Table of Contents

LIST OF TABLES .............................................................................................................. 4 LIST OF FIGURES ............................................................................................................ 5 EXECUTIVE SUMMARY ................................................................................................. 6 PART I GENERAL INFORMATION ............................................................................ 7 CHAPTER-1 ....................................................................................................................... 7 OVERVIEW OF COMMODITY MARKET..................................................................... 7 1.1 DEFINITION .............................................................................................................. 8 1.2 COMMODITY MARKET........................................................................................... 8 1.3 HISTORY ................................................................................................................... 9 1.4 DEFINITION OF AN EXCHANGE.......................................................................... 10 1.5 COMMODITY EXCHANGES IN INDIA................................................................. 10 1.6 PARTICIPANTS IN DERIVITIVES MARKET........................................................ 14 1.7 REGULATORY FRAMEWORK .............................................................................. 19 1.8 STRUCTURE OF COMMODITY MARKET ........................................................... 23 CHAPTER 2 ...................................................................................................................... 24 INDUSTRY PROFILE ..................................................................................................... 24 2.1 EVOLUTION OF COMMODITIES MARKET ........................................................ 25 2.2 EVOLUTION OF COMMODITIES TRADING IN INDIA....................................... 25 2.3 HEDGING ................................................................................................................ 28 CHAPTER 3 ...................................................................................................................... 29 BULLION MARKET ....................................................................................................... 29 3.1 INTRODUCTION ..................................................................................................... 30 3.2 GOLD AN INVESTMENT AVENUE ...................................................................... 32 3.3 INTRODUCTION OF GOLD ................................................................................... 32 3.4 OVERVIEW ............................................................................................................. 33 3.5 HISTORY OF GOLD IN INDIA ............................................................................... 34 3.6 GOLD AND ITS BULL RUN ................................................................................... 34 3.7 MINE PRODUCTION .............................................................................................. 35 3.8 INDIA ....................................................................................................................... 36 3.9 MARKET MOVING FACTORS FOR GOLD IN INDIA.......................................... 36 3.10 FACTORS THAT MAY CAUSE THE PRICES OF GOLD TO INCREASE .......... 37 3.11 MAJOR TRADING CENTERS OF GOLD ............................................................. 37 3.12 SILVER PROFILE .................................................................................................. 38 3.13 SALIENT CHARACTERISTICS ............................................................................ 38 3.14 GRADING OF SILVER .......................................................................................... 38 3.15 PRODUCTION OF SILVER IN INDIA .................................................................. 40 3.16 INDIAN SILVER MARKET ................................................................................... 41 3.17 MARKET INFLUENCING FACTORS FOR INDIA .............................................. 41

PART - 2 PRIMARY STUDY .......................................................................................... 43 CHAPTER 4 ...................................................................................................................... 43 INTRODUCTION OF THE STUDY ............................................................................... 43 4.1 LITERATURE REVIEW .......................................................................................... 44 4.2 BACKGROUND OF THE STUDY........................................................................... 45 4.3 STATEMENT OF PROBLEM .................................................................................. 46 4.4 PURPOSE OF THE STUDY ..................................................................................... 46 4.5 RESEARCH OBJECTIVES ...................................................................................... 46 4.6 SIGNIFICANCE OF THE STUDY ........................................................................... 47 4.7 HYPOTHESIS .......................................................................................................... 47 CHAPTER 5 ...................................................................................................................... 48 RESEARCH METHODOLOGY ..................................................................................... 48 5.1 RESEARCH DESIGN ............................................................................................... 49 5.2 SOURCES OF DATA ............................................................................................... 49 5.3 METHODS OF DATA COLLECTION ..................................................................... 49 5.4 POPULATION .......................................................................................................... 50 5.5 SAMPLE DESIGN.................................................................................................... 50 5.6 DATA COLLECTION INSTRUMENT .................................................................... 50 CHAPTER-6 ..................................................................................................................... 52 DATA ANALYSIS AND INTERPRETATION ............................................................... 52 6.1 ANALYSIS AND INTERPRETATION OF THE PRIMARY RESEARCH .............. 53 6.2 ANALYSIS OF SURVEY ......................................................................................... 54 6.3 HYPOTHESIS TESTING ......................................................................................... 67 CHAPTER-7 ..................................................................................................................... 76 RESULTS AND FINDINGS ............................................................................................. 76 7.1 FINDINGS AND RESULTS ..................................................................................... 77 CHAPTER-8 ..................................................................................................................... 80 LIMITATIONS OF THE STUDY .................................................................................... 80 8.1 LIMITATIONS ......................................................................................................... 81 CHAPTER-9 ..................................................................................................................... 82 CONCLUSIONS / SUGGESTIONS ................................................................................. 82 9.1 SUGGESTIONS........................................................................................................ 83 9.2 CONCLUSION ......................................................................................................... 83 APPENDIX AND ANNEXURE........................................................................................ 85 ANNEXURE-I ................................................................................................................ 85 ANNEXURE-II............................................................................................................... 89 ANNEXURE-III ............................................................................................................. 90 REFERENCES .................................................................................................................. 91

LIST OF TABLES
Table No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Table Title Commodities Traded in MCX Commodities Traded in NCDEX Measurement Weight Conversion Table Silver Grading Demographic Profile or Characteristics of the Respondents Respondents Investing in Commodity Market Risk Perception about Commodity Market Volatility Perception for Various Commodities Factors Affecting Volatility in the Market Sources of Information Influences for Trade in Commodities Purpose for Investment Savings Invested in Commodity Market Expected Return from Commodity Market Association with the Market Preferred Commodities Types of Deals Different Brokers Statements of Commodity Market Age * Risk Perception about Commodity Market Education * Risk Perception about Commodity Market Annual Income * Risk Perception about Commodity Market Profession * Risk Perception about Commodity Market Traders or Investors Volatility Perception for Various Commodities and their Association with the Market Impact of the Factors Affecting Volatility of the Commodity Market Sources of Information that Influences Respondents Decision to Trade Global Commodities Derivatives Exchanges Development of Commodity Futures Exchanges Page No. 12 12 32 37 52 53 54 54 56 57 59 59 60 61 62 63 64 65 66 67 68 69 70 71 73 88 89

LIST OF FIGURES
Figure No. Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure Title Types of Contracts Structure of Commodity Market Mine Production of Gold in 2011 Risk Perception about Commodity Market Volatility Perception for Various Commodities Factors Affecting Volatility in the Market Sources of Information Purpose for Investment in Commodity Market Savings Invested in Commodity Market Expected Return from Commodity Market Association with the Market Preferred Commodities Types of Deals Different Brokers Page No. 15 22 34 54 55 56 58 59 60 61 61 62 63 64

EXECUTIVE SUMMARY
In this report we would try and look what are commodity markets, how they function and all about commodities and traders and investors risk perception about the commodity market.

For this the report is divided in two sections. In the first section, we would see what is commodity & why is there need for commodities markets, what are t he different factors that affect the commodit y prices, we would see what are commodities markets and what are different types of commodities traded on exchanges. In this sect ion we will also look at the different commodit y exchanges in India and the commodities traded there. We would also look at the funct ioning of commodit ies market. We would see how t he commodit ies are traded in commodit y exchanges, how t he delivery of commodit ies is done and how the issues related to quality of assets and warehousing of commodity are carried out. We would also see the price trends of various commodities traded on NMCE. We would see the regulatory frame work for commodities market.

In the second sect ion, we would see t he risk percept ion about the commodit y market and its impact on different commodit ies. We would also see t ypes o f trading done by different traders to earn high returns in commodit y market. We would see which sources of informat ion influence traders or investors in commodit y market. We would also see the different factors affect ing t he commodit y market.

The experience that I gathered from this project report over the two semesters has certainly provided the orientation, which I believe will help me in shouldering any responsibility in future.

PART I GENERAL INFORMATION

CHAPTER-1 OVERVIEW OF COMMODITY MARKET

1.1 DEFINITION A commodity derivative derives its value from an underlying asset, which is necessarily a commodity. Commodities, in simple words are any goods that are common and unbranded. Gold, silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common commodities. For e.g. apple juice can be a commodity whereas the Real apple juice cannot be called a commodity. One may be surprised to know that in the US commodities markets there are futures available even on cattle. Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable property other than actionable claims, money and securities". Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and unpinned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and Gur; potatoes and onions; coffee and tea; rubber and spices, etc. 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.

1.2 COMMODITY MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency

markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets. 1.3 HISTORY Commodity futures trading has been first recorded in the 17 th century in Japan. The futures trading was basically done with the seasonal agricultural products so as to ensure their continuous supply all the year around. Japanese merchants used to store rice in the warehouses for their future use and used to sell receipts against such stored rice. These receipts were called as rice tickets which then eventually became the basis for their commercial currency. The rules which were established during this time for trading these rice tickets are similar to the rules set for American futures trading. In the United States, the commodity futures trading first started in the middle of the 19 th century with the help of the Chicago Board Of Trade set up in the year 1848.Gradually then about 10 commodity exchanges were set up with a wide variety of agricultural products being traded.

Commodity derivative market first started in India in cotton in the 1875 and in the oilseeds in 1900 at Bombay. Forward trading in raw jute and jute goods started at Calcutta in the year 1912. But however, within few years of their establishment, the forwards trading in these commodities was banned in the year 1960. Recently, in the year 2003, such ban on trading was lifted and the trading in commodity futures was started. Permission was given to establish online multi-commodity exchange in order to facilitate trading. The long period of prohibition of forward trading in major commodities like cotton and oilseeds complex has an enduring impact on the development of the commodity derivative markets in India and the futures market in commodities find themselves left far behind the derivative markets in the developed countries, which have been functioning uninterruptedly. Thus, today the challenge before the commodity markets is to make up for the loss of growth and development during the three decades of government policies, which had the effect of restricting the growth of the derivative markets.

1.4 DEFINITION OF AN EXCHANGE

A futures or derivatives exchange is defined as a trading forum that links a central marketplace, where all those with buying and selling interests in a product designed to permit the shifting risk can meet, with a mechanism (such as clearing house), for intermediating, validating, and enhancing the credit of anonymous counterparts. Key to a successful exchange is the efficient transfer of risk among the exchange participants. This requires efficient trading systems, settlement and clearing mechanisms, membership structures and viable products.

What is Exchange? A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts. Steel contracts started to be traded for the first time on the London Metal Exchange in 2008.

1.5 COMMODITY EXCHANGES IN INDIA

Commodity exchanges are places which trade in particular commodities, neglecting the trade the trade of securities, stock index futures and options etc. Exchanges are the centralized places which provide a platform for both the buyers and the sellers to meet, set quality standards and establish the rules of businesses. Commodity exchanges in India plays an important role as it offers a tool for efficient risk management and price transparency.

