position.
Reasons for options gaining popularity:
1. Flexibility to earn profits or manage risk based on the choice of the

contracting parties
2. Less dependency on market direction to earn profit as options can

enable the trader to earn profits even in market volatility
3. Price protection without limiting profit potential. Traders or buyers

of agri commodities can obtain protection against increasing prices and
still benefit from price fall
4. Liquidity due to large number of participants. A buyer can easily

find a seller on the exchange, thus making the option more liquid in
nature
5. Minimal risk as the option buyer will only lose the premium in case he
decides not to exercise his tight to buy
6. Traded on exchange with standard specification, counter party

guarantee and transparency
230
7. Commodity options can be used as risk management tools by small

farmers/trader as the option contract can serve an price insurance buyer
for the hedgers by paying a one-time option premium without
requirement of margins.
Using Options on Agriculture Futures for Profit
Options on Agriculture Futures are also used for profits by farmers as well
as investors.
• Farmers can lock a desirable selling price for their farm produce. The
minimum support price scheme ensures a pre-decided price for the farm
produce from the Government. An options contract can also be tested for
getting a better price over the minimum support price.
• Investors in agri commodities can also use option strategies to buy or

sell agri commodities in volatile markets. A call option can give unlimited
profits if the Spot price is more than the Strike price.
• Agri commodity processors can also use option strategies to better

manage their raw material positions inorder to increase profitability. A
call option can lock the input price of the raw material.
• Cattle farms can also use option strategies to protect themselves

against the rising cost of the agri-feeds provided to the cattle.
• Agri food manufacturers, millers and other agri businesses

depending on agri commodities can also protect themselves by
maintaining an adequate inventory through options strategy.
231
8.3 TYPES OF OPTIONS AND OPTION PAYOFFS
Options are traded both on exchanges and in the over-the-counter market.

The largest exchange in the world for trading stock options is the Chicago
Board Options Exchange. During 2018-19, MCX had a largest turnover on
options trading amongst all commodity exchanges in India. Infact MCX
recorded a 1647.6% variation in options turnover over previous year.
Options can be classified into the following two main types:

a. Call
b. Put
Call option:
A call option gives the holder the right to buy the underlying asset by a
certain date for a certain price.
Buyers of call are of the opinion that the price of an agri-commodity is
going to rise in the future before the option expires. Hence Call are similar
to a long position on an asset.
Example:
A trader buys one call option on Soybean futures at a premium of Rs.30
per contract on 31st July 2019 at a strike price of Rs.600 and the option
matures on 30th September 2019.
The payoff from call buying can be shown as follows:
Profit from Call Buying / Long Rs

Spot Price Strike Price Premium Payoff Net Profit
590 600 30 0 -30
600 600 30 0 -30
610 600 30 10 -20
620 600 30 20 -10
630 600 30 30 0
640 600 30 40 10
232
Thus it can be concluded from the above table that the trader will lose only
the premium amount in any worst situation of spot being less than the
strike price. However the same trader can book unlimited gains for every
upside in the spot price over the strike price after the breakeven point.
Call option payoff for the buyer

Max (S – E); after adjusting the Call option premium
S = Spot price
E = Exercise price
Options Payoff matrix

Option contracts have non-linear or asymmetrical payoffs i.e. the losses
and profits for the buyer and the seller of an options contract do not follow
a straight line.
One party (option buyer) to the contract can have unlimited upside, while
limiting its downside (to the option premium); losses of the other party
(option seller) can be unlimited, for a limited upside (option premium.
Put option:
A put option gives the holder the right to sell the underlying asset by a
certain date for a certain price. Buyers of puts are of the opinion that the
price of the agri commodity will fall before the option expiry date. Hence
the put option is similar to a short position on an asset.
Example:
A trader buys one put option on Soybean futures at a premium of Rs.30
per contract on 31st July 2019 at a strike price of Rs.600 and the option
matures on 30th September 2019.
The payoff from put buying can be shown as follows:

Profit from Put Buying / Long Rs
Spot Price Strike Price Premium Payoff Net Profit
540 600 30 60 30
550 600 30 50 20
560 600 30 40 10
570 600 30 30 0
233
580 600 30 20 -10

590 600 30 10 -20
600 600 30 0 -30
Thus it can be concluded from the above table that the trader will lose only
the premium amount in any worst situation of spot being more than the
strike price. However the same trader can book unlimited gains for every
downside in the spot price over the strike price after the break even point.
Put option payoff for the seller

Max (E –S); after adjusting the Call option premium
S = Spot price
E = Exercise price
8.4 OPTIONS TERMINOLOGY
Option Premium:
The price paid by the option buyer pays to the option seller for buying the
option.
Strike price / Exercise price:

The price decided mutually between the option buyer and seller, based on
which the option buyer becomes eligible to buy or sell the underlying asset.
Expiration date:
The maturity date or the last date on which the option can be either
exercised or lapsed
Lot size:
Lot size is the number of units of underlying asset in a contract
Open interest:
An open interest is the total number of option contracts outstanding for an
underlying asset. The number of long options as well as number of short
options is equal to the Open Interest.
234
Options can be any of the following types:
a. In the Money Option – Enables investor to sell or exercise it for profit.

Would lead to a positive cash flow to the holder if it were exercised
immediately.
A call option on the index is said to be in-the-money when the current

index stands at a level higher than the strike price.
A put is said to be In-the-money if the index is below the strike price.
b. Out of the Money Option – Stock or index option is in loss in the form
of premium paid to buy the option.
An out-of-the-money (OTM) option would lead to a negative cash flow if it

were exercised immediately.
A call option on the index is out-of-the-money when the current index

stands at a level which is less than the strike price.
c. At the Money Option – Option's strike price is identical to the price of

the underlying security and there is no scope to earn profit
An at-the-money (ATM) option would lead to zero cash flow if it were

exercised immediately.
An option on the index is at-the-money when the current index equals the
strike price.
Determining Option Classifications
Call Option Put Option

In the money Market price > Strike Price Market Price < Strike Price
At the money Market price = Strike Price Market price = Strike Price
Out of money Market Price < Strike Price Market Price > Strike Price
235
Trading cycle
Options contracts have a maximum of 3-month trading cycle - the near
month (one), the next month (two) and the far month (three). On expiry
of the near month contract, new contracts are introduced at new strike
prices for both call and put options, on the trading day following the expiry
of the near month contract. The new contracts are introduced for three
month duration
Strike Price Parameters

The strike scheme for options contracts on all agri commodities is based on
the volatility of the underlying agri commodity. Exchange shall review it
and revise if necessary, on a quarterly basis.
The Exchange, at its discretion, may enable additional strikes as specified

in the direction of the price movement, intraday, if required. The additional
strikes may be enabled during the day at regular intervals and message for
the same shall be broadcast to all trading terminals.
8.5 OPTION STYLES
European Option Contracts: If the option was to be exercised on a

specific date ie. 1 month down the line (settlement date, at the end of the
contract period). Such options are known as European option contracts.
American Option Contracts: If the option could be exercised anytime up

to the expiry of the contract period. Such option are known as American
option contracts.
Bermudan Option Contracts: This type of option can be exercised only

on certain pre-decided dates and are a combination of American and
European options. They are exercisable at the date of expiration, and on
certain specified dates that occur between the purchase date and the date
of expiration.
Asian option Contract: An option whose payoff is determined by the

average underlying price over some preset time period.
Barrier option: A option with the general characteristic that the

underlying security's price must pass a certain level or barrier before it can
be exercised.
236
Binary option: An all-or-nothing option that pays the full amount if the
underlying security meets the defined condition on expiration otherwise it
expires.
Exotic option: An option have a combination of various option contract

features and is of a broad category of options that may include complex
financial structure
As per current regulatory norms, only European style commodity

options are available in India at present. Option type identifies
whether it is a call or a put option., CE - Call European, PE - Put European
8.6 PRICING OF OPTIONS
The option premium has two components - intrinsic value and time
value.
Option Premium (OP) is the sum of the intrinsic value (IV)and its time
value(TV)
Thus OP = IV + TM
Intrinsic value:
Intrinsic value of an option at a given time is the amount the holder of the
option will get if he exercises the option at that time.
A Call option will have an intrinsic value it its strike price is below the
future price. For e.g. if a corn Call option has a strike price of Rs.50 and
the underlying future price is Rs. 60 then the call option will have an
intrinsic value of Rs.10.
A Put option will have an intrinsic value if its strike price is above the future
price for e.g. if a corn Put option has strike price of Rs.60 and the
underlying future price is Rs. 50 then the Put option will have an intrinsic
value of Rs.10.
237
Options intrinsic value can thus be calculated with the following

formula:
For Call Options Intrinsic value = Underlying Future value – Call Strike
price.
For Put Option Intrinsic value = Call Strike price – Underlying Future value
Time value:
The time value of an option is the difference between its premium and its
intrinsic value. Both calls and puts have time value.
Time value is in fact the value of the risk taken by the seller.
The longer the time of expiry of the option, the higher is the probability of
its profitability and hence more premium is demanded by the seller, as the
risk is high. However the quantum of premium is not a linear progression
as the relationship between the strike and the underlying may not be the
same and the appropriate volatility also may not be the same for different
option contracts.
However the time value of an options contract decreases very slightly with
time. The rate at which it decreases is called “time decay”. As the expiry
period becomes shorter this rate increases. Time decay works in favour of
the seller ad against the interest of the buyer.
There are various models which help us get close to the true price
of an option namely
(a) Black-Scholes model
(b) Binomial option pricing model
(c) Black-76 model.
(a) Black-Scholes model

Black-Sholes model helps you to calculate a large number of option prices
in a short time.
The Black Scholes model uses continuous compounding.
The Greeks
Each Greek letter measures a different dimension to the risk in an option
position.
238
Greek letter are used by traders who have sold options in the market to
manage the Greeks in order to manage their overall portfolio.
Delta (Δ) = rate of change of the option price with respect to price of the
underlying asset. delta (Δ) of a portfolio is the change in value of the
portfolio with respect to a small change in price of the underlying asset.
Gamma (Γ)= rate of change of the option’s Delta Δ with respect to the
price of the underlying asset.
Theta (Θ) = rate of change of the value of the portfolio with respect to the
passage of time, with all else remaining the same.
Vega (ν) = rate of change in the value of the portfolio with respect to
volatility of the underlying asset.
Rho(ρ) = rate of change of the value of the portfolio with respect to the
interest rate.
Limitation : cannot be accurately used to calculate the options price with
an American style exercise.
(b) Binomial option pricing model

Black-Sholes model cannot be applied to an American style option.
Binomial models can be applied to early exercise and hence can be used
for American style option also.
Binomial models can also consider changes in interest rates and volatility
over time.
(c) Black-76 model.

