DYNAMICS OF INDIAN COMMODITY MARKET STUDENTS COLLOQUIUM REPORT ON SUBMITTED TO: Dr.

HIMANI JOSHI (Academic Coordinator) SUBMITTED BY: DIPA SHAH KEYUR SAVALIA BHARAT MAHESHWARI KRISHNA RAJPUT MITESH SHAH NIKITA SANG HVI DATE OF SUBMISSION 8th APRIL 2010 STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 1

DYNAMICS OF INDIAN COMMODITY MARKET ACKNOWLEDGEMENT An Acknowledgement is the expression of ones thanks giving to the people who have extended their help in every possible way. Help is a voluntary fulfillment of d uty, which, all the people mentioned below have performed it to their maximum po ssible, in a way giving us & our research the utmost important. At the onset, we wish to express our gratitude to Dr. Himani Joshi, Academic Coo rdinator, Stevens Business School for her keen interest, constant support & help in completing this report successfully. We would also like to thanks to the authors, websites for providing us the relat ed information to our projects subject. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 2

DYNAMICS OF INDIAN COMMODITY MARKET EXECUTIVE SUMMARY Different web based literature has been studied to understand which are the majo r players of commodity markets in the world? And what is their way of operation? Which are the major commodity exchanges in India? What is their modus operandi? While we were surveying various web site we came to know the whole commodity ma rket and the exchange takes place in this market is broadly classify into two pr inciple categories that is agriculture and non agriculture commodity market. The first session deals with the significance of commodity market. As commodity mar ket is the place where 2 parties agree to buy and sell a specified and standardi zed quantity of a commodity at a certain time of future at a price agreed upon a t the time of agreement agreed upon irrespective of availing future price. Follo wing the significance of commodity market is the history of the commodity market . The root of commodity market is traced from Japan where Japanese merchants use d to store rice in ware houses and later on they have issued Rice tickets. And as the time passes rice tickets are started to accepted as a currency. Patterns of exchange that was prevailing in the market which was auction and the pattern tha t is currently prevailing in the market which is future is discussed. Major inte rnational and national players are described. Various national and international markets and their features in brief are described. The perspective of commodity market in which active and passive mode of commodity market, volatility, liquid ity of commodity market and their relation with economy are discussed. Benefits of future commodity markets to agriculturists, farmers are discussed in brief al ong with price discovery, price risk management, import-export competitiveness, improved product quality-market transparency etc. are discussed. The attractive features of commodity market, various instruments those are available in the mar ket are listed. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 3

DYNAMICS OF INDIAN COMMODITY MARKET Participants of the commodity market those a re hedgers, speculators and arbitrators their power and limitations, functioning etc. are described in brief. A complete working and delivery process of commodi ty market including various stages are clearly mentioned with the use of flow ch art. Spot trade and future trade are also explained well. At the end unresolved issues of commodity market and future prospect of commodity market is written do wn. Whole commodity market is divided into two broad categories those are agricu lture commodities and non agriculture commodities. Agriculture commodities inclu de wheat, rice, pulses, cereals, edible oils, ground nut etc. Non- agriculture c ommodities includes crude oil, non ferrous metals like gold, silver, nickel, cop per etc. We have mainly focused upon the commodity groundnut. What are the essen tial features of groundnut as a crop and as a commodity? This session would broa dly deal with groundnut as a commodity, its cropping pattern, production, major markets and its significance as a commodity traded in exchange. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 4

DYNAMICS OF INDIAN COMMODITY MARKET TABLE OF CONTENT S. No. PARTICULARS PAGE No. i. ii. 1. ACKNOWLEDGEMENT EXECUTIVE SUMMARY INTRODUCTION 1.1 1.2 1.3 1.4 2.1 2.2 3.1 3.2 4 .1 4.2 4.3 4.4 4.5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 AN INTRODUCTION MARKET COMMODITY COMMODITY EXCHANGE BRIEF HISTORY 02 03 08 2. HISTORY OF EVOLUTION OF COMMODITY MARKET COMMODITY MARKETS OF WORLD HISTORY 10 3. INDIA AND THE COMMODITY MARKET 12 4. NATIONAL LEVEL COMMODITY EXCHANGES IN INDIA NMCE MCX ICEX NCDEX PRESENT COMMODITY MARKET 15 5. COMMODITIES TRADED IN INDIA SPICES MAJOR REGIONAL COMMODITY EXCHANGES FIBRES AND MANUFACTURERS EDIBLE OILSEED AND O IL PULSES ENERGY PRODUCTS VEGETABLE METALS 18 STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 5

DYNAMICS OF INDIAN COMMODITY MARKET 5.8 6. OTHERS 25 COMMODITY FUTURE MARKET 6.1 6.1.1 Characteristics To qualify as a product for fu ture trading 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 attractive? COMMODITY MARKET COMMODIT Y 6.2 A perspective Commodity Future Objective of commodity futures Benefits of commodity future mar ket What makes commodity trading market 7. 7.1 7.2 7.3 8.1 8.2 8.3 9. 9.1 9.2 10. 9.3 6.3 Comparative analysis of Commodity and Equity 33 INSTRUMENTS AVAILABLE FOR TRADING FORWARD CONTRACTS FUTURE MARKET 7.2.1 OPTIONS Margin Requirements 37 8. PARTICIPANTS OF COMMODITY MARKET HEDGERS SPECULATORS ARBITRAGERS HOW THE COMMODITY MARKET WORKS WORKING PROCEDURE DELIVERY PROCESS 40 REGULATORY FRAMEWORK OF INDIAN COMMODITY MARKET 10.1 10.2 NEED FOR REGULATION FO RWARD MARKET COMMISSION CLEARING AND SETTLEMENT 48 11. CURRENT SCENARIO OF INDIAN COMMODITY MARKET 11.1 11.2 CURRENT SCENARIO PERFORMAN CE ANLYSIS OF INDIAN COMMODITY MARKET BATCH: 2009-2011 51 STEVENS BUSINESS SCHOOL Page 6

11.3 11.4 12. 13. DYNAMICS OF INDIAN COMMODITY MARKET UNRESOLVED ISSUES FUTURE PROSPECTS 61 65 FUTURE TRADING IN AGRI COMMODITY IN INDIAN COMMODITY MARKET TRADING IN AGRI COMM ODITY GROUNDNUT 13.1 13.2 13.3 13.4 13.5 INTRODUCTION OVERVIEW GROUNDNUT PRODUCING COUNTRIES INDIAN GROUNDNUT MARKET PRODUCTION OF GROUNDNUT IN INDIA 72 73 74 14. 15. 16. INTERESTTING FACTS CONCLUSION ANNEXTURE 1 : COMMONLY USED TERMS IN COMMODITY MAR KET ANNEXTURE 2: ATTACHED EXCELL FILES COMPARISION OF INDIA AND USA VOLUME AND VALUE OF TRADING IN MAJOR AGRI COMMODITY YEAR 2006 TO 2008 84 17. REFERENCE STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 7

DYNAMICS OF INDIAN COMMODITY MARKET 1. INTRODUCTION Organized futures markets in India are now 134 years old, with the first such org anization the Bombay Cotton Trade Association Ltd. been set up in 1875. While In dia was gradually becoming the largest consumer of gold in the world, a position it still enjoys, futures markets in bullion were inevitable and began to emerge in Mumbai in 1920. 1.1 AN INTRODUCTION The vast geographical extent of India and her huge population is aptly complemen ted by the size of her market. The broadest classification of the Indian Market can be made in terms of the commodity market and the bond market. The commodity market in India comprises of all palpable markets that we come across in our dai ly lives. Such markets are social institutions that facilitate exchange of goods for money. The cost of goods is estimated in terms of domestic currency. India Commodity Market can be subdivided into the following two categories: Wholesale Market Retail Market Considering the present growth rate, the total valuation of the Indian Retail Market is estimated to cross Rs. 10,000 billion by the year 2 010. Demand for commodities is likely to become four times by 2010 than what it was in 2009. 1.2 MARKET A market is conventionally defined as a place where buyers and sellers meet to e xchange goods or services for a consideration. This consideration is usually mon ey. In an Information Technology-enabled environment, buyers and sellers from di fferent locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the exchange of goods or services for a consideration. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 8

DYNAMICS OF INDIAN COMMODITY MARKET Electronic trading and settlement of transac tions has created a revolution in global financial and commodity markets. 1.3 COMMODITY A commodity is a product that has commercial value, which can be produced, bough t, sold, and consumed. Commodities are basically the products of the primary sec tor of an economy. The primary sector of an economy is concerned with agricultur e and extraction of raw materials such as metals, energy (crude oil, natural gas ), etc., which serve as basic inputs for the secondary sector of the economy. 1.4 COMMODITY EXCHANGE A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 9

DYNAMICS OF INDIAN COMMODITY MARKET 2. HISTORY OF EVOLUTION OF COMMODITY MARKET 2.1 BRIEF HISTORY Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities ev olved in Chicago, in 1848. But one can trace its roots in Japan. In 19th century Chicago in United States had merged as a major commercial hub. So that wheat pr oducers from Mid-west attracted here to sell their produce to dealers & distribu tors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmer s and dealers to transact in spot grain to deliver wheat and receive cash in ret urn. Gradually sellers & buyers started making commitments to exchange the produ ce for cash in future and thus contract for futures trading evolved; Whereby the p roducer would agree to sell his produce to the buyer at a future delivery date a t an agreed upon price. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a pla tform for establishment of a body to regulate and supervise these contracts. Tha ts why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s t he New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodi ties were mostly traded but as long as there are buyers and sellers, any commodi ty can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pric ing, and transfer of agricultural products. The largest commodity exchange in US A is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Merca ntile Exchange, the New York Commodity Exchange and New York Coffee, sugar and c ocoa Exchange. Worldwide there are major futures trading exchanges in over twent y countries including Canada, England, India, France, Singapore, Japan, Australi a and New Zealand. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 10

DYNAMICS OF INDIAN COMMODITY MARKET 2.2 COMMODITY MARKETS OF WORLD Some of the exchanges of the world are: S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Global Commodity Exchanges New York Mercantile Exchange (NYMEX) London Metal Exchange (LME) Chicago Board of Trade (CBOT) New York Board of Trade (NYBO T) Kansas Board of Trade Winnipeg Commodity Exchange, Manitoba Dalian Commodity Exchange, China Bursa Malaysia Derivatives exchange Singapore Commodity Exchange (SICOM) Chicago Mercantile Exchange (CME), US London Metal Exchange Tokyo Commo dity Exchange (TOCOM) Shanghai Futures Exchange Sydney Futures Exchange London I nternational Financial Futures and Options Exchange (LIFFE) Dubai Gold & Commodi ty Exchange (DGCX) Dubai Mercantile Exchange (DME), (joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX)) STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 11

DYNAMICS OF INDIAN COMMODITY MARKET 3. INDIA AND THE COMMODITY MARKET 3.1 HISTORY OF COMMODITY MARKET IN INDIA The history of organized commodity derivatives in India goes back to the ninetee nth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time derivatives market develo ped in several commodities in India. Following Cotton, derivatives trading start ed in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Whea t in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivat ives fuelled unnecessary speculation and were detrimental to the healthy functio ning of the market for the underlying commodities, resulting in to banning of co mmodity options trading and cash settlement of commodities futures after indepen dence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 195 2, which regulated contracts in Commodities all over the India. The act prohibit ed options trading in Goods along with cash settlement of forward trades, render ing a crushing blow to the commodity derivatives market. Under the act only thos e associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisa ges three tire regulations: (i) (ii) (iii) Exchange which organizes forward trad ing in commodities can regulate trading on day-to-day basis; Forward Markets Com mission provides regulatory oversight under the powers delegated to it by the ce ntral Government. The Central Government- Department of Consumer Affairs, Minist ry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. After Liberalization and Globalization in 1990, the Government set u p a committee (1993) to examine the role of futures trading. The Committee (head ed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity gro ups. It also recommended strengthening Forward Markets Commission, and certain a mendments to STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 12