In India, there are about 25 recognized regional exchanges (Annexure-1- List of all the Regional Commodity Exchanges), of which three are national level multi-commodity exchanges. These three national level multi-commodity exchanges are, National Commodity and Derivative Exchange Limited( NCDEX) Multi-Commodity Exchange Of India( MCX) National Multi-Commodity Exchange Of India Limited ( NMCEIL)

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All the above exchanges have been set up under the overall control of Forward Market Commission of Government of India. The other 22 exchange are given below.

National Commodity & Derivative Exchange Limited (NCDEX)

National Commodity & Derivative 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 the 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 (NSE) .It is a professionally

manages online multi- commodity exchange. NCDEX is regulated by Forward Market Commission and is subject to various law of land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange is headquartered in Mumbai and is an independent, demutualised exchange with the 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 market 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, Pulse Importers Association and Shetkari Sanghatana.

National Multi-Commodity Exchange of India Limited (NMCEIL)

National Multi-Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised, 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 been operationalised from November 26 2002. It has been supported by Central Warehousing Corporation Ltd. Gujarat State Agricultural Marketing Board and Neptune Overseas limited. It has got its recognition in October 2002. 11

The other 22 exchanges include are as follows: 1. Bhatinda Om & Oil Exchange Ltd., Bhatinda. 2. The Bombay Commodity Exchange Ltd.Mumbai 3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd 4. The Kanpur Commodity Exchange Ltd., Kanpur 5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut 6. The Spices and Oilseeds Exchange Ltd. 8. Ahmedabad Commodity Exchange Ltd. 8. Vijay Beopar Chamber Ltd., Muzaffarnagar 9. India Pepper & Spice Trade Association. Kochi 10. Rajdhani Oils and Oilseeds Exchange Ltd. Delhi 11. National Board of Trade. Indore. 12. The Chamber Of Commerce, Hapur 13. The East India Cotton Association Mumbai. 14. The Central India Commercial Exchange Ltd, Gwalior 15. The East India Jute & Hessian Exchange Ltd, 16. First Commodity Exchange of India Ltd, Kochi 18. Bikaner Commodity Exchange Ltd., Bikaner 18. The Coffee Futures Exchange India Ltd, Bangalore. 19. Esugarindia Limited. 20. Surendranagar Cotton oil & Oilseeds Association Ltd, 21. Haryana Commodities Ltd., Hissar 22. e-Commodities Ltd.

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COMMODITIES TRADED IN THE DIFFERENT EXCHANGE

MCX:Table 1 Commodities Traded in MCX

Gold, Gold M, Gold HNI, Silver, Silver M, Silver HNI Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD Palmolein, Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil, Cottonseed Oilcake, Cottonseed Pepper, Red Chilli, Jeera, Turmeric

Steel Long, Steel Flat, Copper, Nickel, Tin Kapas, Long Staple Cotton, Medium Staple Cotton

Chana, arad, Yellow Peas, Tur

Rice, Basmati Rice, Wheat, Maize, Sarbati Rice

Crude Oil Rubber, Guar Seed, Gur, Guargum Bandhani, Guargum, Cashew Kernel, Guarseed Bandhani

NCDEX:Table 2 Commodities Traded in NCDEX Arabica Coffee Medium Staple Cotton Castor Seed Chilli Common Parboiled Rice Cotton Seed Oilcake Grade A Parboiled Rice Cashew Mulberry Green Cocoons Chana Common Raw Rice Crude Palm Oil Expeller Mustard Oil Grade A Raw Rice

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Guar gum Gur Agro Products Jute Sacking Bags Long Staple Cotton Mulberry Raw Silk Pepper RBD Palmolein Robusta Coffee Sesame Seeds Yellow Soybean Meal Turmeric Wheat Yellow Red Maize Mild Steel Ingots Base Metals Gold, Silver Bullion

Guar Seeds Jeers Lemon Tur Maharastra Lal Tur Mustard Seed Raw Jute Refined Soy Oil Rubber Soyabean Sugar Urad Yellow Peas

1.6 PARTICIPANTS IN DERIVITIVES MARKET

Participants who trade in the commodity market can be classified under three broad categories namely, Hedgers, Speculators and Arbitragers. These can be discussed as follows

HEDGERS: A hedger is a person who enters the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset. While such locking may not be extremely profitable the extent of loss is known and can be minimized. They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk.

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As an example of a hedger, you might be a large corn farmer wanting to sell your product at the highest possible price. However, unpredictable weather may create risk, as well as excess supply that could drive prices down. You could take a short position in corn futures, and if prices fall, you could then buy back the futures at a lower price than you previously had sold them. This would help you offset the loss from your cash crop and help minimize your risk. Of course, if prices rose, you'd lose money on the futures transaction, but the idea is to use futures as a hedge.

A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis = Spot price of asset to be hedged Futures price of the contract used. Basis risk arises as a result of the following uncertainties. The exact date when the asset will be bought or sold may not be known. The hedge may require that the futures contract be closed before expiration.

SPECULATORS: Speculators are those people who participate in the market for the profits and are ready to face the risk involved in the market. A speculator can be anyone from an individual who has a small surplus income to treasury desks of banks and corporate. ARBITRAGEURS: Arbitrageur are the market participants who make profit using price differences in two different markets without exposing oneself to any type of risk. Arbitraging is a very profitable business. It is possible to arbitrage between two different future markets or between the futures market and the spot market. However, in an efficient market arbitraging is not possible, because any price gap is closed immediately as soon as the arbitragers enter the market. All the market participants use commodity futures to hold a position in the market to achieve a pre-determined objective. Commodity futures are a type of derivative contract. So, in order to understand what commodity futures are? It is important to know what derivatives are:

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DERIVATIVES:A derivative contract is enforceable agreement whose value is derived from the underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or indices. Four most common examples of derivative instruments are forwards, futures, options and swaps/ spreads. Figure 1 Types of Contracts

Contracts/ Agreements

Cash

Derivatives

Forward

Others like SWAPS, FRA

Merchandize Customized

Futures

Options

TRADING INSTRUMENTS:-

Derivatives in the times have become very popular because of their wide application. The most common types of derivative instruments are Forward contracts Future contracts Swaps Warrants

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FORWARD CONTRACTS:A forward contractor forwardis an OTC derivative. A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time of trade is not the time where the securities themselves are exchanged.

The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit or [loss] by the purchasing party. This process is used in financial operations to hedge risk, as a means of speculation, or so as to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

FUTURES CONTRACT:A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. The futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. The both parties of a "futures contract" must fulfill the contract on the settlement date. Futures can be thought of as forwards that are transferable, standardized, and designed to reduce the probability of, and costs of, a default. The futures market was developed to solve the problems existing in the forwards market.

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SWAPS:Swaps were developed as a long-term risk management instrument available on the over-the counter market. Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. These agreements are used to manage risk in the financial markets and exploit the available opportunity for arbitrage in the capital market.

The swaps market offers several advantages like, these agreements are undertaken privately while transactions using exchange traded derivatives are public. Since the swaps products are not standardized, the counter parties can customize cash-flow streams to suit their requirements.

WHAT COMMODITIES MARKET OFFERS:-

For an investor, commodities futures represent a good form of investment because of the following reasons. High Leverage The margins in the commodity futures market are less than the F&O section of the equity market. Less Manipulations - Commodities markets, as international price movements govern them are less prone to rigging or price manipulations. Diversification The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. For an importer or an exporter, commodities futures can help them in the following ways Hedge against price fluctuations Wide fluctuations in the prices of import or export products can directly affect their bottom-line as the price at which they import/export is fixed beforehand. Commodity futures help them to procure or sell the commodities at a price decided months before the actual transaction, thereby ironing out any change in prices that happen subsequently.

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For producers of a commodity, futures can help as follows: Lock-in the price for your produce For farmers, there is every chance that the price of their produce may come down drastically at the time of harvest. By taking positions in commodity futures they can effectively lock-in the price at which they wish to sell your produce Assured demand Any glut in the market can make them wait unendingly for a buyer. Selling commodity futures contract can give them assured demand at the time of harvest. For large-scale consumers of a product, here is how this market can help them: Cost Control For an industrialist, the raw material cost dictates the final price of their output. Any sudden rise in the price of raw materials can compel them to pass on the hike to their customers and make their products unattractive in the market. By buying commodity futures, you can fix the price of your raw material. Ensures continuous supply Any shortfall in the supply of raw materials can stall their production and make them default on their sale obligations. They can avoid this risk by buying a commodity futures contract by which they assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.

1.7 REGULATORY FRAMEWORK At present, there are three tiers of regulations of forward/futures trading system in India, namely, government of India, Forward Markets Commission (FMC) and commodity exchanges. The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. Proper regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market. 19

Rules governing commodity derivatives exchanges Forward Markets Commission (FMC) regulates the trading of commodity derivatives. Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the exchanges, which are granted recognition by the central government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution). All the exchanges, which deal with forward contracts, are required to obtain certificate of registration from the FMC. Besides, they are subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on their working. Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect and promote interest of customers/ non-members. It prescribes the following regulatory measures: a. Limit on net open position as on the close of the trading hours. Sometimes limit is also imposed on intra-day net open position. The limit is imposed operator-wise, and in some cases, also member wise. b. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. c. Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the exchange. d. Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the exchanges. e. Skipping trading in certain derivatives of the contract, closing the market for a specified period and even closing out the contract: These extreme measures are taken only in emergency situations.

Besides these regulatory measures, the F.C(R) Act provides that a client's position cannot be appropriated by the member of the exchange, except when a written consent is taken within three days time. The FMC is persuading increasing number of exchanges to switch over to electronic trading, clearing and settlement, which is more System Friendly. The FMC has also 20

prescribed simultaneous reporting system for the exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like trading ahead of clients, etc. The FMC has also mandated all the exchanges following open outcry system to display at a prominent place in exchange premises, the name, address, and telephone number of the officer of the commission who can be contacted for any grievance. The website of the commission also has a provision for the customers to make complaint and send comments and suggestions to the FMC. Officers of the FMC have been instructed to meet the members and clients on a random basis, whenever they visit exchanges, to ascertain the situation on the ground, instead of merely attending meetings of the board of directors and holding discussions with the office-bearers.

Rules Governing Intermediaries:

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules framed there under, exchanges are governed by its own rules and byelaws (approved by the FMC). In this section we have brief look at the important regulations that govern Exchange. For the sake of convenience, these have been divided into two main divisions pertaining to trading and clearing.

BRIEF ABOUT FORWARD MARKETS COMMISSION (FMC):

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. The functions of the Forward Markets Commission are as follows: a. To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. b. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.

