DETERMINATION OF PRICE VOLATILITY OF THE GOLD PRICE IN FUTURE CONTRACT

WITH REFERENCE TO GOLD TRADING IN COMMODITIY MARKET

Gobiraman.K MBA International Business Department of International Business Pondicherry University

Chapter I INTRODUCTION
INTRODUCTION

Ever since the dawn of civilization commodities trading have become an integral part in the lives of mankind. The very reason for this lies in the fact that commodities represent the fundamental elements of utility for human beings. The term commodity refers to any material, which can be bought and sold. Commodities in a markets context refer to any movable property other than actionable claims, money and securities. Over the years commodities markets have been experiencing tremendous progress, which is evident from the fact that the trade in this segment is standing as the boon for the global economy today. The promising nature of these markets has made them an attractive investment avenue for investors.

In the early days people followed a mechanism for trading called Barter System, which involves exchange of goods for goods. This was the first form of trade between individuals. The absence of commonly accepted medium of exchange has initiated the need for Barter System. People used to buy those commodities which they lack and sell those commodities which are in excess with them. The commodities trade is believed to have its genesis in Sumeria. The early commodity contracts were carried out using clay tokens as medium of exchange. Animals are believed to be the first commodities, which were traded, between individuals. The internationalization of commodities trade can be better understood by observing the commodity market integration occurred after the European Voyages of Discovery. The development of international commodities trade is characterized by the increase in volumes of trade across the nations and the convergence and price related to the identical commodities at different markets. The major thrust for the commodities trade was provided by the changes in demand patterns, scarcity and the supply potential both within and across the nations.

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with 4rganized trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is only in the last decade that commodity future exchanges have been actively encouraged. However, the markets have been thin with poor liquidity and have not grown to any significant level.

India has a long history of commodity futures trading, extending over 125 years. Still, such trading was interrupted suddenly since the mid-seventies in the fond hope of ushering in an elusive socialistic pattern of society. As the country embarked on economic liberalization policies and signed GATT agreement in the early nineties, the government realized the need for futures trading to strengthen the competitiveness of Indian agriculture and the commodity trade and industry. Futures trading began to be permitted in several commodities, and the ushering in of the 21st century saw the emergence of new National Commodity Exchanges with countrywide reach for trading in almost all primary commodities and their products.

Chapter - II COMMODITIES EXCHANGE TRADING AN OVERVIEW

2.1. COMMODITY

Commodity includes all kinds of goods. FCRA [ Forward Contract(Regulation) Act,1952] 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 exchange recognized under the FCRA. The National commodity exchange have been recognized by the central Government for organized trading in all permissible commodities which include precious metals ( Gold & Silver ) and non-ferrous metals; cereals and pulses; ginned and unginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and guar; potatoes and onions; coffee and tea; rubber and spices, etc.

2.2. COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. A commodity exchange or market is a common platform, where market participants from varied spheres trade in wide spectrum of commodity derivatives. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. In simpler terms, it is a place where one can determine the price of contracts on a current date, for goods to be transacted in future. For example, One can determine the price of goods to be transacted in the month of October 2008 or even later in December 2008 through this mechanism, thereby helping people to avoid fluctuations in the price of commodities.

2.3. THE REASON WHY PEOPLE TRADE IN COMMODITIES MARKET:

HEDGING Hedging is a mechanism by which the participants in the physical / cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices move in tandem, enabling the participants in the physical / cash markets to cover their price risk by taking opposite position in the futures market. SPECULATING Speculating are participants who are willing to take risks in the expectation of making profit. Nay person, who feels that the market will move in one direction, can thus take a position in the market. The primary role of speculators is to provide liquidity to the market. ARBITRAGING Arbitraging is primarily done in two different ways to make profit from the futures market. Simultaneously purchase and sale goods in two different markets so that the selling price is higher than the buying price by more than the transaction cost, thereby enabling a person to make risk-less profits. Simultaneously purchase / sale in the spot market and sale / purchase in the futures markets so that selling price is higher than the buying price by more than the transaction cost & the interest cost, again resulting in risk-less profits.

2.4. MARKET DEVELOPMENT

In the context of the development of commodities markets, integration plays a pivotal role in surmounting the barriers of trade. The development of trading mechanisms in the commodities market segment largely helped the integration of commodities markets. The major thrust for the integration of commodities trading was given by the European discoveries and the march of the world trade towards globalization. The commodities trade among different countries was originated much before the voyages of Columbus and Da Gama. During the first half of the second millennium India and China had trading arrangements with Southeast Asia, Eastern Europe, the Islamic countries and the Mediterranean. The advancements in shipping and other transport technologies had facilitated the growth of the trade in this segment. The unification of the Eurasian continent by the Mongols led to a wide transmission of people, ideas and goods. Later, the Black Death of 1340s, the killer plague that reduced the population of Europe and Middle East by one-third, has resulted in more per capita income for individuals and thus increased the demand for Eastern luxuries like precious stones, spices, ceramics and silks. This has augmented the supply of precious metals to the East. This entire scenario resulted in the increased reliance on Indian Ocean trade routes and stimulated the discovery of sea route to Asia. The second half of the second millennium is characterized by the connectivity of the markets related to the Old and the New worlds. In the year 1571, the city of Manila was found, which linked the trade between America, Asia, Africa ad Europe. During the initial stages, because of the high transportation costs, preference of trade was given to those commodities, which had high value to weight ratio. In the aftermath of the discoveries huge volumes of silver was pumped into world trade. With the discovery of the Cape route, the Venetian and Egyptian dominance of spice exports was diluted. The introduction of New world crops into China has lead to the increased demand for silver and a growth in exports of tea and silk. Subsequently, Asia has become the prime trader of spices and silk and Americas became the prominent exporter of silver.

Earlier investors invested in those companies, which specialized in the production of commodities. This accounted for the indirect investments in commodity assets. But with the establishment of commodity exchanges, a shift in the investment patterns of individuals has occurred as investors started recognizing commodity investments as an alternative investment avenue. The establishment of these exchanges has benefited both the producers and traders in terms of reaping high profits and rationalizing transaction costs. Commodity exchanges play a vital role in ensuring transparency in transactions and disseminating prices. The commodity exchanges ensured the standard of trading by maintaining settlement guarantee funds and implementing stringent capital adequacy norms for brokers. In the light of these developments, various commodity based investment products were created to facilitate trading and risk management. The commodity based products offer a huge array of benefits that include offering risk-return trade-offs to investors, providing information on market trends and assisting in framing asset allocation strategies. Commodity investments are always considered as defensive because during the times of inflation, which adversely affects the performance of commodities and bonds, commodities provide a defense to investors, maintaining the performance of their portfolios. The commodities trade in the 18th and 19th centuries was largely influenced by the shifts in macro economic patterns, the changes in government regulations, the advancement in technology, and other social and political transformations around the world. The 19th century has seen the establishment of various commodities exchanges, which paved the way for effective transportation, financing and warehousing facilities in this arena. In a new era of trading environment, commodities exchanges offer innumerable economic benefits by facilitating efficient price discovery mechanisms and competent risk transfer systems.

2.5. ROLE OF COMMODITY TRADING EXCHANGE

Earlier, all the sellers and buyers of a commodity used to come to a common market place for the trade. Buyer could judge the amount of produce that year while the seller could judge the amount of demand of the commodity. They could dictate their terms and hence the counter party was left with no choice. Thus, in order to hedge from this unfavorable price movement, need of the commodity exchange was felt. An exchange designs a contract, which alone would be traded on the exchange. The contract is not capable of being modified by participants, i.e., it is standardized. The exchange also provides a trading platform, which converges the bids and offers emanating from geographically dispersed locations, thereby creating competitive conditions for trading. The exchange also provide facilities for clearing, settlement, arbitration facilities, along with a financially secure environment by putting in a place suitable risk management mechanism and guaranteeing performance of contract.

