Professional Documents
Culture Documents
A PROJECT REPORT ON
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CONTENTS
SL.NO PARTICULARS Executive Summary Research Methodology Company profile Introduction to the topic Analysis and interpretation Findings Suggestions Conclusion Bibliography
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2. 3. 4. 5. 6. 7. 8. 9.
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A project report containing the Awareness of commodity market with reference to Derivative investors a case study of Belgaum city At KARVY Finapolis Belgaum for fulfillment of requirement of MBA IVth semester in Institute of Management Education and research. It was an opportunity to learn the practical aspects of the firm Objectives of the study 1. To know the perception of derivative investors towards commodity future market 2. To find the awareness level of commodity market in Belgaum city 3. To understand the commodity market and its working mechanism. 4. To know which commodity they prefer to invest. 5. To find the potential customer for commodity market The project was undertaken at KARVY Finapolis Belgaum the first part of the study is done by collected information through net, journals, textbooks. And second part of the study is conducted through survey of the derivative investors. Scope of the study This study is limited to only Belgaum City the study is carried out to know the awareness level of derivative investors towards Commodity Futures market. This study also helps to know about trading mechanism of Commodity Market & the future trading level.
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RESEARCH METHODOLOGY
Title of the Project Awareness of commodity market with reference to Derivative investors Sample Size The sample size is consist of traders in derivative market of Belgaum city.100 random sample was taken to identify the awareness level of the derivative investors towards Commodity Future Market Sample Type Sample Area : : Simple random sampling was adopted to select respondents. Belgaum city
Duration of Project: Ist Phase - December IInd Phase - January to April (weekly two days) TOOLS USED FOR ANALYSIS: 1. Graphical Representation of Analysis through SPSS. : a. Pie charts DATA COLLECTION APPROACH: Primary data has been used to carry out the research successfully. The secondary data has been collected from NDEX and MCX. For the purpose of gathering primary data a structure and questionnaire was designed to collect data from the derivative investors. Method of Communication: BABASAB PATIL MBA FINANCE PROJECT REPORT Page 4
Secondary Data: Information is collected through internet From various text books Journals and magazines
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FINDINGS
More than 50% of the Traders in are aware about the commodity future Market Hardly 30% 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 While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unanawareness & mythical perception about commodity market.
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SUGGESTION
There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, 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 Karvy 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 there mind And also create the awareness of electronic commodity trading Firm 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.
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COMPANY PROFILE
The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strengthto better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally totality in services. Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging
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The Karvy Credo: BABASAB PATIL MBA FINANCE PROJECT REPORT Page 10
Teamwork None of us is more important than all of us.Each team member is the face of Karvy. Together we offer diverse services with speed, accuracy and quality to deliver only one product: excellence. Transparency, co-operation, invaluable individual contributions for a collective goal, and respecting individual uniqueness within a corporate whole, is how we deliver again and again. Responsible Citizenship A social balance sheet is as rewarding as a business one. As a responsible corporate citizen, our duty is to foster a better environment in the society where we live and work. Abiding by its norms, and behaving responsibly towards the environment, is some of our growing initiatives towards realizing it. Integrity Everything else is secondary
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Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years. Karvy, a name long committed to service at its best. A fame acquired through the range of corporate and retail services including mutual funds, fixed income, equity investments, insurance to name a few. Our values and vision of attaining total
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The first securities registry to receive ISO 9002 certification in India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being Most Admired Registrar is one among many of the acknowledgements we received for our customer friendly and competent services.
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The company, Member of National Stock Exchange (NSE), offers a comprehensive range of services in the stock market through the benefits of in-depth research on crucial market dynamics, done by qualified team of experts. Apart from stock broking activities, the company also provides Depository Participant Services to its corporate and retail customers.
Registered with SEBI as a Category I Merchant Banker and ranked among the top 10 merchant bankers in the country, the company has built a reputation as a professional advisor in structuring IPOs take over assignments and buy back exercises.
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The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.
The company is into distribution of Financial Products. It distributes a wide range of financial products and services from insurance to credit cards and loans. The company provides sound advisory services to suit the different investment needs of customers.
Stock Broking Services: It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight and BABASAB PATIL MBA FINANCE PROJECT REPORT Page 15
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Quality Policy: To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations. About Karvy Comodities Broking Limited: Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multicommodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system.