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c. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; d. To make recommendations generally with a view to improving the organization and working of forward markets; e. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. Economic Benefits of the Futures Trading and its Prospects: Futures contracts perform two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all segments of economy. It is useful to producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. It enables the consumer get an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. The futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market. Other benefits of futures trading are: I. Price stabilization-in times of violent price fluctuations - this mechanism dampens the peaks and lifts up the valleys i.e. the multitude of price variation is reduced. II. III. IV. V. Leads to integrated price structure throughout the country. Facilitates lengthy and complex, production and manufacturing activities. Helps balance in supply and demand position throughout the year. Encourages competition and acts as a price barometer to farmers and other trade functionaries.

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1.8 STRUCTURE OF COMMODITY MARKET Figure 2 Structure of Commodity Market

Ministry of consumer Affairs

FMC

Commodity Exchange

National exchange

Regional exchange

NCDEX

MCX

NBOT

Other exchange

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CHAPTER 2 INDUSTRY PROFILE

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2.1 EVOLUTION OF COMMODITIES MARKET

Nothing has ever been static-it has always evolved. Necessarily, the present-day shape and contents of futures trading is a product of history. The first recorded instance of futures trading occurred with rice in 17 th century Japan, where merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against stored rice. These were known as rice tickets. Eventually such rice tickets became accepted as a kind of general commercial currency. Rules evolved to standardize the trading in rice tickets and warehouse storage facilities. In the middle of 19th century, futures trading started in the United States in the grain markets. The Chicago Board of Trade was established in 1848 and introduced the first traded derivatives contract in 1859 in agricultural products. The first (non-precious) metals contract began trading at the London Metal Exchange (LME) in 1878 and over the few next decades a number of commodities exchanges sprang up. Today as well as the LME, the largest exchanges include the Chicago Board Of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Brazilian Mercantile & Futures Exchange (BM&F). Futures exchange trading is to be found in more than 25 countries, including the US, Canada, UK, France, India, China, Singapore, South Africa, Japan, Australia and New Zealand. The products traded range from agricultural staples like corn and wheat to rubber, gold and energy. The development of many emerging markets has recently given rise to the establishment of new exchanges, which have allowed market participants to access local terminal markets. These new exchanges have lowered transaction costs, enhanced the transfer of local information, and facilitated the geographical transfer of risk and cross-border transactions.

2.2 EVOLUTION OF COMMODITIES TRADING IN INDIA The inception of organized commodity Derivatives markets in India took place way back in the year 1875 with cotton being first commodity to be traded. Trading in oilseeds in the year 1900 followed this. In the year 1912, forwards trading in raw jute and jute goods come into being. In those years volumes traded in those markets were bleak and investors awareness was under scrutiny. Today, the scenario has changed radically and trading in commodities is considered to be the next biggest bet in the investor fraternity. Commodities prices are

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believed to have also benefited from the falling dollar. It is to be noted that in few months investor will be able to trade in options in the commodity derivatives market. Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd." in 1875. In 1893, following widespread discontent amongst leading

cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a separate association by the name "Bombay Cotton Exchange Ltd." was constituted. Futures trading in oilseeds were organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900, which carried on futures trading in groundnut, castor seed and cotton. Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab. Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd. was set up in 1927 for organizing futures trading in Raw Jute. These two associations amalgamated in 1945 to form the present East India Jute & Hessian Ltd., to conduct organized trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several centers at Punjab and U.P. The most notable amongst them was the Chamber of Commerce at Hapur, which was established in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar, Fazilka, Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar, Chandausi, Meerut, Saharanpur, Hathras, Gaziabad, Sikanderabad and Barielly in U.P. Futures market in Bullion began at Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta. In due course several other exchanges were also created in the country to trade in such diverse commodities as pepper, turmeric, potato, sugar and gur (jaggory). After independence, the Constitution of India brought the subject of "Stock Exchanges and futures markets" in the Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Govt. of India. A Bill on forward contracts was referred to an expert committee headed by Prof. A.D.Shroff and Select Committees of two successive Parliaments and finally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided for 3-tier regulatory system;

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I.

An association recognized by the Government of India on the recommendation of Forward Markets Commission,

II. III.

The Forward Markets Commission (it was set up in September 1953) and The Central Government.

Forward Contracts (Regulation) Rules were notified by the Central Government in July 1954 The Act divides the commodities into 3 categories with reference to extent of regulation, viz: a. The commodities in which futures trading can be organized under the auspices of recognized association, b. The Commodities in which futures trading is prohibited, c. Those commodities that have neither been regulated for being traded under the recognized association nor prohibited are referred as Free Commodities and the association organized in such free commodities is required to obtain the certificate of registration from the Forward Market Commission. In the seventies, most of the registered associations became inactive, as futures as well as forward trading in the commodities for which they were registered came to be either suspended or prohibited altogether. The Khusro Committee (June 1980) had recommended reintroduction of futures trading in most of the major commodities, including cotton, kapas, raw jute and jute goods and suggested that steps may be taken for introducing futures trading in commodities, like potatoes, onions, etc. at appropriate time. The government, accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar Pradesh. After the introduction of economic reforms since June 1991 and the consequent gradual trade and industry liberalization in both the domestic and external sectors, the Govt. of India appointed in June 1993 one more committee on Forward Markets under Chairmanship of Prof. K.N. Kabra. The Committee submitted its report in September 1994. The majority report of the Committee recommended that futures trading be introduced in 1. Basmati Rice 2. Cotton and Kapas

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3. Raw Jute and Jute Goods 4. Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean, and oils and oilcakes of all of them. 5. Rice bran oil 6. Castor oil and its oilcake 7. Linseed 8. Silver 9. Onions. The committee also recommended that some of the existing commodity exchanges particularly the ones in pepper and castor seed, may be upgraded to the level of international futures markets. The liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management. The National Agriculture Policy announced in July 2000 and the announcements of Honorable Finance Minister in the Budget Speech for 2003-2004 were indicative of the Governments resolve to put in place a mechanism of futures trade/market. As a follow up the Government issued notifications on 1.4.2004 permitting futures trading in the commodities, with the issue of these notifications futures trading is not prohibited in any commodity. An option trading in commodity is, however presently prohibited.

2.3 HEDGING

Hedging is a mechanism by which the participants in the physical market can cover their price risk. Theoretically, the relationship between the futures and the cash prices is determined by the cost of carry. The two prices therefore move in tandem. This enables the participants in the physical market to cover their price risk by taking opposite positions in the futures market.

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CHAPTER 3 BULLION MARKET

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3.1 INTRODUCTION

Bullion is defined as a bulk quantity of precious metals consisting of gold, silver and others that can be assessed by weight and cast as a lump. The bullion reserve of a country is the indicator of the amount of wealth a country possesses. Bullion is valued by its purity and mass rather than its face value which is applicable in the case of money. India Bullion Market is a recognizable index that highlights the economic growth of the nation.

Indian Bullion Market Association IBMA or the Indian Bullion Market Association is a national level body that represents the Indian Bullion Trade and Industry. This body is an association of all leading bullion dealers and jewelry merchants who have tied up with the National Spot Exchange Limited. The idea of this association is to promote a professional organizational dedication towards the development and growth of the bullion industry in India.

London Bullion Market

London is the world's largest market for gold and silver trading. Market makers mainly quote prices in US dollars per troy ounce for spot and forward delivery. It is operated by the London Bullion Market Association (LBMA), whose primary task is to ensure that refiners of gold and silver meet the required standards of quality. The Association maintains close links with the Bank of England, which is responsible for the supervision of the market and for publishing its code of conduct

Trading System

The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/ or price conditions Time related Conditions DAY order- A Day order is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day.

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GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the respective contract in which it is entered or until when the same is cancelled by the member.

GTD - A Good Till Date (GTD) order is valid till the date specified by the member. After the specified date the unexecuted orders get automatically cancelled by the system.

IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same is placed in the market, failing which the order will get cancelled immediately Price Conditions Limit Order The order wherein the price is to be specified while placing the same. Market Order The order at the best available price at the time of placing the same.

Trade Timings

Special Session: Monday to Saturday: 9:45 a.m. to 9:59 a.m. Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market. Normal Session: Monday through Friday: 10:00 a.m. to 11:30 p.m. (Up to 11:55 p.m. on account of day light savings typically between every November and March of the following year) Saturdays: 10:00 a.m. to 2:00 p.m. Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agricommodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.

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3.2 GOLD AN INVESTMENT AVENUE

Global Inflation ---------------------------

Dollar and its traded Dollar Index ---Investment Demand ----------------------

Production of Gold ------------------------

3.3 INTRODUCTION OF GOLD

Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a severe correction To fully appreciate why 8,000 years of experience say gold is forever", we should review why the world reveres what England most famous economist, John Maynard Keynes, has cynically called the "barbarous relic. Why gold is "good as gold" is an intriguing question. However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold's value was a function of its pleasing physical characteristics and its scarcity.

Gold is primarily a monetary asset and partly a commodity. More than two thirds of gold's total accumulated holdings account as 'value for investment' with central bank reserves, private players and high-carat Jewellery. Less than one third of gold's total accumulated holdings are as a 'commodity' for Jewellery in Western markets and usage in industry. Due to large stocks of Gold as against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium.

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South Africa is the world's largest gold producer with 394 tons in 2001, followed by US and Australia. India is the world's largest gold consumer with an annual demand of 800 tons.

Table 3

Measurement Weight Conversion Table

To Convert from Troy Ounce Grams Kilograms Kilograms

To Grams Troy Ounce Troy Ounce Tolas

Multiple by 31.1035 0.0321507 32.1507 85.755

Purity: Gold purity is measured in terms of karats and fineness. Karat: Pure gold is defined as 24 karat. Fineness: Parts per thousand. Thus, 18 karat = (18/24) th of 1000 parts = 750 fineness.

3.4 OVERVIEW Worlds largest gold producing country is South Africa with 394 tons in 2001. On the other hand, world's largest gold consuming country is India with an annual demand of 843.2 tones comprising of 26.2% of total world demands. Worlds gold demand is constantly increasing and it is nearing record levels at 4000 tons per year while the mine production is constant at 2250 tons per annum (Source: World Gold Council)

The gold prices are moving upwards due to the reduction in production level as compared to the demand and also due to the weakening economy of the US.

It has been found out the total world gold production would decline about 30% over the next 7 years as the new discoveries in the major gold producing countries have become difficult, expensive and time consuming according to the studies done by The World Bank and Beacon Group.

