A MAJOR PROJECT REPORT
“COMMODITY MARKET” A BRIGHT SPOT
Submitted in partial fulfillment for the award of degree of
Masters of Business Administration
2016 – 2018
Faculty of Management Studies, Udaipur
Mohanlal Sukhadia University
UNDER THE GUIDENCE OF: SUBMITTED BY :
PROF. HANUMAN PRASAD SUBODHA DANI
MBA 4th SEM
CERTIFICATEThis is to certify that SUBODHA DANI, student of MBA E-Comm. IV semester, Faculty of Management Studies, Mohan Lal Sukhadia University, Udaipur has completed his Major Research Project on the topic “COMMODITY MARKET” A BRIGHT SPOT as a part of curriculum for fourth semester under my supervision and he has completed his work satisfactorily.
Date: Prof. Hanuman Prasad
DECLARATIONI, the undersigned SUBODHA DANI student of Master of Business Administration at Faculty of Management Studies, Udaipur, hereby declare that the Major Research Project “COMMODITY MARKET” A BRIGHT SPOT, is original and bonafide work done by me.
The project is being submitted in partial fulfillment requirements for the award degree of Master of Business Administration at Faculty of Management Studies, Udaipur (Rajasthan).
The contents of this project are based on the study done by me during the research period and not submitted for the award of any other degree/diploma/fellowship or other similar titles or prizes to any other Institution/School or University by any other person.
I feel great pleasure to present this report of “GOD”. I am thankful to Prof. Hanuman Prasad the head of our E-Com. Management department for arranging such a research project work where we could learn the fundamentals of research work. I also like to extend my gratitude to my project guide Mrs. Tarannum Hussain, who assisted me in completing the research project work.
I would like to thanks to all the persons who have helped me in this report and give me adequate guidance and information for preparing this report. Last but not least I place a deep sense of gratitude to my friends and family members and who have been endless source of inspiration during the preparation of this research project work.
A commodity exchange is defined as a market where buyers and sellers trade commodity linked contracts on the basis of terms and conditions laid down by Commodity Exchange (UNCTAD, 2007). At present, there are 23 exchanges operating in India and carrying out futures trading activities in as many as 146 commodity items. As per the recommendation of the Forward Market Commission (FMC), the Government of India recognized the National Multi-Commodity Exchange (NMCE), Ahmadabad, Multi- Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX), Mumbai, as nation-wide multi-commodity exchanges. NMCE commenced in November 2002 and MCX in November 2003 and NCDEX in December 2003.
In a developing business sector setting like India, the development of capital and item future market would rely upon adequacy of subordinates in overseeing hazard. There have been broad research and item future markets in a few nations over the world. In any case, surveys of writing on ware future markets show that while there has been explore on specialized inquiries, the exploration has had wasteful financial substance. Therefore our paper centers the examining relationship agonist’s spot and future cost for item showcase, turmeric specifically.
I take this opportunity to present the project report and sincerely hope that it will enhance the knowledge of readers.
Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.
This report is divided following chapters:
The first chapter consists of introduction about the topic and Introduction to Commodity Market in India.
The second chapter of the report includes Review of Literature which includes text of research papers which takes account of knowledge, findings as well as theoretical contributions to a particular topic.
The third chapter is on Research Methodology which includes objectives of the research, research design, sampling design and analysis techniques. It mainly focuses on how research has been carried out.
The fourth chapter consists of data analysis and interpretation. This analysis is done on the basis of response generated by the respondents. For each question, the analysis is done and presented in brief through diagrammatic representations ; statistical analysis.
The fifth chapter summarizes the conclusions along with appropriate suggestions followed by references, bibliography and questionnaire.
TABLE OF CONTENTS
S.No. PARTICULARS Page No.
1 CERTIFICATE 1
2 DECLARATION 2
3 ACKNOWLEDGEMENT 3
4 ABSRACT 4
5 EXECUTIVE SUMMARY 5
6 CH. 1 INTRODUCTION T COMMODITY MARKET 6-25
7 CH.2 REVIEW OF LITERATURE 26-27
8 CH.3 RESEARCH METHODOLOGY 28
9 CH.4 DATA ANALYSIS AND INTERPRETATION 29-38
10 CH.5 FINDING, CONCLUSION, SUGGESTIONS AND LIMITATIONS 39-42
11 REFERENCES 43-44
12 QUESTIONNAIRE 45-46
Introduction to Commodity Market
What is “Commodity”?
Any item that can be utilized for business or an article of trade which is exchanged on an approved product trade is known as ware. The article ought to be mobile of significant worth, something which is purchased or sold and which is delivered or utilized as the subject or deal or deal. In short item incorporates a wide range of products.Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.