2.6. PARTICIPANTS OF COMMODITY MARKET

For a market to succeed, it must have all three kinds of participants - hedgers, speculators and arbitragers. The confluence of these participants ensures liquidity and efficient price discovery on the market. Commodity markets give opportunity for all three kinds of participants. Hedgers Many participants in the commodity futures market are hedgers. They use the futures market to reduce a particular risk that they face. This risk might relate to the price of any commodity that the person deals in. The classic hedging example is that of wheat farmer who wants to hedge the risk of fluctuations in the price of wheat around the time that his crop is ready for harvesting. By selling his crop forward, he obtains a hedge by locking in to a predetermined price.

Hedging does not necessarily improve the financial outcome; indeed, it could make the outcome worse. What it does however is, that it makes the outcome more certain. Hedgers could be government institutions, private corporations like financial institutions, trading companies and even other participants in the value chain, for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices. There are basically two kinds of hedges that can be taken. A company that wants to sell an asset at a particular time in the future can hedge by taking short futures position. This is called a short hedge. A short hedge is a hedge that requires a short position in futures contracts. As we said, a short hedge is appropriate when the hedger already owns the asset, or is likely to own the asset and expects to sell it at some time in the future. Similarly, a company that knows that it is due to buy an asset in the future can hedge by taking long futures position. This is known as long hedge. A long hedge is appropriate when a company knows it will have to purchase a certain asset in the future and wants to lock in a price now. Speculators If hedgers are the people who wish to avoid price risk, speculators are those who are willing to take such risk. These are the people who takes positions in the market & assume risks to profit from price fluctuations in fact the speculators consume market information make forecasts about the prices & put money in these forecasts. An entity having an opinion on the price movements of a given commodity can speculate using the commodity market. While the basics of speculation apply to any market, speculating in commodities is not as simple as speculating on stocks in the financial market. For a speculator who thinks the shares of a given company will rise, it is easy to buy the shares and hold them for whatever duration he wants to. However, commodities are bulky products and come with all the costs and procedures of handling these products. The commodities futures markets provide speculators with an easy mechanism to speculate on the price of underlying commodities.

Arbitrage A central idea in modern economics is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage. The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalise prices and restore market efficiency.

2.7. DERIVATIVES
Another major leap in the development of commodities markets is the growth in commodities derivative segment. Derivatives trading has a long history. The first recorded incident of commodities trade was traced back to the times of ancient Greece. In the year 1688 De la Vega reported the trading in 'time bargains' which were the then commonly used terms for options and futures. Though the first recorded futures trade was found to have happened in Japan during the 17th century, evidences reveal that the trading in rice futures was existent in China, 6000 years ago. Derivatives are useful for both the producers and the traders for the mitigation of risk in their business. Trading in futures is an outcome of the mankind's efforts towards maintaining the supply balance of seasonal commodities throughout the year. Farmers derived the real benefits of derivatives contracts by assuring the prices they want to procure on their products. The volatility of prices has made the commodity derivatives not only significant risk hedging instruments but also strategic exchange traded assets. Slowly, traders and speculators, who never intended to take the delivery of goods, entered this segment. They traded in these instruments and made their margins by taking the advantage of price volatility in commodity markets.

The dawn of the 21st century brought back the good times for commodity markets. With the end of a 20 year bear market for commodities, following the global economic recovery and increased demand from China and other developing nations, has revitalized the charisma of commodities markets. According to the forecasts given by experts commodities markets are likely to experience a bright future with the depreciation in the value of financial assets. Furthermore, increasing global consumption, declining U.S. Dollar value, rising factor-input costs and the recent recovery of the market from the clutches of bear trend are considered to be the positive symptoms, which contribute to the acceleration of growth in commodity markets segment.

Meaning of Derivatives: A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In other words, Derivative means having no independent value. i.e. the value is derived from the value of the underlying asset. Derivative means a forward, future, option or any other hybrid contract of predetermine fixed duration, linked for the purpose of contract fulfillment to the value of a specified real of financial asset or to an index securities. Thus, a derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset. The four most common examples of derivative instruments are forwards, futures, options and swaps / spreads.

2.8. TYPES OF DERIVATIVE CONTRACTS

FORWARD CONTRACT A forward contract is an agreement between two parties to buy or sell the underlying asset at a future date at todays future price. Forward contract is very valuable in hedging and speculation. It can help a farmer to hedge himself against any unfavorable movement of the price of his crop by forward selling his harvest at a known price. FUTURES CONTRACT A futures contract is a contract traded on a futures exchange for the delivery of a specified commodity at a specified future time. The contract specifies the item to be delivered and the terms and conditions of delivery. Future contract is alone executed in the commodity exchange trading. What is the different between the futures contracts and forward contracts? Following are some of the basic differences between the futures and forward contract: While futures contracts are traded on the exchange, forwards contracts are traded In case of futures contracts, the exchange specifies the standardize features of the The exchange provides the mechanism that gives the two parties a guarantee that

over-the-counter market. contract, while no predetermined standards are there in the forward contracts. the contract will be honored whereas there is no surety / guarantee of the trade settlement in case of forward contract.

2.9.DETERMINATION OF FUTURE PRICE

Futures prices evolves form the interaction of bids and offers emanating from all over the country which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date. How do professionals predict prices in futures Futures price evolve form the interaction of bids and offers emanating from all over the country which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date. There are two methods for predicting futures prices fundamental analysis is concerned with basic supply and demand information, such as, weather patterns, carryover supplies, relevant policies of the government and agricultural reports. On the other hands, technical analysis includes analysis of movement of prices in the past. Many participants use fundamental analysis to determine the direction of the market, and technical analysis to time their entry and exit.

2.10. ADVANTAGES AND LIMITATION OF THE FUTURES TRADING

THE ADVANTAGES OF FUTURES TRADING The main advantages of futures trading are: i. Leverage ii. Ability to go short iii. Hedging iv. Portfolio diversification v. Automated, emotionless trading vi. Flexible point of entry vii. Predictability

(i) Leverage Trading a futures / commodity contract allows one to trade higher quantity with less money. (ii) Ability to go short Most traditional stock mechanisms do not permit traders to short sell without large account size, or large experience. With futures going short is as simple and as common as going long. There are also no margin penalties or additional requirements for going short.

(iii) Hedging This is beneficial when protecting a stock portfolio by going short futures, or buying a futures, or other various strategies. This is also very important for the world producers of commodities such as coffee, where they can lock in their price for delivery at a price as sometime in the future. (iv) Portfolio diversification Trading commodities and futures is probably a great idea for large investors who can diversify from traditional portfolio models like bonds, stocks, and cash. (v) Automated, Emotionless trading Systems trading helps avoid the risky decisions an investor tends to make when a strategy in not in place at the time the position is entered. (vi) Flexible point of entry Entry timing becomes irrelevant because some trades will go long, some short, some will reverse, etc. and it really doesnt matter what market prices are or what day of the week it is to get started.