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3.5 HISTORY OF GOLD IN INDIA

Prior to 1962, India was the world's largest gold market and the main trading center was Bombay. In 1962, the government enacted the Gold Control Act, which prohibited the citizens of India from holding pure gold bars and coins due to loss of reserves during the indo-china war. It was declared that the old holdings in pure gold had to be compulsorily converted into jewelry. Pure gold bars and coins were to be dealt only by licensed dealers.

In 1990, India was on a verge of default of external liabilities as it had a major foreign exchange problem. It had to give up the concept of controlling and licensing as it led to nothing more than corruption and shortages. As a result, the Indian government pledged 40 tones from their gold reserves with the Bank of England. India had to adopt the concept of liberalization. The government abolished the 1962 Gold Control Act in 1992 and liberalized the import of gold in India for a duty payment of Rs. 250 per 10 grams. The government made up for the foreign exchange problem by allowing free imports and earning the taxes. This step expanded the gold market and it also waved off the unofficial trade i.e. smuggling and black marketing. This makes India the most price- sensitive.

3.6 GOLD AND ITS BULL RUN

Gold has had a great run from 2001 to the current year 2011. The reason for gold spot prices to increase so much is the new demand for gold futures as a form of investment .It is used :As a hedge against inflation. As a hedge against a declining dollar. As a safe haven in times of geopolitical and financial market instability. As a commodity, based on golds supply and demand fundamentals. As a store of value. As a portfolio diversifier; gold can act as portfolio insurance.

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3.7 MINE PRODUCTION

Mining of gold takes place in every continent except for Antarctica, where mining is forbidden. According to recent figures, there are around 400 operating gold mines worldwide. The production of gold has reached a stable level, averaging approximately 2550 tons per year over the last five years. New mines that are being developed are serving to replace current production, rather than to cause any significant expansion in the global total.

Gold mines take a longer time to set up usually 10 years for a mine to be up and running. Since the price of Gold was at a real low in 2001 China which is the largest producer of gold in the world did not explore enough for new mine sites and is estimated to run out of ore in 2014. South Africa the once largest producer of gold and now the worlds second largest has seen its output decline due to hazardous environmental conditions and an acute power shortage which started recently when the economy opened up a bit.

Figure 3

Mine Production of Gold in 2011

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1. China: 13.1% 3. United States: 8.8% 5. South Africa: 7% 8. Indonesia: 4.4% 9. Ghana: 3.7%

2. Australia: 10% 4. Russia: 7.4% 6. Peru: 5.6% 8. Canada: 4.1% 10. Uzbekistan: 3.3%

3.8 INDIA

Indian love of gold and silver is deep-rooted and embedded in historical, cultural and religious traditions. As it has never mind more than a small amount of gold itself, gold holdings were built up as a result of trade. India consumes around 1000 metric tons of gold in 2011. In the third quarter of 2011, year-on-year gold demand in India is up 15% in tones and 46% in value (US$), as reported by the World Gold Council in November 2011.

The degree of economic prosperity is inevitably a key determinant of gold demand. Rapidly rising incomes have been a supportive factor for the growing level of spending on gold jeweler. Nevertheless this is not a one-way factor since rising prosperity also brings a wider choice of goods and services for consumers and hence more competition. In India, as elsewhere, it has proven important to provide attractive and well-marketed products to satisfy the more demanding and sophisticated consumer. So we could say if the Indian economy keeps on growing there will always be a growing demand for Gold and this could be a factor in increasing prices.

3.9 MARKET MOVING FACTORS FOR GOLD IN INDIA

Reclaimed scrap and official gold loans (Above ground supply from sales by central banks). Producer / miner hedging interest. World macro-economic factors - US Dollar, Interest rate. Comparative returns on stock markets. Domestic demand based on monsoon and agricultural output.

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3.10 FACTORS THAT MAY CAUSE THE PRICES OF GOLD TO INCREASE

An under supply of newly-mined gold. Global inflation is the main factor that can cause the price of the gold to increase. It's a natural hedge against the US dollar Dollar Price Gold is typically quoted in Dollars, and if the dollar begins to falls then the value of Gold tends to increase and vice-versa. Market Fear: Whenever the stock markets or political situations look bad then people tend to fly towards Gold. Stock market crashes, terrorist attacks, or wars will all tend to push the value of Gold up.

3.11 MAJOR TRADING CENTERS OF GOLD

London (clearing house) New York (home of futures trading) Zurich (physical turntable) Istanbul, Dubai, Singapore and Hong Kong Tokyo Mumbai (India's liberalized gold regime) Hong Kong Gold Market, Zurich Gold Market, London Gold Market and New York Market are the 24-hour gold markets.

In India the gold is traded thought the well know exchange mainly MCX and NCDEX, but most of the traders favor trading through MCX. If a particular trader wants to take the physical delivery of the Gold then he can do so as per the specifications set by the respective exchange. The trading in Gold is available in 1kg, 100 Grams and Gold Guinea which consists of 8 Grams. The increase in 1 rupee of gold is termed a 1 tick which stands for Rs 100, Rs10 and Rs 8 respectively. The margin amount which is supposed to be paid by the traders is set by the exchange depending upon the fluctuation in the prices. Initially the margin was set @4% for every month, and this may vary depending upon the volatility.

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3.12 SILVER PROFILE

Silver has been known since ancient time and has been long valued as a precious metals used to make jewellery and high value tableware. Apart from its former uses its now an important metal in the industrial use. The property of a good conductor of electricity has enhanced the appeal of the metal for various industrial purposes. The silvers antimicrobial properties have made the foray for use of the metal into the food industry, solar panels, new soaps and medicinal purposes.

3.13 SALIENT CHARACTERISTICS

Silver is a very ductile and malleable (slightly harder than gold) monovalent coinage metal with a brilliant white metallic luster that can take a high degree of polish. It has the highest electrical conductivity of all metals, even higher than copper, but its greater cost and tarnish ability have prevented it from being widely used in place of copper for electrical purposes. Another notable exception is in high-end audio cables, although the actual benefits of its use in this application are questionable. Among metals, pure silver has the highest thermal conductivity, the whitest color, and the highest optical reflectivity Silver also has the lowest contact resistance of any metal. Silver halides are photosensitive and are remarkable for their ability to record a latent image that can later be developed chemically. Silver is stable in pure air and water, but tarnishes when it is exposed to air or water containing ozone or hydrogen sulfide.

3.14 GRADING OF SILVER

Silver that is found with some percentage of other elements in it is called impure silver. That is why it is graded upon its fineness. According to the Indian standards, silver is graded into six categories: Table 4 Grade 9999 9995 999.5 999 999 Silver Grading 970 970 925 925 916 916

Fineness 999.9

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TOP 10 SILVER PRODUCING COUNTRIES IN 2011 1. Mexico: In the last 500 years, Mexico silver industry provided one-third of the world. In Mexico, the production of silver is 128.6 million ounces. It has two of the top silver miners, industries Penoles and Grupo which together produce 66% silver. It is the pillar of world production of silver. 2. Peru: Mexico and Peru are the two pillars of silver production in the world. It produces 116.1 million ounces silver in Peru. In silver output, companies were more active and produce more than the last year. It exports about $479 million silver compared with $281 million in 2005. 3. China: The production of silver in china is 99.2 million ounces. It supplies 29,000 tons silver to the world. The domestic price of Chinas silver market is higher than international market price. The demand of silver in china is high. 4. Australia: Its production is 59.9 million ounces. It has the largest share of the worlds economic silver resources. Australias silver production ranks after Mexico, Peru and the china. About 25% its mine output is refined to silver metal and sent to Japan. 5. Chile: The productions of silver in Bolivia and in Chile are same. It also produces 41.0 million of ounces silver. It is very old silver production country and remains among the fifth number. 6. Bolivia: The production of silver in Bolivia is 41.0 million. San Cristobal is the top silver mine in Bolivia producing some 620,000 tons of the silver. San Cristobal mine is the third largest producers in the world. 7. United States: The United state is the major producers of the production silver in the world. In United State, silver produce 1,200 metric tons silver. 35% of the silver it used. The 65% is imported from Mexico, Canada, Peru and Chile. 8. Poland: The production of silver is 37.7 million in Poland. The production of silver increases in 2011 compared with their average production from 1998 to 2006 is 14.4%. The situation of Poland is close because a majority of the production is handled by a single mine.

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9. Russia: It produces 36.8 million of ounces silver. Russias biggest silver producing regions are the Krasnoyarsk territory, Bashkortostan, Chelyabinsk region, Orenburg region Primorye territory. Over the past Russia was produce 60% silver. Now it produce 90% silver. 10. Argentina: Argentina has jumped 55% in silver output in 2009 to 15.5% million ounces over the previous year. It produces 20.6 million of ounces silver. Only one mine at this time is in production and producing revenues. The pirquitas mine in Argentina.

The countries that are the major consumers of silver are: United states Canada Mexico United Kingdom France Germany Japan India

3.15 PRODUCTION OF SILVER IN INDIA India hardly produces any silver and is basically a silver importing country. It holds the 20th place in the list of silver producing countries. The three major silver producing states in India are: Rajasthan Gujarat Jharkhand

Rajasthan was the leading silver producing state in India with a production of around 32 thousand tons. Gujarat follows on the second place with a production of around 20 thousand tons.

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3.16 INDIAN SILVER MARKET

As we know that, India is primarily a silver importing country, as the production of India is not sufficient to satisfy the ever-growing domestic demand. The production of silver in India stands out at the figure of around 2.1 million ounces placing it at the 20th position in the list of major silver producing countries. The import of silver in India hovers over 110 million ounces that shows the huge size of Indian domestic demand. However, this import level fell sharply as a result of the decline in demand due to rise in silver prices and inconsistent monsoon on which the income of the rural sector depends. But, even this sharp decline could not affect Indias reputation of being one of the largest consumer countries of silver in the world. India stands third after United States and Japan among the leading consumers of silver in the world. The countries from which India imports silver and maintain the flow of silver in the market are: China United Kingdom European Union Australia Dubai Over 50% share of import of silver in India is held by Chinese silver. The major importing center of silver in India was Mumbai but now it has been shifted to Ahmedabad and Jaipur due to high sales tax and octroi charges.

3.17 MARKET INFLUENCING FACTORS FOR INDIA Price movements of other metals. Income level of the rural sector of the economy. Available supply verses Fabrication demand. Fluctuation in deficits and interest rates. Inflation. Major trading centers of silver London Zurich New York (COMEX)

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Chicago (CBOT) Hong Kong Tokyo Commodity Exchange (TOCOM)

In India, silver is traded at the following places: Delhi Indore Rajasthan Madhya Pradesh Mathura (Uttar Pradesh) Rajkot (Gujarat) In India the Silver is traded through the well know exchange mainly MCX and NCDEX, but most of the traders favor trading through MCX. If a particular trader wants to take the physical delivery of the silver then he can do so as per the specifications set by the respective exchange. The trading in Silver is available in 1kg and 100Grams. The increase in 1rupee of Silver is termed a 1 tick which stands for Rs100 and Rs10 respectively. The margin amount which is supposed to be paid by the traders is set by the exchange depending upon the fluctuation in the prices. Initially the margin was set @4% for every month, and this may vary depending upon the volatility.