DYNAMICS OF INDIAN COMMODITY MARKET Forward Contracts (Regulation) Act 1952, par ticularly allowing option trading in goods and registration of brokers with Forw ard Markets Commission. The Government accepted most of these recommendations an d futures trading was permitted in all recommended commodities. It is timely deci sion since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Commodity exchange in India plays a n important role where the prices of any commodity are not fixed, in an organize d way. 3.2 PRESENT COMMODITY MARKET IN INDIA Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, endusers, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in th e vital market. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer. That keeps t he market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. Since 2002, the commoditie s future market in India has experienced an unexpected boom in terms of modern e xchanges, number of commodities allowed for derivatives trading as well as the v alue of futures trading in commodities, which crossed $ 1 trillion mark in 2006. In India there are 25 recognized future exchanges, of which there are four nati onal level multi-commodity exchanges. After a gap of almost three decades, Gover nment of India has allowed forward transactions in commodities through Online Co mmodity Exchanges, a modification of traditional business known as Adhat and Vay da Vyapar to facilitate better risk coverage and delivery of commodities. The fo ur exchanges are: (i) (ii) (iii) (iv) National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX) Mumbai a nd National Multi- Commodity Exchange of India Limited (NMCEIL) Ahmedabad. India n Commodity Exchange Limited (ICEX), Gurgaon STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 13

DYNAMICS OF INDIAN COMMODITY MARKET There are other regional commodity exchanges situated in different parts of India. EXIHIBIT 3.1: INDIAN COMMODITY MARKET STRUCTURE MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC DISTRIBUTION FORWARD MARKET COMMIS ION INDIAN COMMODITY EXCHANGE NATIONAL EXCHANGE REGIONAL EXCHANGE 20 OTHER REGIO NAL EXCHANGES NCDEX MCX NMCEIL ICEX NBOT STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 14

DYNAMICS OF INDIAN COMMODITY MARKET 4. NATIONAL LEVEL COMMODITY EXCHANGES IN INDIA 4.1 NMCE (National Multi Commodity Exchange of India Ltd.) NMCE is the first demutualised electronic commodity exchange of India granted th e National exchange on Govt. of India and operational since 26th Nov, 2002. Prom oters of NMCE are, Central warehousing corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corpo ration Limited (GAICL), Gujarat state agricultural Marketing Board (GSAMB), Nati onal Institute of Agricultural Marketing (NIAM) and Neptune Overseas Ltd. (NOL). Main equity holders are PNB. The Head Office of NMCE is located in Ahmedabad. T here are various commodity trades on NMCE Platform including Agro and non-agro c ommodities. 4.2 NCDEX (National Commodity & Derivates Exchange Ltd.) NCDEX is a public limited co. incorporated on April 2003 under the Companies Act 1956, It obtained its certificate for commencement of Business on May 9, 2003. It commenced its operational on Dec 15, 2003. Promoters shareholders are: Life I nsurance Corporation of India (LIC), National Bank for Agriculture and Rural Dev elopment (NABARD) and National Stock Exchange of India (NSE) other shareholder o f NCDEX are: Canara Bank, CRISIL limited, Goldman Sachs, Intercontinental Exchan ge (ICE), Indian farmers fertilizer corporation Ltd (IFFCO) and Punjab National Bank (PNB). NCDEX is located in Mumbai and currently facilitates trading in 57 c ommodities mainly in Agro product. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 15

DYNAMICS OF INDIAN COMMODITY MARKET 4.3 MCX (Multi Commodity Exchange of India Ltd.) Headquartered in Mumbai, MCX is a demutualised nation wide electronic commodity future exchange. Set up by Financial Technologies (India) Ltd. permanent recogni tion from government of India for facilitating online trading, clearing and sett lement operations for future market across the country. The exchange started ope ration in Nov, 2003. MCX equity partners include, NYSE Euronext,, State Bank of India and its associated, NABARD NSE, SBI Life Insurance Co. Ltd. , Bank of Indi a, Bank of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank , etc. MCX is well known for bullion and metal trading platform. 4.4 ICEX (Indian Commodity Exchange Ltd.) ICEX is latest commodity exchange of India Started Function from 27 Nov, 09. It is jointly promote by Indiabulls Financial Services Ltd. and MMTC Ltd. and has I ndian Potash Ltd. KRIBHCO and IFC among others, as its partners having its head office located at Gurgaon (Haryana). BSE is also planning to set up a Commodity exchange. UNIQUE FEATURES OF NATIONAL LEVEL COMMODITY EXCHANGES The unique features of national level commodity exchanges are: They are demutual ized, meaning thereby that they are run professionally and there is separation o f management from ownership. The independent management does not have any tradin g interest in the commodities dealt with on the exchange. They provide online pl atforms or screen based trading as distinct from the open outcry systems (ring t rading) seen on conventional exchanges. This ensures transparency in operations as everyone has access to the same information. They allow trading in a number o f commodities and are hence multi-commodity exchanges. They are national level e xchanges which facilitate trading from anywhere in the country. This corollary o f being an online exchange. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 16

DYNAMICS OF INDIAN COMMODITY MARKET 4.5 MAJOR REGIONAL COMMODITY EXCHANGES IN INDIA a) BATINDA COMMODITY & OIL EXCHANGE LTD. b) THE BOMBAY COMMODITY EXCHANGE c) THE RAJKOT SEEDS OIL AND BULLION MERCHAT d) THE KANPUR COMMODITY EXCHANGE e) THE ME ERUT AGRO COMMODITY EXCHANGE THE SPICES AND OILSEEDS EXCHANGE (SANGI) f) AHEMDAB AD COMMODITY EXCHANGE g) VIJAY BEOPAR CHAMBER LTD. (MUZAFFARNAGAR) h) INDIA PEPP ERS AND SPICE TRADE ASSOCIATION ( KOCHI ) i) RAJDHANI OILS AND SEEDS EXCHANGE ( DELHI ) j) THE CHAMBER OF COMMERCE (HAPUR) k) THE EAST INDIA COTTON ASSOCIATION (MUMBAI) l) THE CENTRAL COMMERCIAL EXCHANGE ( GWALIOR ) m) THE EAST INDIA JUTE & HESSIAN EXCHANGE OF INDIA (KOLKATA) n) FIRST COMMODITY EXCHANGE OF INDIA ( KOCH I ) o) BIKANER COMMODITY EXCHANGE LTD. ( BIKANER ) p) THE COFEE FUTURE EXCHANGE LTD. ( BANGALORE ) q) E SUGAR INDIA LTD. (MUMBAI) STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 17

DYNAMICS OF INDIAN COMMODITY MARKET 5. EXHIBIT 5.1 COMMODITIES TRADED IN INDIA COMMODITIES IN WHICH FUTURES TRADING IS BEING CONDUCTED IN INDIA STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 18

DYNAMICS OF INDIAN COMMODITY MARKET 1. Kapas A. V797 Kapas 2. 3. Hessian Indian Cotton A. S06 L S Cotton Ahmedabad B. CottonKadi C. Indian 31 mm cotton D. indian 28 mm cotton E. J34 M S Cotton Bhatinda F. CottonAbohar 4. Sttaple Fibre Yarn 5. 6. 7 . 8. 9. Sacking Gram cottonbales cottonseeds Long Staple Cotton A. Jute (B twill -665 Gms) - Kollata A. Gram(Chana) - New Delhi A. undecorticated cotton seed oilcake 10. Medium Stapple Cotton A. NEW MEDIUM STAPLE COTTON 11. Silk A. Mulberry Raw Silk - Bangalore B. Mulberr y Green Cocoons - Ramnagar 12. Mulberry Raw Silk 13. Mulberry Green Cocoons 14. Coffee-Arabica 15. Cotton Long Kadi 16. Cotton Med Abohar 17. Cotton Short Stapl e 18. Sugar (S-30) 19. Muatardseed Oilcake 20. PPTQ 21. Cement 22. Medium cotton yarn 23. Polyvinchlorid STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 19

DYNAMICS OF INDIAN COMMODITY MARKET 1. Pepper Domestic-MG1 2. 3. 4. 5. 6. 7. Turmeric Pepper Domestic-500g/l Black epper Int l-MLS ASTA Black Pepper Int l-VB ASTA Black pepper Int l FAQ Pepper A. Turmeric - Nizamabad A. Pepper Dommestic-MG1. B. Black Pepper Int l VB ASTA. C. Black Pepper Int l-ML S ASTA. D. Black Pepper Int l FAQ. E. Pepper Dommestic-500g/L. F. Pepper - Kochi 8. 9. Cardamom Pepper 550 G/L 10. Red Chilly A. Chilli (Paala) Guntur B. Chilli (Paala) LCA 334 11. Jeera 12. Rubber RSS4 13. Jeera Unjha 14. CUMINSEED 15. Arecanut . STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 20

DYNAMICS OF INDIAN COMMODITY MARKET 1. 2. 3. 4. RBD Pamolein Groundnut Oil Sunfl ower Oil Rapeseed/Mustardseed 18. Cottonseed oil 19. Sesamum (Til or Jiljili) A. Whitish Sesame Seed - Rajkot A. RBD P Olein - Kakinada A. Groundnut Expeller Oil 20. Sesamum oil 21. Sesamum OilCake 22. Safflower OilCake 23. Rice Bran 24. Rice Bran Oil 25. Ri ce Bran OilCake 26. Safflower Oil 27. Sanflower OilCake 28. Sunflower Seed A. Rapeseed - 42 B. Rape/Mustard seed - Jaipur 5. Rapeseed/Mustardseed Oil A. EXP R/M oil - Jaipu r B. Expeller mustard oil -Sri Ganganagar 6. 7. 8. Rapeseed/Mustardseed oil-Cake Soy bean Soy Meal 29. Crude Palm Oil A. Crude Palm oil - Kandla 30. Cottonseed - Oilcake A. Cotton Seed Oilcake - Ako la A. Soy bean - Indore A. Soy Meal - Indore B. Yellow Soybean Meal (Export) 9. Soy Oil A. Ref Soya oil - Indore 31. Vanaspati 32. Soybean Oilcake 33. Linseed 34. Linseed Oil 35. Linseed Oilcake 36. Coconut Oilcake 37. Mustard Seed 38. Mustard Seed Jaipur 39. Sesame Seed ( Natural 99.1) 10. Copra 11. CottonSeed A. Cottonbales 12. Safflower 13. Groundnut A. Groundnut(shell) 14. Castor oil-Int l 15. Coconut oil 16. Copra cake 17. Grou ndnut oilCack 40. Castorseed- Disa 41. Mustardseed Oilcake 42. KAPASKHALI 43. Middle east crude oil 5.3 EDIBLE OILSEEDS AND OIL STEVENS BUSINESS SCHOOL 5.3 EDIBLE OILSEEDS AND OIL BATCH: 2009-2011 44. refined sunflower oil Page 21

DYNAMICS OF INDIAN COMMODITY MARKET 1. 2. Masoor Urad A. masoor grain bold A. Urad - Mumbai 1. 2. 3. 4. Crude Oil 1. Potato Brent Crude Oil Furnace Oil Natural Gas 3. Tur / Arhar A. Lemon Tur - Mumbai B. Maharashtra Lal Tur Akola 4. 5. 6. Moong Yellow Peas Ch ana A. Yellow Peas - Mumbai 5.4 PULSES 5.5 ENERGY PRODUCT S 5.6 VEGETABL ES STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 22