(vii) Predictability Past performance of system trading is no guarantee but it is a mighty good predictor over a long period of time. Because results arent based on price appreciation, but rather catching appropriate long and short trades, its easy to back-test a system and sees a few years history of completed trades for that particular market. LIMITATIONS OF FUTURES TRADING (i) First they are impersonal contracts traded in exchange and provide little scope to

farmers to choose particular buyers. Commodity futures also play marginal role in nurturing subsidy chains comprising farmers, processors and customers. (ii) Commodity futures market is yet to develop fully as an efficient mechanism of risk management and price discovery. The volume of transaction is low and the liquidity is poor. The risk remains high indicating poor integration with the physical market and inadequate participation by hedgers. The market are further deficient in infrastructure, coupled with linkages with financial institutions.

FUTURES TRADING ARE EXTREMELY RISKY Futures contracts are leveraged investments, meaning that one can control something more valuable than the amount of money one used to trade it. With stocks, if one wants to trade 5 shares of Infosys, one would have to pay an amount equal to 5 times the current share price of insfosys. With futures, one is able to trade one contract of the nifty that is worth Rs.3,00,000/- ( based on todays prices) with only Rs.50,000/- to Rs.60,000 in his account. This type of leverage power can be very dangerous to the amateur futures trader if used improperly. If traders were placed without setting protective stop losses, one could lose substantial sum of money.

COMMODITIES SUITABLE FOR FUTURES TRADING

All the commodities are not suitable for future trading and for conducting futures trading. For being suitable for futures trading the market for commodity should be competitive, i.e., there should be large demand for and supply of the commodity no individual of group of persons acting in concert should be in a position to influence the demand or supply, and consequently the price substantially. There should be free from substantial government control. The commodity should government control. The commodity should have long shelf-life and be capable of standardization and gradation. THE PRINCIPLE FOR DESIGNING A FUTURES CONTRACT The most important principle for designing a futures contract is to take into account the systems and practices being followed in the cash market. The unit of price quotation, unit of trading should be fixed on the basis of prevailing practices. The base should generally be that quality or grade which has maximum production. The delivery centers should be important production or distribution centers. While designing a futures contract care should be taken that the contract designed is fair to both buyers and sellers and there would be adequate supply of the deliverable commodity thus preventing any squeezes of the market.

2.11. MARGIN REQUIREMENTS AND SETTINGS

By collecting margins, the possibility of accumulating loss, particularly when futures price moves only in one direction, gets substantially reduced, thereby reducing the risk of default. Thus, margin requirement is a good faith deposit to help back the traders position. If the positions goes against him, then he will eventually receive a margin call requiring a deposit of funds to bring the equity back up to where he began the trade with, known as the original margin. The respective exchange set the margin requirements which are 15 20 percent of the total value of the commodity being traded. In certain cases, when prices and volatility rise sharply the exchanges may raise margin requirements to a higher percentage of the total value. The aim of the margin money is to minimize the risk of default by either party. The amount of initial margin is so fixed as to ensure that the probability of loss on account of worst possible price fluctuation, which cannot be met by the amount of ordinary / initial margin, is very low. The exchanges fix margin rates on the requirement for balancing high security of contract and low cost of entering into contract. The daily collection of margin funds ensure that sufficient funds are in place to receive their gains. Therefore, while futures offers the opportunity to enter into highly leveraged transactions, the margin system prevents losses as a result of nonperformance by the other party. The main types of margins payable on futures contracts are: Initial / Ordinary margin It is the amount to be deposited by the market participants in his margin account with clearing house before they can place order to buy or sell futures contracts. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out. Mark-to-market margins - these are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing / clearing rate and the rate of the contract or the previous days clearing rate. The exchange collects these margins from buyers if the prices decline and pays to the seller and vice versa.

2.12. COMMODITY EXCHANGE TRADING REGULATIONS IN INDIA

Commodity Derivative markets started in India in cotton in 1875 and in oilseeds in 1900 at Bombay. Forward trading in raw jute and jute goods started at Calcutta in 1912. Forward markets in wheat have been functioning at Hapur since 1913 and in bullion at Bombay since 1920. After independence, the Constitution of India brought the subject of stock exchanges and futures markets into the Union list. As a result, the responsibility for regulation of commodity futures markets devolved on the Government 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, the Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided for three-tier regulatory system: The Forward Markets Commission (FMC) (set up in September 1953) (http://www.fmc.gov.in) An association recognized by the Government of India on the recommendation of Forward Markets Commission The Central Government. Forward Contracts (Regulation) Rules were notified by the Central Government in July 1954. The Act divides the commodities into three categories with reference to extent of regulation: Commodities in which futures trading is prohibited. Commodities in which futures trading can be organized under the auspices of a recognized association. Commodities that have neither been regulated for being traded under the recognized association nor prohibited are referred to as free commodities and the association involved in such free commodities must obtain the Certificate of Registration from the Forward Markets Commission. In the seventies, most registered trade associations became inactive, as futures, as well as forward trading in the commodities for which they were registered, were either suspended or prohibited altogether.

The liberalized policy now 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 declarations in the 2002-2003 Budget indicated the Governments resolve to put in place a mechanism of a futures market. As a follow up, the government issued notifications on 1 April 2003 permitting futures trading in all commodities. The authorities subsequently granted licenses to three national commodity exchanges: Multi Commodity Exchange (MCX), National Commodity & Derivatives Exchange (NCDEX) and National Multi Commodity Exchange of India (NMCE), which began operations in 2004.

COMMODITY TRADING REGULATOR AND EXCHANGES IN INDIA

DIFFERENT TYPES OF COMMODITIES TRADED World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following:

PRODUCTS Precious Metals Other Metals Agro-Based Commodities Soft Commodities Live-Stock Energy

COMMODITIES Gold, Silver, Platinum etc Nickel, Aluminum, Copper etc Wheat, Corn, Cotton, Oils, Oilseeds. Coffee, Cocoa, Sugar etc Live Cattle, Pork Bellies etc Crude Oil, Natural Gas, Gasoline etc

DIFFERENT SEGMENTS IN COMMODITIES MARKET The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

2.13. LEADING COMMODITY MARKETS OF WORLD

Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX), The London Metal Exchange (LME) and The Chicago Board of Trade (CBOT).

2.14. LEADING COMMODITY MARKETS OF INDIA

The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business in this regard. They are: Multi Commodity Exchange (MCX) located at Mumbai. National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. National Board of Trade (NBOT) located at Indore. National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Chapter - III COMPANY PROFILE

3.1. GEOJIT FINANCIAL SERVICES LTD-AS SERVICES PROVIDER

Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a partnership firm in the year 1987. In 1993, Mr. Ranajit Kanjilal retired from the firm and Geojit became a proprietary concern of Mr. C. J George. In 1994, it became a Public Limited Company by the name Geojit Securities Ltd. The kerala State Industrial Development Corporation Ltd. (KSIDC), in 1995, became a co-promoter of Geojit by acquiring 24% stake in the company, the only instance in India of a government entity participating in the equity of a stock broking company. Geojit listed at The Stock Exchange, Mumbai (BSE) in the year 2000. In 2003, the company was renamed as Geojit Financial services Ltd. (GFSL). The board of the company consists of professional directors, including a Kerala government nominee with 2/3rd of the board members being Independent Directors. With effect from July 2005, the company is also listed at The National Stock Exchange (NSE). Geojit is a charter member of the Financial Planning Standards Board of India and is one of the largest DP brokers in the country.

3.2. Overseas Joint Venture

Barjeel Geojit Securities, LLC, Dubai, is a joint venture of Geojit with Al Saud Group belonging to Sultan bin Saud Al Qassemi having diversified interests in the area of equity markets, real estates and trading, Barjeel Geojit is a financial intermediary and the first licensed brokerage company in UAE. It has facilities for off-line and on-line trading in Indian capital market and also in US, European and Far-Eastern capital markets. It also provides Depositary services and deals in Indian and International Funds. An associate company, Global Financial Investments S.A.O.G provides similar services in Oman. Geojit has a tie up with Doha Bank in Qatar, which offers capital market services from the Indian Desk.