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PART - 2 PRIMARY STUDY

CHAPTER 4 INTRODUCTION OF THE STUDY

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4.1 LITERATURE REVIEW

Commodity Derivatives Market in India: Development, Regulation and Future Prospects by Dr. Narender L. Ahuja in 2005 India is one of the top producers of a large number of commodities, and also has a long history of trading in commodities and related derivatives. The commodities derivatives market has seen ups and down, but seem to have finally arrived now. There is a great need and vast scope of commodity derivative market in India provided the mistakes of the past are not repeated and the Government promptly addresses the serious problems facing the market. Among issues that need immediate resolution are those related to introduction of commodity options, warehousing, cash settlement at maturity and standardization?

Growth in Commodity Investment: Risks and Challenges for Commodity Market Participants by Emmet Doyle, Jonathan Hill and Ian Jack in March 2007 Past and continued future growth in the level of commodities investment, a raft of new products, and a changing user base have combined to create a significantly different commodities market environment in recent years, giving rise to a number of challenges and risks for those who participate in these markets. The risks identified in this paper should not come as a surprise to those active in the market, but none-the-less serve to focus attention on those areas we consider to be most important. Firms should consider how they have addressed these risks and ensure they continue to mitigate them in an appropriate manner.

Issues and Concerns of Commodity Derivative Markets in India by Niranjan Ghosh in November 2009 Indian academics abroad have turned their shoulders to Indian markets, citing reasons of low publication potential. Even from the policymakers perspective, there seems to be a less than sufficient attempt to promote research on market microstructure in commodity markets, while financial economists have rarely attempted to understand commodity market microstructure. It is a fact that commodity market research (while talking of agro-commodities) has been dominated by agricultural economists. This has resulted in less than optimum appreciation of the nuances of financial economics associated with this area. On the other hand, sole intervention of financial economists in commodity market can result in reductionist frameworks that might not be applicable for commodity derivative research. For issues on

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emerging markets like environmental resources, the intervention of environmental economists trained in neoclassical valuation frameworks would be a welcome new breath in commodity market research. They further need to collaborate with researchers from the space of financial economics. At the same time, the important role of institutionalists cannot be over emphasized.

Commodity Market Review by Alexander Sarris in May 2010 Volatile prices have signicant negative effects on developing countries. Price surges induce substantial income risks and can be particularly detrimental to developing countries welfare and growth prospects. The papers contribute towards analyzing the empirical behaviour of food prices during the recent price surge and provide a systematic examination on a number of issues. The main drivers of agricultural price volatility are discussed. The role of speculators in the food futures markets and the effect of national food reserve and trade policy responses are examined, illustrating the implications for developing countries. Most of these issues are controversial, but at the same time raise a variety of important policy questions. Should food price volatility increase, concerted effort at the international level will be necessary in order to shield low income food importing developing countries from the negative effects of sudden and unpredictable increases.

4.2 BACKGROUND OF THE STUDY

The price and the price volatility of basic commodities matter enormously to economies and to populations all over the world. Energy prices often linked to oil prices are a major element of most economies. The prices of basic foodstuffs from wheat to corn are crucial not only to budgets in developed countries where they average about 10% of household spending but, in particular, to millions in developing countries where they can be all about survival and account for as much as 80% of household spending. Base metals like copper, aluminium and iron are key inputs to many industries and thus critically important to both developing and developed countries alike. Such prices matter not only to those who consume these products either directly or as an input to other production- but also to those who have to decide whether to invest in exploring for more oil or in alternatives to oil or to plant more of a particular product next year and gear up to grow more the year after. 45

4.3 STATEMENT OF PROBLEM The commodity market is still new and growing in India and it has a bright scope to develop, on that view this research study is taken. The Research main intention is to know the various price drivers that determine the price of commodity. The main problem in the commodity market is to know the risk perception of the traders or investors of commodity market. Especially this research on Gold and silver because these two commodities have global market with high volatility. The price of gold and silver are highly affected by the various factors happening in and around the world. In order to know behavior of this to commodity to that factor, researcher referred past reacts of commodity market.

4.4 PURPOSE OF THE STUDY To understand the trading and investment perspective of commodity traders and other investors. To understand how commodity market will affect the local market.

4.5 RESEARCH OBJECTIVES To analyze the view of commodity traders. To make understand the process of commodity trading in India. To know the investment pattern of commodity traders and investors. To learn about the Indian commodity market. To study different price drivers affect the Gold and silver. To find out how price of Gold and silver fluctuate in Indian Commodity market. To analyze the perception of investors towards commodities futures To Study the Factors considered by the Investors and those, which ultimately influence him while investing. To study the volatility of the market.

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4.6 SIGNIFICANCE OF THE STUDY Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Access to a huge potential market much greater than the securities and cash market in commodities. Member can trade in multiple commodities from a single point, on real time basis.

4.7 HYPOTHESIS

In this research study, Chi-Square, Annova and One Sample T-Test has used for data analysis and interpretation.

1) H0: There is no significant relationship between Age of the Respondent and their Risk Perception of Commodity Market. 2) H0: There is no significant relationship between Education of the Respondent and their Risk Perception of Commodity Market. 3) H0: There is no significant relationship between Annual Income of the Respondent and their Risk Perception of Commodity Market. 4) H0: There is no significant relationship between Profession of the Respondent and their Risk Perception of Commodity Market. 5) H0: There is no significant difference in Traders or Investors Volatility Perception for Various Commodities and their Association with the Market. 6) H0: The impact of the factors affecting volatility of the commodity market is less than or equal to moderate value ( 3). 7) H0: The sources of information which influences respondents decision to trade in commodity market is less than or equal to moderate value ( 3).

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CHAPTER 5 RESEARCH METHODOLOGY

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5.1 RESEARCH DESIGN Descriptive research is used in this study because it will ensure the minimization of bias and maximization of reliability of data collected. The researcher had to use fact and information available through questionnaire and analyze this information to make critical evaluation. Quantitative research has been carried out through questionnaire in order to get the data into figurative terms for analysis.

5.2 SOURCES OF DATA The Sources of data are from Brokers, Internet, Reference Books, Surveyors Responses and Commodity Traders or Investors.

5.3 METHODS OF DATA COLLECTION Primary data delivers more specific results than secondary research, which is an especially important consideration when one launching a new product or service. In addition, primary research is usually based on statistical methodologies. The tiny sample can give an accurate representation of a particular market. Primary data was collected through a survey in the twin cities of Ahmedabad & Gandhinagar. A sample of 103 traders and investors were surveyed. They were all asked to answer a questionnaire true to their knowledge. The feedback obtained from the customer was instrumental, gauging the perception of the investors towards commodity futures or capital market. It also throws light on the factors, which influence them to make decisions while investing. Primary Sources: 1. Questionnaire 2. Personal interview

Secondary data is based on information gleaned from studies previously performed by government agencies, chambers of commerce, trade associations and other organizations. This includes census bureau information. Much kind of this information can be found in libraries or on the web, but looks on business publications, as well as magazines and newspapers.

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The main sources of secondary data are the various web sites like Sharekhan Commodities Pvt. Ltd., Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX) and more such organizations. Secondary Sources: 1. Magazines. 2. Newspapers 3. Websites 4. Books

5.4 POPULATION

Population is the traders or investors of Commodity Market in Ahmedabad and Gandhinagar.

5.5 SAMPLE DESIGN Sampling type: In this project convenient sampling method is used for the selection of traders and investors. Sampling unit: To define sampling unit, one must answer the question that who is to be surveyed. In this project sampling units are commodity traders and other investors. Sample size: The sample size of the survey was 103 people.

5.6 DATA COLLECTION INSTRUMENT

Primary Data Collection Method:

The main instrument of this research is Structured Questionnaire method. Questionnaire is the heart of the survey operation. This is structured questionnaire, which has been framed for conducting the survey. The questions were presented with exactly the same wording and in

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the same order to all of the respondents. In this questionnaire method various types of questions have been framed. They are: a. Open-ended b. Close ended c. Multi choice method

Secondary Data Collection source: Data available from the internet has been used during the project. Data provided by some Magazines, Journals and Newspaper has also been used.

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CHAPTER-6 DATA ANALYSIS AND INTERPRETATION

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6.1 ANALYSIS AND INTERPRETATION OF THE PRIMARY RESEARCH

Table 5 Characteristics

Demographic Profile or Characteristics of the Respondents: Particulars Frequency Student Business Job Total MALE FEMALE Total 18 TO 30 30 TO 40 Above 40 Total Under Graduate Graduate Post Graduation Total Less than 1,00,000 1,00,000 to 3,00,000 3,00,000 to 5,00,000 More Than 5,00,000 Total 17 46 40 103 Frequency 102 1 103 Frequency 45 29 29 103 Frequency 19 53 31 103 Frequency 16 44 33 10 103

Percent 16.5 44.7 38.8 100.0 Percent 99.0 1.0 100.0 Percent 43.7 28.2 28.2 100.0 Percent 18.4 51.5 30.1 100.0 Percent 15.5 42.7 32.0 9.7 100.0

Profession

Gender

Age

Education

Annual Income

Interpretation: Profession: Out of 103 respondents in the survey conducted 17 are students, 46 are having business and 40 are having job or service. Gender: From 103 respondents, only 1 is female and 102 are male. So we can observe that in commodity trading females are not interested.

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Age: The age group of 18 to 30 is having highest frequency i.e. 45 respondents and remaining two age groups are having same frequency i.e. 29 respondents. Education: Only 19 respondents are under graduate, 53 are graduates and 31 are post graduates out of total respondents. Annual Income: 16 respondents showed their income as Less than 1 Lakh, 44 respondents as 1 Lakh to 3 Lakh, 33 respondents as 3 Lakh to 5 Lakh and 10 respondents showed their income as More than 5 Lakh.

6.2 ANALYSIS OF SURVEY Q1.) Do you currently invest in Commodity Market? Table 6 Respondents Investing in Commodity Market Frequency 100 3 103 Percent 97.1 2.9 100.0

YES NO Total

Interpretation: Out of 103 respondents, 100 are currently investing or trading in Commodity Market and 3 respondents are not.