DYNAMICS OF INDIAN COMMODITY MARKET 1. 2. 3. 4. 5. 6. Aluminium Ingots Nickel Co pper Zinc Lead Tin A. Copper Cathode 7. Gold A. Gold-M B. Pure Gold - Mumbai C. Kilo - Gold D. Gold - HNI E. SONA995MUM F. Pu re Gold - Mumbai - 1 Kg Silver 8. A. Silver-M B. Pure Silver - New Delhi - 30 Kg (Mega) C. Pure Silver - New Delhi D. Silver - HNI E. CHANDIDEL 9. Steel A. Steel - Long B. Steel - Flat C. Mild S teel Ingots - Ghaziabad 10. Steel Long Bhavnagar 11. Steel Long Govindgarh 12. sponge iron 13. GOLD AHMEDABAD 14. GOLD DELHI 15. GOLD KOLKATA 16. GOLD MUMBAI 17. GOLD MINI DELHI 18. GOLD MINI KOLKATA 19. GOLD MINI MUMBAI 20. GOLD MINI AHM EDABAD STEVENS BUSINESS SCHOOL 5.7 METALS BATCH: 2009-2011 Page 23

DYNAMICS OF INDIAN COMMODITY MARKET 1. 2. Gur Coffee-Plantation A 14. Rice A. Ba smati Rice B. Grade A Parboiled Rice Delhi C. Common Parboiled Rice Delhi D. Ind ian Raw Rice Parmal E. Indian Parboiled Rice IR-36/IR-64 F. Grade A Raw Rice Del hi G. Common Raw Rice Delhi 15. Wheat A. Wheat - New Delhi SMQ B. Wheat Delhi (N ew) 16. Raw Jute A. Gur-chaku - Muzaffarnagar 3. 4. Potato Sugar A. Sugar M Grade - Muzaffarnagar B. Sugar S Grade - Vashi C. Sugar S Grade D. Su gar Grade - M E. Sugar Grade - S 5. Coffee-Robusta Cherry AB 6. 7. 8. Raw Coffee Arabica Parchment Raw Coffee Robusta Cherry Castorseed A. Raw Jute - Kolkata 17. GuarGum A. GuarGum - Jodhpur 18. Guarseed Bandhani 19. Maize A. Yellow Red M aize - Nizamabad 20. Guar Gum Bandhani 21. CASHEW KERNEL W320 A. Cashew W 320 Kollam 22. Sugar S 23. Sugar M 24. Sarbati Rice 25. Coffee-Arabica Plantation A A. Castorseed-5 B. Castorseed - Disa 9. Castor-oil 10. Coffee A. Coffee-Plantation A. B. Coffee-Robusta Cherry AB. C. Raw Coffee Robusta Cherr y. D. Raw Coffee Arabica Parchment. E. Arabica Coffee - Hassan F. Robusta Coffee - Kushalnagar G. Arabica Coffee - Hassan (New) H. Robusta Coffee - Kushalnagar (New) 11. Guarseed A. Guarseed - Jodhpur B. Guarseed - BND 12. CastorOil Cake 26. Cashews W-320-Kollam 27. Mentha Oil 28. Sugar (S30) 29. HIGH DENSITY POL 30. Gurchaku 31. cardamom 32 . ISABGULSEED 33. Isabgul 13. Rubber A. Rubber - Kottayam 5.8 OTHERS STEVENS BUSINESS SCHOOL 5.8 OTHERS BATCH: 2009-2011 Page 24

DYNAMICS OF INDIAN COMMODITY MARKET 6. COMMODITY FUTURE MARKET 6.1 COMMODITY A commodity may be defined as an article, a product or material that is bought a nd sold. It can be classified as every kind of movable property, except Actionab le Claims, Money & Securities. 6.1.1 TO QUALIFY AS A COMMODITY FOR FUTURES TRADI NG, AN ARTICLE OR A PRODUCT HAS TO MEET SOME BASIC CHARACTERISTICS: 1. The produ ct must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the pro duct must be in a basic, raw, unprocessed state. There are of course some except ions to this rule. For example, metals, which are refined from metal ores, and s ugar, which is processed from sugarcane. 2. The product has to be fairly standar dized, which means that there cannot be much differentiation in a product based on its quality. For example, there are different varieties of crude oil. Though these different varieties of crude oil can be treated as different commodities a nd traded as separate contracts, there can be a standardization of the commoditi es for futures contract based on the largest traded variety of crude oil. This w ould ensure a fair representation of the commodity for futures trading. This wou ld also ensure adequate liquidity for the commodity futures being traded, thus e nsuring price discovery mechanism. 3. A major consideration while buying the pro duct is its price. Fundamental forces of market demand and supply for the commod ity determine the commodity prices. 4. Usually, many competing sellers of the pr oduct will be there in the market. Their presence is required to ensure widespre ad trading activity in the physical commodity market. 5. The product should have adequate shelf life since the delivery of a commodity through a futures contrac t is usually deferred to a later date (also known as expiry of the futures contr act). STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 25

DYNAMICS OF INDIAN COMMODITY MARKET 6.2 COMMODITY MARKET 6.2.1 A PERSPECTIVE A market where commodities are traded is referred to as a commodity market. Thes e commodities include bullion (gold, silver), non-ferrous (base) metals such as copper, zinc, nickel, lead, aluminum, tin, energy (crude oil, natural gas, etc.) , agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, e tc. Existence of a vibrant, active, and liquid commodity market is normally cons idered as a healthy sign of development of a countrys economy. Growth of a transp arent commodity market is a sign of development of an economy. It is therefore i mportant to have active commodity markets functioning in a country. 6.2.2 COMMOD ITY FUTURES A Commodity futures is an agreement between two parties to buy or sell a specifi ed and standardized quantity of a commodity at a certain time in future at a pri ce agreed upon at the time of entering into the contract on the commodity future s exchange. The need for a futures market arises mainly due to the hedging funct ion that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price v olatility can be attributed to the following reasons: 1. Consumer Preferences: In the short-term, their influence on price volatility is small since it is a s low process permitting manufacturers, dealers and wholesalers to adjust their in ventory in advance. 2. Changes In Supply: - They are abrupt and unpredictable br inging about wild fluctuations in prices. This can especially noticed in agricul tural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutrali ze such risks through a mechanism; namely hedging. STEVENS BUSINESS SCHOOL BATCH : 2009-2011 Page 26

6.2.3 DYNAMICS OF INDIAN COMMODITY MARKET OBJECTIVES OF COMMODITY FUTURES Hedging with the objective of transferring risk related to the possession of phy sical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market informat ion and demand supply factors that facilitates a regular and authentic price dis covery mechanism. Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks r elated with price fluctuation declines. Resources can thus be diversified for in vestments. Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price move ments. Liquidity in Contracts of the commodities traded also ensures in maintain ing the equilibrium between demand and supply. Flexibility, certainty and transp arency in purchasing commodities facilitate bank financing. Predictability in pr ices of commodity would lead to stability, which in turn would eliminate the ris ks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players. 6.2.4 BENEFITS OF COMMODITY FUTURES MARKETS The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade i n the commodities being offered in the exchange as well as those who have nothin g to do with futures trading. It is because of price discovery and risk manageme nt through the STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 27

DYNAMICS OF INDIAN COMMODITY MARKET existence of futures exchanges that a lot of businesses and services are able to function smoothly. Price Discovery:-Based o n inputs regarding specific market information, the demand and supply equilibriu m, weather forecasts, expert views and comments, inflation rates, Government pol icies, market dynamics, hopes and fears, buyers and sellers conduct trading at f utures exchanges. This transforms in to continuous price discovery mechanism. Th e execution of trade between buyers and sellers leads to assessment of fair valu e of a particular commodity that is immediately disseminated on the trading term inal. Price Risk Management: - Hedging is the most common method of price risk m anagement. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price chan ge. This could dent the profitability of their business. Hedging benefits who ar e involved in trading of commodities like farmers, processors, merchandisers, ma nufacturers, exporters, importers etc. Import- Export competitiveness: - The exp orters can hedge their price risk and improve their competitiveness by making us e of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical mar ket might expose them to the risk of price risk resulting to losses. The existen ce of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time co nsuming and costly physical transactions. Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure th at the prices should be stable in order to protect their market share with the f ree entry of imports. Futures contracts will enable predictability in domestic p rices. The manufacturers can, as a result, STEVENS BUSINESS SCHOOL BATCH: 2009-2 011 Page 28

DYNAMICS OF INDIAN COMMODITY MARKET smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caugh t between severe short-term price movements of oils and necessity to maintain pr ice stability, which could only be possible through sufficient financial reserve s that could otherwise be utilized for making other profitable investments. Bene fits for farmers/Agriculturalists: - Price instability has a direct bearing on f armers in the absence of futures market. There would be no need to have large re serves to cover against unfavorable price fluctuations. This would reduce the ri sk premiums associated with the marketing or processing margins enabling more re turns on produce. Storing more and being more active in the markets. The price i nformation accessible to the farmers determines the extent to which traders/proc essors increase price to them. Since one of the objectives of futures exchange i s to make available these prices as far as possible, it is very likely to benefi t the farmers. Also, due to the time lag between planning and production, the ma rket-determined price information disseminated by futures exchanges would be cru cial for their production decisions. Credit accessibility: - The absence of prop er risk management tools would attract the marketing and processing of commoditi es to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degre e of reluctance among banks to fund commodity traders, especially those who do n ot manage price risks. If in case they do, the interest rate is likely to be hig h and terms and conditions very stringent. This possesses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is pos sible through futures markets, would cut down the discount rate in commodity len ding. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 29

DYNAMICS OF INDIAN COMMODITY MARKET Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other r elated benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures unifor m standardization of commodity trade, including the terms of quality standard: t he quality certificates that are issued by the exchange-certified warehouses hav e the potential to become the norm for physical trade. Commodities as an asset c lass for diversification of portfolio risk: Commodities have historically an inv erse correlation of daily returns as compared to equities. The skewness of daily returns favors commodities, thereby indicating that in a given time period comm odities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the sharpe ratio of a portfolio consi sting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Thus, an Investor can effectively minimize the portfolio risk arising due to price fluctuations in other asset classes by i ncluding commodities in the portfolio. Commodity derivatives markets are extreme ly transparent in the sense that the manipulation of prices of a commodity is ex tremely difficult due to globalisation of economies, thereby providing for price s benchmarked across different countries and continents. For example, gold, silv er, crude oil, natural gas, etc. are international commodities, whose prices in India are indicative of the global situation. An option for high net worth inves tors: With the rapid spread of derivatives trading in commodities, the commoditi es route too has become an option for high net worth and savvy investors to cons ider in their overall asset allocation. Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prev ail on a future date and therefore can decide between various competing commodit ies, the best that suits him. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 30

DYNAMICS OF INDIAN COMMODITY MARKET Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commod ity would be available at a future point of time. He can do proper costing/finan cial planning and also cover his purchases by making forward contracts. Predicta ble pricing and transparency is an added advantage. 6.2.5 WHAT MAKES COMMODITY T RADING ATTRACTIVE? A good low-risk portfolio diversifier A highly liquid asset class, acting as a c ounterweight to stocks, bonds and real estate. Less volatile, compared with, equ ities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in eq uities or bonds as there is Little correlation with equity and bond markets. Hig h co-relation with changes in inflation. No securities transaction tax levied. 6.3 COMPARATIVE ANALYSIS OF COMMODITY AND EQUITY MARKETS Factors Commodity Markets Gold gives 10-15 % Percentage Returns returns on the c onservative basis. Initial Margins Lower in the range of 45-6% Exists on 1-2 mon th contracts. There is a small difference in prices, Equity Markets Returns in t he range of 1520 % on annual basis. Higher in the range of 2540% Significant Arb itrage Opportunities exists. Arbitrage Opportunities STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 31