The most popular model to price a commodity option on futures is the
Black-76 model.
The Black 76 model states:
Call = e-rt [F*N (d1) - K*N (d2)]
Put = e-rt [K*N (-d2) - F*N (-d1)]
d1 = [ln (F / K) + (σ2 / 2) * t] / σ√ t
d2 = d1 – σ√ t
√ = symbol for square root
Where,
F = Current underlying futures price
K = Strike price of the option
239
t = Time in years until the expiration of the option r = risk free interest
rate
σ = volatility of the underlying futures contract
N = Standard normal cumulative distribution function
Factors influencing Options prices (Black 76 model)

Factors Increase Decrease
Call prices will Put prices will Call prices will Put prices will
Underlying Increase Decrease Decrease Increase
Price
Time until Increase Increase Decrease Decrease
Expiration
Volatility Increase Increase Decrease Decrease
Interest Rates Decrease Decrease Increase Increase
Strike Price Decrease Increase Increase Decrease
Factors influencing underlying commodity futures prices

• Area under cultivation
• Crop size and yield per hectare
• Monsoons
• Seasonality of the commodity
• Demand and supply imbalances
• Pests and diseases
• Government policies
• Global markets and pricing
• Weather conditions and production
• Modern technology used in farming
• Prices of substitutes
• Excess or deficit rain fall can adversely affect the yields
240
8.7 OPTIONS PAY OFF AND PAYOFF MATRIX
Four types of participants in options markets

Now Let us understand how many types of participants actually participate
in a options market with the following examples:
Put Option : Selling by A and Buying by B

If B instead of being obliged to sell, had the right to sell the underlying,
then 1 month down the line, B can choose, NOT to sell the underlying. In
such case party B has bought (or written) the put option.
If B decided to sell the underlying and A was obliged to buy them then A
has sold (or written) the put option.
Seller of the option is under an obligation

The seller of the option (the option writer) is under an obligation and not
the buyer of the option (the option purchaser).
In a call option, the buyer of the option has the right to BUY the underlying
In a put option, the buyer of the option has the right to SELL the
underlying
Option buyer may or may not exercise his right

In case the buyer of the option does exercise his right, the seller of the
option must fulfill whatever is his obligation (for a call option, the option-
seller has to deliver the asset to the buyer of the option; for a put option
the option-seller has to receive the asset from the buyer of the option).
Thus a long calls payoff has the upside of a forward without its downside.
Based on the above information there can be four types of

participants on options markets as follows:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts.
Options Strategies
Options strategies are formed by combining any of the four basic kinds of
option trades (possibly with different exercise prices and maturities) and
the two basic kinds of commodity trades (long and short). Various types of
options strategies are stated as follows:
241
a. Butterfly spread : (Long one X1 call, Short two X2 calls, and Long one
X3 call) allows a trader to profit if the commodity price on the expiration
date is near the middle exercise price, X2, and does not expose the
trader to a large loss.
b. Iron condor : Similar to a butterfly spread, but with different strikes

for the short options
c. Straddle: Selling both a put and a call at the same exercise price would
give a trader a greater profit than a butterfly if the final commodity
price is near the exercise price
d. Strangle : Similar to the straddle as it is also constructed by a call and

a put but with different strikes
e. Covered call: Trader buys a commodity (or holds a previously-

purchased long commodity position), and sells a call. If the commodity
price rises above the exercise price
f. Protective put: Trader buys a commodity (or holds a previously-

purchased long commodity position), and buys a put
Various forms of Options Payoff matrix
a. Long Call : A trader who expects a agri commodity's price to increase

can buy a call option to purchase the agri commodity at a fixed price
("strike price") at a later date, rather than purchase the agri commodity
outright. Profit is made if spot price exceeds strike price.
b. Long Put : A trader who expects a agri commodity’s price to decrease

can buy a put option to sell the agri commodity at a fixed price ("strike
price") at a later date.
c. Short Call: A trader who expects a agri commodity’s price to decrease

can short (sell the agri commodity) or instead sell, or "write", a call.
d. Short Put : A trader who expects a agri commodity’s price to increase

can buy the agri commodity’s or instead sell or "write", a put
242
Difference between Forwards and Options

Forwards Options
Agreement between two parties to buy Agreement where buyer acquires the
or sell a underlying at a fixed date in right but not a obligation to buy or sell
the future at the agreed price an underlying at a fixed date in the
future at the agreed price
Contracts are executed through OTC Contracts are executed through OTC or
exchange
Contracts are not tradable Contracts are tradable on the exchange
Both parties have to perform obligation The buyer may or may not exercise his
to take or give delivery right to buy. Only after buyer exercises
his right the seller is obliged to deliver
Contract can mature on any day before Options mature on the last Thursday of
expiry the month on the exchange
Symmetrical obligations for both buyer Asymmetrical obligations for buyer and
and seller seller
Forward price is based on the Spot rate Option price is based on the intrinsic
and Cost of carry of the underlying and time value of the option
Contracts can be exercised only on The contracts can be exercised on any
maturity date day till the expiry date of the options
contract
(American options)
Forward price is known only to the Options premium is known to the
negotiating parties public
Price discovery is not efficient Efficient price discovery
Margin need not be paid for trading Only seller is required to deposit the
margin as seller is exposed to
unlimited loss
Profit of buyer is the loss of the Seller Profit / loss of the buyer is not equal to
that of the Seller
243
Difference between Futures and Options
Futures Options
Both buyers and sellers have Agreement where buyer acquires the
obligations to buy/sell right but not a obligation to buy or sell
an underlying at a fixed date in the
future at the agreed price
Linear payoff Non Linear pay off
Symmetrical obligation Asymmetrical obligation
Trading is done on exchange Trading can be done at both OTC and
Exchange
Margins are required from both buyer Margin is not required from the buyer.
and seller for trading Only seller is required to pay margin
Premium is not paid by the buyer Buyer has to pay the premium
Settlement is done daily on the Settlement is done either
exchange daily( American option) or on specified
date( European option)
All contracts are settled All contracts may not be settled as the
settlement depends on the buyer
exercising his right to buy
Delivery can be demanded only on the Delivery can be demanded on any day
maturity of the contract upto maturity( American contract)
Trading strategies are restricted to buy Various trading strategies can be
or sell option deployed
Contract price is zero Contract price is positive till maturity
date
Futures contract are not further sub Options contracts can be a Call or a Put
classified Option
Contract price is fixed but the Strike Strike price remains fixed but the
price keeps changing based on the premium keeps on changing based on
market view market view
Buyer and Seller are exposed to Buyers loss is restricted to the
unlimited profit or loss premium paid. Seller can be exposed
to unlimited loss and gain
244
Futures are traded at a single price for Option contracts are traded at multiple
a contract strike prices
Profit of the buyer can become the loss Profit of buyer is reduced to the extent
of the seller of premium paid.
Activity 1. Compare and contrast between forward, futures and options

and explain how each of them can be used for used for either speculation
or hedging?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
Activity 2. Make a report on the development and growth of commodity

derivatives market after SEBI’s permission to commodity exchanges to
offer options trading in commodities for deepening the market.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
Q.1 What is an Option contract?

Q.2 What are the different types of Options contract?
Q.3 What are the different styles of Options contracts?
Q.4 Explain the payoff and payoff matrix in case of Call and Put Options
Q.5 Explain how an Options contract is priced?
245
1. Options gives the holder the right to buy or sell without an obligation to
buy or sell. Option are gaining popularity over forwards and futures
contract due to which of the following reasons?
a) Flexibility
b) Minimal risk
c) Less dependency on market direction
2. A trader who expects a agri commodity's price to increase can buy a call
option to purchase the agri commodity at a fixed price ("strike price") at
a later date, rather than purchase the agri commodity outright. Profit is
made if spot price exceeds strike price.We are talking about which type
of Option contract?
a) Long call
b) Long put
c) Short call
d) Short put
3. Trader buys a commodity (or holds a previously-purchased long

commodity position), and sells a call. If the commodity price rises above
the exercise price in case of a :
a) Straddle
b) Iron condor
c) Covered call
d) Protective put
4. If the option was to be exercised on a specific date ie. 1 month down

the line (settlement date, at the end of the contract period). Such
options are known as
a) Asian option
b) European option
c) American option
d) African option
246
5. Intrinsic value of an option at a given time is the amount the holder of

the option will get if he exercises the option at that time. State whether
the above statement is true or false.
a) True
b) False
Answers: 1.(d), 2.(a), 3.(c), 4. (b), 5.(a)
8.11.REFERENCES
Services Limited

5. Commodity Markets: Recent Developments by by Dhandapani Alagiri
7. Options, Future & Other Derivatives by John C. Hull and Sankarshan

Basu
8. Best Option Trading Strategies for Indian Market by Moonmoon Biswas
9. The Options Trading Bible by Kiril Valtchev
247
https://www.rbi.org.in
https://www.ncdex.com/
https://www.mcxindia.com/
https://en.wikipedia.org/
http://www.optiontradingpedia.com
https://www.asianage.com
https://zerodha.com
248
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
249
AGRI PRICE RISK MANAGEMENT STRATEGIES
Chapter 9
Agri Price Risk Management Strategies
Objectives: This chapter will help you understand the Agri Price Risk
Management Strategies
Structure:
9.1 Introduction to Risk Management using Agri Commodity Derivatives
9.2 Various types of Risk connected with agri commodities
9.3 How to manage risk
9.4 Derivative as Risk management tool
9.5 Derivative trading strategies
9.6 NSE Clearing Limited risk management system
9.10 Reference
250
9.1 INTRODUCTION TO RISK MANAGEMENT USING AGRI

COMMODITY DERIVATIVES
The Oxford Dictionary defines risk as “Chance or possibility of danger, loss,

injury or other adverse consequence”. The term risk is generally used to
refer to a situation where the outcome is uncertain and there is a
possibility of loss. Risk may be controllable or uncontrollable according to
their origin and consequences.
In economics and finance, risk means actual outcome of an action being

different from the expected outcome and there is a tradeoff between risk
and return. Higher the risk higher the returns. A security that yields
consistent returns over a period of time is termed risk free security. The
response to risk varies based on human behavior, risk appetite and
tolerance, and the strategies used to either transfer risk, prevent risk,
mitigate risk or to accept risk. Futures prices differ from expected futures
spot prices even after adjusting for systematic risk because of unevenly
distributed demand by hedgers for futures positions. A risk might relate to
fluctuations in the price of oil, a foreign exchange rate, the level of the
stock market, or some other variable.
Speculators are risk seekers and trade in the market to earn profit from
risky venture. Hedgers have a enter the market to cover a pre existing
risk. Risk aversion is commonly associated with many investors in
secondary market. Risk is accepted or retained willingly only if the
expected profit from bearing the risk will compensate the investor from risk
exposure.
Risk creates obstacles in the path of finance managers to forecast future

cash flows for making appropriate finance decisions on when and how to
finance new investments. Hence Risk management is critical to the ability
of a business to successfully manage its business operations. Businesses
should be fully equipped to manage the risks and consequently plan to
have more control on cash flows.
It is believed that the concept of risk management evolved with the usage
of probability theories in the 1700 for solving puzzles. Later the concept of
insurance was to utilized manage risk. However modern risk management
methods emerged in the 1950’s which further refined I the usage of
derivatives to manage risk in the 1970’s. Risk management requires a
251
systematic and logical approach to minimize and mitigate the impact of

risk which is fundamentally different from avoiding it totally. Risk
management strategies comprises of identification of probability, analysis
in terms of frequency and severity, assessment in terms of scope of loss,
measurement in terms of financial and non financial loss, and control of
risk through prevention through appropriate mechanism, reduction if
unpreventable to reduce loss, transfer through insurance or outsourcing,
retention by dealing with it and avoidance by eliminating the risk.
Agri commodities are exposed to risk due to various factors namely early
or after season monsoons, climate and weather change, agriculture trade
globalization and impact of world trade bodies, stringent quality control
measures and legislations etc. The risk perception varies from a small
farmer to a huge land holding farmer. Agri commodity derivatives can be
used to hedge the agri commodity risk as well as to gain profits. However
the risk management strategy will be based on the tradeoff between the
cost of reducing risk exposure and the benefits accrued out of risk
management. The agri commodity risk mainly originates from the price
fluctuations and the volatility in the market. Such risk were better
managed with forward contracts initially and then refined by the futures,
options and the swaps. Farmers can also adopt risk management strategies
such as select product with lower risk exposure and short duration life
cycle, diversify production into a variety of crops, take adequate insurance
on the entire life cycle of the crops, adopting risk sharing strategies such
as contract farming, cooperative marketing, vertical integration for
lowering marketing risks etc. The Pradhan Mantri Fasal Bima Yojana
provides a comprehensive insurance cover against failure of crops in order
to help farmers to manage risk and stabilize their income.
Risk management can also be done by hedging i.e to off set risk of adverse
price movement. Hedging can be performed by taking a long or short
position against the agri commodity. Hedging ensures a certain amount of
cash flows and insulates the farmer processor form price volatility. Ind AS
allows for hedges which have exposure as off balance sheet items, to not
have their MTM impact realize on the Profit and Loss account till the time
this exposure is recognized as a balance sheet item. Hedging has reached
new height with the establishment of modern commodities exchanges with
standards for quality and specifications. Even though hedging can offset
risk and create profits for the farmers/processors, risks associated with
hedging also needs careful consideration and monitoring. Strategies needs
252
to be planned, designed and used to manage price risk, based on the

characteristics of the commodity.
Commodities can be traded on OTC, domestic markets and even

international markets. Reserve Bank of India (‘RBI’) has formulated certain
regulatory guidelines through the Master Direction reference no. RBI/
FMRD/2016-17/31 and the FMRD Master Direction No. 1/2016-17 for
companies involved in hedging.. The guidelines state that Indian
companies cannot hedge commodities like gold, silver and platinum on
international exchanges unless specific approval has been obtained from
the RBI. Indian commodity exchanges provides various guidelines for
hedging contracts involving variety of underlying such as gold, energy and
including agri commodities.
9.2 VARIOUS TYPES OF RISK CONNECTED WITH AGRI