3.3. MILESTONE
The company crossed the following miestones to reach its present position as a leading retail broking house in India. 1986 Geojit becomes a member of the Cochin Stock Exchange. 1994 The Kerala State Industrial Development Corporation (KSIDC), an arm of the Government of Kerala, becomes a co-promoter of the company by acquiring 24% equity stake in Geojit Financial Services Ltd., based on the evaluation report of Ernst & Young. This is the only venture in India where a state owned development institution is participating in the equity of a stock broking company. Geojit becomes a corporate broking house. 1995 Geojit comes cut with a small Initial Public Offer (IPO) of Rs.9.5 million, which was oversubscribed by 15 times. Geojits issued and subscribed equity capital increased to Rs.30 million and KSIDCs equity stake comes down to 17%. Geojit becomes a member of the National Stock Exchange (NSE) and installs its first trading terminal in Cochin, Kerala. 1996 The company launches Portfolio Management Services after obtaining required registration (Portfolio Management) from Securities Exchange Board of India (SEBI). 1997 Geojit becomes a Depository Participant under National Securities Depository Limited (NSDL) and begins providing Depository Services through its branches. 1999 Geojit becomes a member of The Stock Exchange, Mumbai (BSE) and activates Bombay Online Terminals (BOLT) in different branches. The customer base of Geojit crosses the 50,000 mark. 2000 Geojit becomes the first broking in the country to offer online trading facility. Then, the SEBI Chairman. Mr. D.R.Mehta inaugurates the facility on 1st February 2000. Commences Derivative Trading after obtaining registration as a Clearing and Trading Member in NSE. 2001 Becomes Indias first DP to launch depository transactions through internet. Establishes Joint Ventures in the UAE for serving NRI clients.

2002 Geojit ties up with MetLife for the marketing and distribution of insurance products across the country. The company becomes the first online brokerage house to launch integrated Internet trading system for both cash and derivatives segments. Sheikh Sultan Bin Saud al Oassemi, a member of the ruling family of sharjah, WE, joins the Board of Directors of Geojit. 2003 Geojit Commodities Limited, a wholly owned subsidiary of Geojit, becomes member of National Multi-Commodity Exchange of India Ltd., National Commodity & Derivatives Exchange Ltd., Multi Commodity Exchange and launches Commodity Futures Trading in rubber, pepper, gold. wheat and rice. Geojit Commodities Limited launches Online Futures Trading in multiple commodities namely, agri-commodities, precious metals like gold and silver, other metals like steel, aluminum,etc. and energy futures namely, crude oil and furnace oil. Geojit raises more than Rs.100 million through issue of preferential shares. 2005 Barjeel Geojit Securities LLC becomes a member of Dubai Gold Commodity Exchange. Geojit Credits, a subsidiary of Geojit Financial Services Ltd. registers with Reserve Bank of India as a Non-Banking Financial Company (NBFC). The Company gets listed on National Stock Exchange of India Limited. The Company implements Employees Stock Option Scheme. The Company opens a first of its kind-all womens branch in cochin. 2006 Geojit relaunches Internet trading on Reuters TIB Mercury Platform. 2007 Geojit joint venture with BNP Paribas to provide Global Financial services to their customer and now Geojit become Geojit BNP Paribas Limited.

3.4. Services Provided by Geojit Financial Services Ltd.

PRODUCTS Internet Trading Geojit, a member of NSE and BSE, has a network of over 300 branches in India and abroad, rendering quality equity trading services. Geojit not only has a strong offline presence but also provides automated online trading services. Geojit also provides a Call & Trade facility to its customers wherein they can place and track their orders through our dedicated Call Center Desk by dialing the toll free number. Geojits retail spread caters to the need of individual investors. Trading in equities is made simple, safe and interesting with smart advice from the research desk through daily SMS alerts, market pointers, periodical research reports, stock recommendations and customer meets organized frequently. The online trading system allows customers to track the markets by setting up their own market watch, receiving research tips, stock alerts, real-time charts and news and many more features enable the customer to take informed decisions. The brokerage structure makes Geojits Online Trading all the more attractive:

Types of trading platform We can choose the trading platform that suits you best. Geojit offers three versions to meet customer needs: Gold Silver Platinum Silver

Gold and Silver platforms are quite similar as they are both web-based. In Silver version the feeds are updated every minute and not real-time as in the Gold platform. However, one can click the refresh button as many times to view the latest stock prices. There are no minimum brokerage charges for this platform. A normal investor who does not engage in speculative transactions may find the Silver version most suited to his needs. Gold

This platform is a web-based solution and the customer can login to the trading platform from anywhere in the world. During Market hours the stock prices are refreshed seamlessly and the delay in transmission would be a few seconds, which is mostly dependant on the bandwidth connectivity used by the customer. In this, the trader will receive live quotes as the rates are refreshed every second. Platinum

The Platnium version acts as a virtual dealers terminal providing live updates and confirmation. The executable program is downloaded on the customers computer so that he can trade from the comfort of his home / office. Stock prices are real-time and continuously updated once logged in.

Depository A depository can be compared to a bank. It holds securities such as shares, denentures, bonds, government securities, units etc. of investors in electronic form. There are two depositories in India, The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). An individual who desires avail the depository services can approach a Depository Participant (DP). Banks,financial institutions, custodians, brokers or any other entity eligible as per SEBI (Depositories and Participants) Regulations,1996 can apply to the Depository to become a Depository Participants. As on 31st December 2005 there were 221 Depository Participants in India. Geojit is a Depository participant of NSDL. Investors can open demat accounts with NSDL through Geojit. One can approach the nearest branch of Geojit for opening holdings, reports, and ledger and will have free access to our research reports at any time. Commodity Geojit Commodities, a subsidiary of Geojit Financial Services Limited, is mainly engaged in the business of Commodity Futures Trding. Geojit Commodities is a member of: National Multi-Commodity Exchange of India Limited (NMCE) National Commodity & Derivatives Exchange Limited (NCDEX) Multi-Commodity Exchange (MCX) India Pepper and Spice Trade Association (IPSTA) Singapore Commodity Exchange (SICOM) Dubai Gold Commodity Exchange (DGCX).

Geojit provides information on commodity futures, along with technical and fundamental analysis online at its website and also through the companys large branch network. The company conducts Seminars, distributes free-in-house literature and holds interactive sessions that help raise awareness on the futures market. The number of participants is continuously on the rise thus leading to increased volumes and market efficiency.

Geojit Commodity offers futures trading through multiple exchanges in varied commodities such as: Agri commodities: oilseeds, soya, groundnut, pulses, rice, wheat, sugar, spices,

rubber, guar, pepper, cardamom, coffee,etc Precious metals: gold and silver, Base metals: steel, aluminum, nickel, zinc, copper, etc Energy products: crude oil and furnace oil Geojit clientele in commodities rage from investors, co-operative socities, state and national institutions to dealers, traders, manufacturers, financiers, speculators, arbitragers, etc. Geojit does not have proprietary interest in any commodity and therefore is price neutral. Transaction costs are highly affordable attracting a spectrum of investors. Membership in multiple exchanges gives clients the added advantage of arbitrage. Geojit has specialized staff that provide the required guidance, help and enable clients to enter at the appropriate price.