DYNAMICS OF INDIAN COMMODITY MARKET but in case of commodities, which it is in l arge tonnage makes a huge difference. Price movements are Price Movements purely based on the supply and demand. Price changes are due to Price Changes policy c hanges, changes in tariff and duties. Predictability of future prices is not in the Future Predictability control due to factors like Failure of Monsoon and For mation of El-ninos at Pacific. Volatility Securities Transaction Act Application Lower Volatility Securities Transaction Act is not applicable to commodity futu res trading. Prices movements based on the expectation of future performance. Pr ice changes can also be due to Corporate actions, Dividend announcements, Bonus shares / Stock splits. Predictability of futures performance is reasonably high, which is supplemented by the History of management performance. Higher Volatili ty Securities Transaction Act is applicable to equity markets trading. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 32

DYNAMICS OF INDIAN COMMODITY MARKET 7. INSTRUMENTS AVAILABLE FOR TRADING In recent years, derivatives have become increasingly popular due to their appli cations for hedging, speculation and arbitrage. While futures and options are no w actively traded on many exchanges, forward contracts are popular on the OTC ma rket. While at the moment only commodity futures trade on the NCDEX, eventually, as the market grows, we also have commodity options being traded. 7.1 FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date f or a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. T he salient features of forward contracts are: They are bilateral contracts and h ence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and qual ity. The contract price is generally not available in public domain. On the expi ration date, the contract has to be settled by delivery of the asset. If the par ty wishes to reverse the contract, it has to compulsorily go to the same counter party, which often results in high prices being charged. However forward contrac ts in certain markets have become very standardised, as in the case of foreign e xchange, thereby reducing transaction costs and increasing transactions volume. This process of standardisation reaches its limit in the organised futures marke t. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 33

DYNAMICS OF INDIAN COMMODITY MARKET 7.2 FUTURES MARKET Futures markets were designed to solve the problems that exist in forward market s. A futures contract is an agreement between two parties to buy or sell an asse t at a certain time in the future at a certain price. But unlike forward contrac ts, the futures contracts are standardized and exchange traded. To facilitate li quidity in the futures contracts, the exchange species certain standard features of the contract. It is a standardized contract with standard underlying instrum ent, a standard quantity and quality of the underlying instrument that can be de livered, (or which can be used for reference purposes in settlement) and a stand ard timing of such settlement. A futures contract may be offset prior to maturit y by entering into an equal and opposite transaction. More than 99% of futures t ransactions are offset this way. The standardized items in a futures contract ar e: Quantity of the underlying Quality of the underlying The date and the month o f delivery The units of price quotation and minimum price change Location of set tlement Spot price: The price at which an asset trades in the spot market. Futur es price: The price at which the futures contract trades in the futures market. 7.2.1 MARGIN REQUIREMENTS Initial Margin The amount that must be deposited in the margin account at the ti me a futures contract is first entered into is known as initial margin. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 34

DYNAMICS OF INDIAN COMMODITY MARKET Initial margin based on Value at Risk Model (V aR) to estimate worst loss that can happen for a time horizon 99% confidence lev el SPAN is the system used for margin calculation. Volatility is one of the input s to the SPAN calculations EWMA/ J.P.Morgan Risk Metrics methodology for calcula tion of volatility will be adopted. Similar procedure is followed in most intern ational exchanges like CBOT, CME, NYMEX, NYBOT, TOCOM, LME, LIFFE. Marking- tomarket Margin In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor s gain or loss depending upon the fu tures closing price. This is called marking-to-market. All open positions will b e marked-to-market at the daily settlement price at the end of the day Client ha s to bring mark-to-market (MTM) margin to be through funds transfer the next day . Maintenance margin This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initi al margin level before trading commences on the next day. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 35

DYNAMICS OF INDIAN COMMODITY MARKET 7.3 OPTIONS Options are fundamentally different from forward and futures contracts. An optio n gives the holder of the option the right to do something. The holder does not have to exercise this right. In contrast, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothi ng (except margin requirements) to enter into a futures contract, the purchase o f an option requires an up-front payment. There are two basic types of options, call options and put options. Call option: A call option gives the holder the ri ght but not the obligation to buy an asset by a certain date for a certain price . Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 36

DYNAMICS OF INDIAN COMMODITY MARKET 8. PARTICIPANTS OF COMMODITY MARKET Participants who trade in the derivatives market can be classified under the fol lowing three broad categories: Hedgers Speculators Arbitragers 8.1 HEDGERS A Hedger can be Farmers, manufacturers, importers and exporter. A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks. The holders of the long position in futures contracts (buyers of the comm odity), are trying to secure as low a price as possible. The short holders of th e contract ( sellers of the commodity) will want to secure as high a price as po ssible. The commodity contract, however, provides a definite price certainty for both parties, which reduces the risks associated with price volatility. By mean s of futures contracts, Hedging can also be used as a means to lock in an accept able price margin between the cost of the raw material and the retail cost of th e final product sold. Someone going long in a securities future contract now can hedge against rising equity prices in three months. If at the time of the contr act s expiration the equity price has risen, the investor s contract can be clos ed out at the higher price. The opposite could happen as well: a hedger could go short in a contract today to hedge against declining stock prices in the future . STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 37

DYNAMICS OF INDIAN COMMODITY MARKET 8.2 SPECULATORS Other commodity market participants, however, do not aim to minimize risk but ra ther to benefit from the inherently risky nature of the commodity market. These are the speculators, and they aim to profit from the very price change that hedg ers are protecting themselves against. A hedger would want to minimize their ris k no matter what they re investing in, while speculators want to increase their risk and therefore maximize their profits. In the commodity market, a speculator buying a contract low in order to sell high in the future would most likely be buying that contract from a hedger selling a contract low in anticipation of dec lining prices in the future. Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by off setting rising and declining prices through the buying an d selling of contracts. LONG HEDGER Secure a price now to protect against future rising prices Secure a price now in anticipation of rising prices SHORT Secure a price now to protect against future declining prices Secure a price now in ant icipation of declining prices SPECULATOR 8.3 ARBITRAGERS 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 ris k 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 act ivity termed as arbitrage, involves the simultaneous purchase and sale of the sa me or essentially similar security in two different markets for advantageously d ifferent prices. The buying cheap and STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 38

DYNAMICS OF INDIAN COMMODITY MARKET selling expensive continues till prices in t he two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. Since the cash and futures price tend to move in the same direction as they both react to the same supply/demand factors, the differe nce between the underlying price and futures price is called as basis. Basis is more stable and predictable than the movement of the prices of the underlying or the Futures price. Thus, arbitrageur would predict the basis and accordingly ta ke positions in the cash and future markets. EXHIBIT 8.1 PARTICIPANTS OF COMMODI TY MARKET HEDGERS Producers farmers Consumers refineries, food processing companies SPECULATORS Brokerage houses Retail investors People involved in commodity spot trading ARBITRAGEURS Brokerage houses People trading in commodity spot markets Warehousing companies STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 39

DYNAMICS OF INDIAN COMMODITY MARKET 9. HOW THE COMMODITY MARKET WORKS 9.1 WORKING PROCEDURE The futures market is a centralized market place for buyers and sellers from aro und the world who meet and enter into commodity futures contracts. Pricing mostl y is based on an open cry system, or bids and offers that can be matched electro nically. The commodity contract will state the price that will be paid and the d ate of delivery. Almost all futures contracts end without the actual physical de livery of the commodity. There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The secon d is futures trade. The underpinning for futures is the warehouse receipt. A per son deposits certain amount of say, good X in a ware house and gets a warehouse receipt which allows him to ask for physical delivery of the good from the wareh ouse but some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an ex change based on his expectation of where the price will go. Futures have somethi ng called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an acc ount of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contra ct so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in In dia very few warehouses provide delivery for specific commodities. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 40

DYNAMICS OF INDIAN COMMODITY MARKET FIG 1: Following diagram gives a fair idea a bout working of the Commodity market A futures contract is an agreement between two parties: a short position, the pa rty who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. In every commodity contract, everything is specified: t he quantity and quality of the commodity, the specific price per unit, and the d ate and method of delivery. The price of a futures contract is represented by th e agreed - upon price of the underlying commodity or financial instrument that w ill be delivered in the future. 9.2 DELIVERY PROCESS 9.2.1 9.2.2 PROCEDURES FOR DELIVERY: Open a Beneficiary Demat account INFORMATIO N REQUIRED FOR DELIVERY: Commodity code Quantity Location/branch preference for physical receipt/delivery of commodities BATCH: 2009-2011 Page 41 STEVENS BUSINESS SCHOOL

9.2.3

9.2.4

9.2.5

DYNAMICS OF INDIAN COMMODITY MARKET Demat Indicator Delivery process requires DE LIVERY PROCESS REQUIRES: Delivery information submitted on Expiry date. This is done through the delivery request window on the Trading Terminal. Matching deliv ery information is obtained. VALIDATION OF DELIVERY INFORMATION: On Clients Net O pen Position On Delivery lot for commodity Excess quantity rejected and cash set tled Matched delivery information MATCHING PARAMETERS: Commodity Quantity Locati on Branch Matching limited to the total warehouse capacity Settlement through De pository. Settlement Schedule in Settlement Calendar Today Commodity trading system is fully computerized. Traders need not visit a c ommodity market to speculate. With online commodity trading they could sit in th e confines of their home or office and call the shots. The commodity trading sys tem consists of certain prescribed steps or stages as follows: STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 42

DYNAMICS OF INDIAN COMMODITY MARKET I. TRADING - Execution - Matching - Reporting - Surveillance - Price limits - Position limits - Registration - Clearing - Clearing limits - Notation - Margining - Price limits - Position li mits III. SETTLEMENT II. CLEARING -Order receiving - Matching -Marking to market - Receipts and payments - Reporting - Delivery upon expiration or maturity - Clearing house STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 43

DYNAMICS OF INDIAN COMMODITY MARKET 9.3 CLEARING AND SETTLEMENT Most futures contracts do not lead to the actual physical delivery of the underl ying asset. The settlement is done by closing out open positions, physical deliv ery or cash settlement. All these settlement functions are taken care of by an e ntity called clearing house or clearing corporation. National Securities Clearin g Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDE X. The settlement guarantee fund is maintained and managed by NCDEX. 9.3.1 CLEAR ING Clearing of trades that take place on an exchange happens through the exchange c learing house. A clearing house is a system by which exchanges guarantee the fai thful compliance of all trade commitments undertaken on the trading floor or ele ctronically over the electronic trading systems. The main task of the clearing h ouse is to keep track of all the transactions that take place during a day so th at the net position of each of its members can be calculated. It guarantees the performance of the parties to each transaction. Typically it is responsible for the following: Effecting timely settlement. Trade registration and follow up. Co ntrol of the evolution of open interest. Financial clearing of the payment flow. Physical settlement (by delivery) or financial settlement (by price difference) of contracts. Administration of financial guarantees demanded by the participan ts. The clearing house has a number of members, who are mostly financial institu tions responsible for the clearing and settlement of commodities traded on the e xchange. The margin accounts for the clearing house members are adjusted for gai ns and losses at the end of each day (in the same way as the individual traders keep margin accounts with the broker). STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 44

DYNAMICS OF INDIAN COMMODITY MARKET 9.3.1A Clearing Mechanism Only clearing members including professional clearing members (PCMs) are entitle d to clear and settle contracts through the clearing house. The clearing mechani sm essentially involves working out open positions and obligations of clearing m embers. This position is considered for exposure and daily margin purposes. The open positions of PCMs are arrived at by aggregating the open positions of all t he TCMs clearing through him, in contracts in which they have traded. A TCM s op en position is arrived at by the summation of his clients open positions, in th e contracts in which they have traded. Client positions are netted at the level of individual client and grossed across all clients, at the member level without any set-offs between clients. Proprietary positions are netted at member level without any set-offs between client and proprietary positions. 9.3.2 SETTLEMENT Futures contracts have two types of settlements, the MTM settlement which happen s on a continuous basis at the end of each day, and the final settlement which h appens on the last trading day of the futures contract. Daily settlement price: Daily settlement price is the consensus closing price as arrived after closing s ession of the relevant futures contract for the trading day. However, in the abs ence of trading for a contract during closing session, daily settlement price is computed as per the methods prescribed by the exchange from time to time. Final settlement price: Final settlement price is the closing price of the underlying commodity on the last trading day of the futures contract. All open positions i n a futures contract cease to exist after its expiration day. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 45