COMMODITIES
Farmers and processors have to face various types of risk and hence they
need to assess these risks before taking a decision to cultivate a crop /
process the harvest and thereafter take suitable actions to minimize the
impact of risk by deploying appropriate strategies. The different types of
risks should be considered together to find a solution to the farmers
problems.
All agri commodity derivatives contracts like forwards, futures and options
as well as other complex instruments are risky. Using agri commodity
derivative product to manage or hedge risk requires specific knowledge
and expertise relating to which product is to be used and at what time right
from its origination till expiry.
253
The various sources of risk originating from agri commodities can be as

follows:
a. Credit risk: loss due to counterparty party failure to perform obligation
b. Market risk: Loss due to adverse changes in the market value
c. Liquidity risk: Failure of an institution to meet its funding requirement
d. Operational risk: Loss due to inadequate systems and control, human

error, management failure
e. Legal risk: Loss arising from legally non enforceable contracts
f. Regulatory risk: Loss arising from failure to comply with regulatory or

legal requirement
g. Reputation risk: Loss arising from adverse public opinion
h. Settlement Risk: Arises as a result of the timing differences between

when an institution either pays out funds or deliverables assets before
receiving assets or payments from a counterparty and it occurs at a
specific point in the life of the contract.
i. Strategic Risk: Arises from activities such as entrepreneurial behavior

of traders in financial institutions, misreading client requests, costs
getting out of control, trading with inappropriate counterparties etc
j. Systemic Risk: Arises when there is a failure of large and complex

organization of financial positions in the economy.
k. Technology risk: Risk has increased due to increased use of

technology. Increased sophistication and new information technology
have created complications and insecurity.
l. Production risk: Production risk can originate from weather conditions,

impact of pests and diseases, production of inferior quality of farm
produce, low rainfall, drought, hail, heavy rains, break down of
equipments etc
254
m. Marketing risks: Markets may fluctuate between demand and supply

of the farm produce. Surplus may not get good price, while deficit may
not fetch good income
n. Financial risk: A farmer requires capital to procure inputs for farming.

If he falls short of capital like due to the impact of recent wet droughts
on agriculture, then his damaged/destroyed crops may not generate
enough capital to recover the cost of previous input costs and sustain
the costs of the new cultivation to be undertaken for the new season.
Borrowing money can be also risky as a bad crop produce may wipe out
the farmers income and he may not be able to repay the loan and will
have to live his life on the edge of uncertainty.
o. Institutional risk: Farmers may have to face Institutional risk, when

they may not get the services / support from the Institutions such as
export services, waste disposal etc consistently
p. Skilled workers risk: Not all agro-processing industries are

mechanized nor do they have enough skilled workers for processing the
farm produce. For any undorseen reason if there is a shortage of such
resource the farm produce may get spoilt and optimum processing of
the farm produce may not happen.
9.3 HOW TO MANAGE RISK?
Food and Agriculture Organization of the United Nations (FAO) Farm

management extension guide on Managing Risks in farming by David
Kahan gives a wonderful document on helping farmers who are
frequently exposed to the uncertainties of weather, prices and disease,
living on the edge of extreme uncertainty, to cope with manage the risks.
It also suggests ways to help farmers deal with risk and reduce variability
in productivity and profitability with good risk management.
255
Some important points from the above document is as follows:
• Farmers need information on many aspects of the farming business such

as input prices, output prices and yields, farm records, tax legislation,
import/export regulations, environmental legislation, resource
conservation, food safety, water and soil quality, animal health, farm
programmes and policies as well as other technical data for effective
decisions to be taken to manage risk. The sources of information
available include farm records, off-farm statistics, information from input
dealers, traders, extension workers and other farmers and market price
data.
• Farmers have to find ways of dealing with risk and protecting themselves
from the uncertainties of the future. Farmers should be helped to
understand and predict the patterns and trends in changes that happen
in farming.
• Farmers need to identify the possible sources of risk; realize the possible
outcomes; decide on alternative strategies available; assess the
consequences of each possible outcome; and evaluate the trade-offs
between the cost of the risk and the gains that can be made.
• Risk management refers to actions farmers take to increase the chances

of success of the farm business. Farmers can do this by influencing
events in the future and by limiting the negative effect of those events
• A farmer may keep a stock of spare parts for the farm machinery to
minimize risks of breakdowns
• A farmer may decide to grow a drought-resistant crop instead of one that

is more drought prone
• A farmers must weigh up the costs and benefits of using an input as a

risk reducing strategy
• Farmers can reduce risk by learning about and applying new technologies
and practices designed to address specific risks common to their area of
production.
256
• A farmer may forego an enterprise that has a high potential for income
but also carries a high risk for loss, and choose instead an enterprise
which is less profitable but also less risky.
• A flexible farming system makes it possible for the farmer to make quick
or short-term changes in production and sales
• Diversification spreads risk and is a successful risk management strategy

because not all farm enterprises and operations are likely to be affected
in the same way by changing situations
• The risk management strategy works on the understanding that the

same crops grown in different areas will not meet the same fate
• Staggered planting can be used to manage household food supply and

also to reduce the risk of water stress
• Diversification of production can be used to manage price, yield, and

income risk
• Many farmers around the world, particularly smallholder farmers;

integrate crops and livestock to reduce risk and improve their efficiency
in resource use and sustainability of the natural resource base.
• Farmers may take part-time work in towns or on commercial farms or

one of their family members may have a full-time job to generate income
from off-farm activities
• In places land tenure arrangements is permitted, farmers can share

leases for crop and livestock production in lines with risk management
strategy.
• Custom(contract) farming for farm operations as well as livestock feeding

can keep the operational costs fixed and save the farmer from the risk of
high equipment costs. Custom cattle feeding and custom farming allow
farmers to focus on production.
• A farmer with equipment, contracted as an operator, receives alternative

income and makes more efficient use of equipment.
257
• Marketing risk exists because of the variability of product prices and the
uncertainty of future market prices that the farmer faces when making
the decision to produce a commodity. The farmer can watch for changes
in the market and sell when prices are most favourable. Farmers should
realize that both costs and benefits of storage and on-farm primary
processing are important for income generation. Farmers need to be sure
that they can sell everything taken to market.
• Forward pricing practice enables farmers to reduce the risk that the price
they receive for their output might not cover production costs.
Agreements that are based on an exchange of produce with specific
price, quantity and quality of produce at a specified future time enables
farmers to establish a price for later delivery
• Minimum price contracts offer the farmer protection against a drop in

price below a minimum level, while still leaving the final pricing until a
later date.
• Futures contracts enables the farmer to transfer risk to his counter party
that is more willing to accept them
• Farmers aim at negotiating the highest possible price to maximize their

profits and buyers try to ensure that low prices are paid so that they can
also maximize their profits. Farmers need skills in negotiating contracts
in order to arrive at an acceptable agreement.
• Farmers should track price information relevant to their products should

try to establish if there are seasonal, annual or other cyclical price trends
for those products. to manage price risks
• Financial risk occurs when money is borrowed to finance the operation of

the farm business. Farmers should be helped to understand availability
and cost of credit and the repayment schedule, farmer’s liquidity or
ability to generate cash flow and farmer’s ability to maintain and
increase capital inorder to manage financial risk.
• Farmers can lease land, machinery, equipment or livestock for generating

additional income and spreads the cost of paying for and maintaining the
asset
258
• Rather than buying all the necessary equipment at one time, the farmer
may spread the purchases out over time and can thus limit the debt and
at the same time build equity.
• Based on his experience, the farmer can add some cost as a contingency
to those costs anticipated over a growing season or year.
• The farmer usually pays an insurance company (private or public) to

provide protection against the consequences of these major risks. Crop
or weather insurance is a simple risk management strategy. However,
farmers need to make careful calculations to determine the impact of the
cost of the insurance (i.e. the premium) on their net income.
• Institutional risk refers to unpredictable changes in the provision of

services, such as the supply of credit and purchased inputs, and
information from both formal and non-formal institutions. When farmers
have sufficient trust in each other there is scope for them to work
together informally as a producer group in order to reduce some of the
risks associated with credit mobilization, the purchase of inputs and
marketing.
• The risk reducing function of farmer groups comes from the pooling of
capital of individual farmers into a common fund, collecting and
disseminating information to its members, and bulk buying and
marketing.
• Forming and participating in more formal cooperative organizations also

provides farmers the opportunity to benefit from volume sales of
produce, bulk purchases of inputs and supplies, and the mobilization of
credit
• Traditional farmers societies provide security against risk through strong

community bonds. The customs and organization of traditional societies
tend to provide the individual family with a measure of security against
risk.
• Human risk refers to the risks to a farm business caused by illness and
the personal situation of the farm family. Italso covers issues that relate
to hired workers. The reduction of human risk can be possible by
ensuring that workers with suitable skills and experience, are selected
259
and by providing communication, supervision and a safe working

environment.
• A farmer should also deploy effective strategies to guard against

unexpected changes in the availability and productivity of labour with
labour planning.
• Farmers should develop a broad range of strategies that take into

account the advantages and disadvantages (benefits and costs) of each
risk management option individually and in combination.
Having understood the important points for managing risks through the
FAO document, as well as the various types of risk that can impact agri
commodities now let us understand the risk strategies with the help of agri
commodities derivatives.
9.4 DERIVATIVE AS RISK MANAGEMENT TOOL
In life you just can’t leave the future to chance. The best way to
predict the future is to create the future…Tim Ogunbiyi
Many risks in the financial markets can be eliminated by diversification by

using Derivative instruments as risk management tools in order to help
traders in agri commodities to safeguard their investments value through
hedging strategies.
Derivatives are meant to reduce or contain the risk in the original

transaction. Hence it is essential to identity risk, evaluate and measure the
risk and manage and control the risk on a continuous basis.
Volatility (price change), liquidity (ease of selling without causing price

change), uncertainty of future interest rates are three major determinants
of price risks. Risk management is possible only in when there is a chance
of price volatility of the underlying. Hedging brings greater certainty in
cash flows and operations.
Risk management with derivatives requires specialized knowledge of

derivative and strategies to generate a positive payoff. Risk management
policies helps the contracting party to understand the limits within which
he should trade with agri commodities. Effective risk management is
260
possible if the trader does trading in agri commodities on merits to each