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KARVY Advantage: Trade from anywhere in India Karvy, with its network of branches across the length and breadth of the country, is always within your reach, no matter where you are. This gives you the facility to trade from anywhere in India. Reliable research BABASAB PATIL MBA FINANCE PROJECT REPORT Page 18
You need to deposit an initial upfront margin as specified by the exchange (usually between 5-10% of the contract value).The cheque/DD should be in favour of Karvy Commodities Broking Private Limited Mark to Market Margin: In addition to initial margin, you also need to keep a mark to market margin for taking care of the adverse price movements, if any.
Achievements Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the to top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operations
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Vice-President Karvy
Vice-President Karvy
Vice-President Karvy
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Deputy General Manager SeniorManager Deputy General Manager Deputy General Manager Senior Manager Deputy General Manager SenoirManager
Senior Manager
Branch Manager
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Introduction to derivatives The origin of derivatives can be traced back to the need of farmers to protect themselves against Fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be a futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the `to arrive contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. These were eventually standardized, and in 1925 the First futures clearing house came into existence. Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc. Besides commodities,
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Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer dated options are called warrants and are generally traded over the counter. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a weighted average of a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Exchange traded versus OTC derivatives Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. These contracts were typically OTC kind of contracts. Over the counter (OTC) derivatives are privately negotiated contracts. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre- arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility those large swings would inhibit marketing the commodity after a harvest Later many of these contracts were standardized in terms of quantity and delivery dates and began to trade on an exchange.
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The OTC derivatives markets have the following features compared to exchangetraded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative Contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the interbank foreign exchange market. Commodity derivatives the world over are typically exchange traded and not OTC in nature. Exchange traded versus OTC derivatives Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. These contracts were typically OTC kind of contracts. Over the counter (OTC) derivatives are privately negotiated contracts. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre- arranging a buyer or seller for a stock of BABASAB PATIL MBA FINANCE PROJECT REPORT Page 26
The OTC derivatives markets have the following features compared to exchangetraded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchangetraded and OTC derivative Contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the interbank foreign exchange market. Commodity derivatives the world over are typically exchange traded and not OTC in nature. Commodities trading Over the modern age of investing, commodity trading has emerged as an important player in the way that people invest in and speculate. It was developed as a reaction to the way BABASAB PATIL MBA FINANCE PROJECT REPORT Page 27
Commodity prices have been driven higher by a number of factors, including increased demand from China, India and other emerging countries that need oil, steel and other commodities to support manufacturing and infrastructure development. The commodity supply chain has also suffered from a lack of investment, creating bottlenecks and adding an insurance premium and/or a convenience yield to the returns of many commodity futures. Over the long term, these economic factors are likely to support continued gains in commodity index returns. The potential for attractive returns is probably the most obvious reason for increased investor interest in commodities, but it isn't the only factor. Commodities may offer investors other significant benefits, including portfolio diversification and a hedge against inflation and risk. Commodities are real assets, unlike stocks and bonds, which are financial assets. Commodities, therefore, tend to react to changing economic conditions in different ways than traditional financial assets. For example, commodities are one of the few asset classes that tend to benefit from rising inflation. As demand for goods and services increases, the price of those goods and services usually goes up as well, as do the prices of the commodities used to produce those goods and services. Because commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge against inflation. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 29
Why invest in commodities? Leverage is very important to the commodities markets. Unlike the stock market, where you might have to invest 10,000 dollars to leverage 10,000 dollars. A commodities trader can leverage tens of thousands of dollars worth of a commodity for pennies on the dollar. Also unlike stocks, commodities have intrinsic value and will not go bankrupt.