Q2.) If no, what are the reasons? Interpretation: Only 3 respondents are currently not investing in Commodity market, because of insufficient funds, heavy losses in past dealings and due to uncertain future trend in the Commodity Market.

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Q3.) What is your risk perception about Commodity Market? Table 7 LESS RISKY RISKY VERY RISKY Total Figure 4 Risk Perception about Commodity Market Frequency 22 53 28 103 Percent 16.5 53.4 30.1 100.0

Risk Perception about Commodity Market

Interpretation: 22 respondents perceived Commodity Market as Less Risky, 53 respondents perceived as Risky and 28 respondents perceived Very Risky.

Q4.) Give your rating about volatility perception for following commodities in market? 1 = Least Volatile to 5 = Most Volatile Table 8 Volatility Perception for Various Commodities Bullion Least volatility Less volatility Moderate volatility More volatility Most volatility TOTAL 2 13 30 31 27 103 Spices 4 20 46 31 2 103 Oil 1 9 23 48 22 103 Fiber 1 46 46 10 0 103 Metal 2 8 15 44 34 103

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Figure 5

Volatility Perception for Various Commodities

Interpretation: Here in Bullion Commodities, one can say that they are highly volatile because that more than 50% of respondents say that it is more or most volatile. In Spices, 46 respondents say that it has moderate volatility. In Oil, 70% of the respondents say that it is highly volatile. Based on the respondents responses, Fiber is Less Volatile compared with other Commodities. And Metal is the Most Volatile Commodity as per the responses of respondents. Thus, Metal Commodities is the Most Volatile, Bullion and Oil are More Volatile, Spices is Moderately Volatile and Fiber is Least Volatile compared to other commodities.

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Q5.) Which of the following factor affects the volatility of the commodity market? 1 = Lowest Impact to 5 = Highest Impact Table 9 GDP Growth Rate Lowest Impact Less Impact Moderate Impact High Impact Highest Impact TOTAL 4 11 30 35 23 103 Factors Affecting Volatility in the Market Economy Global Trend 0 8 28 31 36 103 Agricultural Production 0 23 38 34 8 103 Inflation Rate 0 3 18 49 33 103 Seasonal Variation 4 23 36 29 11 103

Figure 6

Factors Affecting Volatility in the Market

Interpretation: As per the respondents, the change in GDP Growth Rate brings high volatility in the market which we can observe from their responses. 67 % of the respondents say that Economy Global Trend is a reason for fluctuation in the prices.

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Compared with GDP Growth Rate and Economy Global Trend, Agricultural Production has moderate impact for the fluctuation in the prices of different Commodities. Inflation Rate has the highest impact for the volatility in the market as per respondents. Whereas, Seasonal variation has less impact for the volatility in the market compared to other factors. Thus, one can say that GDP Growth Rate, Economy Global Trend and Inflation Rate bring more volatility in the market compared to Agricultural Production and Seasonal Variation.

Q6.) Which source of information influences your decision to trade in Commodities? 1 = Lowest Influence to 5 = Highest Influence

Table 10

Sources of Information Influences for Trade in Commodities Advice of friends 27 23 32 21 0 103

Lowest Influence Less Influence Moderate Influence High Influence Highest Influence TOTAL

Independently 6 23 30 31 13 103

News News Channel Internet Broker Paper 1 9 6 5 9 40 42 11 103 23 28 36 7 103 3 32 42 20 103 18 25 45 10 103

Business Magazine 17 29 26 27 4 103

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Figure 7

Sources of Information

Interpretation: Most of the respondents as per their responses takes decisions to trade in Commodity Market Independently i.e. as per their knowledge or their understanding about different commodities. News Channels also has high influence for taking decision to trade in Commodity Market. Internet is having less influence for taking decision to trade in Commodity Market . The reason may be less awareness of the internet usage. Brokers and Newspapers is having high influence compared with Advice of Friends and Business Magzines. Thus, Traders/Investors take decisin to trade in Commodity Market as per their understanding about the market.

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Q7.) Which factor plays a crucial role when you make a decision to invest in Commodity Market? Table 11 Purpose for Investment

Frequency

Risk Speculative Leverage Arbitrage Reduction Motive Benefit Investment Benefit NO YES NO YES NO YES NO YES NO YES 72 31 65 38 79 24 41 62 81 22

Figure 8

Purpose for Investment in Commodity Market

Interpretation: Here, high no. of respondents invests money in Commodity Market for the purpose of Speculative Motive and Investment. And very less respondents invests money in Commodity Market for the purpose of Risk Reduction, Leverage Benefit and Arbitrage Benefit.

Q8.) What part of your saving do you invest in Commodity Market? Table 12 Less than 25% 64 Savings Invested in Commodity Market 25% to 50% 36 50% to 75% Above 75% 3 0 TOTAL 103

Frequency

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Figure 9

Savings Invested in Commodity Market

Interpretation: Here, 64 respondents invests less than 25% of their savings in Commodity Market, 36 respondents invests 25% to 50% and 3 respondents invests 50% to 75% their savings, where as no respondents invests above 75% of their savings in Commodity Market. Q9.) On an average what is the return you expect from Commodity Market? Table 13 10% to 15% Frequency 29 Expected Return from Commodity Market 15% to 20% 47 20% to 30% 21 More than 30% 6 TOTAL 103

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Figure 10

Expected Return from Commodity Market

Interpretation: Here, 29 respondents on an average expect 10% to 15% returns, 47 respondents expects 15% to 20%, 21 respondents expects 20% to 30% and 6 respondents expect more than 30% return from Commodity Market.

Q10.) How long you are associated with Commodity Market? Table 14 Less than 1 year Frequency 46 Figure 11 Association with the Market 1 to 5 year 45 5 to 10 year 12 More than 10 year 0 TOTAL 103

Association with the Market

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Interpretation: Here, 46 respondents are associated with Commodity Market from Less Than 1 year, 45 respondents from 1 to 5 Years and 12 respondents from 5 to 10 years with the Commodity Market.

Q11.) Which are the preferred commodities you look for investment in Commodity Market? Table 15 Preferred Commodities

Cereals Metal Crops Oil & Pulse Spices Energy Bullions No Yes No Yes No Yes No Yes No Yes No Yes No Yes Frequency 32 71 100 3 70 33 95 8 86 17 69 34 34 69

Figure 12

Preferred Commodities

Interpretation: From the above chart it is clear that most of the Traders/Investors prefer Metal and Bullion Commodities for investment, less number of traders prefers other commodities like Oil, Energy, Spices, etc.

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Q12.) Which type of trading do you prefer to deal with? Table 16 Types of Deals

Square-up Mode Arbitrage Intraday Hedging Delivery based No Yes No Yes No Yes No Yes No Yes 60 43 92 11 58 45 69 34 58 45 Frequency

Figure 13

Types of Deals

Interpretation: From the above it is clear that most of the traders or investors are speculators or hedgers because most of them either use Intraday or Square up Mode type of deal for trading in Commodity Market. Here, many of the traders takes the benefits of different type of deals as per their understanding and some traders use more than 1 type deal in Commodity Market.

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Q13.) Which broker you prefer for commodity trading and advice purpose? Table 17 Different Brokers

Angel Indiabulls broking Sharekhan Religare Others No Yes No Yes No Yes No Yes No Yes 79 24 69 34 65 38 93 10 86 17 Frequency

Figure 14

Different Brokers

Interpretation: This chart only indicates the name of the broking firms which traders or investors prefer for trading and advices about the Commodity Market. Most of the traders or investors prefer Sharekhan and Angel Broking as a broker.

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Q14.) Kindly rate the below statements of Commodity Market on 5 point likerts scale. 1 = Strongly Disagree and 5 = Strongly Agree Table 18 Sr no. 1 2 3 4 5 6 7 8 9 10 Statements One must take high risk for making profit in the commodity market. Buy commodities when prices are going down and sell commodities when prices are going up. When someone makes money, someone else loses it. Investing in commodities is just like gambling. Commodities that go up must come down. Buy And Hold is the best strategy. In the volatile market one must be an active trader. Investing in the commodity market lets you to participate in the growth of the economy. Investing in commodities make sense only if we are in bull market. Farmers record-breaking incomes due to higher commodity prices. Statements of Commodity Market Std. Deviation 3.6214 1.03010 3.5049 3.3398 2.9320 3.0680 3.2718 3.7961 3.1845 2.7864 2.7573 .99876 1.31770 1.36671 .95242 .98214 1.05123 .96759 1.05394 1.26387 Mean

Interpretation: From the above table one can say that the responses for statement no. 3, 4, 5, 6, 8, 9 and 10 are neither agree nor disagree, but among these statement no. 3, 4and 9 fluctuations in responses is high because the standard deviation is more than 1. And the responses for statement no. 1, 2 and 7 shows the disagreement towards the myths and realities about the Commodity Market, but among these statement no. 1 and 7 has high variability of responses.

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6.3 HYPOTHESIS TESTING

1.) Age & Risk Perception about Commodity Market

H0: There is no significant relationship between Age of the Respondent and their Risk Perception of Commodity Market.

H1: There is significant relationship between Age of the Respondent and their Risk Perception of Commodity Market. Table 19 Age * Risk Perception about Commodity Market

Risk Perception about Commodity Market LESS RISKY Age 18 TO 30 30 TO 40 Above 40 Total 11 7 4 22 RISKY 20 12 21 53 Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association No. of Valid Cases Conclusion: From the above table one can say that, since the significant value is more than p value i.e. 0.121 > 0.05 so we cannot reject H0 hypothesis. This means that there is a no significant relationship between Age of the respondent and their Risk Perception of Commodity Market. 7.297 7.547 .123 103 Df 4 4 1 Asymp. Sig. (2-sided) .121 .110 .726 VERY RISKY 14 10 4 28 Total 45 29 29 103

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2.) Education & Risk Perception about Commodity Market H0: There is no significant relationship between Education of the Respondent and their Risk Perception of Commodity Market.

H1: There is significant relationship between Education of the Respondent and their Risk Perception of Commodity Market. Table 20 Education * Risk Perception about Commodity Market Risk Perception about Commodity Market LESS RISKY Education Under Graduate Graduate Post Graduation Total 6 10 6 22 RISKY 7 31 15 53 VERY RISKY 6 12 10 28 Total 19 53 31 103

Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 3.327 3.283 .461 103 Df 4 4 1 Asymp. Sig. (2-sided) .505 .512 .497

Conclusion: From the above table one can say that, since the significant value is more than p value i.e. 0.505 > 0.05, so we cannot reject H0 hypothesis. This means that there is a no significant relationship between Education of the respondent and their Risk Perception of Commodity Market.

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3.) Annual Income & Risk Perception about Commodity Market H0: There is no significant relationship between Annual Income of the Respondent and their Risk Perception of Commodity Market.

