Commodity futures trading on indian commodity exchanges.

1. An IntroductionAn Introduction
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CommodityCommodity
MarketsMarkets
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2.  Commodities is life!!
 Trading in commodities is heterogeneous
 It’s a different asset class
 Underlying assets are tangible
Commodity Exchanges

3. Highly Commodities Traded
BULLIONS: Gold (100gms,1kg, 3kg), Silver(5kg, 30kg,
150Kg)
BASE METALS: Steel, Nickel, Tin, Copper, Zinc, Aluminium
SPICES: Pepper, Red Chilli, Jeera, Turmeric, Cardamom
ENERGY & Gas: Crude Oil, Brent Crude Oil, Natural Gas
OIL & OIL SEEDS: Castor Seeds, Mustard Seed, Mustard Oil
FIBRE: Kapas, Cotton
PULSES: Yellow Peas, Maize
PLANTATIONS: Cashew Kernel
OTHERS: Guar Seed, Gur, Sugar M200, Guargum,
 Mentha Oil etc.

4. Reasons to trade in commodities
Portfolio diversification
No counter party risk
Higher leverage
Contract sizes meeting individual needs and
requirements
Hedging the price risks

5.  Hedgers
 Consumers – refineries, food processing companies
 Traders
 Producers – farmers
 Speculators
 Brokerage houses
 Retail investors
 Commodity spot trader
 Institutional proprietary traders
 Arbitrageurs
 Brokerage houses
 Commodity spot trader

6. Benefits to Investors
Big money spinner
Attractive valuations compared to capital markets
Effective Instrument for Hedging
Diversification tool, for investors to park their
money

7. ASSET
CL. RT AS
ON
04/09/08
MKT LOT
CONTRACT
VALUE
1% GAIN
1% GAIN in
Rs. Term
PROFIT
GOLD (1kg) 11600 100 1160000 1% 116 11600
GOLDM(100gms) 11700 10 117000 1% 117 1170
SILVER 20000 30 600000 1% 200 6000
SILVERM 20075 5 100375 1% 200.75 1003.75
CRUDE 4854 100 485400 1% 48.54 4854
NATURAL GAS 323 500 161500 1% 3.23 1615
COPPER 320 1000 320000 1% 3.2 3200

8.  Monday to Friday
 Agricultural commodities: 10.00 a.m. to 5.00 p.m.
 Gold,Silver,Crude oil,Brent crude oil,Furnace oil,,
and Metals (ferrous & non-ferrous
eg.Copper,Nickel,Tin, Aluminium & Steel) 10.00 a.m.
to 11.55p.m..
 Saturday (agri commodities) 10.00 a.m. to 2.00 p.m.
 Holidays notified in advance

9. Illustration
 Trading in physical gold  Trading in gold derivatives
 Involves paying of the entire
cost of the gold transacted
 Involves paying a small
amount of 5-7% as margin of
the entire cost of the gold
transacted.
 Costs incurred for safe
keeping of gold
 ZERO costs
 Cumbersome to avail of the
best price opportunities in
market
 Standardized pricing across
India

10. MCX
 Multi Commodity Exchange of India (MCX), an independent and
demutualized Exchange, is India’s leading multi-commodity trading
platform with a Pan-India online infrastructure.
 Headquartered in Mumbai, MCX is led by a team of senior industry
professionals, with extensive business and operations expertise.
 Multi Commodity Exchange of India (MCX), India's first multi-
commodity, online exchange launched its operations in November
2003.
 A highly scalable, ‘distributed architecture’ based trading
platform, built on Microsoft® technology using the Microsoft .NET
Framework is in place for the exchange.
 The exchange provides:
 Connectivity through VSAT & Internet.
 Real Time price and trade information dissemination
 Robust risk management system and controls.

11. MCX (Contd.)
 The Exchange has been promoted by Bank of India, Bombay Bullion
Association, Bombay Metal Exchange Ltd., Canara Bank, Corporation
Bank, FTIL, Pulses Importers’ Association, Solvent Extractors’
Association, State Bank of India and Union Bank of India.
 MCX currently offers futures for over 50 commodities. Of these eight
commodities viz. Gold, Silver, Crude, Natural Gas, Soy oil, Guar,
Kapas and urad account for almost 95% of the trade on this
exchange. Peak one way turnover of the exchange has crossed Rs.
12,000 crores.
 MCX is the first Commodity Futures Exchange in the world to have
launched “Steel Futures Contract”
 MCX is the fastest growing exchange in the world (UNCTAD Report).
It also ranks second (next only to NYMEX) in trading on natural gas
futures (volumes traded). Natural gas futures were listed for trading
on MCX platform in July 2006.