DYNAMICS OF INDIAN COMMODITY MARKET EXHIBIT 9.1: TYPES OF SETTLEMENT - DIAGRAM 9.3.2A Settlement mechanism Settlement of commodity futures contracts is a little different from settlement of financial futures which are mostly cash settled. The possibility of physical settlement makes the process a little more complicated. a) Daily mark to market settlement Daily mark to market settlement is done till the date of the contract expiry. This is done to take care of daily price fluctuations for all trades. A ll the open positions of the members are marked to market at the end of the day and the profit/ loss is determined as below: On the day of entering into the con tract, it is the difference between the entry value and daily settlement price f or that day. On any intervening days, when the member holds an open position, it is the difference between the daily settlement price for that day and the previ ous day s settlement price. On the expiry date if the member has an open positio n, it is the difference between the final settlement price and the previous day s settlement price. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 46

DYNAMICS OF INDIAN COMMODITY MARKET b) Final settlement On the date of expiry, t he final settlement price is the spot price on the expiry day. The spot prices a re collected from members across the country through polling. The polled bid/ as k prices are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price. The responsibility of settlement is on a trading cu m clearing member for all trades done on his own account and his client s trades . A professional clearing member is responsible for settling all the participant s trades which he has confirmed to the exchange. EXHIBIT 9.2: SETTLEMENT PAY-IN A ND PAY-OUT MECHANISM PAY-IN PAY-OUT COMMODITIES Seller ensures Demat of commodities prior to Pay-in Instruction to D P by seller to move commodities to Clearing Member Pool Account Pay-in of commod ities on Settlement Date thru Clearing member pool account COMMODITIES Credit given into the Buyer member CM Pool A/c Instruction by Member to transfer from CM pool to buyer clients Demat account Subsequent Remat of comm odities and physical movement handled by buyer FUNDS Pay-in of funds Thru the Clearing bank of the Member on the Pay-in day. FUNDS Funds pay-out is done into designated bank account of Member with the Clea ring bank the the STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 47

DYNAMICS OF INDIAN COMMODITY MARKET 10. REGULATORY FRAMEWORK INDIAN COMMODITY MARKET 10.1 NEED FOR REGULATION The need for regulation arises on account of the fact that the benefits of futur es markets accrue in competitive conditions. Proper regulation is needed to crea te competitive conditions. In the absence of regulation, unscrupulous participan ts 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 r isk management system. In the absence of such a system, a major default could cr eate a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transpa rency in trading, clearing, settlement and management of the exchange so as to p rotect and promote the interest of various stakeholders, particularly non-member users of the market. 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 head ed by Prof. A.D.Shroff and Select Committees of two successive Parliaments and f inally in December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. T he Act provided for 3-tier regulatory system; (a) An association recognized by t he Government of India on the recommendation of Forward Markets Commission, (b) The Forward Markets Commission (it was set up in September 1953) and (c) The Cen tral Government. Forward Contracts (Regulation) Rules were notified by the Centr al Government in July, 1954. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 48

DYNAMICS OF INDIAN COMMODITY MARKET The Act divides the commodities into 3 categ ories 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 commoditie s which have neither been regulated for being traded under the recognized associ ation nor prohibited are referred as Free Commodities and the association organi zed in such free commodities is required to obtain the Certificate of Registrati on from the Forward Markets Commission. 10.2 FORWARD MARKETS COMMISSION Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory author ity which is overseen by the Ministry of Consumer Affairs, Food and Public Distr ibution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. Forward Markets Commission provides regulator y oversight in order to ensure financial integrity (i.e. to prevent systematic r isk 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-mem bers. It prescribes the following regulatory measures: 1. Limit on net open posi tion as on the close of the trading hours. Some times limit is also imposed on i ntra-day net open position. The limit is imposed operator-wise, and in some case s, also member-wise. 2. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 49

DYNAMICS OF INDIAN COMMODITY MARKET 3. Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or bel ow 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. 4. Circuit breakers or minimum/maximum prices: Thes e are prescribed to prevent futures prices from falling below as rising above no t warranted by prospective supply and demand factors. This measure is also impos ed on the request of the exchanges. 5. Skipping trading in certain derivatives o f the contract, closing the market for a specified period and even closing out t he contract: These extreme measures are taken only in emergency situations. Besi des 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 cons ent is taken within three days time. The FMC is persuading increasing number of exchanges to switch over to electronic trading, clearing and settlement, which i s more customerfriendly. The FMC has also prescribed simultaneous reporting syst em 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 tra ding ahead of clients, etc. The FMC has also mandated all the exchanges followin g open outcry system to display at a prominent place in exchange premises, the n ame, address, telephone number of the officer of the commission who can be conta cted for any grievance. The website of the commission also has a provision for t he customers to make complaint and send comments and suggestions to the FMC. Off icers of the FMC have been instructed to meet the members and clients on a rando m basis, whenever they visit exchanges, to ascertain the situation on the ground , instead of merely attending meetings of the board of directors and holding dis cussions with the office-bearers. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 50

DYNAMICS OF INDIAN COMMODITY MARKET 11. CURRENT SCENARIO OF INDIAN COMMODITY MARKET 11.1 CURRENT SCENARIO The growth paradigm of Indias commodity markets is best reflected by the figures from the regulators official website, which indicated that the total value of tra de on the commodity futures market in the financial year 2008/09 was INR52.49 la kh crore (over US$1 trillion) as against INR 40.66 lakh crore in the preceding y ear, registering a growth of 29.09%, even under challenging economic conditions globally. The main drivers of this impressive were growth in commodity futures t he national commodity exchanges. MCX, NCDEX and NMCE along with two regional exchanges NBOT Indore and ACE, Ahmedabad contributed to 99.61% of the total value of commoditie s traded during 2008/09. So far, this years volumes have seen a significant jump over the last year in agro-commodities, as well as international commodities like gold, silver, crude oil and copper. Of course, more than 100 commodities are tod ay available for trading in the commodity futures market and more than 50 of the m are actively traded. These include bullion, metals, agricultural commodities a nd energy products. Most importantly, an archaic market has suddenly turned into an organised, service-oriented set-up with shooting volumes. The unqualified su ccess of the futures market has ensured the next step, i.e., the launch of elect ronic spot markets for agro-products. Being in a time-zone that falls in the gap left by the major commodity exchanges in the US, Europe and Japan has also work ed in Indias favour because commodity business by its very nature is a 24/7 busin ess. Innovation coupled with modern and successful financial market environment has ensured the beginning of a success story in commodities which will eventuall y see India becoming a price-setter in major commodities on the strength of its large production and consumption. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 51

DYNAMICS OF INDIAN COMMODITY MARKET It is pertinent to note that India and China are being projected as the major drivers for the initiation of yet another comm odity super-cycle. Tracking price trends and analyzing the statistics have alway s been key areas of economic research; but in each cycle whether defined by Jim Rogers, Kondratieff or Dewey & Dakin the trigger is always different, and in thi s case it may well be increase in regional consumption, some of which we have al ready seen. One outcome of the recent boom-bust cycle has been that mergers and acquisitions have gained speed and the biggest beneficiaries will likely be larg e companies from historically conservative countries, like India. This phase is likely to propel India into the international big league quicker and on a firmer footing. In fact, India did well to weather the global financial crisis over th e last year and a half, with GDP growing at 6% at the worst of times, compared t o almost every other country which showed negative growth in one or more quarter s during this period. Growth did fall from 9% to 6% but was way above the World Banks forecast of 4%, demonstrating economic resilience, a sure sign of things to come. Turnover at Indian commodity bourses rose 49.80 percent to 73.51 trillion rupees in the first eleven-and-a-half months of fiscal 2009/10, regulator Forward Mark ets Commission (FMC) said on its website (as on 25th March 2010). Turnover rose 44.12 percent to 3.79 trillion rupees in the fortnight ending March. 15, data sh owed on Thursday. Active trade was seen in gold, silver, copper and crude oil in the energy and metals pack during the March 10 first fortnight. Guar seed, chana , soybean, turmeric and jeera saw maximum trade among agricultural commodities. Turnover at India s 23 commodity bourses, including four operating at the nation al level, grew from 1.29 trillion rupees in 2003/04 to 52.49 trillion rupees in 2008/09. The regulator said it has approved Fid Fund (Mauritius) Ltd, an affilia te of Fidelity International s sale of 1.62 percent stake in Multi Commodity Exc hange of India (MCX) to Intel Capital (Mauritius) Ltd. FMC had last month allowe d Fid Fund (Mauritius) Ltd s sale of 2.03 percent stake in MCX to Passport India Investments (Mauritius) Ltd. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 52

DYNAMICS OF INDIAN COMMODITY MARKET 11.2 PERFORMANCE ANALYSIS OF INDIAN COMMODITY MARKET Futures contracts are available for major agricultural commodities, metals and e nergy. Commodity group-wise value of trading since 2004-05 is given in Fig. 11.1 . FIG 11.1 COMMODITY GROUP-WISE VALUE OF TRADE TRADE VALUE ISN Rs. LAKH CRORE 30 25 20 15 10 5 0 Bullion and other metals Agric ulture Energy Others 2004-05 2005-06 2006-07 2007-08 SOURCE: ECFT The year 2003 is a watershed in the history of commodity futures ma rket. The last group of 54 prohibited commodities was opened up for forward trad ing, along with establishment and recognition of three new national exchanges wi th on-line trading and professional management. Not only was prohibition on forw ard trading completely withdrawn, including in sensitive commodities such as whe at, rice, sugar and pulses which earlier committees had reservations about, the new exchanges brought capital, technology and innovation to the market. These ma rkets notched up phenomenal growth in terms of number of products on offer, part icipants, spatial distribution and volume of trade. Starting with trade in 7 com modities till 1999, futures trading is now available in 95 commodities. There ar e more then 3000 members registered with the exchanges. More than 20,000 termina ls spread over more than 800 towns/cities of the country provide access to tradi ng platforms. The volume of trade has increased STEVENS BUSINESS SCHOOL BATCH: 2 009-2011 Page 53

DYNAMICS OF INDIAN COMMODITY MARKET exponentially since 2003- 04 to reach Rs. 36 .77 lakh crore in 2006-07. Almost all of this (97.2%) of this is now accounted f or by the three national exchanges. The other 21 Exchanges have a miniscule shar e in the total volume. The growth in commodity futures trade has spawned an upsu rge of interest in a number of associated fields, viz. research, education and t raining activities in commodity markets, commodity reporting for print and visua l media, collateral management, commodity finance, ware-housing, assaying and ce rtification, software development, electronic spot exchanges etc. Markets and fi elds almost non-existent four years ago now attract significant mind-share natio nally and internationally. Although agricultural commodities led the initial spu rt, and constituted the largest proportion of the total value of trade till 2005 -06 (55.32%), this place was taken over by bullion and metals in 2006-07. The gr owth in 2006-07 was almost wholly (88.7%) accounted for by bullion and metals, w ith agricultural commodities contributing a small fraction (10.7%). This was par tly due to the stringent regulations, like margins and open interest limits, imp osed on agriculture commodities and the dampening of sentiments due to suspensio n of trade in few commodities. Futures market growth in 2006-07 appears to have bypassed agriculture commodities. Moreover, there has been a very significant de cline in volume of futures trade in agriculture commodities during the year 2007 -08, by 28.5%. The overwhelming bulk of this decline is accounted for by Chana, Maize, Mentha Oil, Guar seed, Potato, Guar Gum, Chillies and Cardamom. Trade in these eight commodities, which accounted for 57.9% of total futures trade in agr icultural commodities in 2006-07, declined by over 66.4% during 2007-08 compared to previous year. The decline in these eight commodities exceeded the decline o f futures trading volumes in all agricultural commodities taken together. Four c ommodities (wheat, rice, urad and tur) were de-listed for futures trading toward s the end of financial year 2006-07. This de-listing has been held responsible i n many circles for the recent general downturn in futures trading in agricultura l commodities. But these four de-listed commodities together accounted for only 6.65% of the total value of futures trading in all agricultural commodities in 2 006-07. Thus, although this STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 54