3.5. TRADING IN COMMODITIES @ GEOJIT

Open a trading account and maintain initial margin with Geojit. When an order request is entered for buying/selling for a match with the existing

orders in the Exchange system. If the order matches another order in the system it results in a trade. Contract note is issued in the exchange specified format containing details such as transaction, quantity, price etc. Contract note is a legal document enforceable in the court of law. Mark to market margin is levied on the contract. The open purchase/sale positions can be squared off at any time during the contract NMCE however does not allow members to enhance their position during the On the first (tenth in case of gold & silver) day of settlement month, margins on From 1st to 15th of the contract month (10th to 15th in case of gold & silver), seller This means that the seller has the right to make delivery of the sold position any

period. settlement month. Existing positions can be squared off. existing position are increased by 20% can tender warehouse receipt for settlement. time between the 1st to 15th (10th to 15th in case of gold & silver) of the contract month. The first buyer (as per the exchange records) shall have to necessarily take delivery of the same. The seller shall receive payment from the exchange on T+3 day while the buyer has to make payment on T+1 day. (T is the transaction day) The seller who places his commodity with Central Warehousing Corporation (CWC) is issued a CWC receipt against this delivery. This receipt is accepted by Geojit and sent to the exchange that gives it to the buyer. The buyer presents it at CWC and takes delivery of his commodity.

Commodity Depository
1. The commodity Depository account can be opened by individuals, partnerships

firms, companies, etc. unlike in the capital market segment where Partnership firms cannot open the demat account in the firm name. 2. 3. 4. 5. 6. The content of the Agreements shall differ for each category Depository charges differ for each category Only warehouse electronic receipts are considered for the purpose debiting / Commodities depository account can be availed at both the Depositories i.e. NSDL The Commodities Identification number i.e.INC is akin to the ISIN

crediting depository account and CDSL

The commodities Depository account may be credited in the following situations: 1. 2. 3. Demat Revalidation Actual purchase from market.

Demat: If the customer has some commodities with him, he may unload it in the warehouse and take the warehouse receipt after due verification of the Assayer appointed by NCDEX AND MCX. To convert the warehouse receipt in demat form, he has to fill up necessary details in the Commodity Deposit Form available in the Warehouse. The Warehouse shall inform the Registrar and Transfer Agents (RTA) with the required details who shall then arrange to credit the depository account of the customer through NSDL/CDSL. Currently, there is only one RTA for commodities i.e. Karvy.

Revalidation: If the client doesnt wish to open the DP account then he may trade directly in the market with the physical warehouse receipts (in MCX AND NMC) Normally the Warehouse receipt (whether demat or physical) is for duration of 3 months. After the expiry of 3 months the owner of the receipt needs to revalidate it. He will request ther Warehouse to revalidate the receipt. The assayer will examine the commodity and take into account the wear and tear (normal as well as abnormal) for revalidating the warehouse receipt

Portfolio Management Services Geojit, a SEBI registered Portfolio Manager (Reg. No.INP000000316) offers discretionary portfolio management services. Geojit has a team of experts who carefully take investment decisions based on the clients objectives. The portfolio Management team has a successful track record of more than 10 years in the capital market. The team has access to Geojits strong Equity Research, and Fundamental & Technical-analysis.

Chapter - IV GOLD

4.1. INTRODUCTION
Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of golds total accumulated holdings relate to store of value considerations. Holdings in this category include the central bank reserves, private investments, and high-cartage jewelry bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total accumulated holdings can be considered a commodity, the jewelry bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a currency without a country. It is an internationally recognized asset that is not dependent upon any governments promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk. Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence. Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold is produced primarily for accumulation; other commodities are produced primarily for consumption. Golds value does not arise from its usefulness

in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.

4.2. WHAT MAKES GOLD SPECIAL?

Timeless and Very Timely Investment: For thousands of years, gold has been prized for its rarity, its beauty, and above all, for its unique characteristics as a store of value. Nations may rise and fall, currencies come and go, but gold endures. In todays uncertain climate, many investors turn to gold because it is an important and secure asset that can be tapped at any time, under virtually any circumstances. But there is another side to gold that is equally important, and that is its day-to-day performance as a stabilizing influence for investment portfolios. These advantages are currently attracting considerable attention from financial professionals and sophisticated investors worldwide. Gold is an effective diversifier: Diversification helps protect your portfolio against fluctuations in the value of any oneasset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many cases opposed to, the forces that influence most financial assets. Gold is the ideal gift: In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is passed on from generation to generation. Gold bullion coins make excellent gifts for birthdays, graduations, weddings, holidays and other occasions. They are appreciated as much for their intrinsic value as for their mystical appeal and beauty. And because gold is available in a wide range of sizes and denominations, you dont need to be wealthy to give the gift of gold.

Gold is highly liquid: Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the worlds largest corporations. Gold is also more liquid than many alternative assets such as venture capital, real estate, and timberland. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs. Gold responds when you need it most: Recent independent studies have revealed that traditional diversifiers often fall during times of market stress or instability. On these occasions, most asset classes (including traditional diversifiers such as bonds and alternative assets) all move together in the same direction. There is no cushioning effect of a diversified portfolio leaving investors disappointed. However, a small allocation of gold has been proven to significantly improve the consistency of portfolio performance, during both stable and unstable financial periods. Greater consistency of performance leads to a desirable outcome an investor whose expectations are met.

4.3. THE REASON WHY INVESTORS OWN GOLD

There are six primary reasons why investors own gold: They may never be more relevant than they are today. 1. 2. 3. 4. 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.

5. 6. 1.

As a store of value. As a portfolio diversifier. HEDGE AGAINST INFLATION Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. Today, a number of factors are conspiring to create the perfect inflationary storm: extremely simulative monetary policy, a major tax cut, a long term decline in the dollar, a spike in oil prices, a huge trade deficit, and Americas status as the worlds biggest debtor nation. Almost across the board, commodity prices are up despite the short-term absence of a weakening dollar which is often viewed as the principal reason for stronger commodity prices. Oil, Inflation and Gold Although the prices of gold and oil don't exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been two major upward moves in the price of gold since it was freed to float in 1968. The first occurred between 1972 and 1974 when oil prices climbed 325%, from $2.44 to $10.36. During the same period, gold prices rose 268% (on a quarterly average basis) from $47.45 to $174.76.

The second major price move occurred between 1978 and 1980, when oil prices increased 105%, from $12.70 to $26.00. Over the same period, quarterly average gold prices rose 254% from $178.33 to $631.40. 2. GOLD - HEDGE AGAINST A DECLINING DOLLAR Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world's reserve currency - the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world's central banks. However, now that it has been stripped of its gold backing, the dollar is nothing more than a fancy piece of paper. 3. GOLD AS A SAFE HAVEN Despite the fact that the United States is the worlds only remaining superpower, there are many problems festering around the world, any one of which could explode with little warning. Gold has often been called the "crisis commodity" because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilize the world economy. As banking crises occur, the public begins to distrust paper assets and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.

4.

GOLD - SUPPLY AND DEMAND First, demand is outpacing supply across the board. Gold production is declining; copper production is declining; the production of lead and other metals is declining. It is very difficult to open new mines when the whole process takes about seven years on average, making it hard to address the supply issue quickly. Gold output in South Africa, the world's largest gold producer, fell to its lowest level since 1931 this past year as the rand's gains prompted Harmony Gold Mining Co. and rivals to close mines despite 16 year highs in the gold price. Growing Demand - China, India and Gold India is the largest gold-consuming nation in the world. China, on the other hand, has the fastest-growing economy in modern history. Both India and China are in the process of liberalizing laws relating to the import and sale of gold in ways that will facilitate gold purchases on a huge scale. China is teaching the West something new. Its economy, growing at 9 percent per year, is expected to become the second largest in the world by 2020, behind only the United States. Last year Americans spent $162 billion more on Chinese goods than the Chinese spent on U.S. products. That gap has been growing by more than 25 percent per year. China's consumer class, meanwhile, is spending on everything from bagels to Bentleys and will soon outnumber the entire U.S. population. China's explosive growth "could be the dominant event of this century," says Stapleton Roy, former U.S. ambassador to China. "Never before has a country risen as fast as China is doing." China recently passed legislation that will allow the country's four major commercial banks to sell gold bars to their customers in the near future. Currently, individuals in

China are only allowed to buy gold-backed certificates from the Bank of China and the Industrial and Commercial Bank of China.