12. NCDEX National Commodity & Derivatives Exchange Limited (NCDEX) is a
professionally managed online multi commodity exchange promoted
by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of
India (LIC), National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE).
 NCDEX is the only commodity exchange in the country promoted by
national level institutions. This unique parentage enables it to offer
a bouquet of benefits, which are currently in short supply in the
commodity markets. The institutional promoters of NCDEX are
prominent players in their respective fields and bring with them
institutional building experience, trust, nationwide reach,
technology and risk management skills.
 NCDEX is a public limited company incorporated on April 23, 2003
under the Companies Act, 1956 and has commenced its operations
on December 15, 2003.

13. NCDEX…Contd
 NCDEX is a nation-level, technology driven de-mutualized on-line
commodity exchange with an independent Board of Directors and
professionals
 NCDEX is the largest exchange in the world for trade in agro-commodity
futures .
 NCDEX is located in Mumbai and offers facilities to its members in more
than 450 centres throughout India. The reach will gradually be
expanded to more centres.
 NCDEX currently facilitates trading of forty five, commodities -Cashew,
Castor Seed, Chana, Chilli, Cotton, Cotton Seed Oilcake, Crude Palm
Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute
sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper,
Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oi,
Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,
Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize &
Yellow Soybean Meal. At subsequent phases trading in more
commodities would be facilitated.

14. Future Of Commodity Markets
In 4 years the average daily turnover of MCX has
reached more than 25,000 Crores
World Over the Commodity Markets are 10 times
bigger than the Equity Markets
Possibility of MFs & FIIs to be allowed in the
Commodities market, thereby increasing liquidity
and depth in the market.

15. STOCK & COMMODITY MARKETS –STOCK & COMMODITY MARKETS –
A COMPARISONA COMPARISON

16. Stocks V/S Commodities
Quite often, stock markets and stock exchanges are
compared with commodity markets and commodity
exchanges.
Derivatives of stocks and commodities are also
compared and common man is led to think that both
are similar except that the underlying asset is
different.
This is far from true. Stocks and stock futures are
indeed completely different from commodities and
commodity futures.

17. Basic Difference
Stock/Share certificate is a paper / document which
gives you a part of the ownership of the company.
Commodity Futures contract is also a paper /
document; but does not give you ownership of any
company but only the commodity that is the subject
of the contract.
Speculation in shares need not lead to any social
upheavals. It only affects the players in the market!!
Excessive speculation / volatility in commodity
futures do have social implications since major part of
the tradable commodities are agro-commodities.

18. Independent Alternatives!
Stocks and commodities are two independent asset
classes.
They do not necessarily rise or fall in tandem!
Recent past is a conclusive proof. MCX and NCDEX
saw only a marginal increase in volumes last 6
months while the stock market was sharply down.

19. Volumes On Commodity Exchanges
FIIs, FDI and Mutual Funds / Hedge Funds likely to be
allowed to invest in Commodity futures.
Permission might be granted to them for trading initially
only in Bullion and Crude futures.
Options likely to be allowed this year in the winter session
of Parliament.
All these measures are expected to boost the volumes on
commodity exchanges further.

20. Commodity Markets
Commodity Market Turnover
• 4 national commodity exchanges in India with trading
allowed in 102 commodities
• Commodity turnover grew by INR 30% in 2008 -09
• India is anticipated to be one of the most dominant
global players in the commodities markets as it is
among the largest producers and consumers of several
commodities.
• India to become Hub of Global Trading in Commodities
which promises to be a $ 900 billion opportunity
• Commodity Futures volumes is expected to grow by
15.4% annually(according to FMC chairman)
• MCX India, established in 2003, is India’s largest
commodity exchange and the world’s second largest
silver and third largest gold exchange
• NCDEX, only two and a half years old, is Asia's third-
largest commodities exchange after Tokyo and
Shanghai and the 14th-largest in the world.
Source: Hindu Business Line
Key Facts
Key FactsCopper Turnover
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500000
1000000
1500000
2000000
2500000
3000000
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ec-07Jan-08Feb-08M
ar-08Apr-08M
ay-08Jun-08Jul-08Aug-08Sep-08O
ct-08N
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ec-08Jan-09Feb-09M
ar-09Apr-09M
ay-09