DYNAMICS OF INDIAN COMMODITY MARKET may have affected market sentiments adversel y, the delisting did not have any major direct contribution to the decline in tr ading observed during 2007-08. In fact, except chana and urad, the share of sens itive commodities in total value of futures trade in agricultural commodities ha s so far been quite insignificant. The combined share of other food grains (i.e. wheat, rice, maize and tur) peaked at 5.0% in 2005-06 and of sugar at only 2.2% . This is in line with what various Committees mentioned earlier had foreseen re garding prospects of futures trading in commodities with significant government intervention. If, nonetheless, de-listing has adversely affected market sentimen t regarding futures trading more generally, this must be because of the go-stop na ture of government policy on the matter. FIG 11 .2 TREND OF INDIAN COMMODITY MARKET 500,000.00 450,000.00 TRADE VALUE IN Rs. CRORE 400,000.00 350,000.00 300,000.00 250,000.00 200,000.00 2008-09 150,000.00 100,000.00 50,000.00 0.00 2009-10 16/12-30/12 16/10-30/10 16/11-30/11 16/5-30/5 16/4-30/4 16/6-30/6 16/7-30/7 16/8-30/8 16/9-30/9 16/1-31/1 16/2-28/2 1/9-15/9 1/4-15/4 1/5-15/5 1/6-15/6 1/7-15/7 1/8-15/8 1/1-15/1 1/2-15/2 1/10-15/10

1/11-15/11 TIME PERIOD- DATEWISE SOURCE: www.fmc.gov.in STEVENS BUSINESS SCHOOL BATCH: 2009-2011 1/12-15/12 1/3-15/3 Page 55

DYNAMICS OF INDIAN COMMODITY MARKET The above mentioned graph gives overall info rmation of commodity market during year 2008 09 and 2009-10 Here for instance ye ar 2008-09 and 2009-10 from April to mid of May the market was moving almost par allel with fall of 2% during commence of July and 8% peak in Commence of Septemb er in 2009. Again in December 2009 there is a peak in overall commodity market t he peak of 30% in the commodity market. This is mainly because of in this tenure gold was at its top in the commodity market. And the prices of gold touched pin nacle of 10 years of market. SOURCE: www.mcx.com FIG 11.3 TRADING FROM APRIL 2007 - MARCH 2010 IN UNIT (AS PER MCX) 0% 2% 11% 6% Fibres and Manufactures 4% 1% 10% Spices Edible Oil seeds and Oil Pulses Energy Products Vegetables Metals Other 66% STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 56

DYNAMICS OF INDIAN COMMODITY MARKET 11.3 UNRESOLVED ISSUES Even though the commodity derivatives market has made good progress in the last few years, the real issues facing the future of the market have not been resolve d. Agreed, the number of commodities allowed for derivative trading have increas ed, the volume and the value of business has zoomed, but the objectives of setti ng up commodity derivative exchanges may not be achieved and the growth rates wi tnessed may not be sustainable unless these real issues are sorted out as soon a s possible. Some of the main unresolved issues are discussed below. i. Commodity Options: Trading in commodity options contracts has been banned since 1952. The market for commodity derivatives cannot be called complete without the presence of this important derivative. Both futures and options are necessary for the he althy growth of the market. While futures contracts help a participant (say a fa rmer) to hedge against downside price movements, it does not allow him to reap t he benefits of an increase in prices. No doubt there is an immediate need to bri ng about the necessary legal and regulatory changes to introduce commodity optio ns trading in the country. The matter is said to be under the active considerati on of the Government and the options trading may be introduced in the near futur e. ii. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, relia ble and convenient warehousing system in the country. The Habibullah (2003) task force admitted, A sophisticated warehousing industry has yet to come about. Furth er, independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appro priately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. Warehouses also need to be conveniently located. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 57

DYNAMICS OF INDIAN COMMODITY MARKET Central Warehousing Corporation of India (CW C: www.fieo.com) is operating 500 Warehouses across the country with a storage c apacity of 10.4 million tonnes. This is obviously not adequate for a vast countr y. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan) ha s been introduced to construct new and expand the existing rural godowns. Large scale privatization of state warehouses is also being examined. iii. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present wa rehousing system that only about 1% to 5% of the total commodity derivatives tra de in the country is settled in physical delivery. Therefore the warehousing pro blem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A International Research Journal of Finance and Economics - Issue 2 (2006) 161 particularly difficult problem in cash settl ement of commodity derivative contracts is that at present, under the Forward Co ntracts (Regulation) Act 1952, cash settlement of outstanding contracts at matur ity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their p ositions before maturity. So, in practice, most contracts are settled in cash bu t before maturity. There is a need to modify the law to bring it closer to the w idespread practice and save the participants from unnecessary hassles. iv. The R egulator: As the market activity pick-up and the volumes rise, the market will d efinitely need a strong and independent regular, similar to the Securities and E xchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under th e Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the comm odity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 58

v. DYNAMICS OF INDIAN COMMODITY MARKET Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodit ies are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exch anges. All this splits volumes and makes some exchanges unviable. This problem c an possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated f or a long time now. The Government of India has announced its intention to integ rate the two markets. It is felt that convergence of these derivative markets wo uld bring in economies of scale and scope without having to duplicate the effort s, thereby giving a boost to the growth of commodity derivatives market. It woul d also help in resolving some of the issues concerning regulation of the derivat ive markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commissio n, the Securities and Exchange Board of India, and the Department of Company aff airs etc. vi. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. These need to be removed so that a trul y national market could develop for commodities and derivatives. Also, regulator y changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly i mplemented by all states. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 59

DYNAMICS OF INDIAN COMMODITY MARKET 11.4 FUTURE PROSPECTS With the gradual withdrawal of the Govt. from various sectors in the post libera lization era, the need has been left that various operators in the commodities m arket be provided with a mechanism to hedge and transfer their risk. Indias oblig ation under WTO to open agriculture sector to world trade require future trade i n a wide variety of primary commodities and their product to enable divers marke t functionaries to cope with the price volatility prevailing n the world markets . Following are some of applications, which can utilize the power of the commodi ty market and create a win-win situation for all the involved parties:Regulatory approval/permission to FIIS to trading in the commodity market. Active Involveme nt of mutual fund industry of India. Permission to Banks for acting as Aggregato rs and traders. Active involvement of small Regional stock exchanges. Newer Aven ues for trading in Foreign Derivatives Exchanges. Convergence of variance market . Amendment of the commodities Act and Implementers of VAT. Introduction of opti on contract.

STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 60

DYNAMICS OF INDIAN COMMODITY MARKET 12. FUTURE TRADING IN AGRICULTURAL COMMODITY FIG 12.1 TRADE IN AGRI-COMMODITY IN INDIAN COMMODITY MARKET VALUE OF TRADE IN Rs. CRORE 80,000.00 70,000.00 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 2008-09 2009-10 1/5-15/5 1/8-15/8 1/4-15/4 1/6-15/6 1/7-15/7 1/9-15/9 1/1-15/1 1/2-15/2 1/10-15/10 1/11-15/11 16/11-30/11 16/10-30/10 1/12-15/12 16/12-30/12 TIME PERIOD - DATEWISE SOURCE: www.fmc.com This graph is specific for agri commodity market. It shows m arket trend for the years 2008-09 and 2009-10. Here If trends of April 2009 -10 is observed then there is a in the mid of April there is a peak and commodity ma rket reach to 50,000crore.Here market went up because of summer harvest. Again a t commence of August it is peaked up and cross the line of 60,000 crore. It goes down due to draught condition. Again in the months of November December 2009 it went to peak as better winter crops are harvested it reach to peak and crossed the line of 700 crore which was the highest of 2 years. In 2008-09 between due t o inflation in the world economy the market go to the bottom of 12000crore.And i t has started gradually growing up till January and again it falls down and goes up in March. STEVENS BUSINESS SCHOOL BATCH: 2009-2011

16/2-28/2 16/4-30/4 16/5-30/5 16/6-30/6 16/7-30/7 16/8-30/8 16/9-30/9 16/1-31/1 1/3-15/3 Page 61

DYNAMICS OF INDIAN COMMODITY MARKET FIG 12.2 VOLATILITY IN MONTHLY SPOT PRICE INDICES : ESTIMATES OF STANDARD DEVIAT IONS JAN 2000-DEC 2002 JAN 2003-DEC 2006 JAN 2007-DEC 2009 88 75 71 57 60 42 59 39 17 21 21 14 13 4 5 27 32 3 WHEAT URAD POTATOES ONION SOYABEAN RICE SOURCE: Office of Economic Adviser, Ministry Of Commerce and Industry, Governmen t Of India STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 62

DYNAMICS OF INDIAN COMMODITY MARKET FIG 12.3 COMPARISON OF AGRI-COMMODITY CONSUMPTION BETWEEN INDIA AND US 2006-07 40 35 30 YALUE IN % 25 20 15 10 5 0 India Consumption US consumption Source: WBMS, IEA, FAO, IISI, on pattern of India and US is ption in the world of a given s consuming around 17% of and onsumed in the world. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 63 World Bank Here in a given graph overall consumpti mentioned. Here it is compared with overall consum edibles. For instance if we see wheat then India i USA is consuming around 4% of wheat out of total c

DYNAMICS OF INDIAN COMMODITY MARKET FIG 12.4 COMPARISON OF PROD/CONS RATIO BETWEEN INDIA AND USA (2006-07) 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 India USA Source: WBMS, IEA, FAO, IISI, World Bank This graph shows the country is able to export the edible or not. On Y axis the ration of production to consumption is given, where this ratio is more than 1 th at country is able to import that particular commodity. When the ratio is less t han 1 those commodity is exported by that country as consumption of that commodi ty is more in that country than the production. USA has production consumption r atio i.e. US is not into the production of coffee. It exports its entire coffee requirement from other countries. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 64

DYNAMICS OF INDIAN COMMODITY MARKET 13. 13.1 TRADING IN AGRI-COMMODITY- GROUNDNUT INTRODUCTION Groundnut is an important crop both for oil and food. It is grown in over 100 co untries in the world and plays an important role in the economy of several count ries. About two thirds of the crop produced in the world is crushed to extract o il and one-third is used to make other edible products. India accounts for 40 pe r cent of the world area and 30 per cent of world output of groundnut. On the ot her hand groundnut and groundnut oil is the most illiquid commodity in the commo dity exchanges in India. Therefore the focus of the study is to understand the t rade volume of groundnut as a commodity in commodity exchanges all over the worl d and gain knowledge about various factors governing supply, demand and price of these commodities in Indian market. 13.2 OVERVIEW Groundnut is considered to be the one of the most important oilseed crops in the world. It is grown in over 100 countries of the world and plays a crucial role in the world economy. The seeds are a good source of edible oil and proteins pre sent in the groundnut oil cake. The percentage of oil and protein are extracted from the seed are approximately 55% and 28% respectively. The oil cake meal left after the extraction of the oil is used as an animal fodder and fertilizer. The peanut oil is primarily needed as a cooking agent but it also has some industri al uses like in paint, varnish, lubricating oil, soap, furniture polish etc. the peanut seeds are also consumed directly in roasted form, as butter, in brittle and candies etc. Groundnut production has reached the mark of around 34 million tons. China followed by India is the largest producer of this oilseed crop in th e world. The groundnut oil production hovers around 8 million tons annually. The se two countries are also responsible for the highest consumption of groundnut. The list depicting the major groundnut consuming countries is given below: China India STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 65