In current circumstance, all merchandise and results of farming (counting ranch), mineral and fossil beginning are took into consideration product exchanging perceived under the FCRA. The national product trades, perceived by the Focal Government, grants wares which incorporate valuable (gold and silver) and non-ferrous metals, grains and beats, ginned and un-ginned cotton, oilseeds, oils and oilcakes, crude jute and jute merchandise, sugar and gur, potatoes and onions, espresso and tea, elastic and flavors. etc
What is a commodity exchange?
A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.
What is Commodity Futures?
A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange.
The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons:
Consumer Preferences: – In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance.
Changes in supply: – They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.
The objectives of Commodity futures: –
Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism.
Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments.
Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply.
Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.
Benefits of Commodity Futures Markets:
The essential destinations of any prospects trade are real value disclosure and an effective value chance administration. The recipients incorporate the individuals who exchange the products being offered in the trade and also the individuals who have nothing to do with fates exchanging. It is a direct result of value revelation and hazard administration through the presence of prospects trades that a great deal of organizations and administrations can work easily.
Price Discovery:- In light of data sources with respect to particular market data, the request and supply harmony, climate conjectures, master perspectives and remarks, swelling rates, Government arrangements, showcase progression, expectations and fears, purchasers and merchants lead exchanging at prospects trades. This changes in to nonstop value revelation instrument. The execution of exchange amongst purchasers and dealers prompts appraisal of reasonable estimation of a specific product that is quickly spread on the exchanging terminal.
Predictable Pricing: – The interest at specific wares is very cost versatile. The makers need to guarantee that the costs ought to be steady to ensure their piece of the pie with the free passage of imports. Prospects contracts will empower consistency in household costs. The makers can, thus, smooth out the impact of changes in their info costs effectively. Without any prospects advertise, the maker can be gotten between serious here and now value developments of oils and need to keep up value solidness, which must be conceivable through adequate money related stores that could some way or another be used for making other gainful ventures.
Benefits for farmers/Agriculturalists: – Value unsteadiness has an immediate bearing on ranchers without prospects advertise. There would be no need expansive stores to cover against negative value variances. This would lessen the hazard premiums related with the promoting or preparing edges empowering more profits for deliver. Putting away more and being more dynamic in the business sectors. The cost data open to the agriculturists decides the degree to which merchants/processors increment cost to them. Since one of the targets of fates trade is to make accessible these costs quite far, it is probably going to profit the ranchers. Likewise, because of the time slack amongst arranging and creation, the market-decided value data dispersed by prospects trades would be vital for their generation choices.
Credit accessibility: – The nonappearance of legitimate hazard administration apparatuses would draw in the showcasing and preparing of items to high-chance introduction making it dangerous business action to subsidize. Indeed, even a little development in costs can gobble up an immense extent of capital claimed by brokers, on occasion making it for all intents and purposes difficult to pay back the advance. There is a high level of hesitance among banks to subsidize item dealers, particularly the individuals who don’t oversee value dangers. On the off chance that in the event that they do, the loan fee is probably going to be high and terms and conditions exceptionally stringent. This gangs a tremendous hindrance in the smooth working and rivalry of products showcase. Supporting, which is conceivable through prospects markets, would chop down the markdown rate in product loaning.
Improved product quality: – The presence of stockrooms for encouraging conveyance with evaluating offices alongside other related advantages gives an exceptionally solid motivation to overhaul and improve the nature of the product to review that is adequate by the trade. It guarantees uniform institutionalization of ware exchange, including the terms of value standard: the quality testaments that are issued by the trade ensured distribution centers can possibly turn into the standard for physical exchange.
Introduction to Derivatives
The starting point of subordinates can be followed back to the need of ranchers to secure themselves against Changes in the cost of their product. From the time it was sown to the time it was prepared for reap, ranchers would confront value vulnerability. Using basic subsidiary items, it was feasible for the rancher to in part or completely exchange value hazards by securing resource costs. These were straightforward contracts created to address the issues of ranchers and were fundamentally a methods for lessening hazard.
A rancher who sowed his product in June confronted vulnerability over the value he would get for his gather in September. In years of shortage, he would most likely acquire appealing costs. Be that as it may, amid times of oversupply, he would need to arrange off his collect at a low cost. Unmistakably this implied the rancher and his family were presented to a high danger of value vulnerability.
Then again, a trader with a continuous necessity of grains too would confront a value hazard ñ that of paying excessive costs amid deficiency, albeit positive costs could be acquired amid times of oversupply. Under such conditions, it plainly appeared well and good for the agriculturist and the vendor to meet up and go into an agreement whereby the cost of the grain to be conveyed in September could be chosen before. What they would then arrange happened to be a prospects write contract, which would empower the two gatherings to wipe out the value chance. In 1848, the Chicago Leading group of Exchange, or CBOT, was built up to unite agriculturists and vendors. A gathering of brokers got together and made the `to arrive’ get that allowed agriculturists to secure to cost forthright and convey the grain later. These to-arrive contracts demonstrated valuable as a gadget for supporting and theory on value changes. These were in the long run institutionalized, and in 1925 the Principal fates clearing house appeared. Today, subordinate contracts exist on an assortment of products, for example, corn, pepper, cotton, wheat, silver, and so on. Other than items, subordinates contracts additionally exist on a considerable measure of budgetary basic like stocks, financing cost, conversion scale, and so on.
