Commodity Derivatives

Commodity Derivatives The Next Big

The Next Big Thing THING

IS Commodity Trading New to Us??????

NO!!!!

WHY COMMODITY?

BENEFITS
Additional Inv Opportunity Easy to Understand & Invest Less Investment Because of underlying Value & MSP, down fall is limited Price manipulation not possible because of global market Gives early alert on revival of Economy

Opportunities
Hedging Arbitrage Spreads Trading Intra Day Positional

Hedging
1 40 0 0 1 20 0 0 1 00 0 0 8000 2 0 60 6000 4000 2000 0 J an F e b M a r A p r M a yJ u n eJ ul A u g S e p O c t J u lyN o v D ec 2 0 40 2 0 20 2 0 00 2 1 20 2 1 00 2 0 80
P ro d u c tio n (Q tl) F u tu re s P ric e s (P e r Q tl)

Hedging in copper : spot above Rs.200

Date Jan-5th Mkt/trade Fut apr contract BUY Spot is >200 Spot-BUY Price Total contract value Net position /total cost Rs.200per Rs.200000 per tonne +200000 kg Per kg Rs.323 Rs.323000 323000 Profit (323-200)=123 123000 (profit)

28th apr 28th April 28th April

fut.-sqr off apr Rs.323 contract SELL

Actual cost Cost without hedging

200,000 323,000

If spot below RS.200

28th April If spot price < 200 Spot BUY RS.185 per kg 185 per kg Total cost/ Net position contract value 185,000 (200-185) =15 per kg 15000 (loss) 28TH April 28th April

Fut square off 185 per kg April long position SELL

Effective cost 185,000+15,000=2 to the co. 00,000

Cost without hedging

200,000

Hedging in aluminum (SHORT HEDGE)

Date Mkt/trade Price Total contract per kg value/cost (2 TONNES) Net position

Jan-5th April 28TH

Fut April contract 115 SELL Aluminum spot <115 100 100 100

115*2*1000= 230,000 +230,000

April 28th Spot SELL April 28th Square off the April short BUY

100*2*1000= 200,000 (115-100)=15 (PER KG) Effective selling price With out hedging

200,000 15*2*1000=30,000 (PROFIT) 230,000 200,000

If the spot is more than RS.115

28TH April If the spot > 115 Spot SELL Rs.125 per Total selling price Net position kg 125 PER KG 125*2*1000=250,000

28th April 28th April

Square-off the 125 PER KG (115-125)=10 per kg 10*2*1000=20, future short 000 loss BUY Selling revenue of 250000-20000= the company 230,000

Without hedging

250,000

In the arbitrage :first circle the pportunity occurs where in we would sell comex copper and buy MCX copper. The second one we would have bough MCX and sold comex

Gold Comex v/s MCX

M G CX old vs. CO E G M X old
6800 6600 Rs./10 gms 6400 6200 6000 5800 5600 5400 5200 5000 4 4 4 5 5 4 4 03 04 0 0 0 0 0 0 0 0 0 0 0 0 00 00 /2 /2 /2 /2 /2 /2 0/2 /2 /2 0 0 0 0 0 0 0 0 1 1 /1 /1 /1 /1 /1 /1 /1 1/ 1/ 1 3 5 7 9 1 3 1 1 Date/Year 470 450 430 410 390 370 350 M G CX old CO EX G M old

Commodity spreads
Inter commodity spread
Buy Feb gold futures; Sell Mar Silver contracts

Intra commodity spread

Buy Feb gold and Sell contract of Apr gold.

Calendar spreads
D ate 21-Jan -06 22-Jan -06 21-Jan B y F F tu at R 9151 u s eb u res s. S A F tu at R 9180 ell pr u res s. 22-Jan S F F tu at R 9224 ell eb u res s. B yA F tu at R 9222 u pr u res s. P rofit : 9224 - 9151 =R s.73 Loss 9180-9224 =-42 N P et rofit 73-42 R 31 s P rofit =R 33 s M arginfor 10 G s = m 9180*5/100 =R s.459 (A pprox ately im ) F F tu eb u res 9151 9224 A r F tu p u res 9180 9222