DYNAMICS OF INDIAN COMMODITY MARKET Nigeria United States European Union Except European Union, all the countries lie in the list of major groundnut producing c ountries as well. European Union countries are the largest consumer of groundnut s where the crop is not produced. The major demand i.e. around 75% comes from th e food sector and the rest from other sectors. As European Union is the largest consumer of the oilseed where it is not produced, it has to rely on imports and that makes the countries in the union the largest importers of groundnut. The tr ade done in the world in the context of groundnuts is estimated to about 1 lakh tons per year. The leading groundnut exporting countries are: Argentina Senegal Vietnam Nigeria India Gambia United States The countries mentioned above contrib ute to about 90% of the world exports. Argentina makes the largest groundnut exp orter to the world. The major countries that satisfy their domestic consumption demand by importing groundnuts are: Belgium United States France Germany Ireland Italy Netherlands STEVENS BUSINESS SCHOOL United Kingdom Sweden Indonesia Canad a BATCH: 2009-2011 Page 66 South Africa China

DYNAMICS OF INDIAN COMMODITY MARKET 13.3 GROUNDNUT PRODUCING COUNTRIES

Malaysia

Singapore

Philippines

Japan

Groundnut is one of the vastly produced oilseed crop in the world as it is culti vated in more than 100 countries in the world and that is why it is referred to as a universal crop. The areas in the tropical belt of the earth enjoy the major share in this groundnut crop production as this type of weather conditions suit well to it. It is estimated that around 65% of the crop produced in the world i s crushed to extract groundnut oil and the rest is used in making other edible p roducts. The world production of groundnut seeds hovers around 34 million tons p er year in the current scenario. The groundnut oil is produced to an extent of a round 8 million tons. The major producers of groundnut in 2005 along with their production figures are China (14408500 tons) Chad (450000 tons) India (5900000 t ons) Nigeria(2937000 tons) Congo (368110 tons) United States of America (2112700 tons) Indonesia (1469000 tons) Sudan (1200000 tons) Senegal (820569 tons) Myanm ar (715000 tons) Argentina (593000 tons) Vietnam (453000 tons) Guinea (300000 to ns) Brazil (291966 tons) Burkina Faso (245307 tons) Cameroon (225000 tons) Egypt (190000 tons) Mali (163900 tons) Malawi (161162 tons) Ghana (389649 tons) STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 67

DYNAMICS OF INDIAN COMMODITY MARKET In context of the production of groundnut oi l, China again tops the chart with a production of around 2.5 million tons India following with the production of around 2 million tons. The other regions where groundnut oil is produced includes sub-Saharan African countries and central an d southern America. The maximum area that is used for the production of this oil seed is bagged by India with around 8 million hectares that accounts up to 30% s hare in the total area of around 26.5 million hectares. The country that gets ma ximum yield from the groundnut crop is USA which has a yield of approximately 35 40 Kg/ hectare. The world production has been in the up- trend since last decade and still, it is rising steadily. 13.4 PRODUCTION OF GROUNDNUT IN INDIA India has been producing groundnut since it has been introduced in Asia in the 1 6th century. The weather in the Indian subcontinent suited well to the crop and India transformed into an important contributor to the world production. The cou ntry ranks 2nd in the world groundnut production scenario with an annual groundn ut seed production of 5.9 million tons and annual groundnut oil production of 1. 5 million tons in 2007. Also, India has the maximum area covered under groundnut cultivation. The major states in India that are indulged in the production of t his crop along with their production figures are: Gujarat (2.5 million tons) Tam il Nadu (1 million tons) Andhra Pradesh (1 million tons) Karnataka (0.5 million tons) Maharashtra (0.5 million tons) Madhya Pradesh Orissa Rajasthan The Indian production and area covered is largely concentrated in the above-ment ioned states. Today, groundnut has a share of approximately 25% in the total Ind ian oilseed production. But this share is constantly reducing since India got in dependent, as it was STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 68

DYNAMICS OF INDIAN COMMODITY MARKET around 70% in 1950s. A quick summary of area under cultivation, production and yield of groundnut crop is provided in the ta bles below: Year Wise Area under Cultivation of Groundnut in India Year Wise Production of Groundnut in India STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 69

DYNAMICS OF INDIAN COMMODITY MARKET The inferences from the above data sets are that: a. The average production per year had been to the tune of 5.95 million to nes. b. Nevertheless, the variation in average production has been high with a c o-efficient of variation of almost 27%. 13.5 INDIAN GROUNDNUT MARKET India has been a land where oilseeds have much importance than any other crop. G roundnut constitutes one of the major oil seed in India. As already mentioned, i t accounts to about 25% share in the total oilseeds production in India. The cou ntry produces around 6 million tons of groundnuts annually; Gujarat being the le ader in the production of the crop producing over 40% of the crop produced India . The groundnut oil production in India hovers around 1.5 million tons per year. The production of groundnut seed in the country has shown fluctuations quite of ten largely due to the monsoon behavior. India places 2nd in the world groundnut consumption list. The country actually consumes all most all of its groundnut y ield produced that is around 30% of the worlds total consumption. The main demand of groundnut and derivatives generate from the western and southern parts of th e country. This consumption pattern of the country contracts the Indian groundnu t export size and does not allow it to gain dominance over the world market even though a high production level. Earlier it was an important exporter of groundn ut and its by-products in 1970s. But with time it lost all its importance due to its high prices and increasing competitiveness. The Indian exports of groundnut oil to the world showed a fluctuating trend in the last decade. In 2003-04 Indi a exported around 1 lakh tons of groundnut oil due to a crop failure in Argentin a and Senegal. The imports in the country are second to none as the production l evel is quite sufficient for the domestic demand level in the country. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 70

13.5.1 DYNAMICS OF INDIAN COMMODITY MARKET MARKET INFLUENCING FACTORS Weather conditions in major groundnut producing regions. Monsoon status in the c ountry. Price fluctuations of the other competitive edible oils. International p rice movements. High consumption in festive seasons and celebrations. 13.5.2 MAJ OR TRADING CENTERS OF GROUNDNUT The major trading centers of groundnut and derivatives in India are: arat) Ahmedabad (Gujarat) Gondal (Gujarat) Junagarh (Gujarat) a) Indore (Madhya Pradesh) Delhi Adoni (Andhra Pradesh) Rajkot (Guj Mumbai (Maharashtr

Also, groundnut is traded in Indian commodity exchanges namely, NCDEX, MCX, NMCE STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 71

DYNAMICS OF INDIAN COMMODITY MARKET 14. SOME INTERESTING FACTS Commodities in which future contracts are successful are commodities those are n ot protected through government policies; (Example: Gold/ Silver/ Cotton/ Jute) and trade constituents of these commodities are not complaining too. This should act as an eye-opener to the policy makers to leave pricing and price risk manag ement to the market forces rather than to administered mechanisms alone. Any eco nomy grows when the constituents willingly accept the risk for better returns; i f risks are not compensated with adequate or more returns, economic activity wil l come into a standstill. Worldwide, Derivatives volumes of non-US exchanges in the last decade, has been increasing as compared to the US Exchanges. Commoditie s are less volatile compared to equity market, but more volatile as compared to G-Sec s. The basic idea of Commodity markets is to encourage farmers to choose c ropping pattern based on future and not past prices. Industry in India runs the raw material price risk, going forward they can hedge this risk. Commodities Exc hanges are working with banks to provide liquidity to retail investors against h oldings such as bullion, cotton or any edible oil, much like loan against shares . STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 72

DYNAMICS OF INDIAN COMMODITY MARKET 15. CONCLUSION This decade is termed as Decade of Commodities. Prices of all commodities are he ading northwards due to rapid increase in demand for commodities. Developing cou ntries like China are voraciously consuming the commodities. Thats why globally c ommodity market is bigger than the stock market. India is one of the top produce rs of large number of commodities and also has a long history of trading in comm odities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingl y, this has happened only after the Government protection was removed from a num ber of Commodities, and market force was allowed to play their role. This should act as a major lesson for policy makers in developing countries, that pricing a nd price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world. As majority of Indian inv estors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commod ity market in their minds. It makes them specious towards commodity market. Conc erned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGOs should come forward to educate th e people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for India n farmers rather than spot market. And producers, traders as well as consumers w ill be benefited from it. But for this to happen one has to take initiative to s tandardize and popularize the Commodity Market. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 73

DYNAMICS OF INDIAN COMMODITY MARKET 16. ANNEXURE1: COMMONLY USED TERMS IN COMMODITY MARKET Accruals:- Commodities on hand ready for shipment, storage and manufacture Arbit ragers: - Arbitragers are interested in making purchase and sale in different ma rkets at the same time to profit from price discrepancy between the two markets. At the Market: - An order to buy or sell at the best price possible at the time an order reaches the trading pit. Basis: - Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be n egative or positive depending on the prices prevailing in the cash and futures. Basis grade: - Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures Baskets: - Basket options are options on portfolios of underlying assets. The underlying asset is usually a weighted average of a basket of assets. Equity index options are a form of basket options. Bear: - A person who expects prices to go lower. Bid: - A bid subject to immediate acceptance made on the floor of exchange to bu y a definite number of futures contracts at a specific price. Breaking: - A quic k decline in price. Bulging: - A quick increase in price. Bull: - A person who e xpects prices to go higher. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 74

DYNAMICS OF INDIAN COMMODITY MARKET Buy on Close: - To buy at the end of trading session at the price within the closing range. Buy on opening: - To buy at the beginning of trading session at a price within the opening range. Call: - An opt ion that gives the buyer the right to a long position in the underlying futures at a specific price, the call writer (seller) may be assigned a short position i n the underlying futures if the buyer exercises the call. Cash commodity: - The actual physical product on which a futures contract is based. This product can i nclude agricultural commodities, financial instruments and the cash equivalent o f index futures. Close: - The period at the end of trading session officially de signated by exchange during which all transactions are considered made at the clo se. Closing price: - The price (or price range) recorded during the period design ated by the exchange as the official close. Commission house: - A concern that b uys and sells actual commodities or futures contract for the accounts of custome rs. Consumption Commodity: - Consumption commodities are held mainly for consump tion purpose. E.g. Oil, steel Cover: - The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract. Cross hedge: - When a cash commodity is hedged by using futures contr act of other commodity. Day orders: - Orders at a limited price which are unders tood to be good for the day unless expressly designated as an open order or good till canceled order. Delivery: - The tender and receipt of actual commodity, or i n case of agriculture commodities, warehouse receipts covering such commodity, i n settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions are marked to market on last day of contract based on cash market close. Delivery month: - Specified month within which delivery m ay be made under the terms of futures contract. STEVENS BUSINESS SCHOOL BATCH: 2 009-2011 Page 75

DYNAMICS OF INDIAN COMMODITY MARKET Delivery notice: - A notice for a clearing m embers intention to deliver a stated quantity of commodity in settlement of a sho rt futures position. Derivatives: - These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodit y, foreign exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange or over the counter. Differentials: - The premiu m paid for grades batter than the basis grade and the discounts allowed for the grades. These differentials are fixed by the contract terms on most exchanges. E xchange: - Central market place for buyers and sellers. Standardized contracts e nsure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are a cting on behalf of their clients, companies or themselves. Forward contract: - I t is an agreement between two parties to buy or sell an asset at a future date f or price agreed upon while signing agreement. Forward contract is not traded on an exchange. This is oldest form of derivative contract. It is traded in OTC Mar ket. Not on an exchange. Size of forward contract is customized as per the terms of agreement between buyer and seller. The contract price of forward contract i s not transparent, as it is not publicly disclosed. Here valuation of open posit ion is not calculated on a daily basis and there is no requirement of MTM. Liqui dity is the measure of frequency of trades that occur in a particular commodity forward contract is less liquid due to its customized nature. In forward contrac ts, counter- party risk is high due to customized & bilateral nature of the tran saction. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 76