case. Active risk management relies on the ability to make accurate
reasonable forecast on future movements in prices and rates. Derivatives
risks management and control require an in-depth knowledge of risks
which includes their identification, analysis, assessment, measurement,
and control. A good trader in agri commodities should also understand the
derivative standards to accurately measure derivatives value, risk
management techniques to reduce cost and increase yields, price
dynamics, regulatory direction for functioning of derivative trading and
customization of new derivative products in order to keep pace with the
changes in agri commodities market. The value at risk (VaR) technique
should be effectively used to understand the risk exposure of a particular
derivative asset. A fully centralized risk control structure, strategic level
information and tactical level information in the risk management process
could be very useful for making accurate derivative trading decisions.
Various methodologies and tools used for effective risk management

should be selected on the basis of flexibility in relation to different risk
types, efficiency in terms of time and cost, suitability to portfolio
composition, back-testing and speed versus accuracy trade off.
Various approaches that can be suitable for managing a derivative

position/exposure depend upon nature of the position and market namely:
• Risk Metrics Approach would be suitable for the portfolio position tending
towards linearity (delta at constant rate) and normality (prices move in
random manner) by using statistical and parametric model.
• Historical simulation techniques can be used for linear position and non-
normal markets
• Monte Carlo simulation technique can be used for non linear with non
normal markets
• When neither the market is normal nor the linear then the hybrid models
should be used like combining the option pricing model with scenario
analysis.
261
• Flexibility will decide whether the methodology is subject to desired/

required adjustments or not
• Both speed and accuracy should be considered in selecting a model in the

light of nature of derivative exposures and market situations.
• Back-testing is concerned to evaluating the performance and its actual

experience in the market of the risk model to decide on the acceptable
level for model error.
Forward contract are used by farmers to protect themselves against the

rising or falling prices in the spot market. A farmer can thus know what
price he can receive for his farm produce in advance of the delivery.
Forward contracts enables the farmer to enter into a customized contract
that matches his specific needs in terms of size of production, time and
place of delivery as well as the grade and quality of the crop.
Exchange traded futures and options contracts removes the risk of price
fluctuations for both the farmer and the counter party. Derivative
instrument allows the trader to sell short. This feature is not easily
available in other markets. Trading strategies can beformulated by a
combination of derivative instruments that are helping to attain the trading
objective. Returns and risk can be adjusted to any level with less capital
and maximum trading with lower operations costs and greater liquidity.
Forwards and Futures contract provide price discovery and spot price of an
agri commodity.
Options provide protection against down side risk and at the same time
they also provide an upside potential. The buyer of option contract gets the
right to buy and enjoy the benefit of risk reduction while the seller of an
option contract get the premium for accepting the risk. Options allows the
buyer to transact at a pre-committed price or at the spot price which ever
is advantageous to him. A long call can give the buyer the right to buy the
agri commodity at a predetermined price in the future and protect himself
against the increased price. A short put by the writer of an option contract
to sell agri commodities in the future in a bullish market will result in a
gain of premium as the expected prices are higher than the strike price.
The writer makes the profit without trading. When the expected price
movement in the market is a downward trend, traders can enter into a
short call in the future( buy low means sell high for profit) or a long
262
put( sell low and buy further low in falling market for profit). Traders can
also enter into writers position of a call option since there is a possibility of
gaining the premium amount for taking the risk associated with price
movement. A long put assures the trader large profits as prices decline.
The trader can sell securities to the writer at the strike price and buy it
from the market at very low prices. An option writer willing to take risk can
enter into call contract to make profit by assuming the bearish trend in the
market.
Options can provide a range of payoff possibility. Miscalculation of prices

can create disasters. Hence derivatives should be used most judiciously.
Any imperfect understanding of risk and mismanagement of risk
management strategies may cause loss instead of protection.
Risk Management at Indian Commodity Exchange Limited (ICEX)

The ICEX exchange adopts various tools and practices to protect the
market participants against adverse market conditions. It identifies and
evaluates the risks through Risk Preventive Measures.
Risk Preventive Measures
Margining System
Initial Margin: Initial margin is the VaR based margin, subject to a

minimum Base Margin approved by the regulator for the respective
commodity.
Extreme Loss Margin: Margins to cover the loss in situations that lie
outside the coverage of the VaR based initial margins.
Additional Margin: The margin over and above the initial margin which is
levied due to price volatility in the short period.
Regulatory Margin: Margin recommended by regulator to be levied in a

particular commodity contract based on the market intelligence or to curb
abnormal price movement.
Long Margin/Short Margin: When the margin is imposed only to buyer

or seller against their position that margin is called long and short margin
respectively.
263
Tender and Delivery Period Margin: The Margin imposed during the
tender and delivery period of the contract. Purpose of this margin is to
enable smooth settlement of trade during the expiry.
Margin Utilization Warning Limit

Different level of Collateral warning (i.e. margin utilization) limits have
been defined by the Exchange based on the margin utilized % of Trading
Members & Clearing Members against their positions.
First Collateral Warning%: The first collateral warning limit alert will be
sent to members on breach of 50% of margin utilized of their collateral.
Second Collateral Warning%: The second collateral warning limit alert

will be sent to members on breach of 75% of margin utilized of their
collateral.
Risk Reduction Mode (RRM)%: RRM mode will trigger and an alert will
be sent to members as the collateral utilization level breaches 90% of the
total margin limit.
RRM Revoke%: The RRM mode will be revoked and an alert will be sent
for revoke of RRM mode as the collateral utilized amount reaches below
89% of the total margin limit.
Square off%: The members will be placed into margin square off mode
and an alert will be sent as the collateral utilized amount goes beyond
100% of the total margin limit.
Risk Reduction Mode (RRM)

The trading members/clearing members are mandatorily put in risk-
reduction mode when 90% of the member’s margin limit gets utilized. The
risk reduction mode shall include the following:
All unexecuted orders shall be cancelled once trading member himself or

his clearing member breaches 90% collateral utilization level.
Only Market & Limit orders with Immediate or Cancel (IOC) validity shall be
permitted in this mode.
264
All new orders shall be checked for sufficiency of margins and such
potential margins shall be blocked while accepting the orders in the
system.
The trading member shall be moved back to the normal risk management
mode (i.e. revoked from RRM mode) as and when the margin utilization
level of the trading member as well as his clearing member goes below
89%.
MTM Loss Limit

During the trading session, the system keeps track of loss, both notional
and booked, incurred by every member up to the last executed trade.
Based on this MTM loss, the Exchange has defined different level of MTM
alerts as a measure of risk management. The trading members/clearing
members of the Exchange shall get MTM warning alerts on real-time basis.
For calculation of MTM loss, the MTM loss limit is specified as 100% of the
total margin limit.
Four types of alerts get generated for breach of MTM limit % at Member
level.
First MTM Warning % i.e. 50%: The first MTM warning alert will be sent
as the MTM loss breaches 50% of the MTM loss limit.
Second MTM Warning i.e. 60%: The second MTM warning alert will be
sent as the MTM loss breaches 60% of the MTM loss limit.
Third MTM Warning i.e. 70%: The third MTM warning alert will be sent
as the MTM loss breaches 70% of the MTM loss limit.
MTM Deactivation Limit % i.e. 75%: The square off mode will be
triggered due to MTM and an alert will be sent as the MTM loss breaches
75% of the MTM loss limit. All pending orders will be cancelled and only
square off orders will be allowed on trigger of square off mode with IOC
validity. A member can’t place fresh orders in this mode.
As the MTM loss reaches below MTM deactivation limit%, the square off
mode will be revoked and an alert will be sent for the same.
265
Position Limit
Client Wise A client is allowed to hold the maximum quantity of open

position in a particular commodity contract/contracts.
Member Wise: A member is allowed to hold the maximum quantity of

open position including all their clients in particular commodity contract/
contracts.
Near and Far month Position Limits: Open position in the contract
which is nearby to expiry months may be different than that of far months.
Generally the open position limit is reduced in nearby month expiry
contracts. A buyer/seller has to reduce his position to permissible position
limit in the contract.
Daily Price Range (DPR Limit):

Each contract has a fixed price band. The trade is allowed within the given
price range. The range is typically fixed through a standard percentage as
per the daily price volatility of the commodity. In case of special
circumstances based on the fundamentals of the commodity the daily price
range is revised.
Mark to Market of Positions on Daily Basis:

All the outstanding position of the market participants are marked on daily
basis to the closing market price of the contract. The mechanism ensures
that the gain/loss relative to commodity price movement is adjusted on
daily basis by debit/credit of respective members settlement account
before commencement of the trade next day.
Value At Risk (VaR)

Value at Risk (VaR) measures the largest loss likely to be suffered on a
portfolio position over a particular period with a given confidence level. VaR
is measured in three variables: the amount of potential loss, the probability
of that amount of loss and the time frame.
Source: https://www.icexindia.com/market-operations/risk-management
(for the benefit of student and creating awareness about ICEX)
266
9.5 DERIVATIVE TRADING STRATEGIES
Derivative trading strategy is based on the direction and quantum of

movement in the expected share prices. Trading strategies are formulated
by a combination of derivative instruments that are available in the
market. Derivative trading strategy enables the trader to navigate the
day-to-day volatility as well as riding sustained bullish and bearish trends.
The buyer usually gets the benefit of risk reduction of the investment,
while the seller of an option takes a risk for which the premium is paid by
the buyer. Each trading strategy will have its own methodology, however
the trader gets success out of tested trading strategies.
Strategies for Commodity buyers
• Buy futures for protection against rising prices
• Buy calls for protection against rising prices and opportunity created due
to a down trend of prices
• Sell puts to lower purchase price in a stable market
• Buy a call and sell a put to establish a purchase price range
• Follow the market and make trend aligning strategies
• Make good use of the high intraday volatility during day trading
• Analyze global demands for the assigned commodities
• Assess and evaluate reliable commodity suppliers
• Devise and implement strategies to encourage enhancement of

commodity quality
267
Strategies for Commodity sellers
• Sell futures for protection against falling prices
• Buy puts for protection against falling prices. Use put option in a rapid
falling market
• Sell calls to increase selling price in a stable market
• Buy a put and sell a call to establish a selling rice range
• Sell futures when the near term trend is downwards
• The best time to sell futures is in distribution phase
• Commodities sellers need to evaluate each customer’s perception of risk

and its true exposure
• Take your time to understand your buyers situation and find a reason
why should be buy from you
Options can be used in an effective way by both farmers and traders with
varied objectives. Hedger use options for price protection and locking a
future price today itself. A buyer intends to get price protection, whereas a
seller can fix a minimum selling price irrespective of the rise or fall in
market price.
Strategies for Call Options

Options strategies provides many combinations and possibilities to the
trader to create a wide range of pay out patterns.
When the expected movement in the market is a downward trend, investor

can enter into a short call or a long put trading strategy to protect
investments against such decline.
A long put gives the investor the right to sell shares at a predetermined
price.A long put assures the investor a large profits as prices decline. The
investor can sell the securities to the writer at the strike price and buy it
from the market at very low price.
268
A writers position of a call option will gain the premium. An option writer
willing to take risk may enter into a call contract to make a profit by just
assuming the risk of a bearish trend. Without making trade, the writer of
call gains the premium amount.
Call Options Buy Options Sell Options

Bullish market Buy Out of Money option
Bearish market Sell In the money option
Strategies for Put Options:

When the investor expects the share price to increase, he will go for a long
call or short put. Even if the market do not rise beyond expectation, the
investor can come out of the contract as there is no obligation to buy.
In case of short put position taken by the writer, when the expected prices
are higher than the strike price, the writer gains by amount of premium.
Without trading the writer makes the profit.
While the confidence is high and the investor is the risk seeker, a higher
premium might be accepted by the investor. However if the investor
intends to avoid risk, he will look out for out of money options since
premium payments will be low.
Put Options Buy Options Sell Options