21. Securities V/S Commodities
Security of a particular type (Equity share, debenture, bond,
etc.) has the same face value and its holders have such rights
and obligations as are prescribed by the rules of the company
or the governing authority. One unit of security does not
differ from another of the same type in terms of its face
value and characteristics.
Commodity futures are completely different. The underlying
asset is a commodity. Each commodity may have several
grades / varieties and each lot in a grade may vary from
another in the same grade!!
Commodities may have different usage for different holders
and hence utility and intrinsic value would be different for
different users. Quality may deteriorate due to improper
handling, storage and transportation.

22. Stock Markets V/S Commodity Markets
A commodity exchange is not a physical market. Physical
markets for commodities are spread throughout the country. In
comparison stock exchanges are very few and mostly located in
metropolitan cities with some terminals for trading in other
areas.
Stock prices are essentially determined at central places or
stock exchanges. Commodity prices in total contrast, differ
widely from location to location with their quality
characteristics and preferred usage. Unlike spot security price,
there is no single unique cash price quotation for a commodity
which will be valid throughout the country. Prices of most
commodities, especially those of agro-commodities, also
change seasonally.

23. Equity V/S Commodity Futures
Unlike equity futures which all expire on the last
Thursday of the month of the contract, expiry dates of
commodity futures depend on the underlying
Unlike equity futures that are all cash settled,
commodity futures can be either cash or delivery
settled

24. Similarity in Equity & Commodity
Futures
Just like equity futures, traders can speculate, hedge
and arbitrage using the same strategies
Like equity futures, the commodity futures can be
squared at any time till the expiry date

25. Risks And Hedging Them!
 In view of the unavoidable variations in prices of commodities, participants
in the market face much larger risks than those holding or buying securities.
 In commodities, not only traders / merchants but also processors and
manufacturers, importers and exporters are required to enter into deals for
forward purchases / sales to ensure regular supplies and sales. Hence, the
need for an active futures market for efficient reference pricing and
effective risk management is far more in commodities than in securities.
 Most of the investors in securities do not require any hedging facility since
they are mainly looking for dividends for regular income or appreciation in
value!
 Futures and options market in security derivatives provides an avenue for
speculation to traders and professional speculators without benefiting long
investors in any way. In total contrast, commodity markets do provide an
avenue for hedging risks. Commodity futures market is thus primarily a
hedging market and not a market for delivery.

26. Price Discovery
 Price discovery by futures market has a basic role to perform in commodity markets
than in securities markets. Commodity Futures prices serve as reference prices for
physical market transactions in forward contracts. Securities futures prices have no
such role.
 Price discovery is not that consequential to security market operators. A sharp
increase in prices is merely a “feel good” factor. But market functionaries in
commodities are always keen to know true equilibrium of prices determined by the
demand – supply factors. These prices help them in preparing their production and
distribution plans.
 A sharp rise in prices of commodities is a cause of concern for the Government and
the people at large. A sharp rise is not good for farmers either! It distorts the true
picture and may lead to imports and distort cropping pattern. Transparent price
discovery system is therefore a must for commodities and commodity futures help
achieve this.
 Price discovery is of immense importance in commodity markets. The factors
determining the prices of securities are not many (supply is almost fixed, demand
varies with the financial performance of the company, general market expectations,
etc.), while factors affecting commodity prices are far too many!!
 While demand for securities is mainly for investment and speculation, the demand
for commodities could be for inventories and consumption also.

27. Pricing Structure
 Pricing structure of stocks is simpler vis-à-vis that of commodities.
Irrespective of the company, the tradable lots, face value of shares etc.
remain the same.
 Pricing structure of commodity futures is much more complex:
 - Each commodity is quoted in different units and increments.
 - The trader in a commodity market has to thus study the contract
specifications for every commodity carefully not only for one commodity
exchange but also for other commodity exchanges even for the same
commodity!
 Ideally, a trader should know:
 How contracts are quoted? What are the units? What the minimum and
maximum tradable quantities are? What is the initial margin? Has any
special margin been levied on the day of trading? What is the maximum
volatility permitted for each commodity? What are the standard
specifications for each of the commodities?