The futures markets are so crucial to the well being of our nation, that the government established the Commodity Futures Trading Commission (CFTC) to oversee the industry. There is also a self-regulatory body, the National Futures Association (NFA), who monitor the activities of all futures market professionals to ensure the integrity of the futures markets. Commodities also give the investor the ability to participate in virtually all sectors of the world economy and have the potential to produce returns that tend to be independent of other markets. In fact portfolios that add commodity investments can actually lower the overall portfolio risk by diversification. What is the difference between hedging and speculating? Just about every product that you consume would likely cost dramatically more without the commodities futures markets. Because of the intrinsic risks associated to being in business, lacking the ability to shift risk, a manufacturer/producer of goods or services would be forced to charge higher prices, and the consumer would have to pay those higher prices. This shifting of risk to someone willing to accept it is called hedging. Manufacturers could effectively lock in a sales price by going short an equivalent amount of goods with futures contracts. If a mining company knew that they were going to sell 1000 ounces of gold in several months, they could protect themselves for a future price decline by going short 10 gold futures contracts today. If the price of gold fell by $30 in the following months, they BABASAB PATIL MBA FINANCE PROJECT REPORT Page 30
The person willingly accepting a risk does so because of the opportunity to profit from price movements, this is known as speculating. The cotton in your shirt, the orange juice, cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home, the gas or ethanol that you put in your car all would be priced many times higher without the participation of speculators in the futures markets. Through supply and demand market forces, equilibrium prices are reached in an orderly and equitable manner within the exchanges, and world economies, and you, benefit tremendously from futures trading.
What commodity futures markets do? A well-developed and effective commodity futures market, unlike physical market, facilitates off setting the transactions without impacting on physical goods until the expiry of a contract. Futures market attracts hedgers who minimize their risks, and encourages competition from other traders who possess market information and price judgment. While hedgers have long-term perspective of the market, the traders, or arbitragers as they are often called, hold an immediate view of the market. A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information, such as price, demand and supply, climatic conditions and other market related information. All these factors put together result in efficient price discovery as BABASAB PATIL MBA FINANCE PROJECT REPORT Page 31
In futures market, speculators play a role in providing liquidity to the markets and may sometimes benefit from price movements, but do not have a systematic causal influence on prices. An effective architecture for regulation of trading and for ensuring transparency as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimize price shocks triggered by unanticipated supply demand mismatches. 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 pay more to the farmer or dealer of a produce if its prices go BABASAB PATIL MBA FINANCE PROJECT REPORT Page 32
Speculators: Speculators are participants who bet on future movements in the price of an asset i.e. I commodity to make short term gain from the price movements. Commodity future s gives theme the leverage so to take risks on nominal margin payments and thereby increasing for bigger gains or losses. Speculators are some what 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: If the traders judgment is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. Futures are highly leveraged investments. The trader puts up a small fraction of the value BABASAB PATIL MBA FINANCE PROJECT REPORT Page 33
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. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 34
Multi-Commodity Exchange of India Ltd, Mumbai.(MCX). National Commodity and Derivative Exchange of India, Mumbai (NCDEX). National Multi Commodity Exchange, Ahemdabad (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 exchanges (NCEDX&MCX) have seen tremendous growth in less than two years . the daily average on these two exchanges put together has now grown to a healthy Rs.7800 Crores. It has been believed by experts that the volumes on these exchanges would the stock market in the days to come. Commodity exchanges are regulated by Forwards Market mission (FMC); Forwards Market Commission works under the purview of the ministry of Food ,Agriculture and Public Distribution.