Bullish market Sell In the Money option
Bearish market Buy Out of money options
269
Vertical spreads
A vertical spread is an options strategy involving buying and selling

of multiple options of the same underlying security, same
expiration date, but at different strike prices.
Vertical spreads are used by traders by estimating market price movement

between a low and a high figure. The trader usually enter into a vertical
spread position to protect against fluctuations in the market.
Bull call spread and bull put spread are bullish vertical spreads constructed
using calls and puts respectively. Similarly Bear call spread and bear put
spread are bearish vertical spreads constructed using calls and puts
respectively.
Spread position limit the profit earning opportunity between the two strike
prices.
Bull Call Spread

Option contracts are available with the same expiry date for different strike
prices at different premiums. Bull Call Spread involves purchasing call
options at a specific strike price while also selling the same number of calls
of the same asset and expiration date but at a higher strike and is used
when a moderate rise in the price of the underlying asset is expected for
e.g. An investor buys a call option for wheat commodity at Rs.50 per kg
for a premium of Rs.25 with an expiry date of 31st March 2020 and sells a
call option for wheat commodity at Rs.55 for a premium of Rs.5 with an
expiry date of31st March 2020.
Two options:
Call options can be bought at Rs.50 for a premium of Rs.25 and sell a call
option at Rs.55 for a premium of Rs.5 Net cost = Payment of Rs.25 and
receipt of Rs.5 = Rs.20 The minimum loss will be Rs.20 when market
prices fall below Rs.50.
When market rises above Rs.50, the investor will have both the options
that will come up for exercise. Investor will make a profit of Rs.50. Net
profit will be Rs.50-Rs.20 = Rs.30
270
Bear Put Spread
A bear put spread is a type of options strategy used when an option trader
expects a decline in the price of the underlying asset. When prices are
expected to decline in the market, a spread strategy will help investor to
lock the share price between two prices for a specific time .Bear Put Spread
is achieved by purchasing put options at a specific strike price while also
selling the same number of puts at a lower strike price.
The Bear spread is formed by buying a put option at a higher price and
selling a put option at a lower price simultaneously for a share with the
same expiry date but with different trike prices.
E.g. A traders sells a Put option with strike price Rs 50 at a premium of

Rs.5 with expiry date 31/03/20
The same trader buys another Put option with a strike price Rs.75 at a
premium of Rs. 10 with expiry 31/03/20.
Option price will not be exercised when the market price at expiry will be
greater than Rs.75. Net cost = Rs 10-5 = Rs.5.
If market price is below Rs.50, both the put option will be exercised.
Investor can sell at Rs.75 . In other option investor can buy at Rs.50.
Maximum profit will be (75- 50 - 5) = 30
Bull Put Spread
Writing a put option with a high exercise price and buying a put option with
a low exercise price creates a bull put spread. A bull put spread is an
options strategy that is used when the trader expects a moderate rise in
the price of the underlying asset. This strategy is constructed by
purchasing one put option while simultaneously selling another put option
with a higher strike price.
A bull spread is entered in bullish expectation.
E.g. A trader buys a put option strike price Rs.2000 at a premium Rs.30
with expiry 31/03/20
271
Sells another put option strike price Rs.3000 at a premium Rs.100 with
expiry 31/03/20
If market price goes up both options will not be exercised and the trader
will gain 100-30 = Rs.70.
If the market price is below Rs.2000 both option can be exercised and the
loss position will be (3000-2000-70) = Rs.930
Bear Call Spread
When the expectations are bearish, a trader can enter into a bear call
spread trading strategy in which the trader will sell call options at a lower
strike price and will also buy the same number of calls, but at a higher
strike price, as he expects the market to decline.
Selling a call option with a low exercise price and buying a call option with
a high exercise price gives profit to the trader.
E.g. If a trader sells a call option at Rs.500 and receive premium Rs.50
expiry date 31/03/20 and also buys a call option at Rs.600 and receive
premium Rs.30 expiry date 31/03/20. His Net profit will be (50-30) Rs.20
If the market goes below Rs.500 both contracts are not exercised and
profit will be Rs.20
If market goes above Rs.600 both options are exercised and net loss will
be (600-500 +20) Rs.80
Calendar Spread
A calendar is an options strategy involving options of the same underlying

agri commodity, same strike prices, but different expiration months. It is
also called as inter delivery, intra market, time or horizontal spread.
A trader can enter into two options with different expiry dates. A calendar
spread is an options or futures spread established by simultaneously
entering a long and short position on the same underlying asset but with
different delivery months.
272
The trader will sell a near expiry option contract and buy a far expiry
contract.
The trader goes for two call options with the same strike price or two put
options with the same strike price.
The time value of an option that is very near the expiry date will be almost
zero, where as the time value of an option that is having far expiry will be
more.
The trader makes a gain from the difference in time values.
A calendar spread can also be created with a put option.
If the trader instead buys a nearby month's options in some underlying

market and sells that same underlying market's later with the same
striking price, such type of spread will be known as a reverse calendar
spread. This strategy will give benefits to the trader from a decline in the
agri commodity’s volatility of that market's options over time.
Butterfly Spread
The butterfly spread combines a bull spread and a bear spread to have
limited risk and profit especially when the future volatility of the underlying
asset is expected to be lower or higher than the implied volatility.
A long butterfly position will make profit if the future volatility is lower than
the implied volatility. A long butterfly options strategy consists of the
following options with three different strike prices:
1. Long 1 call with a strike price of (S − a)

2. Short 2 calls with a strike price of S
3. Long 1 call with a strike price of (S + a)
A butterfly spread takes three call prices with same expiry date.
for e.g.
1. Buying a call option with a low strike price ,

2. Buying another call option with a high strike price
3. Selling two call options with a strike price in between the high and low
strike prices.
273
Usually the call options are sold near the current market price. When the
share price in the market moves between the low and high prices, the
trader makes a profit.
When the agri commodity price moves near to the low and high price and
goes beyond these points, the trader incurs a loss.
A short butterfly position will make profit if the future volatility is

higher than the implied volatility.
A short butterfly options strategy consists of middle strike option position

with a long position and the upper and lower strike option positions are
short.
Straddles
A straddle is an options strategy using a combination of Call and Put

Option. In a straddle strategy the trader holds a position in both a call and
put with the same strike price and expiration date. The trader pays the
premiums for both Call and Put option.
The straddle strategy enables the trader to profit from the movement of
the price of the underlying agri commodity, regardless of the direction of
price movement.
If the agri commodity price is close to the strike price at expiration of the
options, the straddle leads to a loss. However the trader will fetch
significant profit on significant movement of the agri commodity price.
Hence a straddle options strategy is chosen by the trader if he is expecting
a large move in a agri commodity price without any knowledge of the
direction in which the agri commodity price will move.
The purchase of particular option derivatives is known as a long straddle,

while the sale of the option derivatives is known as a short straddle.
Long Straddle: A Long Straddle combines a long call and a long put on
the same agi commodity, with the same exercise price and for the same
expiry date. Long straddle options fetch unlimited profit with, limited risk.
Long straddle strategy is used by the trader especially when the options
trader foresees volatility in prices of underlying securities in the future.
274
By having long positions in both call and put options, straddles can achieve
large profits. Maximum loss for long straddles occurs when the underlying
stock price on expiration date is trading at the strike price of the options
when it was purchased.
Short Straddle: A short straddle involves a simultaneous sale of a call and

put option with the same exercise price and with the same expiry time.
The trader foresee a low volatility of the underlying agri commodity in the
future. The profit is limited to the premium received from the sale of put
and call on the expiry of the both call and put options. Hence a short
straddle is also called a credit spread
A maximum profit upon expiration can be fetched if the underlying agri

commodity trades exactly at the strike price of the straddle. However the
risk can be unlimited due to large upward or downward moves of the
underlying agri commodity’s price. A short straddle is also called non
directional as the short straddle profits when the underlying agri
commodity changes little in price before the expiration of the straddle.
Strangles
A strangle options strategy combines both a call and put with different
strike prices but with the same maturity and underlying asset.
A strangle is similar to straddles but the two options will have different
exercise price though the date of expiry will be same.
A purchase of particular options is known as a long strangle, while a sale of

the same options is known as a short strangle
A strangle options strategy provides an opportunity to the trader to

construct different payout models with low cost and low probability of
profit. A strangle can be less expensive than a straddle if the strike prices
are out-of-the-money. If the strike prices are in-the-money, the spread is
called a gut spread. A long strangle can make a profit if the underlying
price moves substantially from the spot price, regardless of the direction in
which it moves.
275
Buyer of strangle believes that the volatility is going to be huge, while the
seller of the strangle is expecting low volatility.
Covered Call
A covered call options strategy is a combination of a holding a long position

in an asset and writing (sells) call options on that same asset in an
attempt to generate increased income from the asset.
If a trader buys the underlying instrument at the same time the trader sells
the call, the strategy is often called a "buy-write" strategy.
The long position in the underlying agri commodity is said to provide the
"cover" as the agri commodities can be delivered to the buyer of the call if
the buyer decides to exercise.
Writing a call generates income in the form of the premium paid by the
option buyer in case the prices of agri commodities remain stable or
increases. The risk of ari commodities is not limited as losses can happen
on decline of agri commodities prices.
If strike is close to the prevailing price of underlying stock, it would fetch

higher premium upfront but would lock the potential gain from the agri
commodity early. If strike is too far from the current price of underlying, it
would fetch low upfront premium but would provide for longer rise of
money on underlying agri commodity.
The long cash position can be used to sell calls of that target strike price.
As long as price stays below that target price, a call option can be written
of target price strike and premium can be earned. The moment target price
is reached in the spot market, it can be sold in the cash market and also
cover the short call position.
276
Protective Put
A protective put is an options strategy used by an options trader who hold

agri commodities and wants to protects himself from the downward
movement of the price of agri commodity in the future. A protective put
options strategies is a especially used when the trader is certain about a
short-term bearish forecast but expects a the long-term bullish forecast.
A protective put position is a combination of buying (or owning) a agri

commodity and buying put options on the same agri commodity. If the agri
commodity price declines on the maturity date , the purchased put
provides protection below the strike price. A protective put differs from a
married put in one aspect i.e. agri commodities and puts are purchased at
the same time in a married put whereas a protective put may have
different timing. Protective puts are added to protect a already owned agri
commodity position.
A protective put can provide unlimited profit as the price of agri

commodities can rise to any extent. The protection under the protective
put option strategy shall last only until the expiration date. Risk is limited
to an amount equal to agri commodity price plus premium less strike price.
The protective put strategy requires a bullish forecast and intention of

limiting the risk. The profit from a protective put position will increase
when volatility rises and decrease when volatility falls. Similarly profit from
a protective put position decreases as time passes and other factors
remain constant, as the time value portion of an option’s price decreases
as expiration approaches.
277
9.6 NSE CLEARING LIMITED RISK MANAGEMENT SYSTEM
NSE Clearing Limited (NSE Clearing) (formerly known as National