Item Fates are contracts to purchase particular amount of a specific product at a future date. It is like the file fates and stock fates however the basic happens to be items rather than stocks and files. Ware prospects advertise has been in presence in India for quite a long time.
The Administration of India prohibited prospects exchanging certain wares in 70s.However exchanging item fates has restricted allowed again by the legislature with a specific end goal to help the ware items, brokers, and financial specialists. Around the world, ware trades started before the other money related exchanges. Truth be told a large portion of the subordinates instruments had their introduction to the world in ware trades. Item showcases are markets where crude or essential items are traded.
These crude items are exchanged on managed trades, in which they are purchased and sold in institutionalized Contracts. Ware Future is a Subordinate instrument where the hidden resource is a ware. Product future is trades exchanged contracts to offer or purchase institutionalized fates contract.
Over the cutting edge time of contributing, ware exchanging has risen as an imperative player in the way that individuals put resources into and hypothesize. It was produced as a response to how business is directed, and it proceeds with today as wares exchanging on the web. A wide range of individuals transform their business know how into a gainful wander, and it is items and fates exchanging that causes them arrive. Basically, products are things like, wheat, corn, gold and silver, and steers and pork midsections, and raw petroleum. At the point when ranchers take their product to “showcase”, they are offering wares. Exchanging products is the world’s one impeccable business. The upside potential is boundless and you can control the drawback. You can exchange products on low maintenance premise or a full-time premise. You can spend as meager as an and procure a full time salary
Wares trades as a rule exchange fates contracts on wares, for example, exchanging contracts to get something, say corn, in a specific month. A rancher raising corn can offer a future contract on his corn, which won’t be reaped for a while, and ensure the value he will be paid when he conveys; a breakfast oat maker purchases the agreement now and ensures the cost won’t go up when it is conveyed. This shields the agriculturist from value drops and the purchaser from value rises.
Examiners and financial specialists additionally purchase and offer the fates contracts to make a benefit and give liquidity to the framework Individuals have begun with a little record and in a brief timeframe developed their record to the point that they have possessed the capacity to stop their employments and exchange wares full-time furnishing themselves with an extremely open to living.
Items are crude materials used to make the items purchasers purchase, from nourishment to furniture to fuel. Wares incorporate farming items, for example, wheat and steers, vitality items, for example, oil and gas, and metals, for example, gold, silver and aluminum. There are additionally delicate items, or those that can’t be put away for drawn out stretches of time. Delicate items are sugar, cotton, cocoa and espresso. The product advertise has advanced fundamentally from the days when ranchers pulled bushels of wheat and corn to the neighborhood showcase. In the 1800’s, interest for institutionalized contracts for exchanging agrarian items prompted the improvement of ware prospects trades. Today, fates and alternatives contracts on a gigantic cluster of rural items, metals, vitality items and delicate wares can be exchanged on trades everywhere throughout the world.
Products have additionally advanced as an advantage class with the improvement of item fates records and, all the more as of late, the presentation of speculation vehicles that track ware files.
Ware costs have been driven higher by various components, including expanded request from China, India and other rising nations that need oil, steel and different products to help assembling and foundation advancement. The product inventory network has additionally experienced an absence of speculation, making bottlenecks and including a protection premium as well as a comfort respect the profits of numerous item prospects. Over the long haul, these monetary components are probably going to help proceeded with picks up in ware file returns.
The potential for appealing returns is presumably the most evident purpose behind expanded financial specialist enthusiasm for products, yet it isn’t the main factor. Products may offer speculators other critical advantages, including portfolio broadening and a support against swelling and hazard.
Items are genuine resources, not at all like stocks and bonds, which are money related resources. Items, in this manner, have a tendency to respond to changing monetary conditions in unexpected courses in comparison to conventional money related resources. For instance, wares are one of only a handful couple of advantage classes that tend to profit by rising swelling. As interest for merchandise and ventures builds, the cost of those products and enterprises as a rule goes up also, as do the costs of the
Products used to deliver those merchandise and ventures. Since product costs for the most part rise when expansion is quickening, putting resources into items may furnish portfolios with a support against swelling.
Why put resources into products?
Use is essential to the products markets. Dissimilar to money markets, where you may need to contribute 10,000 dollars to use 10,000 dollars. A products merchant can use a huge number of dollars worth of a ware for pennies on the dollar. Additionally not at all like stocks, items have inborn esteem and won’t go bankrupt.