At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a holiday the expiry day will be the previous working day. At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiry day will be the previous day. The expiry day differs for different commodities in both the exchanges. Generally commodity futures require an initial margin between 5-10% of the contract value. The exchanges levy higher additional margin in case of excess volatility. The margin amount varies between exchanges and commodities. Therefore they provide great benefits of leverage in comparison to the stock and index futures trade on the stock exchanges. The exchange also requires the daily profits and losses to be paid in/out on open positions (mark to Market or MTM) so that the buyers and sellers do not carry a risk of not more than one day. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 35
Functions of an Exchange Product Conceptualization and Design Price Discovery & Dissemination Robust Trading & Settlement systems Management of Counter party Credit Self Regulation to ensure Overview of Trading and Surveillance Audit and review of Members Enforcement of Exchange rules
Risk
Agri commodities Soya bean Soya oil Rapeseed/Mustard Seed Rapeseed/ Mustard Seed Oil Crude Palm oil RBD Palmolein 40 Commodities introduced in Phase II Rubber BABASAB PATIL MBA FINANCE PROJECT REPORT Page 36
BMF
Brazil
CME Group
CME
Chicago
Chicago California
Kansas City Board of Trade KCBT Memphis Cotton Exchange Mercado a Termino de Buenos Aires
MATba
Argentina
Agricultural
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MGEX
Minneapolis Agricultural
New York Board of Trade NYBOT New York Mercantile Exchange U.S. Futures Exchange Winnipeg Commodity Exchange
New York
NYMEX
New York
USFE
Chicago
WCE
Winnipeg
Agricultural
Asia Exchange Bursa Malaysia Central Japan Commodity Exchange Dalian Commodity Exchange Dubai Mercantile Exchange Abbreviation Location MDEX Malaysia Biofuels Product Types
Nagoya
DCE
China
Agricultural, Plastics
DME
Dubai
Energy
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Dubai
Precious Metals
KANEX
Osaka
Agricultural
India
National Commodity Exchange Limited National Commodity and Derivatives Exchange Singapore Commodity Exchange
Karachi
NCDEX
Mumbai
All
SICOM
Tokyo
Tokyo Grain Exchange Zhen Zhou Commodity Exchange Europe Exchange Climex
TGE
Tokyo
CZCE
China
Agricultural
Product Types
Amsterdam Emissions
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NYSE Euro next European Climate Exchange ECX London Metal Exchange LME
Indian Commodities Market In India commodity markets have been in existence for decades. However in 1975 the Government banned forward contracts on commodities. Later in 2003 the Government of India again allowed forward contracts in commodities. There have been over 20 exchanges existing for commodities all over the country. However these exchanges are commodity specific and have a strong regional focus. The Government, in order to make the commodities market more transparent and efficient, accorded approval for setting up of national level multi commodity exchanges. 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) Page 40
Our technological and infrastructure strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group. Our wide national network, spanning the length and breadth of India, further supports these advantages. Regular trading workshops and seminars are conducted to hone trading strategies to perfection. Every move made is a calculated one, based on reliable research that is converted into valuable information through daily, weekly and monthly newsletters, calls and intraday alerts. Further, personalized service is provided here by a BABASAB PATIL MBA FINANCE PROJECT REPORT Page 41
Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.
COMMODITY MARKET IN INDIAN PERSPECTIVE. India, a commodity based economy where 75% of the one billion populations depend on agriculture, surprisingly has an underdeveloped commodity market. The history of commodity markets in India is more than a century old. The institution of formal commodity market in India is almost as old as the UK and the US.
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All contracts settling in cash will be settled on the following day after the contract expiry date. Commodity trading follows a T + 1 settlement system, where the settlement date is the next working day after expiry. However, in case of delivery-based traders, settlement takes place five to seven days after expiry
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Let us now take a look at what the present scenario of each of the above markets is like.
The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons: BABASAB PATIL MBA FINANCE PROJECT REPORT Page 44
The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.
The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt. In recent years, the extent of the retail market (both organized and unorganized)
has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered around the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. Moreover, the retail outlets belong to both the organized as well as the unorganized sector. The unorganized retail outlets of the yesteryears consist of small shop owners who are price takers where consumers face a highly competitive price structure. The organized sector on the other hand is owned by various business houses like Pantaloons, Reliance, Tata and others. Such markets are usually sell a wide range of articles both agricultural and manufactured, edible and inedible, perishable and durable. Modern marketing strategies and other techniques of sales promotion enable such markets to draw customers from every section of the society. However the growth of such markets has still centered on the urban areas primarily due to infrastructural limitations. Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is.
What can commodity market offer? If you are an investor, commodities futures represent a good form of investment because of the following reasons..
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Ensure continuous supply Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by
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even true of the national multi commodity exchanges because of lack of volumes in 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. 7. 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. 8. 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. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 49
9. 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. 10. 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. 11. Options trading in commodities are prohibited as of now which puts constraints on the markets. Introduction of options trading in commodities is a necessary condition for institutional investors to trade in commodity derivatives trading, as this would make it easier for the institutional investors to convert the commodity derivatives products as financial products. If the institutional investors, like banks and mutual funds, whose presence as of now is only in capital markets need to start operating in commodity derivatives markets as well then these additional issues are also required to be addressed. 12. Convergence of the regulators of capital markets and commodity markets is a prerequisite for free flow of funds between markets. 13. The players in capital markets must acquire the required expertise for trading in commodity markets and vice versa to have an integrated view of all markets.