Securities Clearing Corporation Limited, NSCCL), a wholly owned subsidiary
of NSE has put in place a comprehensive risk management system, which
is constantly upgraded to pre-empt market failures.
NSE introduced for the first time in India, risk containment measures that
were common internationally but were absent from the Indian securities
markets. Risk containment measures include capital adequacy
requirements of members, monitoring of member performance and track
record, stringent margin requirements, position limits based on capital,
online monitoring of member positions and automatic disablement from
trading when limits are breached, etc.
NSE does risk management for derivative products with highly

sophisticated, value-at-risk methodology i.e Standard Portfolio Analysis of
Risk (SPAN) to calculate performance bond/margin requirements by
analyzing the "what-if's" of virtually any market scenario. SPAN is a
registered trademark of the Chicago Mercantile Exchange, used herein
under License. The Chicago Mercantile Exchange assumes no liability in
connection with the use of SPAN by any person or entity.
Margins
NSE Clearing has developed a comprehensive risk containment mechanism

for the Futures & Options segment with online position monitoring and
margining system. NSE Clearing uses the SPAN (Standard Portfolio
Analysis of Risk) system for the purpose of margining. NSE Clearing
collects initial margin up-front for all the open positions of a CM to cover
potential losses for at least a 99% VaR over one day horizon subject to
minimum percentage floor value as prescribed by SEBI from time to time.
Clearing members shall be subject to exposure margins in addition to initial
margins. Futures final settlement margin shall be the net futures final
settlement obligation of clearing member, if payable. NSE CLEARING shall
levy tender period/pre-expiry margin which may be increased gradually
every day beginning from the pre-determined number of days before the
expiry of the contract as applicable. Appropriate delivery period margin
shall be levied by NSE CLEARING on the long and short positions marked
for delivery till the pay-in is completed by the member. NSE CLEARING
278
may impose adequate concentration margins (only on concentrated

positions) to cover the risk of longer period required for liquidation of
concentrated positions in any commodity. As a risk containment measure,
the relevant authority may require clearing members to make payment of
additional margins as may be decided from time to time.
Deposits
All collateral deposits made by CMs are segregated into cash component
and non-cash component. At least 50% of the Effective Deposits should be
in the form of cash.
Liquid Net worth

Liquid Net worth is computed by reducing the applicable margins payable
at any point in time from the effective deposits.
The Liquid Net worth maintained by CMs at any point in time should not be
less than Rs.50 lakhs (referred to as Minimum Liquid Net Worth).
Liquid assets
Clearing members are required to provide liquid assets which adequately
cover various margins and liquid net worth requirements. A clearing
member may deposit liquid assets in the form of cash, bank guarantees,
fixed deposit receipts, approved securities and any other form of collateral
as may be prescribed from time to time.
Minimum liquid net worth requirement for clearing members:

Every clearing member of the NSE Clearing is required to maintain a
minimum liquid net worth of Rs.50 lakhs with the NSE Clearing in the
following manner:
a. Rs.25 lakhs in the form of cash and

b. Rs.25 lakhs in any one or combination of the forms of collaterals
accepted towards liquid assets.
Any failure on the part of a clearing member to meet with the deposit
requirements will be treated as a violation of the Rules, Bye-Laws and
Regulations of the NSE Clearing and NSE Clearing may initiate suitable
action.
279
Risk Reduction Module

Clearing/trading member shall be compulsorily placed in risk reduction
mode when 90% of the clearing member's capital/trading member limit is
utilised towards margins.
When a member moves in to risk reduction mode:
• All unexecuted orders shall be cancelled
• Fresh orders placed by members to reduce open positions shall be

accepted.
• Fresh orders placed by members that increase open positions shall be

checked for sufficiency of margins and orders that do not satisfy
sufficiency of margins will be rejected.
• Fresh orders can be placed for immediate or cancel (IOC) only
• Members will be able to trade in normal mode as and when the utilisation
goes below 85%
Client Margin Reporting
Members are required to collect margins from their client/constituents on

an upfront basis. It is mandatory for all clearing /trading members to
report details of such "Margins" collected to the NSE Clearing in accordance
with the procedure and formats specified.
The period of T+2 days has been allowed to members to collect margin
from clients. The members shall report to the Exchange on T + 5 day the
actual short -collection/non-collection of all margins from clients.
All instances of non-reporting of client margins by the members shall be

treated similar to and as 100% short reporting of client margins and
accordingly penalties shall be imposed.
280
NSE Clearing SPAN
The objective of SPAN is to identify overall risk in a portfolio of futures and

options contracts for each member. The system treats futures and options
contracts uniformly, while at the same time recognizing the unique
exposures associated with options portfolios like extremely deep out-of-
the-money short positions, inter-month risk and inter-commodity risk.
The complex calculations (e.g. the pricing of options) in SPAN are executed
by the Clearing Corporation. The results of these calculations are called
Risk arrays.
The SPAN risk array represents how a specific derivative instrument will
gain or lose value from the current point in time to a specific point in time
in the near future
PRISM (Parallel Risk Management System)
PRISM (Parallel Risk Management System) is the real-time position

monitoring and risk management system for Commodity Derivatives
segment at NSE Clearing. The risk of each trading and clearing member is
monitored on a real-time basis and alerts/disablement messages are
generated if the member crosses the set limits.
Source :https://www.nscclindia.com/NSCCL/risk/
Com_risk_management.htm
Activity 1.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
281

1. Explain the various types of risk connected with agri commodities
2. Explain the process of managing risk connected with agri commodities
3. Explain the various options strategy to manage risk
4. Explain the various approaches that can be suitable for managing a

derivative position/exposure depending upon nature of the position and
market
5. Explain a covered call options strategy.
1. Options strategies provides many combinations and possibilities to the

trader to create a wide range of pay out patterns. State whether the
above statement is true or false
a) True
b) False
2. Which of the following risk can originate from weather conditions,

impact of pests and diseases, production of inferior quality of farm
produce, low rainfall, drought, hail, heavy rains, break down of
equipment’s etc.?
a) Production
b) Marketing
c) Financial
d) Settlement
3. Which approach would be suitable for the portfolio position tending

towards linearity (delta at constant rate) and normality (prices move in
random manner) by using statistical and parametric model.
a) Monte Carlo
b) Risk Metrics
c) Back testing
d) Historical simulation
282
4. Options strategies are formed by combining any of the four basic kinds
of option trades (possibly with different exercise prices and maturities)
and the two basic kinds of stock trades (long and short). Which of the
following investment strategies has unlimited profit potential?
a) Covered call
b) Protective put
c) Iron condor
d) Straddle
5. Which of the following risk arises as a result of the timing differences

between when an institution either pays out funds or deliverables assets
before receiving assets or payments from a counterparty and it occurs
at a specific point in the life of the contract.
a) Business
b) Credit
c) Settlement
d) Interest rate
Answers: 1.(a), 2.(a), 3.(b), 4.(b), 5.(c)
283
9.10 REFERENCES

Services Limited

8. Options as a Strategic Investment by Lawrence G McMillan
9. The Complete Idiot's Guide to Options and Futures by Barrie Scott
10.Strategies for Profiting from Market Swings by Adam Warner
11.Investment Analysis and Portfolio Management by Prasanna Chandra
12.Hot commodities : How anyone can invest profitably in the worlds best
market by Jim Rogers
13.Fundamentals of Futures and Options Markets by C. Hull John
14.Options, Future & Other Derivatives by John C. Hull and Sankarshan

Basu
15.Financial Management, Theory and Practice by Prasanna Chandra
16.Indian Financial System by M Y Khan
284
https://www.icexindia.com/
https://www.nscclindia.com
http://www.fao.org/
https://tradingstrategyguides.com
https://www.great-option-trading-strategies.com
285
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
286
HEDGING AS A TOOL FOR AGRI PRICE RISK MANAGEMENT
Chapter 10
Hedging As A Tool For Agri Price Risk
Management
Objectives: This chapter will help you understand hedging as a tool for
Agri Price Risk Management
Structure:
10.1 Introduction to Hedging
10.2 Key steps in Hedging
10.3 Essential requirements in Hedging
10.4 Hedging with a Forward Futures and Options
10.5 Derivative Accounting
10.6 Advantages & Limitations of Hedging
10.10 References
287
10.1 INTRODUCTION TO HEDGING
Hedging is the practice of taking a position in one market to offset and

balance against the risk adopted by assuming a position in a contrary or
opposing market or investment. The main objective of hedging is to reduce
or limit risk associated with price changes of agri commodities. The degree
of effectiveness of a hedge is determined by the percentage of the actual
gain or loss incurred in a hedging transaction. Hedging can be done with
a forward as well as a futures transaction.
Hedging example:
A farmer has 1000 kgs of maize as a spot price of rice of Rs. 100 at
present.
Goal : Sell these maize in three months.
Worry : Price of these agri commodity could fall considerably by then.
Problem : Do not want to liquidate the agri commodities today, as the

stock has a possibility of appreciation in the near-term.
Objective of holding: Like to receive a minimum of Rs. 100 per kg of

maize and no less. At the same time, in case the price rises above Rs. 100,
you would like to benefit by selling them at the higher price.
Solution: Hedging: By paying a small price, the farmer can purchase a

derivative contract called an 'option' that incorporates all your above
requirements. The farmer is thus, hedging his risks, and transferring them
to someone who is willing to take these risks.
In the derivative market, there will be a speculator who expects the market
to rise. For every opportunity that the derivative market offers a risk-
averse hedger, it offers a counter opportunity to a trader with a healthy
appetite for risk.
A short hedge (or a selling hedge) is a hedge that involves short position
in futures contract with a basic objective to protect the value of the cash
position against a decline in cash prices. Selling hedge strategy is used by
manufacturers, processors and others. who have exposure in the physical
288
market. These entities acquire agri commodity in the spot market and
simultaneously sell an equivalent amount or less in the futures market.
For example: A sweet shop requires sugar for preparing sweets. He has
an option to buy the required quantity of sugar now or in the future. If the
shop owner buys it now there is a possibility of the price drop in the future
and thus he will have to suffer loss. Hence inorder to hedge, the shop
owner would have to sell the futures contracts so that if the price of sugar
falls, the cash market loss will be offset by a gain in the futures contract.
Similarly when the shop owner sells the sugar produced by him at the
lower cash market price, he will simultaneously lift his hedge by buying
back the futures contracts at the lower price. The loss in the cash market
will be compensated by gain in futures’ contract.
A selling hedge strategy enables the hedger to protect the price of agri
commodities and also to protect the agri commodities.
A long hedge (or a buying hedge) involves taking a long position in a

futures contract with a basic objective to protect itself against a price
increase in the underlying asset prior to purchasing it in either the spot or
forward market.
Investing in two positively correlated agri commodities that have similar

price movements and taking opposing positions in each investment to
reduce the risk of holding just one of the securities is called Cross
hedging.
Hedging protects the farmer from price risk in the spot market to avoid
loss in the future. The difference between the spot price (cash price) and
futures price of an underlying asset is called as basis risk. If the spot price
is higher than the futures price, then the basis will be called as positive.
Basis risk for financial assets arises mainly from uncertainty as to the level
of the risk-free interest rate in the futures. Hedgers always assume some
basis risk which needs to be lower than the price risk for making an
effective hedge. Hedge effectiveness is the extent to which a hedge
transaction results in offsetting changes in fair value or cash flow that the
transaction was intended to provide. The basic objective of an hedging
strategy is to minimize risk or to maximize hedging effectiveness.
289
Hedging can also be done with the Options contract. Hedging incurs
cost in the form of commission and brokerage. Options carry an upfront
cost in the form of premium. The put option protects the investor from a
fall in agri commodity price as it gives the right to sell the agri commodity
at a specific price called the strike price. The option collar can act as a
hedge because the put option would rise in value if the agri commodity
price falls.
The perfect hedge is referred to that position which completely eliminate

the risk with the use of derivative instruments. Several conditions must be
fulfilled before a perfect hedge is possible.
A number of other costs are also incurred to manage the hedge. In most
cases, this implicit cost is the potential loss the individual stands to suffer if
market factors, such as interest rates or exchange rates, move in an
adverse direction. for e.g. In Futures contract daily mark to market cash
flows need to be managed, forward contracts are treated as non-fund
exposure and thus reduced from aggregate funded limit which could be
lent
Hedging requires measurement of the risk exposure as well as