5.

GOLD STORE OF VALUE One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998 report for the World Gold Council, although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth. It has also proved to be a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of ones portfolio in an asset that will, at least, hold its value. Today is the scenario that the World Gold Council report was referring to in 1998.

6.

GOLD - PORTFOLIO DIVERSIFIER The most effective way to diversify your portfolio and protect the wealth created in the stock and financial markets is to invest in assets that are negatively correlated with

those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks.

Investment advisors recognize that diversification of investments can improve overall portfolio performance. The key to diversification is finding investments that are not closely correlated to one another. Because most stocks are relatively closely correlated and most bonds are relatively closely correlated with each other and with stocks, many investors combine tangible assets such as gold with their stock and bond portfolios in order to reduce risk. Gold and other tangible assets have historically had a very low correlation to stocks and bonds. Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the erosion of the purchasing power of paper money. Gold is an important part of a diversified investment portfolio because its price increases in response to events that erode the value of traditional paper investments like stocks and bonds.

4.4. TRADING PARAMETERS FOR GOLD IN COMMODITY EXCHANGE MARKET

Authority Trading of Gold futures may be conducted under such terms and conditions as specified in the Rules, Byelaws & Regulations and directions of the Exchange issued from time to time. Unit of Trading The unit of trading of Gold shall be 1 Kg and 100gm mini lot. Bids and offers may be accepted in lots of Gold shall be 1 Kg or multiples thereof. Months Traded In Trading in Gold futures may be conducted in the months as specified by the Exchange from time to time. Tick Size The tick size of the price of Gold shall be Re. 1.00. Basis Price The basis price of Gold shall be Ex-Mumbai inclusive of Customs Duty and Octroi, excluding Sales Tax. Unit for Price Quotation The unit of price quotation for Gold shall be in Rupees per 10 gms of Gold with 995 Fineness. Hours of Trading The hours of trading for futures in Gold shall be as follows: Mondays through Fridays 10.00 AM to 11.30 PM Saturdays 10.00 AM to 02.00 PM Or as determined by the Exchange from time to time. All timings are as per Indian

Standard Timings (IST) Last Day of Trading Last day of trading for Gold shall be 20th calendar day of contract month, if 20 th happens to be a holiday or a Saturday or a Sunday, then the previous working day, which is other than a Saturday. Mark to Market The outstanding positions in futures contract in Gold would be marked to market daily based on the Daily Settlement Price (DSP) as determined by the Exchange. Position limits At the commodity level, the member-wise position limit will be a maximum of 6 MT or 15% of market-wide open position whichever is higher. The Client-wise position limit will be a maximum of 2 MT. Both position limits will be subject to NCDEX Regulations and directions from time to time. The above position limits will not apply to bona fide hedgers as determined by the Exchange. Margin Requirements NCDEX will use Value at Risk (VaR) based margin calculated at 99% confidence interval for one day time horizon. NCDEX reserves the right to change, reduce or levy any additional margins including any mark up margin. Special Margin In case of additional volatility, a special margin of at such other percentage, as deemed fit, will be imposed immediately on both buy and sell side in respect of all outstanding positions, which will remain in force for next 2 days, after which the special margin will be relaxed. Pre-Expiry Additional Margin There will be an additional margin imposed for the last 2 trading days, including the expiry date of the Gold contract. The additional margin will be added to the normal exposure margin and will be increased by 5% everyday for the last 2 trading days of the contract. Delivery Margins In case of open positions materializing into physical delivery, delivery margins as may be determined by the Exchange from time to time will be charged. The delivery margins will be calculated based on the number of days required for completing the physical delivery settlement (the look-ahead period and the risks arising thereof).

Arbitration Disputes between the members of the Exchange inter-se and between members and constituents, arising out of or pertaining to trades done on NCDEX shall be settled through arbitration. The arbitration proceedings and appointment of arbitrators shall be as governed by the Bye-laws and Regulations of the Exchange.

4.5. DELIVERY PROCEDURES

Unit of Delivery The unit of delivery for Gold shall be 1 kg. Delivery Size Delivery is to be offered and accepted in lots of 1 kg Net only or multiples thereof. No quantity variation is permitted as per contract specification. Delivery Requests The procedure for Gold delivery is based on the contract specifications as per Exhibit IA and Exhibit IB. All the open positions shall have to be compulsorily delivered either by giving delivery or taking delivery as the case may be. That is, upon expiry of the contracts, any seller with open position shall give delivery of the commodity. The corresponding buyer with open position as matched by the process put in place by the Exchange shall be bound to settle by taking physical delivery. In the event of default by seller or buyer to give delivery or take delivery, as the case may be, such defaulting seller or buyer will be liable to penalty as may be prescribed by the Exchange from time to time. The Buyers and the Sellers need to give their location preference through the front end of the trading terminal. If the Sellers fail to give the location preference then the allocation to the extent of his open position will be allocated to the base location. Delivery Allocation The Exchange would then compile delivery requests received from members on the last trading day, as specified in Chapter 1 above. The buyers / sellers who have to receive / give delivery would be notified on the same day after the close of trading hours. Delivery of Gold is to be accepted by Buyers at the accredited warehouse/s where the Seller effects delivery in accordance with the contract specifications. Gold Delivery Where Gold is sold for delivery in a specified month, the seller must have requisite electronic credit of such Gold holding in his Clearing Members Pool Account before the

scheduled date of pay in. On settlement the buyers Clearing Members Pool Account would be credited with the said delivery quantity on pay out. The Clearing Member is expected to transfer the same to the buyers depository account.

Quality Standards The contract quality for delivery of Gold futures contracts made under NCDEX Regulations shall be Gold conforming to the quality specification indicated in the contract. No lower grade/quality shall be accepted in satisfaction of futures contracts for delivery except as and to the extent provided in the contract specifications. Delivery of higher grade would be accepted with premium. Packaging The gold bars to be accepted at the designated vault shall be directly imported and hallmarked from the approved list of refiners through the approved logistic agency i.e. Brinks Arya India (Pvt.) Ltd. or their affiliates / associates. The Gold bars delivered at the Exchange designated vault, indicated in Exhibit 4, should bear the refinery serial no. and accompanied with the Refinery certificate. Gold held at the NCDEX approved vaults will be on un -allocated basis i.e. it will be co mingled with those gold bars pertaining to the participants of NCDEX. These bars will be of 1 Kg only. Standard Allowances No standard allowance is allowed on account of sample testing. Weight The quantity of Gold received and or delivered at the NCDEX designated vault would be determined / calculated by the weight together with serial number as indicated in the enclosed Refinery certificate submitted at the time of delivery into the designated vault and would be binding on all parties. Good / Bad delivery Norms Gold delivery into NCDEX designated Warehouse would constitute good delivery or bad delivery based on the good / bad delivery norms as per Exhibit 3. The list contained in Exhibit 3 is only illustrative and not exhaustive. NCDEX would from time to time review and update the good / bad delivery norms retaining the trade / industry practices.