DYNAMICS OF INDIAN COMMODITY MARKET Forward contract is not regulated by any exc hange. Forward contract is generally settled by physical delivery. In this case delivery is carried out at delivery center specified in the customized bilateral agreement. Futures Contract:- It is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at certain ti me in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. It is standardized in terms of quantity as specified by exchange. Contract pric e of futures contract is transparent as it is available on centralized trading s creen of the exchange. Here valuation of Mark-to-Mark position is calculated as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is traded on the exchange. In futures con tracts the clearing-house becomes the counter party to each transaction, which i s called novation. Therefore, counter party risk is almost eliminated. A regulat ory authority and the exchange regulate futures contract. Futures contract is ge nerally cash settled but option of physical settlement is available. Delivery te ndered in case of futures contract should be of standard quantity and quality as specified by the exchange. Futures commission merchant: - A broker who is permi tted to accept the orders to buy and sale futures contracts for the consumers. F utures Funds: - Usually limited partnerships for investors who prefer to partici pate in the futures market by buying shares in a fund managed by professional tr aders or commodity trading advisors. Futures Market:-It facilitates buying and s elling of standardized contractual agreements (for future delivery) of underlyin g asset as the specific commodity and not the physical commodity itself. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 77

DYNAMICS OF INDIAN COMMODITY MARKET The formulation of futures contract is very specific regarding the quality of the commodity, the quantity to be delivered an d date for delivery. However it does not involve immediate transfer of ownership of commodity, unless resulting in delivery. Thus, in futures markets, commoditi es can be bought or sold irrespective of whether one has possession of the under lying commodity or not. The futures market trade in futures contracts primarily for the purpose of risk management that is hedging on commodity stocks or forwar d buyers and sellers. Most of these contracts are squared off before maturity an d rarely end in deliveries. Hedging: - Means taking a position in futures market that is opposite to position in the physical market with the objective of reduc ing or limiting risk associated with price. In the money: - In call options when strike price is below the price of underlying futures. In put options, when the strike price is above the underlying futures. Inthe-money options are the most expensive options because the premium includes intrinsic value. Index Futures: Futures contracts based on indexes such as the S & P 500 or Value Line Index. T hese are the cash settlement contracts. Investment Commodities: - An investment commodity is generally held for investment purpose. e.g. Gold, Silver Limit: - T he maximum daily price change above or below the price close in a specific futur es market. Trading limits may be changed during periods of unusually high market activity. Limit order: - An order given to a broker by a customer who has some restrictions upon its execution, such as price or time. Liquidation: - A transac tion made in reducing or closing out a long or short position, but more often us ed by the trade to mean a reduction or closing out of long position. STEVENS BUS INESS SCHOOL BATCH: 2009-2011 Page 78

DYNAMICS OF INDIAN COMMODITY MARKET Local: - Independent trader who trades his/h er own money on the floor of the exchanges. Some local act as a brokers as well, but are subject to certain rules that protect customer orders. Long: - (1) The buying side of an open futures contract or futures option; (2) a trader whose ne t position in the futures or options market shows an excess of open purchases ov er open sales. Margin: - Cash or equivalent posted as guarantee of fulfillment o f a futures contract (not a down payment). Margin call: - Demand for additional funds or equivalent because of adverse price movement or some other contingency. Market to Market: - The practice of crediting or debating a traders account base d on daily closing prices of the futures contracts he is long or short. Market o rder: - An order for immediate execution at the best available price. Nearby: The futures contract closest to expiration. Net position: - The difference betwe en the open contracts long and the open contracts short held in any commodity by any individual or group. Offer: - An offer indicating willingness to sell at a given price (opposite of bid). On opening: - A term used to specify execution of an order during the opening. Open contracts: - Contracts which have been brough t or sold without the transaction having been completed by subsequent sale, repu rchase or actual delivery or receipt of commodity. Open interest: - The number o f open contracts. It refers to unliquidated purchases or sales and never to their combined total. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 79

DYNAMICS OF INDIAN COMMODITY MARKET Option: - It gives right but not the obligat ion to the option owner, to buy an underlying asset at specific price at specifi c time in the future. Out-of-the money: - Option calls with the strike prices ab ove the price of the underlying futures, and puts with strike prices below the p rice of the underlying futures. Over the counter: - It is alternative trading pl atform, linked to network of dealers who do not physically meet but instead comm unicates through a network of phones & computers. Pit: - An octagonal platform o n the trading floor of an exchange, consisting of steps upon which traders and b rokers stand while trading (if circular called ring). Point: - The minimum unit in which changes in futures prices may be expressed (minimum price fluctuation m ay be in multiples of points). Position: - An interest in the market in the form of open commodities. Premium: - The amount by which a given futures contracts pr ice or commoditys quality exceeds that of another contract or commodity (opposite of discount). In options, the price of a call or put, which the buyer initially pays to the option writer (seller). Price limit: - The maximum fluctuation in p rice of futures contract permitted during one trading session, as fixed by the r ules of a contract market. Purchase and sales statement: - A statement sent by F MC to a customer when his futures option has been reduced or closed out (also ca lled P and S) Put: - In options the buyer of a put has the right to continue a sho rt position in an underlying futures contract at the strike price until the opti on expires; the seller (writer) of the put obligates himself to take a long posi tion in the futures at the strike price if the buyer exercises his put. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 80

DYNAMICS OF INDIAN COMMODITY MARKET Range: - The difference between high and low price of the futures contract during a given period. Ratio hedging: - Hedging a cash position with futures on a less or more than one-for-one basis. Reaction: - The downward tendency of a commodity after an advance. Round turn: - The execu tion of the same customer of a purchase transaction and a sales transaction whic h offset each other. Round turn commission: - The cost to the customer for execu ting a futures contract which is charged only when the position is liquidated. S calping: - For floor traders, the practice of trading in and out of contracts th rough out the trading day in a hopes for making a series of small profits. Settl ement price: - The official daily closing price of futures contract, set by the exchange for the purpose of setting margins accounts. Short: - (1) The selling o f an option futures contract. (2) A trader whose net position in the futures mar ket shows an excess of open sales over open purchases. Speculator: - Speculator is an additional buyer of the commodities whenever it seems that market prices a re lower than they should be. Spot Markets:-Here commodities are physically brou ght or sold on a negotiated basis. Spot price: - The price at which the spot or cash commodity is selling on the cash or spot market. Spread: - Spread is the di fference in prices of two futures contracts. Striking price: - In options, the p rice at which a futures position will be established if the buyer exercises (als o called strike or exercise price). STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Pag e 81

DYNAMICS OF INDIAN COMMODITY MARKET Swap: - It is an agreement between two parti es to exchange different streams of cash flows in future according to predetermi ned terms. The two commonly used swaps are : Interest rate swaps: These entail s wapping only the interest related cash flows between the parties in the same cur rency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy o r sell a swap that will become operative at the expiry of the options. Thus a sw aption is an option on a forward swap. Technical analysis (charting): - In price forecasting, the use of charts and other devices to analyze price-change patter s and changes in volume and open interest to predict future market trends (oppos ite of fundamental analysis). Time value: - In options the value of premium is b ased on the amount of time left before the contract expires and the volatility o f the underlying futures contract. Time value represents the portion of the prem ium in excess of intrinsic value. Time value diminishes as the expiration of the options draws near and/or if the underlying futures become less volatile. Volum e of trading (or sales): - A simple addition of successive futures transactions (a transaction consists of a purchase and matching sale). Writer: - A sealer of an option who collects the premium payment from the buyer. STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 82

Comparison of India And USA commodity on the Bases of their Consumption, Product ion and Prod/Cons Ratio. USA volume rank 7,145 2,685 1,643 168 58 1,524 59,982 102,710 2 2 2 3 2 2 6 3 2. 869428 2.626028 1.180734 0.927644 2.469136 2.616029 4.353417 3.743116 20.08038 1 4.15841 19.20739 10.38961 11.93416 9.380771 4.219206 8.335619 35,582 18,964 8,55 4 1,617 486 16,246 1,421,642 1,232,182 1.014 0.078 0.059 0 0 1.402 2.055 0.426 0 .502 0.316 0 0 0.81 0.96 1035.294 38.844 5.959 0 0 595.85 127184 0 0 1.06 0.421 204.465 38.272 680.52 403.318 3043.77 1347.87 519.188 0 0 1234.44 57582.72 0 0 I ndia Consumption US consumption world total volume of world % of Word % India Pr od/cons ratio US Prod/cons ratio India Production US Production India volume rank STEVENS BUSINESS SCHOOL Metals aluminum copper lead nickel tin zinc iron ore steel production 1021 498 101 15 12 425 61,890 46,122 8 11 15 17 7 8 5 7 Energy 3 7 642 958 2 1 7.138114 3.233831 21.31474 29.78856 3,012 3,216 0.951 0.368 ANNEXURE 2 coal oil 215 104 BATCH: 2009-2011 Agriculture 1.253 1.086 1.103 1.003 0.693 NA 1.217 1.294 4.958 1.002 1.106 31,850 4,624 251, 231 48,238 8,243 169 24,388 154 1,333 1,402 1,246 4 12 1 1 1 37 2 7 1 5 2 13.452 48 25.52848 2.337007 4.122202 6.402912 15.01889 16.13784 19.09182 0.815763 15.60 393 8.159432 5.323692 1.155682 36.37723 24.70146 27.77853 0.613831 12.68761 3.86 3522 16.72942 7.215275 13.00083 598,269 400,110 690,627 195,284 29,674 27,532 19 2,219 3,986 7,968 19,431 9,584 1.866 1.652 1.317 1.543 1.108 1.397 0.992 0 0.005 3.143 1.16 100843.9 110926.2 17802.42 8074.15 1316.7 37751.34 984.734 322.27 30 38.064 864.892 59432.1 7638.848 330871.2 74431.23 9133.244 236.093 24192.9 0 6.6 65 4406.486 1445.36 DYNAMICS OF INDIAN COMMODITY MARKET wheat rice maize soybeans soy oil palm oil sugar tea coffee cotton rubber 80,482 102,142 16,140 8,050 1,900 4,135 31,020 761 65 3,032 782 2 2 6 5 4 2 1 1 27 2 4 Page 83

DYNAMICS OF INDIAN COMMODITY MARKET 17. http://www.fmc.gov.in/ REFERENCE http://www.eurojournals.com/finance.htm http://www.scribd.com/doc/15961806/Commo dity-Market-Report http://www.coolavenues.com/know/fin/tushar_3.php3 http://fina nce.indiamart.com/markets/commodity/nmceil.html http://business.mapsofindia.com/ india-market/commodity.html http://www.tradingpicks.com/beginners_guide.htm http ://www.indiancommodity.com/lic.htm http://ncdex.com/Aboutus/profile.aspx http:// www.indiancommodity.com/trader.htm http://finance.indiamart.com/markets/commodit y/traders_derivatives_market.htm l http://business.mapsofindia.com/india-market/ commodity.html http://isid.org.in/pdf/WP1003.PDF http://www.ftkmc.com/markets-co mmodities.html http://www.banknetindia.com/banking/80628.htm http://www.religare commodities.com/class_roomIntro.asp http://www.oxfordfutures.com/futures-educati on/futures-fundamentals/how-themarket-works.htm http://www.smcindiaonline.com/co mmo_trading_faq.asp http://www.docstoc.com/docs/32951953/Commodity-Futures-Marke t-in-India http://www.fmc.gov.in/htmldocs/Abhijit%20Sen%20Report.pdf STEVENS BUSINESS SCHOOL BATCH: 2009-2011 Page 84