determination of the hedging ratio periodically inorder to monitor the
hedges. Hedge ratio is the ratio of the number of futures contracts to be
purchased or sold to the quantity of the cash asset that is required to be
hedged. Hedge ratio is defined as the slope of the regression line defined
between the change in the spot price and change in futures. It Indicates
the extent of variation of the future price relative to the variation of spot
price.
Large variations encourages more futures contracts than stable

instruments.Index could vary more or less than the portfolio. While
hedging a portfolio of securities, it is essential to compute the hedge
ratioThe cost of hedging must be evaluated in the same manner as the cost
of an insurance policy, that is, relative to the potential loss.
The key challenge to hedging is to determine the risks and define a

hedging program to achieve the optimal risk profile that balances
the benefits of protection against the costs of hedging. An effective
hedging program does not attempt to eliminate all risk. Rather, it attempts
to transform unacceptable risks into an acceptable form. The main goal of
290
any hedging program should be to help the trader achieve the optimal risk
profile that balances the benefits of protection against the costs of
hedging.
10.2 KEY STEPS IN HEDGING
A hedger has to face various types of price risk. For e.g a fund manager
will have to face the fluctuations of the prices of the commodities held in
his portfolio. An importer has to face the risk of foreign exchange required
to buy the agri commodities. An exporter has to face the risk of foreign
exchange he will get out of selling the agri commodities. A processor of
agri commodities has to face the fluctuations in the prices of the input agri
commodities.
The global price of agri commodities have been volatile along with the
domestic prices. The evidence of these price rise is easily witnessed in the
commodities exchanges across the globe. Hence risk management though
hedging has became an important tool for survival in this agri world.
Effective risk management is initiated with a hedging policy on risk
management, setting up a hedging desk to align and implement actions
with the risk management policy as well as to monitor and control the risk
management policy with changing times and markets. A logical hedging
plan has to be supported by an analytical statistical approach. The process
has to comply with the risk management policies in spirit without falling
prey to any sort of temptations.
Risk management activities can be summarized in the following

steps:
• Define and identity the risk , risk exposure and level and risk appetite for
facing the risk in agri commodities
• Evaluate and measure the risk. Evaluation and measurement helps to

identify the problem and design the best solution
• Identify various approaches to hedge the risk with the help of available
historic data and statistics. Various statistical tools such as range,
variances, standard deviation, Value at Risk, regression and correlation
can used to get a correct picture of the risk problem
291
• Select the best hedging approach amongst the identified approach for
optimum price control
• Specify the policies to be used while hedging risk under various

circumstances
• Monitor and control the performance of the hedging policies
The risk exposure and levels should be defined in terms of volumes

produced, pricing basis and quality of the agri commodities produced by
the farmer. The risk management plan should also define as benchmark
against which the leverage to the hedge program should be established.
The hedge instruments should also correlate with the hedge accounting
guidelines. The volumes should clarify the extent to which the agri
commodities could be bought and sold under normal market conditions as
well as in volatile market conditions. The hedging plan should rely upon the
correlation between the spot prices and the prices at which the derivative
contracts are settled at the commodity exchanges.
The risk appetite is purely based on the farmers acumen and the quantity
and quality of his agri produce. The farmer has to decide for himself the
hedging strategy towards gains and loses due to different types of hedging
strategies. A lower risk level hedger will prefer to enter into 100% hedging
inorder to avoid adverse price hedging, while a higher risk taker hedger will
prefer to diversify hedging between hedging to protect from adverse
pricing and hedging to capture favourable pricing. A hedger will also need
to balance between the higher costs the forward contracts and the lower
cost of premiums in case of options contracts.
Different types of Risk Model

• Variance/co-variance methods
• Historical models
• Factor models
• Value-at-risk models
• Statistical models; and
• Monte Carlo technique
292
Asset Allocation Strategies for agri commodities
a. Integrated Asset Allocation: Asset allocation is based on agri

commodity market conditions and traders objectives and constraints.
The allocation that best serves the traders needs is chosen.
b. Strategic Asset Allocation: Asset allocation is based on optimal

portfolio mixes based on returns, risk, and co-variances. Allocation is
adjusted periodically to restore target allocation within the context of
the investor’s objectives and constraints.
c. Tactical Asset Allocation: Asset allocation is based on investor’s risk

tolerance and the asset allocation is changed based on expectations
about capital market conditions.
Once the risk management policies are defined the next step is to
set up a Hedging desk with broad objectives such as:
• Identify the best hedge
• Minimize risk with lesser cost but with higher gains
• Limit the price risk associated with the physical commodity
• Protect the price risk of a commodity for long periods by rolling over
contracts
• Enabling effective business planning without interfering in routine
business operations
• Facilitate low cost financing
The process of hedging is generally monitored and controlled by a risk

management cell which comprises of a front office, a mid office and a back
office.
• Front office : Responsible for executing trade based on the hedging

policy
• Mid office : Evaluates the risk and ensure that the trades are in
compliance with the specific risks and controls specified in the hedging
policy
293
• Back office : Processes post trade operations by leveraging recording of

trade deals, confirming and settling transactions. They also prepare
reports for records and reporting to decision makers
10.3 ESSENTIAL REQUIREMENTS IN HEDGING
Identification of risks is closely connected with the exposure levels. Risk

identification has to be done on the basis of both internal and external
sources of risk. Internal sources can skilled labour for input and harvest,
time availability, water, seeds and fertilizsers availability etc. External
sources can be monsoons, demand and supply of agri commodities, market
price etc Risk identification can be based on objectives of the farmer,
scenarios faced by the farmers, taxonomy and knowledge of best practices
as well as a chart of risk pattern and trends based on the historical data. A
higher risky proposition needs to addressed first over lower risky
proposition. The cost involved in hedging is also worth considering while
designing policy for hedging. Advantages can also be taken from the
analysis done by some rating agencies on evaluating exposure on
derivatives. However the credit worthiness of the counter party should be
done independently based on the past experience. In case of a rolling over
the hedge positions continuous monitoring is imperative. Rolling over the
hedge position involves closing out the existing position in one futures
contract and simultaneously taking a new position in a futures contract
with a later expiry date. For e.g. If a person wants to reduce or limit the
risk due to fall in prices of agri commodities to be sold after 3 months and
if futures contracts up to 2 months are liquid, then he can roll over the
short hedge position three times till the date when the actual physical sale
takes place. In this process the hedge position is rolled over on the
possibility of basis risk. Eventually it culminates into limiting or reduces
the price risk.
Based on the dash boards generated through historical data the hedger will
get the answer to his questions what to hedge, when to hedge and at what
price to hedge, which are critical for any successful hedging. The hedger
also needs to decide on the nature of hedging instruments i.e between a
forward, future or a option contract.
294
Essential information for regular monitoring of hedge could be:

• Cash position
• Future position
• Margins
• Basis movements
Any other information than can be useful to monitor
Essential information for adjustments in hedge:

• Change in risk exposure
• Change in hedge ratio
• New hedging goals
• Basis management
• Rolling the hedge
The final step in effective hedge management is to evaluate the

effectiveness of hedging strategies and to determine improvements if any.
10.4 HEDGING WITH A FORWARD FUTURES AND OPTIONS
Forward contracts helps the investor to get a fixed price from the hedger
and reduce the risk of adverse price movement that the hedger. Forward
rate agreements can also be used to manage the risk by entering a
notional agreement to lend or borrow in the futures at a rate of interest
determined in the present.
A future hedge enables the farmer/trader to take a position that neutralizes

the risk. For e.g if a trader is of the opinion that he will gain Rs.30000 for
every 1% increase in the price of an agri commodity and will lose Rs.30000
for every 1% decrease in the prize of the agri commodity during the same
period then it would be better for him to take a short futures position to
offset the risk perceived in the future. If the price of the agri commodity
goes down the gains on the futures off sets the loss. Similarly if the price
of the agri commodity goes up the loss on the futures is off set by the gain
from the rest of activity. A short hedge involves a short position in a
295
futures contract and best suits the farmer/trader who actually owns the
agri commodity. A long hedge is useful for a farmer/ trader when they want
to purchase ari commodity in the future and want to lock the price today
itself.
Options contracts helps the investors to protect themselves against

adverse price movements in the future while still allowing them to benefit
from favorable price movements. A call option can be used for ensuring a
maximum purchase price, in spite of the market price exceeding the strike
price. Similarly a put option can be used for ensuring a minimum selling
price in spite of market price falling below the strike price.
A fixed hedge with options retains an exposure and entails a cost in which
the protection is obtained only for one direction price movement.
10.5 DERIVATIVE ACCOUNTING
Accounting definition of derivatives and treatment of embedded derivatives

has become important because derivatives are shown at fair value unlike
most other assets and liabilities. Conventional accounting principles do not
specifically describe the accounting treatment of derivative financial
instruments and their risk reducing effects of a hedge.
To accommodate the fair value accounting of derivative changes are

required in the accounting of the hedged items. Accounting Standards
require that all derivative contracts be accounted for at fair value in the
profit and loss and balance sheet.
It requires marked to market means any change in the fair (market) value
of a derivative must become a part of the profit or loss for that period.
Fair value accounting is used for the derivative(the hedge) but not for the
hedged item. Hence Fair value or mark to market accounting can be
adopted for the hedged item as well.
The Mark to market gains and loses should be allowed to hit the profits of
the company only when the off setting gains and losses on the hedged
items are also realized. This is done for cash flow hedges.
296
Accounting for Fair Value Hedges requires fair value hedging of the
hedged item. The precise implication depends upon how the
hedged item would have been accounted.
E.g. 1 If the hedged item is a financial instrument which is held for

Trading(HFT), then it is marked to market regardless of whether there is
any hedging or not.
E.g.2 Financial assets that are Held to Maturity (HTM)are valued at cost in
the absence of hedging. If an HTM asset is covered by a fair value hedge
then the asset becomes subject to fair value accounting.
E.g.3 If an Available for Sale (AFS) asset is covered by Fair value hedge
then the valuation gains and losses are not deferred but are allowed to flow
into profits where they offset the valuation gains and losses of the
derivative with which it is hedged.
The idea of cash flow hedge accounting is that valuation gains and losses
of the derivative are deferred while the derivative is still shown in the
balance sheet at fair value.
In the future, the hedged cash flow impacts the profits. The deferred
valuation gains and losses are moved from reserve account to profits.
The hedged cash flow and the valuation gains and losses of the derivative
hit the profit at the same time and off set each other. However the
derivative continues to be shown at fair value in the balance sheet.
Requirements for Hedge Accounting
1. Formal documentation and designation of the hedging relationship and

the entity’s risk management objective and strategy for undertaking the
hedge.
2. The hedge is expected to be highly effective in achieving offsetting

changes in fair value or cash flows attributable to the hedged risk,
consistently with the originally documented risk management strategy
for that particular hedging relationship
297
In order to adopt hedge accounting, the enterprise must demonstrate

hedge effectiveness both at the inception and on an ongoing basis.
The requirement is that the changes in the derivative should be between

80% and 125% of the changes in the value of the hedge item.
Globally, the accounting treatment largely follows International Accounting

Standard IAS39 and IAS32. IAS 39 deals with: Financial Instruments:
Recognition and Measurement while IAS 32 deals with Financial
Instruments: Disclosure and Presentations. The objective of the standard is
to enhance understanding of the significance of on-balance sheet and off-
balance financial instruments of a firm’s financial position, performance and
cash flows.
Accounting for foreign exchange derivatives is guided by AS-11 on