28. Limited/Short Life Span
Unlike shares, commodity futures have expiry date. In
case of stocks, there is no life span barrier.
Thus you can afford to wait and hold the shares as long
as you want to ensure that you are not booking losses.
This is not possible in commodity future’s trading.
Futures contracts are valid for a month or for a few
months. At the expiry, the owner has to necessarily take
the possession of the commodity mentioned in the
contract or the owner has to square off his / her
position before the futures contract enters the delivery
period.
Limited life of contracts also makes it difficult to
undertake long term price forecasting.

29. Lower Margins
This is perhaps the most important difference between
shares and commodity futures.
All the commodity futures contracts require initial
margin to be paid by the participant. These margins are
different for different commodities. However, they
usually range between three to ten percent only. The
participant can thus leverage his investment to a great
extent.
In case of shares, the investor has to pay the entire
amount upfront. Even if the participant is dealing in
stock futures, the initial margin paid is quite high
compared to the commodity futures.

30. Time Frame Is Short
Since the leverage in case of commodity futures is quite
high, it is necessary to watch the developments on
price front meticulously and frequently – almost on a
continuous basis.
In case of stocks or stock futures, the analysts would
like to look at the long range scenario whereas in case
of commodity futures this is not possible due to the
pre-determined life span of the contract
Stock analysts may be able to talk about where the
market will be in five to six months from now whereas
the commodity futures analyst would like to assess
where the market would be in the next few weeks
rather than months.

31. Timing Is Important
Timing is of utmost importance in case of commodity
futures. Ascertaining the direction of market is no doubt
important; but ascertaining the entry point is more
important in case of commodity derivatives. If the timing
of the entry or exit is not planned properly, the results
could be disastrous!

32. Broad Market Averages
Stock market players give considerable importance to
movement of stock market averages such as Standard and
Poor’s 500 Stock Index, BSE Index, Technology Index, etc. This
is in fact, a starting point for any study or analysis of
movement of prices of stocks.
In case of commodity futures, there are few indices like
Weather index, Commodity Research Bureau (CRB) Futures
price index. Though these indices are used to some extent in
anticipating the overall direction of the commodity markets,
they are hardly given as much importance as the stock market
averages by the participants in the market.

33. Use Of Technical Indicators
All technical tools were originally developed for
analysis of stock price movements. Though these
can be used in case of commodity markets, the
usage so far in commodity markets has been
limited.
It is a common knowledge that chart patterns in
futures on commodities do not get formed as
completely as they do in case of stock prices.

34. Sentiment Indicators
Participants in the stock market make extensive use of
sentiment indicators and “Flow of Funds” analysis.
Sentiment Indicators monitor the performance of various
operators like Mutual Funds, Floor Specialists, etc.
Flow of funds analysis refers to the cash positions of the
large groups of investors such as Banks, Mutual Funds,
Financial Institutional Investors (FIIs), FDIs, etc.
These indicators are not used in commodity Futures –
particularly in Indian context since Banks, FIIS, etc. are
not allowed to trade in commodities’ futures as yet!!

35. In Short!!
S.
No.
Commodity Futures Stock Futures
1. Pricing structure cannot be uniform since
quantity, quality, units, etc. are different for
different commodity contracts. Price structure
is thus complex.
Price structure is simple and uniform.
2. Contracts have expiry dates and hence they
have limited life span.
No expiry dates for stocks.
3. Lower margins required for trading – usually
less than 10% and hence, the leverage is very
high.
Immediate payment / delivery and hence higher
or no margins
4. High risks due to high leverage Comparatively low risks due to limited or no
leverage.
5. Time frame at traders’ disposal is shorter due
to short life span of contracts and hence quick
decisions are required.
Time frame is adequate. Traders could wait if the
situation is not favorable for buying / selling.
“Buy and Hold” strategy can work.
6. Time is of essence since it can “make” or
“break” the players depending on “right” or
“wrong” entry time.
Situation is similar except in severity.

36. Commodities Affect All!
Stock prices if manipulated can do harm to only the
participants (Buyers/Sellers) in the market. They neither
affect third party directly nor do they have any social
implications.
Contrary to this, any manipulation in prices of futures
contracts in Commodity markets can directly have a bearing
on the spot market prices and create artificial shortages of
the concerned commodity in the market. This can cause
excessive volatility in the prices of the commodity and harm
the social fabric of the country since commodities are
invariably products of mass consumption.

37. Thank you
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