The prospects markets are so pivotal to the prosperity of our country, that the legislature built up the Ware Fates Exchanging Commission (CFTC) to supervise the business. There is likewise a self-administrative body, the National Fates Affiliation (NFA), who screen the exercises of all prospects showcase experts to guarantee the respectability of the fates markets.
Wares likewise enable the speculator to partake in for all intents and purposes all areas of the world economy and can possibly create restores that have a tendency to be free of different markets. Truth be told portfolios that include item speculations can really bring down the general portfolio hazard by enhancement.
What is the distinction amongst supporting and guessing?
Pretty much every item that you expend would likely cost significantly more without the products prospects markets. In view of the natural dangers related to being ready to go, without the capacity to move chance, a maker/maker of merchandise or administrations would be compelled to charge higher costs, and the customer would need to pay those higher costs. This moving of hazard to somebody willing to acknowledge it is called supporting. Makers could viably secure a business cost by going short an equal measure of merchandise with prospects contracts. On the off chance that a mining organization realized that they would offer 1000 ounces of gold in a while, they could secure themselves at a future cost decrease by going short 10 gold prospects contracts today. In the event that the cost of gold fell by $30 in the next months, they would get substantially less in the money commercial center for their gold, however procure that much back when they balance their short gold prospects position. The fates cost will in the long run turn into the money cost. A client or purchaser of merchandise can utilize the fates showcase in a similar way. They would need to shield themselves from a future cost increment, and in this manner go long fates contracts.
The individual enthusiastically tolerating a hazard does as such on account of the chance to benefit from value developments, this is known as hypothesizing. The cotton in your shirt, the squeezed orange, oat and espresso you had for breakfast, the timber, copper and home loan for your home, the gas or ethanol that you put in your auto all eventual valued commonly higher without the support of theorists in the prospects markets. Through free market activity showcase powers, balance costs are come to in a systematic and impartial way inside the trades, and world economies, and you, advantage massively from prospects exchanging.
What commodity futures markets do?
A very much created and viable product fates advertise, not at all like physical market, encourages balancing the exchanges without affecting on physical merchandise until the expiry of an agreement. Fates advertise pulls in hedgers who limit their dangers, and supports rivalry from different dealers who have showcase data and value judgment. While hedgers have long haul viewpoint of the market, the dealers, or arbitragers as they are regularly called, hold a quick perspective of the market.
An extensive number of various market players partake in purchasing and offering exercises in the market in light of differing local and worldwide data, for example, value, request and supply, climatic conditions and other market related data. Every one of these variables set up together outcome in proficient value disclosure because of huge number of purchasers and venders executing in the fates showcase. Prospects showcase, as saw from the crosscountry experience of dynamic ware fates markets, helps in proficient value revelation of the particular wares and rice conduct of a product in the fates market may demonstrate A few deviations responding does not disable the long-run harmony Cost of items. On occasion, notwithstanding, p to the component of hypothesis and ‘fleeting trend impact’ inborn in any market, however it rapidly returns to long-run balance cost, as data streams in, reflecting basics of the separate ware.
In fates advertise, examiners assume a part in giving liquidity to the business sectors and May here and there advantage from value developments, yet don’t affect costs. A powerful design for control of exchanging and for guaranteeing straightforwardness and opportune stream of data to the market members would upgrade the utility of product trades in proficient value revelation and limit value stuns activated by unexpected supply request confuses.Participants of Commodity Market:
The participants who trade in the commodity derivatives markets can be classified as follows;
Hedgers:- Hedgers are participants who use commodity derivative instruments to hedge / eliminate the price risk associated with the underlying commodity asset held them. Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce.
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take an example:
A Hedger pays more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce raise enough to offset cash loss on the produce.
Speculators: Speculators are participants who bet on future movements in the price of an asset i.e. Commodity to make short term gain from the price movements. Commodity future s gives them the leverage so to take risks on nominal margin payments and thereby increasing for bigger gains or losses. Speculators are somewhat like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms.
Buying a futures contract in anticipation of price increases is known as ‘going long’. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. Speculative participation in futures trading has increased with the availability of alternative methods of participation.
Speculators have certain advantages over other investments they are as follows:
In the event that the merchant’s judgment is great, he can profit in the fates advertise quicker in light of the fact that costs tend, by and large, to change more rapidly than land or stock costs.
Prospects are much utilized speculations. The broker sets up a little portion of the estimation of the hidden contract as edge, yet he can ride on the full estimation of the agreement as it climbs and down. The cash he sets up isn’t an upfront installment on the hidden contract, however an execution bond. The genuine estimation of the agreement is just traded on those uncommon events when conveyance happens.
Arbitrageurs: Arbitrageurs work at making profits by taking advantaged of existence of difference in prices of the same product across different markets (MCX and NCDEX).
Investors: Investors are participants having a a longer term view as compared to speculators when they enter into trade in the commodes market. E.g. Farmers, Producers, consumers, etc.