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Two important derivatives are futures and options. (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a Commodity for a predetermined delivery price at a specific future time. Futures are standardize contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity. (ii) Commodity Options contracts: Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties the seller of the option writes the option in favour of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a call option gives the holder a right to buy a commodity at an agreed price, while a put option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a premium of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise BABASAB PATIL MBA FINANCE PROJECT REPORT Page 52
Modern Commodity Exchanges To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the commodity exchanges using the most modern systems and practices in the world. Some of the main regulatory measures imposed by the FMC include daily mark to market system of margins, creation of trade guarantee fund, back-office computerization for the existing single commodity Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and one-third representation of independent Directors on the Boards of existing Exchanges etc. Unresolved Issues and Future Prospects Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolved. Agreed, the number of commodities allowed for derivative trading have increased, the volume and the value of business has zoomed, but the objectives of setting up commodity derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. Some of the main unresolved issues are discussed below. a. Commodity Options: Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of this important derivative. Both futures and options are necessary for the healthy growth of the market. While futures contracts help a participant (say a farmer) to hedge against downside price movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is an immediate need to bring about the necessary legal and regulatory changes to BABASAB PATIL MBA FINANCE PROJECT REPORT Page 53
b. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. The Habibullah (2003) task force admitted, A sophisticated warehousing industry has yet to come about. Further, independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located. Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses across the country with a storage capacity of 10.4 million tonnes. This is obviously not adequate for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan) has been introduced to construct new and expand the existing rural godowns. Large scale privatization of state warehouses is also being examined. c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trade in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A International Research Journal of Finance and Economics - Issue 2 (2006) 161 particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 54
d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regular, similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets. e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets BABASAB PATIL MBA FINANCE PROJECT REPORT Page 55
f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. These need to be removed so that a truly national market could develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by all states. To study the Trading mechanism of Commodity Future market and Wholesale/ Local market Second objective is completed by Collecting Primary as well as secondary data. Primary data is collected through personal interview and discussion with the Wholesale merchants in APMC yard Belgaum and secondary data is collected through Web sites. The following Chart Shows the Present Trading System of Local /Wholesale market. Chart showing Trading System of Local Mark Consumer
Super Markets
Large retailers
Sub Wholesaler
Market Yard
Village level Consolidation Small & Marginal Farmers The emergence of organized sector retail chain stores and a rise in competition is likely to be a catalyst for bringing about much needed reform in the agriculture-related supply chain. The large players in the retail sector and fast moving consumer goods are also influencing the government to liberalize the regulations, which hitherto have constricted the operational environment. In addition, political pressure is rising, invoking a response from the government to change the regulations so as to enable farmers to operate more productively. First, instead of using the current chain, which results in large mark-ups due to a multiple number of intermediaries, the farmers are beginning to transact directly with the large corporate, reducing inefficiencies. Second, some of the large retail players will start contract manufacturing with farmers, providing them with the right quality inputs (fertilizers and seeds), capital support and signals on the mix of output they need to produce to earn maximum returns. Third, an increase in direct sourcing by large players will also encourage the private sector to invest in the logistics and infrastructure needed to improve the productivity and efficiency of the supply chain.
The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as an online monitoring and BABASAB PATIL MBA FINANCE PROJECT REPORT Page 57
The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity Fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. NCDEX trades commodity futures contracts having one month, two month and three Month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If the 20th of the expiry month is a trading holiday, the contracts shall expire on the previous trading day. New contracts will be introduced on the trading day following the expiry of the near month contract. Contract cycle The following figure shows the contract cycle for futures contracts on NCDEX. As can be seen, at any given point of time, three contracts are available for trading a near-month, a middle-month and a far-month. As the January contract expires on the 20th of the month, a new three month contract starts trading from the following day, once more making available three index futures contracts for trading.
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INTRODUCTION TO PULSE MARKET India is the world's largest pulse producer, consumer and importer accounting for 27% of the global pulse production. However, stagnant production has led to declining per capita consumption over the past 20 years. The per capita availability has progressively declined from 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led the Government of India to ease the norms related to importing of pulses. In India, pulses are grown on 22-23 million hectares area with an annual production of 1315 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19% of the gross cropped area and less than 8% of the total food grain production of the country. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas (Gram or Desi Chana). Their share in the total pulses production is about 20% and 33% respectively. Important Pulse Markets in India are Mumbai, Delhi, Chennai, Indore, Kanpur, Bikaner, Hapur, Hyderabad, Jaipur, Jalandhar, Ludiana, and Sangrur.