Accredited Assayer NCDEX has approved the Assayer for quality testing and certification of Gold received at the designated warehouse. The quality testing and certification of Gold will be undertaken only by the approved Assayer. The assayer details are given in the Exhibit 2 alongside the warehouses.

Quality Testing Report Gold delivered into the NCDEX designated vault. This must be accompanied with the certificate from the LBMA approved Refinery. A specimen of the certificate issued by LBMA approved refinery is posted under Exhibit 6. Assayer Certificate Testing and quality certificate issued by NCDEX approved Assayer for Gold delivered at designated warehouse in Mumbai, Ahmedabad and at such other locations announced by the Exchange from time to time shall be acceptable and binding on all parties. Each delivery of Gold at the warehouse must be accompanied by a certificate from NCDEX approved Assayer in the format as per Exhibit 4. Validity period The validity period of the Assayers Certificate for Gold is till the withdrawal from the warehouse. Electronic transfer Any buyer or seller receiving and or effecting Gold would have to open a depository account with an NCDEX empanelled Depository Participant (DP) to hold the Gold in electronic form. On settlement, the buyers account with the DP would be credited with the quantity of Gold received and the corresponding sellers account would be debited. The Buyer wanting to take physical delivery of the Gold holding has to make a request in prescribed form to his DP with whom depository account has been opened. The DP would route the request to the warehouse for issue of the physical commodity i.e. Gold to the buyer and debit his account, thus reducing the electronic balance to the extent of Gold so rematerialized. Charges All charges and costs payable at the designated warehouse towards delivery of Gold including sampling, grading, weighing, handling charges, storage etc. from the date of receipt into designated warehouse upto date of pay in & settlement shall be paid by the seller.

No refund for warehouse charges paid by the seller for full validity period shall be given to the seller or buyer for delivery earlier than the validity period. All charges and costs associated & including storage, handling etc. after the pay out shall be borne by the buyer. Warehouse storage charges will be charged to the member / client by the respective Depository Participant. The Assayer charges for testing and quality certification should be paid to the Assayer directly at the delivery location either by cash / cheque / demand draft. Duties & levies All duties, levies etc. up to the point of sale will have to be fully borne by the seller and shall be paid to the concerned authority. All related documentation should be completed before delivery of Gold into the NCDEX accredited warehouse. Stamp Duty Stamp duty is payable on all contract notes issued as may be applicable in the State from where the contract note is issued or State in which such contract note is received by the client. Taxes Service tax Service tax will be payable by the members of Commodity Exchanges on the gross amount charged by them from their clients on account of dealing in commodities. Sales Tax / VAT Local taxes/ VAT wherever applicable is to be paid by the seller to the sales tax/VAT authorities on all contracts resulting in delivery. Accordingly the buyer will have to pay the taxes/VAT to the seller at the time of settlement. Members and / or their constituents requiring to receive or deliver Gold should register with the relevant tax/VAT authorities of the place where the delivery is proposed to be received / given. In the event of sales tax exemption, such exemption certificate should be submitted before settlement of the obligation. There will be no exemptions on account of resale or second sale in VAT regime. Premium / Discount Premium & Discount on the Gold delivered will be provided by the Exchange on the basis of quality specifications: The Exchange will communicate the premium / discounts amount applicable. Such amount will be adjusted to the members account through the supplementary settlement. Grade Premium / (Discount) %

9999 9990 9950

0.49 0.40 0.00

Formula used = 100 - (Delivery Grade / Standard Grade) * 100, e.g. 100(0.995/0.9999)*100

4.6.

CLEARING AND SETTLEMENT

Daily Settlement All open positions of a futures contract would be settled daily based on the Daily Settlement Price (DSP). Daily Settlement Prices The Daily Settlement Price (DSP) will be as disseminated by the Exchange at the end of every trading day. The DSP will be reckoned for marking to market all open positions. Final Settlement Prices The Final Settlement Price (FSP) will be determined by the Exchange upon maturity of the contract. The open positions for which information have been provided for and have been matched by the Exchange, would result in physical delivery. Spot Prices NCDEX will announce / disseminate spot prices for Gold relating to the designated delivery center and specified grade/ quality parameters determined through the process of polling a set of market participants representing different segments of the value chain such as traders, importers / exporters, processors etc. The polled prices shall be input to a normalizing algorithm (like bootstrapping technique) to arrive at a representative, unbiased and clean benchmark spot price for Gold. The security of data and randomness of polling process will ensure transparency and correctness of prices. The Exchange has absolute right to modify the process of determination of spot prices at any time without notice. Dissemination of Spot Prices Spot prices for Gold will be disseminated on daily basis. Pay in and Pay out for Daily Settlement / Final Settlement The table below illustrates timings for pay in and pay out in case of daily settlement as

well as cash settled positions for final settlement. The buyer clients would have to deposit requisite funds with their respective Clearing Member before pay in. All fund debits and credits for the Member would be done in the Members Settlement Account with the Clearing bank.

Time (E+1) On or before 11.00 hrs funds After 13.00 hrs a/c for funds

Activity PAYIN - Debit paying member a/c for PAYOUT Credit receiving member

Pay in and Pay out for final physical settlement The table below illustrates timings for pay in and pay out in case of positions marked for physical settlement. The buyers / sellers would have to deposit requisite funds / Gold with their respective Clearing member before pay in.

Pay in and Pay out for Final Settlement in case of physical deliveries Time (E+2) Activity On or before 11.00 hrs PAYIN - Debit Buyer Member Settlement a/c for funds - Debit Seller Members CM Pool Account for Gold After 13.00 hrs PAYOUT - Credit Seller Member Settlement a/c for funds - Credit Buyer Members CM Pool Account for Gold Additionally the supplemental settlement for Gold futures contracts for premium / discount adjustments relating to quality of Gold delivered, actual quantity delivered and close out for shortages, will also be conducted on the same day. Clearing Members are required to maintain adequate fund balances in their respective accounts. Pay in and Pay out for supplemental settlement Time (E + 2)

Activity

On or before 16.00 hours for funds After 18.00 hours a/c for funds

PAY IN - Debit Member Settlement a/c PAY OUT Credit Member Settlement

Supplementary Settlement for Taxes The Exchange will conduct a separate supplementary settlement, as illustrated below, two days after normal pay out for completion of tax transactions. In order to facilitate issue of invoice to right parties, the buyer Clearing Members are required to give the buyer client details to the Exchange latest by 15.00 noon on E+3 day. The amounts due to the above differences will be debited / credited to Members clearing bank account similar to normal settlement. Pay in and Pay out for Taxes Time (E + 4) Activity On or before 15.00 hours - PAY IN: Debit Buyer Member Settlement a/c for funds. After 17.00 hours - PAY OUT: Credit Seller Member Settlement a/c for funds

Chapter - V

ANALYSIS

5.1. DETERMINATION OF PRICE VOLATILITY OF THE GOLD PRICE IN FUTURE CONTRACT:

To find the price movement fluctuation and volatility of the Gold price, six month future contract of Gold is taken and their respective price is used for the purpose of analsis. The six month period starts from January 2008 future contract to June 2008 future contract. Line graph shows movements of the future prices of Gold. The X-axis represents the period of the future contract and , the Y-axis represents the price of the commodity(Gold100MUM). For each months contract, descriptive statistics is calculated, this descriptive statistics shows the Mean, Median, Standard Deviation (S.D), and Skewness. I have also showed the maximum price movement and the minimum price movement in the descriptive statistics. Standard Deviation(volatility): A statistical term that provides a good indication of volatility. It measures how widely values (closing prices for instance) are dispersed from the average. The larger the difference between the closing prices and the average prices, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility. A complementary description of the data includes skewness and kurtosis. Skewness: Skewness is a measure of symmetry. A data set, or distribution, is symmetric if it has a similar shape to the left and right of a centre point. The skewness of a normal

distribution is zero. Negative values for the skewness indicate that observations are skewed leftwards, or that the left tail is heavier than the right tail. Positive skewness, on the other hand, indicates more upward spikes (episodes of rising prices) than negative ones.