Major Commodity Exchanges:
The Government of India permitted establishment of National-level Multi- Commodity exchanges in the year 2002 and accordingly three exchanges have come into picture.
Multi-Commodity Exchange of India Ltd, Mumbai.(MCX).
National Commodity and Derivative Exchange of India, Mumbai (NCDEX).
National Multi Commodity Exchange, Ahmadabad (NMCE).
However there is regional commodity exchanges functioning all over the country. Karvy commodities Broking Pvt. Ltd has got membership of both the premier commodity exchanges i.e. MCX and NCDEX.
The two trades (NCEDX;MCX) have seen huge development in under two years. The day by day normal on these two trades set up together has now developed to a sound Rs.7800 Centers. It has been accepted by specialists that the volumes on these trades would the share trading system in the days to come. Item trades are controlled by Forwards Market mission (FMC); Advances Market Commission works under the domain of the service of Sustenance, Agribusiness and Open Conveyance.
At NCDEX the agreements lapse on twentieth day of every month. On the off chance that twentieth happens to be an occasion the expiry day will be the past working day.
At MCE the expiry day is fifteenth of consistently .if fifteenth happens to be an occasion the expiry day will be the earlier day. The expiry day varies for various products in both the trades.
For the most part product fates require an underlying edge between 5-10% of the agreement esteem. The trades impose higher extra edge in the event of overabundance unpredictability. The edge sum changes amongst trades and wares. In this manner they give extraordinary advantages of use in contrast with the stock and file prospects exchange on the stock trades. The trade additionally requires the day by day benefits and misfortunes to be paid in/out on open positions (check to Market or MTM) with the goal that the purchasers and venders don’t convey a danger of not over one day.
Functions of an Exchange
Product Conceptualization and Design
Price Discovery & Dissemination
Robust Trading & Settlement systems
Management of Counter party Credit Risk
Self Regulation to ensure
Overview of Trading and Surveillance
Audit and review of Members
Enforcement of Exchange rule
Types of Commodities
Mustard Seed Oil RBD Palmolein
Indian Commodities Market
In India item showcases have been in presence for quite a long time. However in 1975 the Administration prohibited forward contracts on products. Later in 2003 the Administration of India again permitted forward contracts in products. There have been more than 20 trades existing for wares everywhere throughout the nation. However these trades are product particular and have a solid territorial core interest. The Legislature, with a specific end goal to influence the wares to advertise more straightforward and productive, agreed endorsement for setting up of national level multi ware trades. Accordingly three exchanges are there which deal in a wide variety of commodities and which allow nation-wide trading. They are
Multi Commodity Exchange (MCX)
National Multi Commodity Exchange (NMCE)
National Commodity & Derivatives Exchange Limited (NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.
Multi Commodity Exchange of India Limited (MCX) Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de- mutualised exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country.
MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana.
National Multi-Commodity Exchange of India Limited (NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex. It has operationalised from November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002.
Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do.
Problems Facing by Commodity Future market
The spot/physical markets are fragmented. This may be because of the restrictions on the free movement of commodities in the physical form under the Essential Commodities Act, APMC Act, Licensing restrictions, etc. Hence, the creation of an integrated and vibrant domestic market for physical trading in commodities with adequate infrastructure and transparent trading system is a pre-requisite for broad based commodity derivatives markets.
Lack of mechanism for standardization of warehousing receipts. The absence of the regulatory authority for accreditation of warehouses and for setting standards for scientific grading, packaging, storage and preservation. As a result, though Banks grant credit against warehouse receipts now, they are largely restricted to the ones issued by the Central Warehousing Corporation and those promoted by the State Governments. However, this problem is being sorted out by the Food Ministry, which is in the process of drafting a Warehouse Development and Regulation Act to promote warehouse receipts-based lending and commodity derivative transactions.
Dematerialized settlement system for commodities which has the standardization of warehouse receipts as a pre-requisite. A system of physical delivery of commodities backed by warehouse receipt system can help eliminate the quality risk and price risk. It will facilitate seamless nationwide spot market for commodities.
Creation of depository system for electronically facilitating transfer and delivery of commodities in dematerialized form.
Need to make warehouse receipts transferable. We understand that a bill to amend the Forward Contracts (Regulation) Act, 1952 is slated to be taken up during the current budget session of the Parliament, which proposes to permit the transferability of warehouse receipts by scrapping Section 18(2) of the Act. This will also easy access to finance from banks and financial institutions against produce stored in warehouses.
Most of the commodity exchanges function as specialized product bourses. This is even true of the national multi commodity exchanges because of lack of volumes in many commodities in spite the trading being allowed in many formally. While NCDEX technically trades in 35 commodities, about 90 per cent of its volume comes from just 8 products. In case of MCX, gold and silver account for a major share in the trading volume, though it trades in 41 commodities. Pepper, cardamom, rubber, coffee and jute products are the five products that are prominently traded in NMCE even though about 59 commodities are traded here. This may be attributed to the fact that there are different players for different commodities.