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occupation Frequency business 24 profession 13 govt service 37 private service 25 others 1 Total 100 Percent 24.0 13.0 37.0 25.0 1.0 100.0 Valid Percent 24.0 13.0 37.0 25.0 1.0 100.0 Cumulative Percent 24.0 37.0 74.0 99.0 100.0
Valid
occupation
o thers 1.0% private service 25.0% business 24.0%
go service vt 37.0%
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Valid
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50000-100000 37.0%
10001-200000 38.0%
Interpretation: above graph depicts that most of the investors income lies between 10001200000 followed by 38%,37% investors income lies between 50000-100000,14% of the investors lies between 20001-400000,6% of the investors lies below 50000 & 5% of the investors lies more than 400000
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Investment creteria they prefer ot invest Frequency Bank deposit 10 Real estate 4 stocks 32 commodity future market 7 mutual fund 5 life insurance 8 derivitive market 32 bonds 2 Total 100 Percent 10.0 4.0 32.0 7.0 5.0 8.0 32.0 2.0 100.0
Valid
sto cks 32.0% life insurance 8 .0% mutual fund 5.0% co mmo dity future mar 7.0%
Interpretation: From this chart it is known that 32% of the respondents prefer to invest in derivative and stocks, 10% of the respondents in bank deposit, 8% & 7% in life insurance & commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds
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Awareness of derivitive market Frequency 100 Percent 100.0 Valid Percent 100.0 Cumulative Percent 100.0
Valid
yes
yes 100.0%
Interpretation: as my targeted customer is derivative investors the above diagram depicts about the awareness level of the derivative investors is 100%
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Have you invested in future & options Frequency 100 Percent 100.0 Valid Percent 100.0 Cumulative Percent 100.0
Valid
yes
yes 100.0%
Interpretation: as my targeted customer is derivative investors the above diagram depicts about the investment level of the derivative investors is 100% that is respondents are purely from derivative market BABASAB PATIL MBA FINANCE PROJECT REPORT Page 67
factors considered while investing in derivitive market Frequency price 9 risk 39 return 45 demand & supply 7 Total 100 Percent 9.0 39.0 45.0 7.0 100.0 Valid Percent 9.0 39.0 45.0 7.0 100.0 Cumulative Percent 9.0 48.0 93.0 100.0
Valid
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return 45.0%
risk 39.0%
Interpretation: Most of the investors consider 45% of return,39% of risk,9% price& 7% demand and supply .while investing in derivatives mainly they considered returns & risk
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Valid
yes no Total
yes 64.0%
Interpretation: The above pie chart depicts that 64% of the trader aware about the Commodity Future market and 36% of them are not aware about Commodity Future Market. So there is a need to create awareness about the commodity future market and its benefits. There is a lot of potential is there to create customer and influence them to invest in Commodity Future market
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Valid
yes no Total
yes 39.0%
no 61.0%
Interpretation: From the above diagram we can say that out of 100 traders only 39% have invested in commodity market 61% have not invested in commodity market so even though the most of the traders are aware about Commodity Future market they are not trading in Future market traders feel there is a high risk involved in the future market.
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how do you came to know about commodity market Frequency not attempted 61 frnds/colleauges 12 bill boards/advt/brochure 9 agents 18 Total 100 Percent 61.0 12.0 9.0 18.0 100.0 Valid Percent 61.0 12.0 9.0 18.0 100.0 Cumulative Percent 61.0 73.0 82.0 100.0
Valid
Interpretation: most of the investors came to know about the commodity by agents the respondents who have invested in commodity market from them 18% of the people came to know by agents ,9% from the bill boards /advertisement/brochure &12% people came to know by there friends and colleagues. Here not attempted indicates the people who have not invested in commodity market have not attempted this question. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 72
commodity you prefer for trading Frequency 64 10 5 16 5 100 Percent 64.0 10.0 5.0 16.0 5.0 100.0 Valid Percent 64.0 10.0 5.0 16.0 5.0 100.0 Cumulative Percent 64.0 74.0 79.0 95.0 100.0
Valid
not attempted Agro products Base metals Precious metals Energy products Total
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Interpretation: among the persons who have invested in commodity in them 10% prefer to trade in agro products, 5% in base metals, 16% in precious metals & 5 % in energy products .here not attempted indicates the people who have not invested in commodity market have not attempted this question.