H1: There is significant relationship between Annual Income of the Respondent and their Risk Perception of Commodity Market. Table 21 Annual Income * Risk Perception about Commodity Market Risk Perception about Commodity Market LESS RISKY Annual Income Less than 1,00,000 1,00,000 to 3,00,000 3,00,000 to 5,00,000 More Than 5,00,000 Total 7 7 7 1 22 RISKY 7 23 15 8 53 VERY RISKY 2 14 11 1 28 Total 16 44 33 10 103

Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases Conclusion: 10.139 9.877 1.271 103 Df 6 6 1 Asymp. Sig. (2-sided) .119 .130 .260

From the above table one can say that, since the significant value is more than p value i.e. 0.119 > 0.05 so we cannot reject H0 hypothesis. This means that there is a no significant relationship between Annual Income of the respondent and their Risk Perception of Commodity Market.

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4.) Profession & Risk Perception about Commodity Market

H0: There is no significant relationship between Profession of the Respondent and their Risk Perception of Commodity Market.

H1: There is significant relationship between Profession of the Respondent and their Risk Perception of Commodity Market. Table 22 Profession * Risk Perception about Commodity Market Risk Perception about Commodity Market LESS RISKY Profession Student Business Job Total 7 8 7 22 RISKY 5 26 22 53 VERY RISKY 5 12 11 28 Total 17 46 40 103

Chi-Square Tests Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association No. of Valid Cases Conclusion: 5.729 5.383 .860 103 df 4 4 1 Asymp. Sig. (2-sided) .220 .250 .354

From the above table one can say that, since the significant value is more than p value i.e. 0.220 > 0.05 so we cannot reject H0 hypothesis. This means that there is a no significant relationship between Profession of the respondent and their Risk Perception of Commodity Market.

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5.) Volatility Perception for Various Commodities & Traders/Investors Association with the Market H0: There is no significant difference in Traders or Investors Volatility Perception for Various Commodities and their Association with the Market. H 1: There is significant difference in Traders or Investors Volatility Perception for Various Commodities and their Association with the Market. Traders or Investors Volatility Perception for Various Commodities and their Association with the Market ANOVA Sum of Squares Volatility Perception for bullion commodities Between Groups Within Groups Total Volatility Perception for spices commodities Between Groups Within Groups Total Volatility Perception for oil commodities Between Groups Within Groups Total Volatility Perception for Fiber commodities Between Groups Within Groups Total Volatility Perception for metal commodities Between Groups Within Groups Total 3.558 111.549 115.107 .173 74.351 74.524 .856 84.445 85.301 1.235 44.746 45.981 8.604 90.309 98.913 df 2 100 102 2 100 102 2 100 102 2 100 102 2 100 102 4.302 4.764 .903 .011 .617 1.380 .447 .256 .428 .844 .507 .604 .087 .744 .117 .890 Mean Square F Sig. .208

Table 23

1.779 1.595 1.115

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Conclusion: From the above table one can say that, since the significant value is less than p value i.e. 0.011 < 0.05 in Metal Commodities, so we reject H0 hypothesis. This means that there is significant difference in Traders or Investors Volatility Perception for Metal Commodities and their Association with the Market. But in all the other Commodities we accept H0 hypothesis because significant value is more than p value i.e. 0.05. This means that there is no significant difference in Traders or Investors Volatility Perception for Various Commodities (except Metal) and their Association with the Market.

6.) Factors affecting the Volatility of the Commodity Market

H0: The impact of the factors affecting volatility of the commodity market is less than or equal to moderate value ( 3).

H1: The impact of the factors affecting volatility of the commodity market exceeds moderate value ( > 3).

Table 24

Impact of the Factors Affecting Volatility of the Commodity Market

One-Sample Statistics Factor affecting the volatility of the commodity market GDP Growth Rate Economy Global Trend Agricultural Production Inflation Rate Seasonal Variation N 103 103 103 103 103 Mean 3.6019 3.9223 3.2621 4.0874 3.1942 Std. Deviation 1.06954 .96700 .89619 .78098 1.02955 Std. Error Mean .10538 .09528 .08830 .07695 .10144

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One-Sample Test Test Value = 3 Factor affecting the volatility of the commodity market t GDP Growth Rate Economy Global Trend Agricultural Production Inflation Rate Seasonal Variation 5.712 9.680 2.969 14.130 1.914 df 102 102 102 102 102 Sig. (2-tailed) .000 .000 .004 .000 .058 Mean Difference .60194 .92233 .26214 1.08738 .19417 95% Confidence Interval of the Difference Lower .3929 .7333 .0870 .9347 -.0070 Upper .8110 1.1113 .4373 1.2400 .3954

Conclusion: From the above table one can say that, since the significant value is more than p value i.e. 0.058 > 0.05 for Seasonal Variation Factor, so we cannot reject H0 hypothesis. This means that the impact of the Seasonal Variation on the volatility of the commodity market is less than or equal to moderate value ( 3). But for all the other Factors, we reject H0 hypothesis because significant value is less than p value i.e. 0.05. This means that the impact of remaining factors such as GDP Growth Rate, Economy Global Trend, Agricultural Production and Inflation Rate on the volatility of the commodity market exceeds moderate value ( > 3) i.e. these factors has much impact on volatility of Commodity Market.

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7.) Sources of information that influences respondents decision to trade in commodities. H0: The sources of information which influences respondents decision to trade in commodity market is less than or equal to moderate value ( 3). H1: The source of information which influences respondents decision to trade in commodity market exceeds moderate value ( > 3). Sources of Information that Influences Respondents Decision to Trade One-Sample Statistics Source of Information Independently News Channel Internet Broker News Paper Advice of friends Business Magazine N 103 103 103 103 103 103 103 Mean 3.2136 3.5146 3.0874 3.6505 3.3592 2.4563 2.7282 Std. Deviation 1.10835 .83858 1.09461 1.01661 1.03710 1.09165 1.13927 Std. Error Mean .10921 .08263 .10786 .10017 .10219 .10756 .11226

Table 25

One-Sample Test (Test Value = 3) Source of Information Sig. (2-tailed) .053 .000 .420 .000 .001 .000 .017 Mean Difference .21359 .51456 .08738 .65049 .35922 -.54369 -.27184 95% Confidence Interval of the Difference t Independently News Channel Internet Broker News Paper Advice of friends Business Magazine 1.956 6.227 .810 6.494 3.515 -5.055 -2.422 df 102 102 102 102 102 102 102 Lower -.0030 .3507 -.1266 .4518 .1565 -.7570 -.4945 Upper .4302 .6785 .3013 .8492 .5619 -.3303 -.0492

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Conclusion: From the above table one can say that, since the significant value is more than p value i.e. 0.053 > 0.05 for traders who take the decisions independently, so we cannot reject H0 hypothesis. This means that the influence of independent decision to trade in commodity market is less than or equal to moderate value ( 3). And the significant value is more than p value i.e. 0.420 > 0.05 for traders who take decision on the basis of information from internet. This means that the influence of information from internet on decision to trade in commodity market is less than or equal to moderate value ( 3). But for all the other sources of information which influences decision to trade in

commodity market, H0 hypothesis is rejected because significant value is less than p value i.e. 0.05. This means that the source of information which influences decision to trade in commodity market exceeds moderate value ( > 3).

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CHAPTER-7 RESULTS AND FINDINGS

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7.1 FINDINGS AND RESULTS

Around 85 commodities are trading in futures in India through 25 exchanges, which an ordinary investor does not know it. Very few traders trade in the futures market because they were not fully aware of hedging and its benefits. Awareness among many traders or investors about the proper understanding of commodity market and future commodity trading is very low. Most of them are even did not know about the varieties of commodities available in the market. The traders or investors who deal in delivery based trading where facing the issues regarding the delivery system, as there is not enough warehouse of the exchanges situated at nearby distances. Thus adding additional cost of transportation to the traders. Hedgers are having problem with the delivery mechanism of the goods, hence they would prefer squaring off their position rather than taking the delivery of the goods. Most of the trader expects 15% to 20% of return from commodity market. As compared to the total market participants, very few people participate in the commodity markets due to the high risk involved in the commodity markets. To reap higher profits in the commodity one requires or is required to acquire strong fundamental, as it helps them in maximizing the profit, and also helps in minimizing the losses if any by putting stop loss. The commodity market happens to be highly volatile especially in bullion and metal commodities. Most of the traders in the commodity maket first perfer in investing in Gold followed by Silver, Crude Oil, and the Base Metals. Apart form these they were some trader who also invest agricultural commodities like Gur, Turmeric, Mentha Oil, Sugar, etc.
The production, supply and distribution of many agricultural commodities are controlled by the government and only forwards and futures trading are permitted in certain commodity items. People who knows, they believe that operators and big players in the market drive this future commodity market. Most of peoples feel that the qualities of the commodities are not as per the requirement.

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For the process of taking or giving delivery in future commodity market is lengthy, costly, and required so many documents. The delivery centers of commodities are very less in India compare to other developed countries. People still considering that to invest in commodity market is very risky. People still considering commodity market for speculation rather than business purpose.

22 respondents perceived Commodity Market as Less Risky, 53 respondents perceived as Risky and 28 respondents perceived Very Risky. Metal Commodities is the Most Volatile, Bullion and Oil are More Volatile, Spices is Moderately Volatile and Fiber is Least Volatile compared to other commodities. GDP Growth Rate, Economy Global Trend and Inflation Rate bring more volatility in the market compared to Agricultural Production and Seasonal Variation. Traders/Investors take decision to trade in Commodity Market as per their understanding about the market. Mostly they take decision to trade on the basis of brokers advice, newspaper reading and from news channels. High no. of respondents invests money in Commodity Market for the purpose of Speculative Motive and Investment. And very less respondents invests money in Commodity Market for the purpose of Risk Reduction, Leverage Benefit and Arbitrage Benefit. 64 respondents invests less than 25% of their savings in Commodity Market, 36 respondents invests 25% to 50% and 3 respondents invests 50% to 75% their savings, where as no respondents invests above 75% of their savings in Commodity Market. This means most of the traders invest less than 25% of their savings in commodity market. 29 respondents on an average expect 10% to 15% returns, 47 respondents expects 15% to 20%, 21 respondents expects 20% to 30% and 6 respondents expect more than 30% return from Commodity Market. So a trader expects 15% to 20% of return from Commodity Market. Most of the traders or investors are speculators or hedgers because most of them either use Intraday or Square up Mode type of deal for trading in Commodity Market. Demographic Characteristics i.e. Age, Education, Profession and Annual Income of the respondents of the survey conducted, does affects the risk perception about commodity market.