‘Accounting for the effect of changes in foreign exchange rates’.
India is working on similar lines with AS30.The Institute of Chartered

Accountants of India has recently issued a Guidance Note on Accounting
for Equity Index Futures.
The Institute of Chartered Accountants of India (ICAI) has issued guidance

notes on accounting of index futures contracts.
At Inception of Contract:
Every client is required to pay to the trading member/clearing member, the
initial margin determined by the clearing corporation as per the bye-laws/
regulations of the exchange for entering into equity index futures
contracts. Additional margins, if any, should also be accounted for in the
same manner.
At the time of Daily Settlement:

Journal entry for payments made or received on account of daily
settlement should be made. At the year-end, any balance in the “Deposit
for mark-to-market margin account” should be shown as a deposit under
the head “current assets”.
298
Open Positions:
Position left open on the balance sheet date must be accounted for.
Final Settlement:
The profit/loss should be calculated as the difference between final
settlement price and contract prices of all the contracts in the series.
Default:
When a client defaults in making payment in respect of a daily settlement,
the contract is closed out. The amount not paid by the Client is adjusted
against the initial margin.
Disclosure Requirements
The amount of bank guarantee and book value as also the market value of
securities lodged should be disclosed in respect of contracts having open
positions at the year end.
Total number of contracts entered and gross number of units of equity

index futures traded (separately for buy/sell) should be disclosed in respect
of each series of equity index futures.
The number of equity index futures contracts having open position, number
of units of equity index futures pertaining to those contracts and the daily
settlement price as of the balance sheet date should be disclosed
separately for long and short positions, in respect of each series of equity
index futures.
The Institute of Chartered Accountants of India issued guidance

note on accounting for index options and stock options.
At Inception of Contract:
The buyer/holder of the option should is not required to pay margin but
should account for the premium.
The seller/writer of the option is required to pay initial margin for entering
into the option contract. Such initial margin paid should be accounted. In
the books of the seller/writer, the premium received from the buyer /
holder should be accounted.
299
At the time of Payment / Receipt of Margins Payments made or received by

the seller/writer for the margin should be accounted.
Open Positions:
The ‘Equity Index Option Premium Account’ and the ‘Equity Stock Option
Premium Account’ should be shown under the head ‘Current Assets’ or
‘Current Liabilities. In the books of the buyer/holder, a provision should be
made for the amount by which the premium paid for the option exceeds
the premium prevailing on the balance sheet date. In the books of the
seller/writer, the provision should be made for the amount by which
premium prevailing on the balance sheet date exceeds the premium
received for that option.
Final Settlement:
On exercise of the option, the buyer/holder will recognize premium as an

expense and debit the profit and loss account by crediting ‘Equity Index
Option Premium Account’ or ‘Equity Stock Option Premium Account.
On exercise of the option, the seller/writer will recognize premium as an

income and credit the profit and loss account by debiting ‘Equity Index
Option Premium Account’ or ‘Equity Stock Option Premium Account.
The difference between the premium paid and received on the squared off
transactions should be transferred to the profit and loss account.
10.6 ADVANTAGES & LIMITATIONS OF HEDGING
The goal of hedging is to freeze the spread between asset returns and
liability costs and to offset declining values on certain assets by profitable
transactions. Hedging is a strategy designed to minimize exposure to an
unwanted business risk, while still allowing the business to profit from an
investment activity. Hedging provided a tool to set risk level as well as to
survive and make profits regardless of how things work out at the time of
executing transaction. An option to buy saves money if the price of the agri
commodity increases substantial than the spot price of the date of
contract, but it will also let the option expire if the price of agri commodity
underperforms. Hedging provides a useful insurance against adverse
commodity price movements, and lowers expenses.
300
Products Advantages Disadvantages

Forwards • An over-the-counter (OTC) • Since forward contracts are
instrument gives more negotiated between two parties it
flexibility to set the trading is not marketable
terms • There is no regulatory mandate on
• Both parties can design Trades to report transactions and
Customised contract prices are unknown to the outside
between the two parties, in world
terms of size, quality and • Closing out the position to limit the
delivery Date losses may not be unilaterally
• Usually involves no possible Higher counter party risk
‘upfront’ payment and
‘cash’ changes hands only
at the expiry of the
contract;
Futures • Standardised contract in • Initial margin required to start a
terms of contract size, trade
delivery dates, quality, • Do not cover basis risk
trading hours, tick size, • Requires active portfolio
and maximum daily price management as adverse mark to
limits is possible market margin can erode the
• Traded at exchange and capital
hence higher marketability
Zero counterparty risk
Price discovery is
transparent
Options • Trader has the option to • Option buyer are required to pay
lock-in the price without premium
the compulsion to buy in • Options are in specified quantity
an adverse situation and quality and cannot be
• Margin money is not customized
required for options buyers • Requires an knowledge and
Risk is limited for the understand of the agri commodities
buyer of options contract , markets as well the factors
as the loss is restricted to affecting the pricing of agri
the premium amount commodities
• Options can be exercised
or offset before expiration
301
We can list out the various advantages of hedging as follows:
• Risk of price changes can be shifted to the specialized risk-takers
• Buyer involved in hedging can operate on a narrower margin
• Hedging protects the traders profit by locking a future price today
• Hedging helps the management to avoid the downside
• Hedging helps the company to endure challenging market conditions
• Hedging enables the owner of commodities to procure finance at cheaper

rates
• Hedging enables to design good short-term risk-minimizing strategy for

long term trades
• Hedging enables the farmer trader to survive irrespective of the changes

in market and price conditions
• Hedging gives the trader protection against commodity price changes
• Hedging can also save time as the long-term trader is not required to
monitor/adjust his portfolio with daily market volatility
• Hedging facilitates usage of complex options trading strategies to

maximize returns
• Hedging limits the loss for the farmer/trader
• Hedging helps in increasing the liquidity in financial markets
• Hedging helps to correct a wrong decision on the exchange with an

alternative order executed easily and immediately
• Hedging operations requires a small initial outlays of money
302
• Different risk mitigation hedging instruments can be tailored to a client's

requirements
• Hedging also helps in reducing the tax liability as lower income volatility
would help in reducing the tax liability
We can list out the various limitations and dis advantages of

hedging as follows:
• Forward contracts involves credit risk from counter party
• Hedging may wipe out the profits if not implemented effectively with
good trading skills and experience
• Hedging may not be effective If the market is performing well or moving

sidewise
• Trading of options or futures require capital and there are certain costs
associated with hedging
• Hedging does not help you in earning money but it helps you in lessening
the potential loss
• Not all risks can be hedged and also all risks cannot be covered fully
• Low risk means low reward, so reducing risk will automatically convert
into lower profit
• Hedging using futures encourages convergence as when future price is

close to expiration date, the future and spot price will move closer to
each other
The relative advantages and disadvantages of a hedge will depend greatly

on the situation in which the hedge is applied, as well as the hedge's cost.
Hence before doing hedging the farmer / trader should look at his portfolio
and requirement as hedging is very good and beneficial in some cases
whereas in some cases it may not be any use. The farmer/trader should
think and analyze whether his case requires hedging or he can survive and
make profits without hedging.
303
Activity 1. Design a hedging contract with short strategy for any agri
commodity of your choice
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
Activity 2. Design a hedging strategy of any agri commodity of your

choice
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

1. What is hedging?
2. What is a selling hedge or short hedge?
3. What is a long hedge?
4. What are hedging ratios?
5. Explain the advantages and limitations of hedging
304
1. The key challenge to hedging is to determine the risks and define a

hedging program to achieve the optimal risk profile that balances the
benefits of protection against the costs of hedging. State whether the
above statement is true or false.
a) True
b) False
2. Which of the following involves taking a long position in a futures

contract with a basic objective to protect itself against a price increase
in the underlying asset prior to purchasing it in either the spot or
forward market.
a) A covered hedge
b) A long hedge
c) A short hedge
d) A open hedge
3. Activities like processing post trade operations by leveraging recording

of trade deals, confirming and settling transactions, preparing reports
for records and reporting to decision makers are done by which type of
risk management cell?
a) Front
b) Mid
c) Back
d) Central
4. The relative advantages and disadvantages of a hedge will depend

greatly on the situation in which the hedge is applied, as well as the
hedge's cost. Which of the following can be considered as a
disadvantage of hedging?
a) Risk of price changes can be shifted to the specialized risk-takers
b) Buyer involved in hedging can operate on a narrower margin
c) Hedging protects the traders profit by locking a future price today
d) Not all risks can be hedged and also all risks cannot be covered
fully
305
5. The hedged cash flow and the valuation gains and losses of the
derivative hit the profit at the same time and off set each other.
However the derivative continues to be shown at
a) Spot price of the contract
b) Fair value in the balance sheet
c) Spot price of the contract at maturity date
d) Strike price of the contract
Answers: 1.(a), 2.(b), 3.(c), 4.(d), 5.(b)
10.10 REFERENCES
Services Limited

8. 2019 Annual Commodity and Currency Report by Karvy Consulting
306
https://www.icexindia.com/
https://www.nscclindia.com
http://www.fao.org/
https://gradesfixer.com
https://efinancemanagement.com
307
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
308

Agri Price Risk Management 701 v1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Agri Price Risk Management 701 v1

Uploaded by

Copyright:

Available Formats

Agri Price Risk Management

Sub Code - 701

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, January 2020

Chapter No. Chapter Name Page No.

1 Agri Commodities at a glance 4-24

1.1 INTRODUCTION ON INDIAN AGRICULTURE

India's agriculture is composed of many crops due to high proportion of

Government of India is aiming to increase the capacity of food processing

Recently the Government has increased the Minimum Support Price(MSP)

The Government of India’s National Agriculture Policy has been described

The Indian food industry is successful in increasing its contribution

1.2 WHAT IS AN AGRICULTURE COMMODITY?

India’s agricultural production comprises of food crops such as rice, wheat,

The structure of agriculture market was of unorganized nature. A

Farmers follow various methods of buying and selling agriculture

Later the markets were regulated by implementation of the open

The modern methods of selling agriculture produce includes selling the

The latest in the line is trading of agriculture commodities through wide

The trading in agriculture commodities is done through the national

Securities and Exchange Board of India (SEBI) now regulates the

1.3 AGRICULTURE COMMODITIES ON eNAM

The Electronic National Agriculture Market (eNAM) has successfully created

Over 20 major wholesale agri markets have been integrated electronically.

The following agriculture commodities are traded on eNAM:

1. Food grains / Cereals

1. Food grains / Cereals

1. Areca nut (betel nut)

1.4 AGRICULTURE COMMODITIES ON NCDEX

Commodities exchanges are trying to improve trading in agriculture

National Commodity & Derivatives Exchange Limited (NCDEX) is a

NCDEX deals with the following agriculture commodities:

Cereals and Pulses

Oil and Oil seeds

1.5 AGRICULTURE COMMODITIES ON MCX

Multi Commodity Exchange of India Limited (MCX) is also a nation

The Exchange provides neutral, secure and transparent trade mechanisms.

MCX deals with the following agriculture commodities:

1.6 AGRICULTURE COMMODITIES ON ICEX

Indian Commodity Exchange (ICEX) is the third largest commodities

The exchange provides nationwide trading platform for agricultural

ICEX deals with the following agriculture commodities:

Oils and Seeds

1.7 ACTIVITIES FOR STUDENTS

1. Based on the list of agriculture commodities provided in this chapter

2. Based on the various parameters related with growth of Agriculture

1.8 SELF-ASSESSMENT QUESTIONS

1.9 MULTIPLE CHOICE QUESTIONS

1. India's agriculture is composed of many crops due to high proportion of

2. The Indian food industry is successful in increasing its contribution to