There are no uniform contract specifications for the same commodity traded on various exchanges. As a result, there is no proper mechanism to assess price of the same commodity across various exchanges, as price depends on the contract specification.
Online trading at the national level is mandatory only in respect of National level multi commodity exchanges, while such a compulsion is not applicable to the regional ones. Hence transparency suffers.
Demutualization is yet to happen completely. Many exchanges are associations of members who retain trading rights and ownership. This interest of the promoters as traders has serious implications for the integrity of these exchanges.
Residents in India, engaged in import and export trade, may hedge the price risk of commodities in the international commodity exchanges/markets. Applications for commodity hedging are to be forwarded to RBI. A one-time approval will be given by RBI along with the guidelines for undertaking this activity. The Reserve Bank of India, which is considering a proposal to grant blanket approval to Indian companies that have an exposure
to commodities to freely hedge in the international exchanges, must also ensure that they use the products available in the Indian commodity derivatives markets.
Why are Commodity Derivatives Required?
India is among the main 5 makers of the vast majority of the items, notwithstanding being a noteworthy purchaser of bullion and vitality items. Horticulture contributes around 22% to the Gross domestic product of the Indian economy. It workers around 57% of the work constrain on an aggregate of 163 million hectares of land. Horticulture division is an essential factor in accomplishing a Gross domestic product development of 8-10%. This demonstrates India can be advanced as a noteworthy community for exchanging of product subsidiaries.
Tragically that the arrangements of FMC amid the vast majority of 1950s to 1980s stifled the very markets it should urge and sustain to develop with times. It was an error other developing economies of the world would need to stay away from. In any case, it isn’t in India alone that subordinates were associated with making excessively hypothesis that would be to the disservice of the solid development of the business sectors and the ranchers. Such doubts may typically emerge because of a misconception of the attributes and part of subsidiary item.
It is critical to comprehend why item subsidiaries are required and the part they can play in chance administration. It is regular information that costs of products, metals, offers and monetary forms vacillate after some time. The likelihood of antagonistic value changes in future makes chance for organizations. Subsidiaries are utilized to lessen or take out value hazard emerging from unexpected value changes. A subsidiary is a money related get whose cost relies upon, or is gotten from, the cost of another advantage.
Review of Literature
According to de Roon, Frans A., Theo E. Nijman, and Chris Veld (2000). “Hedging Pressure Effects in Futures Markets ” Journal of Finance, “We present a simple model implying that futures risk premium depend on both own-market and cross-market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups (financial, agricultural, mineral, and currency) indicate that, after controlling for systematic risk, both the futures own hedging pressure and cross-hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model.” (p. 1437).
According to Garcia, Leuthold, Fortenbery and Sarassoro (1988) evaluated the pricing efficiency of the live cattle futures and cash market by employing ARIMA model and composite forecasting procedures, in terms of the mean-squared error criterion a necessary condition for market efficiency.
According to Zapata, Fortenbery and Armstrong (2005) examined the relationship between selected sugar futures prices traded in New York and the world cash prices for export sugar and found the unidirectional relationship from futures to cash.
According to Brajesh (2009) Investigated the relationship between futures trading activity andspot market v olatility for agricultural, metal, precious metals and energy commodities in Indian commodity derivatives market.
According to Ollerman and Farris (1989) employed regression techniques to measure the effects of futures trading on the variability and volatility of cash cattle prices and found the futures trading impacting cash markets.
According to Susan Thomas, Agricultural commodity markets in India-Policy issues for growth: “Strengthening institutions in spot and derivative markets for commodities is a necessary ingredient of the liberalization process in agriculture, and can impact upon the lives of millions. n this paper, we describe the existing market design prevalent on both the spot and the futures markets. We show some evidence on the role played by the nascent futures markets in price discovery. We document the problems of both the spot and the futures markets. We offer three policy proposals: using reference rates for strengthening transparency, exploring a greater role for cash settlement, and treating warehouse receipts as securities”.
According to N.Sathish Kumar, Asst. Professor ; Head, Department of Business Management. Vivekananda PG College, Karimnagar “After almost two years that commodity trading is finding favor with Indian investors and is been seen as a separate asset class with good growth opportunities. For diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for long-term investors and arbitrageurs and speculators. And, now, with daily global volumes in commodity tradingtouching three times that of equities, trading in commodities cannot be ignored by Indian investors.
Online commodity exchanges need to revamp certain laws governing futures in commodities to make the markets more attractive. The national multi-commodity exchanges have unitedly proposed to the government that in view of the growth of the commodities market, foreign institutional investors, too, should be given the go-ahead to invest in commodity futures in India. Their entry will deepen and broad base the commodity futures market. As a matter of fact, derivative instruments, such as futures, can help India become a global trading hub for select commodities.