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There is a high impact of factors such as GDP Growth Rate, Economy Global Trend, Agricultural Production and Inflation Rate on the volatility of the commodity market. There is no significant difference in Traders or Investors Volatility Perception for Various Commodities like Bullion, Spices, Oil and Fiber (except Metal) and their Association with the Market i.e. number of years in Commodity Market.

Thus, these are results and findings of this research study on the basis of primary and secondary sources.

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CHAPTER-8 LIMITATIONS OF THE STUDY

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8.1 LIMITATIONS

This survey was restricted to Ahmedabad and Gandhingar city. The sample size for the survey of people was limited to 100 respondents, which might not be representing the whole country. The results are totally derived from the respondents answers. There might be a difference between the actual and projected results. Research also depends on surveyors bias & his/her ability to analyze the data & draw conclusion. The time duration to carry out the survey was very short.

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CHAPTER-9 CONCLUSIONS / SUGGESTIONS

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9.1 SUGGESTIONS ENHANCE AWARENESS ABOUT THE COMMODITY MARKET: -

Enhance awareness among Gold merchants who can be play pivotal role in Bullion Market (Gold and Silver). As per survey results very less people trade in Agricultural Commodities, so Traders should properly information for bringing awareness among agricultural merchants about their respective commodities. Investor must get aware about many features of futures trading.
The FMC has to take some steps to increase the awareness of future commodity trading India. The FMC has to encourage the mutual fund companies and institutional investors to invest in commodity market in India. The government has to allow FIIs to invest in commodity market in India in future market not in option. The FMC should increase the range of commodities in future commodities in commodity market in India. To motivate the commodity business in India the FMC should come up with some rebate in taxes. The FMC should increase the delivery centers of commodities in India.

9.2 CONCLUSION India is an agrarian country producing a large variety of crops. It also stands as one of the leaders in the production of wheat, spices and other such crops. For such a country like ours, commodity futures trading can prove to be an excellent opportunity to the farmers and other such traders for efficient price discovery. Commodity trading can also be used as a hedging tool for minimizing risk against future price fluctuations. According to the primary research, we have concluded that the Demographic Characteristics of any Traders or Investors i.e. Age, Education, Profession and Annual Income has no significant relationship with their Risk Perception about Commodity Market.

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 Primary Research reveals that there is no significant difference in Traders or Investors Volatility Perception for Various Commodities like Bullion, Spices, Oil and Fiber (except Metal) and their Association with the Market i.e. number of years in Commodity Market. The impact of factors such as GDP Growth Rate, Economy Global Trend, Agricultural Production and Inflation Rate on the volatility of the commodity market exceeds moderate value ( > 3) i.e. these factors has much impact on volatility of Commodity Market.

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APPENDIX AND ANNEXURE

ANNEXURE-I

QUESTIONNAIRE
We are the student of National Institute of Co-operative Management and presently doing project on Traders/Investors Perspective on Commodity Market. I request you to fill the questionnaire below and assure you that the data generated shall be used for academic purpose only. (1).NAME: _ ____

(2).ADDRESS:________________________________________________________________ (3).CONTACT NO.: _____________________ (4).PROFESSION: Student Job (5). GENDER:

Male

Business

Female

(6). AGE: 18-30 40-50 (7).EDUCATION: Under Graduate Post Graduate (8) ANNUAL INCOME: Less than 1,00,000 3,00,000 to 5,00,000 (9).Do you currently invest in Commodity Market? Yes (10) If no, what are the reasons:
_________________________________________________________________________________________________________________

30 40 Above 50

Graduate

1,00,000 to 3,00,000 More Than 5,00,000

No

__________________________________________________________________________

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(11).What is your risk perception about Commodity Market? Less Risky Very Risky Risky

(12).Give youre rating about volatility perception for following commodities in market? 1 = Least Volatile to 5 = Most Volatile Sr no. 1 2 3 4 5 COMMODITY Bullion Spices Oil Fiber Metal 1 2 3 4 5

(13).Which of the following factor affects the volatility of the commodity market? 1 = Lowest Impact to 5 = Highest Impact Sr no. 1 2 3 4 5 Factors GDP Growth Rate Economy Global Trend Agricultural Production Inflation Rate Seasonal Variation 1 2 3 4 5

(14).Which source of information influences your decision to trade in Commodities? 1 = Lowest Influence to 5 = Highest Influence Sr no. 1 2 3 4 5 6 7 Particular Independently News Channel Internet Broker News Paper Advice of friends Business Magazine 1 2 3 4 5

(15).Which factor plays a crucial role when you make a decision to invest in Commodity Market? Risk Reduction Leverage Benefit Arbitrage Benefit Speculative Motive Investment

(16).What part of your saving do you invest in Commodity Market?

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Less than 25% 25% to 50% 50% to 75% Above 75% (17).On an average what is the return you expect from Commodity Market? 10% to 15% 20% to 30% 15% to 20% More than 30%

(18). How long you are associated with Commodity Market? Less than 1 year 5 to 10 year 1 to 5 year More than 10 year

(19).Which is the preferred commodities you look for investment in Commodity Market? Metal Oil Spices Bullions Crops Cereals & Pulse Energy If others, please specify _______________

(20).Which type of trading do you prefer to deal with? Square up mode Intraday Delivery based Arbitrage Hedging

(21).Which broker you prefer for commodity trading and advice purpose? Indiabulls Angel broking If others pls. specify_________________ Sharekhan Religare

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(22).Kindly rate the below statements of Commodity Market on 5 point likerts scale. 1 = Strongly Disagree and 5 = Strongly Agree
Sr no. 1 2 3 4 5 6 7 8 9 10 Statements One must take high risk for making profit in the commodity market. Buy commodities when prices are going down and sell commodities when prices are going up. When someone makes money, someone else loses it. Investing in commodities is just like gambling. Commodities that go up must come down. Buy And Hold is the best strategy. In the volatile market one must be an active trader. Investing in the commodity market lets you to participate in the growth of the economy. Investing in commodities make sense only if we are in bull market. Farmers record-breaking incomes due to higher commodity prices. 1 2 3 4 5

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ANNEXURE-II Table 26 Country United States of America Global Commodities Derivatives Exchanges Exchange Chicago Board Of Trade (CBOT) Chicago Mercantile Exchange (CME) Minneapolis Grain Exchange New York Cotton Exchange New York Mercantile Exchange Kansas Board of Trade New York Board of Trade Canada Brazil Australia Peoples Republic of China Hong Kong Japan The Winnipeg Commodity Exchange Brazilian Mercantile & Futures Exchange (BM&F) Sydney Futures Exchange Ltd. Shanghai Metal Exchange, Beijing Commodity Exchange Hong Kong Futures Exchange Tokyo International Financial Futures Exchange Kansai Agricultural Commodities Exchange Tokyo Grain Exchange Malaysia New Zealand Singapore France Italy Netherlands Russia Kuala Lumpur Commodity Exchange New Zealand Futures & Options Exchange Ltd. Singapore Commodity Exchange Ltd. Le Nouveau Marche MATIF Italian Derivatives Market Amsterdam Exchanges Option Traders The Russian Exchange MICEX/Relis Online St. Petersburg Futures Exchange Spain The Spanish Options Exchange Citrus Fruit and Commodity Futures Market of Valencia United Kingdom The London International Financial Futures Exchange The London Metal Exchange

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ANNEXURE-III Table 27 Year 1875 1893 1900 1913 1919 1920 1921 1927 1945 1951 Development of Commodity Futures Exchanges Commodity Traded Cotton Cotton Groundnut, castor seed & cotton Wheat Raw Jute and Jute goods Gold and Silver Cotton Raw Jute Raw Jute and Jute goods

Exchange Established Bombay Cotton Trade Association Bombay Cotton Exchange Ltd. Gujarati Vyapari Mandali Chamber of Commerce, Hapur Calcutta Hessian Exchange Ltd. Gold and Silver Exchange, Mumbai East India Cotton Association East Indian Jute Association East India Jute and Hessian ltd.

Rajkot seeds oil and Bullion Merchants Oil and Bullion Association Ltd.

1956 1956

Bombay Commodity Exchange Ahmedabad Commodity Exchange

Castor seed Castor seed, cottonseed, cotton seed oil and oil cake.

1957 1970 1973 1982 1984

India pepper and spices Trade Association Vijai Beopar chamber Ltd, Muzaffar Nagar Bhatinda Om Oil and oilseeds Exchange Ltd. The Rajdhani oil and oilseeds Exchange

Spices Gur Gur Gur

The Meerut Aro commodities Exchange co. Gur ltd

1997 1998 1999

Coffee Futures Exchange Ltd. Bombay commodity Exchange National Board of Trade

Coffee Castor oil Soya bean oil, Mustard seed oil & cake

2000 2000 2002

Bombay commodity Exchange The Kanpur Commodity Exchange Ltd.

RBD Palmolein Mustard oil and cake

National Multi Commodity Exchange of Edible oils India Ltd.

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REFERENCES
BOOKS

Brown, R. /. (2010). Investment Analysis and Behaviour. Cengage Learning. Chandra, P. (2006). Investment Analysis and Portfolio Management. Cengage Learning. Chatnani, N. N. (2011). Commodity Market. Himalaya Publications. Jankiramanan, S. (2011). Derivaties and Risk Management. Pearson Education. Malhotra, N. K. (2006). Marketing Research. Prentice Hall.

RESEARCH PAPERS

Ahuja, D. L. (2005). Commodity Derivatives Market in India: Development, Regualtions and Future Prospects. 1-15. Black, R., & Jha, A. (n.d.). USAID/India Commodity Futures Markets Project . Doyle, E., Hill, J., & Jack, I. (n.d.). Growth in commodity investments: risk and challenges for commodity market participants. Ghosh, N. (n.d.). Issues and Concerns of Commodity Derivative Markets in India.

WEBSITES

(2011, December). Retrieved from http://www.stockmarketmessages.com/commodity.htm (2011, December). Retrieved from http://www.fao.org/docrep/012/i1545e/i1545e00.pdf (2011, December). Retrieved from http://www.ncdex.com/aboutus/index.aspx (2012, March). Retrieved from http://www.indianmba.com/Occasional_Papers/OP62/op62.html (2012, February). Retrieved from http://www.finmanagementsource.com/history-ofcommodity-market-in-india.htm

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(2012, January). Retrieved from http://www.tiptoptens.com/2011/05/19/top-10-silverproducing-countries/ (2012, January). Retrieved from http://www.mcxindia.com (2012, March). Retrieved from http://www.nmce.com (2012, January). Retrieved from http://www.sharekhan.com/Commodity/ (2012, February). Retrieved from http://www.goldworld.com/

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