January 2008 Futures Contract.

10.10.2007 to 18.01.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

11200 10800 10400 10000 9600 9200 2007:10 2007:11 2007:12 SER01 2008:01

Descriptive statistics
Mean Median 10225.26 10231.00

Maximum Minimum Std. Dev. Skewness Sum Sum Sq. Dev. Observations

10936.00 9457.000 273.5012 -0.587398 746444.0 5385810. 73

February - 2008 Futures Contract

10.11.2007 to 20.02.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

12000 11600 11200 10800 10400 10000 2007:11 2007:12 2008:01 SER02 2008:02

Descriptive statistics
Mean Median Maximum 10732.10 10503.00 11705.00

Minimum Std. Dev. Skewness Sum Sum Sq. Dev. Observations

10150.00 489.2434 0.625964 783443.0 17233852 73

March 2008 Futures Contract

10.12.2007 to 20.03.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

13000 12500 12000 11500 11000 10500 10000 2007:12 2008:01 2008:02 SER04 2008:03

Descriptive statistics
Mean Median Maximum Minimum 11306.68 11425.50 12795.00 10292.00

Std. Dev. Skewness Sum Sum Sq. Dev. Observations

692.6219 -0.003292 836694.0 35019932 74

April 2008 Futures Contract

10.01.2008 to 17.04.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

13200 12800 12400 12000 11600 11200 10800 2008:01 2008:02 2008:03 SER01 2008:04

Descriptive statistics
Mean Median Maximum 11949.56 11750.00 13134.00

Minimum Std. Dev. Skewness Sum Sum Sq. Dev. Observations

11040.00 550.4586 0.449618 848419.0 21210327 71

May 2008 Futures Contract

11.02.2008 to 20.05.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

13600 13200 12800 12400 12000 11600 11200 2008:02 2008:03 2008:04 SER01 2008:05

Descriptive statistics
Mean Median Maximum Minimum 12073.86 11990.50 13260.00 11231.00

Std. Dev. Skewness Sum Sum Sq. Dev. Observations

481.3139 0.555413 869318.0 16448075 72

June 2008 Futures Contract

10.03.2008 to 20.06.2008 future price movement COMMODITY: GOLD 100 GRAMS (GOLD100MUM)

14000 13500 13000 12500 12000 11500 11000 2008:03 2008:04 2008:05 SER01 2008:06

Descriptive statistics

Mean Median Maximum Minimum Std. Dev. Skewness Sum Sum Sq. Dev. Observations

12192.63 12092.00 13697.00 11317.00 512.2186 0.854451 914447.0 19415222 75

Chapter - IV

OBSERVATION
6.1. REASONS FOR RISE IN GOLD PRICE
The gold price closed at $825.50. on January 21, 1980, but today, it takes $2,200.00 to buy what $825.50 bought in January 1980. The reason for the rise in the gold price are given below; The Dollar Slide Over the past five years, the dollar has lost 50% of its value versus the euro. Large institutions and central banks are moving their dollar-based assets into non-dollar-based assets. This is coming at a time when the U.S. economy is slowing to a crawl. In order to stop the U.S. economy from slipping into a recession, the Federal Reserve has no choice but to reduce interest rates in order to stimulate the economy. As rates decrease, the dollar collapses. As the dollar falls, investors are moving their dollar-based assets into assets such as gold increasing demand and pushing the price even higher. Flight to Quality The sub-prime mortgage crisis was the means that pushed gold to 28-year highs, and now were seeing investors make a flight to quality as fundamentals are supporting strong prices. In 2007, gold produced a return just below 30% while the S&P 500 increased less than 8%. The uncertainty in the U.S. stock market, stemming from the subprime crisis, has caused investors to move their assets into stable assets. These assets, such as gold, have provided portfolios with much needed protection and, at the same time, have increased the value of portfolios at a rate of 4 to 1 over the stock market during the past few years.

Oil Versus Gold Ratio Historically, the average oil/gold ratio has been around 15:1, meaning that the price of fifteen barrels of oils equals the price of one ounce of gold. That ratio has recently dropped to around 9:1. To return to average levels, the price of gold would have to increase to around $1400.In the near future, $1400 gold is more likely than $50 per barrel oil. Central Bank Sales and Purchases Central bank sales which served to depress the price of gold throughout the 90s have come to a screeching halt, with most central banks having already liquidated their gold reserves to a bare minimum. Instead of selling, central banks are becoming buyers. For instance, Chinas gold reserves account for only one percent of its total reserves. With those reserves piling up rapidly, it seems inevitable that China will diversify part of its foreign exchange reserves into gold. Investment Demand In recent years, there has been a tremendous increase in institutional demand for gold. In addition, although investment demand has been relatively muted in the U.S., there is plenty of demand from the flourishing middle classes in China and India and from central banks in countries that have enjoyed gains from foreign trade, such as Russia, the Persian Gulf oil producing states, and China.

Commodities Super-Cycle We concur with the strategists at Citigroup, Deutsche Bank and Goldman Sachs who are among the new generation of super-cycle proponents who believe that supply shortages in growing economies in China and India will send commodity prices and gold higher for another 15 to 20 years. The forces that have driven commodity prices higher in the past couple of years remain largely in place: global economic growth is strong; liquidity is plentiful and is increasing; and the demand for commodities will continue to grow in emerging Asia as the region industrializes and wealth grows. Gold Mania

Mine production is falling at the same time that demand is rising. Worldwide investment demand for gold will remain at historically high levels, significantly exceeding 40 million ounces. Dont rule out the possibility of a full-blooded mania in gold within the next couple of years, particularly given the fact that the flight from the dollar is picking up speed and momentum.

THE POSSIBLE EVENTS THAT COULD DRIVE DOWN THE GOLD PRICE SEEM HIGHLY UNLIKELY.
India could slow its consumption The U.S stock market could boom, taking the attention away from gold Peace could break out in the world There could be a huge gold discovery Oil prices could collapse The dollar could rise

Chapter - VII CONCLUSION

CONCLUSION
The study reveals the importance of the futures contract and tells how the futures contract is used as a hedging tool in the commodity exchange market. How the commodities are traded in the commodity market. Since the study was with special reference to Gold, the volatility of the Gold future price has been derived and it shows that the price is highly volatile. Investing in the Gold is more profitable and less risky since, Gold price is expected to increase further in the long run. Today, gold prices float freely in accordance with supply and demand, responding quickly to political and economic events. These findings are of considerable importance for gold investors and traders.

BIBLIOGRAPHY
BOOKS & MAGAZINES COMMODITY MARKET AN INTRODUCTION BY JANARDHANAN BUSINESS WORLD MAGAZINE (16 JUNE 2008) COMMODITY MARKET MAGAZINE (JUNE 2008) CORPORATE INDIA MAGAZINE ( 15 JUNE 2008) HINDU NEWS PAPER ECONOMICS TIME WEBSITES www.gold.org www.gfms.co.uk www.bullionindia.com www.ncdex.com www.mcxindia.com www.nmce.com www.fmc.gov.inv www.sebi.gov.in www.investopedia.com

www.wikipedia.com www.netdaniya.com