Commodity trading in India is poised for a big take-off in India on the back of factors like global economic recovery and increasing demand from China for commodities. Considering the huge volatility witnessed in the equity markets recently with the Sensex touching 6900 level commodities could add the required zing to investors’ portfolio. Therefore, it won’t be long before the market sees the emergence of a completely redefined set of retail investors.
According to Chua, Jess H., Gordon Sick, and Richard S. Woodward (1990). “Diversifying with Gold Stocks” “The authors extend Jaffe’s (1989) study by examining the relative investment benefits of investing in gold equities versus gold bullion during the period September 1971 through December 1988. By splitting their sample period into two sub periods, the authors show that the diversification benefits of gold bullion are much more consistent than the diversification benefits of gold equities. In particular, they find that the beta of gold equities more than doubled between the 1970s and 1980s, whereas the beta of gold bullion remained largely unchanged at approximately zero in both periods. Thus, the authors question the diversification benefits of gold equities, particularly over short investment horizons.”
Title of the Project-
“COMMODITY MARKET” A BRIGHT SPOT
Objectives of the study
To understand the commodity market and its working mechanism.
To know the perception of investors towards commodity future market
To find the awareness level of commodity market in Udaipur city
Research design: Descriptive
Sample Size: The sample size is consisting of traders in derivative market of Udaipur city. 30 respondents have been selected conveniently to identify the awareness level of the derivative investors towards Commodity Future Market
Sample Type:Convenience sampling was adopted to select the respondents.
Sample Area: Udaipur city.
TOOLS USED FOR ANALYSIS:
Frequency Analysis and Graphical Representation of Analysis
Method of Communication:
In order to minimize the bias in data collection, questionnaire was circulated on Google documents.
THE SOURCES OF THE DATA COLLECTION ARE AS FOLLOWS
Information is collected through internet
From various text books Journals and magazines.
DATA ANALYSIS AND INTERPRETATION
Que.1. Personal details Gender?
Gender Frequency Per. %
Male 22 73%
Female 8 27%
Total 30 100%
In our study, we have taken a sample of 30 investors who invest in commodity market.
Out of 30, there are approximately 73% respondent are male while rest of the respondents are female.
Que.2. Age Group:
Age Group Frequency Per. %
Below 20 2 7%
20-40 14 46%
41-60 12 40%
Above 60 2 7%
Total 30 100%
The above chart shows the age group of investors who in commodity market.
From the graph, we can say that majority of the respondents are of age group b/w 20-40 year i.e.46% of the respondents having their age b/w 20-40 year.
Occupation Frequency Per. %
Govt. Employee 7 23%
Self Employee 10 33%
Professional 8 27%
Other 5 17%
Total 30 100%
The above graph shows the occupation of investors.
Out of total respondents, 33% are self employed, 27% are professional employees, 23% are Govt. Employee, and 17% are in other sectors.
Que.4. Monthly Income of Family (in Indian Rupees Rs):
Income Frequency Per. %
Below 10000 2 20%
10000-20000 6 27%
20000-30000 8 30%
40000-50000 9 17%
Above 50000 5 6%
Total 30 100%
The above chart shows the monthly income of family of investors.
In this data there is mostly 30% Investors has 40000-50000 income per month that reason is family business in market and it is well settled because if you have no sufficient income so you cannot payout of deal that you get loss that time you have to pay and you have no more income.
Que.5. Do you have any investment plan?
Investment plan Frequency Per. %
Yes 9 30%
No 21 70%
Total 30 100%
In our study, we are put down this question to check the analytical aspect of investors.
We have found in our study that 70% of investor would prefer to investment plan in it and only 30% of investors would not prefer to investment plan.
Que.6. If Yes, Where you would like to invest your money?
Mode of investment Frequency Per. %
Bank FD 10 33%
Commodity Market 11 37%
Share Market 6 20%
Other 3 10%
Total 30 100%
The above graph shows preferred mode of investment by investors.
As we have taken sample of investors who invest in commodity market, it is obvious that commodity market is most preferable mode of investment for them.
The chart represent that Bank FD is second preferable mode of investment by investors, i.e., 33% of the investor invest in Bank FD.
Que.7. If No, What reasons?
Reason Frequency Per. %
Not aware about Invest Avenues 28 40%
Insufficient Income 38 54%
Other 4 6%
Total 70 100%
In our study, we found that 40% investor have not aware about the invest avenues.
We also found that 54% of investor has insufficient income.
We also found that 6% of the investor has other reason to not invest in money.
Que.8. Do You aware about commodity market?
Aware about commodity market Frequency Per. %
Yes 29 29%
No 71 71%
Total 100 100%
In our study, we have put down this question to check the analytical aspect of the investors.
We have found in our study that 71% of investors would prefer to not aware about the commodity market and 29% of investors would prefer to yes aware about commodity market.