Factors considered while trading in commodity market Frequency 65 3 8 13 11 100 Percent 65.0 3.0 8.0 13.0 11.0 100.0 Valid Percent 65.0 3.0 8.0 13.0 11.0 100.0 Cumulative Percent 65.0 68.0 76.0 89.0 100.0
Valid
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Interpretation: Most of the investors consider 11% of return,13% of risk,3% price& 8% of season. While investing in commodities mainly they considered returns & risk while investing in commodity market they mainly consider returns & risk. here not attempted indicates the people who have not invested in commodity market have not attempted this question.
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Valid
Interpretation: most of the investors say it is in neutral position & some who are benefited lot they will go for factors like agree & strongly agree & percentage of disagree is very less among invested people
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Reasons why they have not invested in commodity mkt Frequency those who hv invested 39 Not intersted 5 Info non availability 10 high investment 7 complex understanding 33 high risk 6 Total 100 Percent 39.0 5.0 10.0 7.0 33.0 6.0 100.0 Valid Percent 39.0 5.0 10.0 7.0 33.0 6.0 100.0 Cumulative Percent 39.0 44.0 54.0 61.0 94.0 100.0
Valid
Interpretation: The above pie chart shows that most of the traders are not interested to invest in Commodity Future Market due to complex understanding involved in it around 33% of the traders are given this reason and 5% of them are not interested in investing in BABASAB PATIL MBA FINANCE PROJECT REPORT Page 77
planning for trading in commodity mkt in future Frequency 67 33 100 Percent 67.0 33.0 100.0 Valid Percent 67.0 33.0 100.0 Cumulative Percent 67.0 100.0
Valid
yes no Total
yes 67.0%
Interpretation: From the above graph we conclude that most of the traders are interested to invest in Commodity Future Market if proper awareness is created among them and BABASAB PATIL MBA FINANCE PROJECT REPORT Page 78
Findings
More than 50% of the Traders in are aware about the commodity future Market Hardly 30% 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 While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unawareness & mythical perception about commodity market. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 79
Most of the respondents are were from government service & business men
Suggestion
There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, 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 Karvy 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 there mind And also create the awareness of electronic commodity trading Firm 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.
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CONCLUSION
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 there 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 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 over here since the commodity market helps all such as farmers, industries and individuals investors it is growing at a faster rate in global outlook.
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BIBLOGRAPHY
News Papers;
Business Line Economic times Times of India
Web site
www.moneycontrol.com www.google.com www.MCX.com www.NCDEX.com Text books BABASAB PATIL MBA FINANCE PROJECT REPORT Page 82
QUESTIONNAIRE
NAME : __________________________________ AGE : __________________________________ ADDRESS : __________________________________ CONTACT NO: __________________________________ 1) Which of the following will best describe your occupation (Note: please tick below the option you want to choose) Business Profession Govt.services Private service Others specify
2) What is your annual income? Below 50000 50000-100000 100001-200000 200001-400000 More than 400001
3) Which among these investment criteria you usually prefer? Bank deposits Real estate Stocks Mutual fund Life insurance Derivative market Page 83
6) Which factors would you consider while investing in derivative market? Price Risk Return Demand & supply
8) If yes have you invested in commodity market? (If no directly go to question 13) Yes No
9) How do you come to know about commodity future trading? Friends/colleagues Billboards /advt/brochure Agents/ brokers Other specify
11) Which factor do you normally consider while trading in commodity market? Price Season Risk Return Demand & supply
12) Commodity future market provides benefits? BABASAB PATIL MBA FINANCE PROJECT REPORT Page 84
13) What made you not to invest in commodity future trading? Not interested Info non availability High investment Complex understanding High risk
14) Are you planning for investing &trading in commodity future market in future? Yes No
Respondent signature
Thank you
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