Gold: Calendar spread

DE C- F E B CO NT RACT
6,700.00 6,650.00 6,600.00 6,550.00 6,500.00 6,450.00

M G 0 1 / S E I R P . L C

6,400.00 6,350.00 6,300.00 6,250.00 6,200.00 6,150.00

7 / 0 1

4 / 1

8 / 1

/ 0 1

5 / 0 1

9 / 0 1

3 2 / 0 1

7 2 / 0 1

3 / 0 1

2 / 1

6 / 1

0 2 / 1

4 2 / 1

DEC

FEB

8 2 / 1

/ 2 1

Gold / Silver correlation

G O L D -S IL VER - D EC C O NT R A C T 67 0 0 66 0 0 65 0 0 GOLD PRICE/ 10 GMS 64 0 0 63 0 0 62 0 0 61 0 0 60 0 0 59 0 0
8/2 8/9 9/1 7/26 8/14 9/7 9/20 10/14 10/20 10/26 11/6 7/20 8/20 8/26 9/13 9/25 10/1 10/8 11/1 11/16 11/22 11/27 9800 10800 10300 12300 11800 11300

GOLD

S IL VER

SILVER PRICES/KG

Learning the Commodities

Demand and Supply patterns Seasonality Global commodity prices Fx Currency movement - $ Global political/ economic events INR v/s $ Indian economic data/ policies Weather

Market Structure

Commodities Available
Gold Silver Refined Soy Oil Soy seed Sugar Wheat Guar seed/ gum Chana (Gram) Castor Seed/ Oil Mustard Seed/ Oil WTI / Brent Crude Oil

CPO RBD Palmolien Rubber Black Pepper Steel Copper Tin Zinc Cotton Jute Urad / Tur lemonand and more

Difference & Similarities between MCX & NCDEX

MCX Months Expiry day Timing
Different for each commodity Different for commodities Summer (May to October) :All Commodities : 10 AM to 5 PM. International Commodities: 5 PM to 11.30 PM. Winter (Nov to April): 10 AM to 5 PM. International Commodities: 5 PM to 11.55 PM. Gold, Silver, Crude Oil, Copper, Kapas Khali, kapas, Ref Soya Oil, Mentha Oil

NCDEX
Normally monthly 20th of each contract month Summer (May to October) : All Commodities : 10 AM to 5 PM. International Commodities: 5 PM to 11.30 PM. Winter (Nov to April): 10 AM to 5 PM. International Commodities: 5 PM to 11.55 PM. Pulses, Sugar, Wheat, Spices, Gold, Silver, Steel, Soy Complex

Active Commodity

Gold: India v/s Comex

India Lot Size Margin Forex Risk Settlement Channel Mkt hours Set. G fund C/Party Risk Spreads 1 Kg, 100 Gms Rs.15,00,000/ 150K 4% NO Cash and Physical Official 10 AM to 11.30 PM YES NO Re 1 COMEX 100 Ounze = 3 Kg Rs. 45,00,000 .5% YES Cash Mostly Unofficial Main mkt 6 PM to 11 A. N. PM YES partially 50 cents = Rs 22

Rule of the Game MCX - GOLD CONTRACT SPECIFICATION

Lot Size Contract Value Margin Margin per contract Price Quotation Tick size Fineness Quality Price - Base Expiry date No of contracts Daily Price Range Delivery Procedure Delivery Centres 1 Kg , 100 gms 15,00,000 &1,50,000 4% Rs. 60,000 &Rs.6,000 10 gms Re 1 0.995 Imported Numbered LBMA approved Bars Ex - Ahemdabad (Excluding St/VAT) 5th 6 - Bi Monthly - Even Months 4% Compulsory Mumbai, Ahmedabad

Rule of the Game (Cont)

MCX - SILVER CONTRACT SPECIFICATION
Lot Size Contract Value Margin Margin per contract Price Quotation Tick size Fineness Quality Price - Base Expiry date No of contracts Daily Price Range Delivery Procedure Delivery Centres 5 Kg & 30 Kg 1,15,000 &7,00,000 4% Rs.4500 & Rs. 30,000 1 Kg Re 1 0.999 Imported Numbered LBMA approved Bars Ex - Ahemdabad (Excluding St/VAT) 5th 6 - Bi Monthly - Odd Months 4% Compulsory Ahmedabad

Play Ground

Parity Calculation..
C o m m o d i tpya r i Rys / $ n i t c o n v e r M i C n p r ic e $ t U s oX
Copper Z in c A lu m in iu m C ru d e N a tu ra l g a s 3 . 7 3 64 6 . 4 23 . 2 0 4 6 2 3 3 . 5 4 4 6 . 4 S a m e u n it 3 2 . 5 8 54 6 . 4 S a m e u n it 3 7 6 . 3 54 6 . 4 S a m e u n it 3 7 . 6 5 4 6 . 4 S a m e u n it 3 3 8 2 .4 1 9 3 7 3 1 6 4 .3 6 2 2 1 2 0 .0 2 1 5 5 3 5 4 4 .9 3 0 5 3 5 5 .1 8 9 5

Thank You