Whereas 29% of investors analyze the market with help of Brokers/Financial advisors of them selves.
Que.9. If Yes, which Commodity Exchange you will prefer for investment?
Commodity Exchange Frequency Per. %
MCX 8 28%
NCDEX 8 28%
NMCE 7 24%
Can’t Say 5 17%
Other 1 3%
Total 29 100%
From the above graph presentation, we can say that investors are mostly preferred MCX(Multi commodity Exchange) and NCDEX (National Commodity ; Derivatives exchange Ltd.) for trading in commodities.
From the above chart we can say that 17% of the investors preferred can’t say and 3% of investors use preferred local trading exchange for trading in commodity market.
Que.10. What is your perception about commodity Market?
Perception About Commodity Frequency Per. %
Less Risk 9 31%
Risk 16 51%
Very Risk 5 18%
Total 30 100%
I can know that commodity is risky because the investor says that there is no one can predict to the commodity price in a market so that commodity is risky for the investing.
We also found that the 30% people are less risky and 18% people are very risky in this market.
Chapter 5 –
Finding, Conclusion, Suggestions and Limitations
More than 50% of the Traders in are aware about the commodity future Market
Hardly 37% traders are invested in the commodity future market
Most of the investors are not ready to invest in commodity future market they feel it involve high risk.
Returns and the Risk of the commodity are the most critical factors, which
Traders will consider while investing in any commodity
Most of the investors are ready to invest in commodity future market if proper information is provided
As commodity future market is new and emerging, many investors and farmers are not fully aware of this market , as the market helps to trade transparently without middlemen and agents
Risk factor is very high in commodity market but 51% of people are ready to take the risk.
Only 3% of people are interested in other commodity exchange while more than 28 % people are investing in MCX.
In comparison of return factor, price factor is not so considerable in commodity.
Since the study is based on the convenient sampling it may not depict the accurate outcome.
Level of accuracy of results of research is restricted to the accuracy level with which the customers have given answers and the accuracy level of the answer cannot be predicted.
The findings are based solely on the information provided by the respondents and there is a possibility of biased results.
The study of project is limited to only Udaipur.
Commodity futures markets are new and emerging market. The awareness of the market is very less among the investors who can use this trade to sell their products without the middlemen or agents it also help the actual buyers too. Here trader also can transfer his risk to some other who can handle it or can appetite the risk through hedging techniques.
Within a short span of 3 years the trading volume in commodity derivatives increased in a rapid manner, now it going to equalize with the financial derivatives trading volume. The SEBI is taking necessary action to create awareness into the investors.
Compared to capital market commodity market is less risky in volatility context here the prices do not change within a fraction of second .significantly, minimum margin ready physical possession, no manipulation & fraud, maximum profitability is available since the commodity market helps all such as farmers, industries and individuals investors it is growing at a faster rate in global outlook.
There is need to create awareness about commodity Future Market. Awareness program has to be conducted by because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc.
From survey it is found that most of the potential customers are concerned about the Brokerage charges so can look upon this. If it can charge moderate brokerage it will help to attract more and more customers.
More agents and marketing executives should be appointed to educate the customers because the customers having many myths in their mind
And also create the awareness of electronic commodity trading firms should approach people who are already into the business of commodities. special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation, market trends etc. They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.
Trading Commodities and Financial Futures: A Step by Step guide to Mastering the Market, 3rd Edition by George Kleinman
Chakrabarty, R., and Sarkar, A. (2010). Efficiency of the Indian Stock Market with Focus on Some Agricultural Product.
Kaur, G., and Rao, D. N. (2010). Efficiency of Indian Commodities Market- A Study of Agricultural Commodity Derivatives Traded on NCDEX.
MCX. Multi Commodity Exchange of India: http://www.mcxindia.com/
NCDEX. National Commodity & Derivative Exchange of India http://www.ncdex.comhttp://www.indianinfiline.com/http://www.commoditiescontrol.com/
(Note: please tick below the option you want to choose)
Que.1 Personal Detail Gender?
Male Female Que.2 Age Group
Age Group Frequency
Below 20 20-40 41-60 Above 60 Que.3. Your occupation
Govt. Employee Self Employeed Profession Other
Que.4. What is your annual income?
Below 10000 10000-20000 20000-30000 40000-50000 Above 50000
Que.5. Do you have any investment plan?
Investment plan Yes No Que. 6. If Yes, Where you would like to invest your money?
Mode of investment Ans
Bank FD Commodity Market Share Market Other Que.7. If No, What reasons?
Not aware about Invest Avenues Insufficient Income Other Que.8. Do You aware about commodity market?
Aware about commodity market Ans
Yes No Que.9. If Yes, which Commodity Exchange you will prefer for investment?
Commodity Exchange Ans
MCX NCDEX NMCE Can’t Say Other Que.10. What is your perception about commodity Market?
Perception About Commodity Ans
Less Risk Risk Very Risk