Rushabh commodity market project

COMMODITY
MARKET
K.E.S. SHROFF COLLEGE Page 1

INDEX
Chapter
No
Topic Page
No.
1 Introduction To Commodity Market 04
2 History OfEvolution Of Commodity
Markets
08
3 India And The Commodity Market 10
4 International Commodity Exchanges 15
5 How Commodity Market Works? 17
6 How To Invest In A Commodity
Market
19
7 Current Scenario In Indian
Commodity Market
23
8 Commodities 28
9 Analysis 38
Annaxture 47
Summary 55
Bibliography 56
Chap ter

1
Introduction to Commodity Market
What is “Commodity”?
Any product that can be used for commerce or an article of commerce
which is traded on an authorized commodity exchange is known as commodity.
The article should be movable of value, something which is
bought or sold and which is produced or used as the subject or barter or sale. In short
commodity includes all kinds of goods. Indian Forward Contracts
(Regulation) Act (FCRA), 1952 defines “goods” as “everykind of
movable property other than actionable claims, money and securities”.
In current situation, all goods and products of agricultural (including
plantation), mineral and fossil origin are allowed for commodity trading recognized
under the FCRA. The national commodity
exchanges, recognized by the Central Government, permits commodities which include
precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-
ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur,
potatoes and onions, coffee and tea, rubber and spices. Etc.
What is a 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.
What is Commodity Futures?
A Commodity futures is an agreement between two parties to buy or sell a
specified and standardized quantity of a commodity at a certain time in future at a price
agreed upon at the time of entering into the contract on the commodity futures exchange.
The need for a futures market arises mainly due to the hedging
function that it can perform. Commodity markets, like any other financial instrument,
involve risk associated with frequent price volatility. The loss due to price volatility
can be attributed to the following reasons:
Consumer Preferences: - In the short-term, their influence on price volatility is small
since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their
inventory in advance.
Changes in supply: - They are abrupt and unpredictable bringing about wild
fluctuations in prices. This can especially noticed in
agricultural commodities where the weather plays a major role in

affecting the fortunes of people involved in this industry. The futures market has
evolved to neutralize such risks through a mechanism; namely hedging.
The objectives of Commodity futures: -
Hedging with the objective of transferring risk related to the possession of
physical assets through any adverse moments in price. Liquidity and Price
discovery to ensure base minimum volume in trading of a commodity
through market information and demand supply
factors that facilitates a regular and authentic price
discovery mechanism.
Maintaining buffer stock and better allocation of resources as it augments
reduction in inventory requirement and thus the
exposure to risks related with price fluctuation declines.
Resources can thus be diversified for investments.
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 movements. Liquidity in Contracts of the commodities traded also
ensures in maintaining the equilibrium between demand and supply.
Flexibility, certainty and transparency in purchasing commodities facilitate bank
financing. Predictability in prices of commodity would lead to stability,
which in turn would eliminate the risks associated with running the business
of trading commodities. This would make funding easier and less stringent for
banks to commodity market players.
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 in the commodities being offered in the exchange
as well as those who have nothing to do with futures trading. It is because of price
discovery and risk management through the existence of futures exchanges that a
lot of businesses and services are able to function smoothly.
1. Price Discovery:-Based on inputs regarding specific market information,
the demand and supply equilibrium, weather forecasts,
expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers and sellers
conduct trading at futures exchanges. This

transforms in to continuous price discovery mechanism. The execution of
trade between buyers and sellers leads to
assessment of fair value of a particular commodity that is immediately
disseminated on the trading terminal.
2. Price Risk Management: - Hedging is the most common method of price
risk management. 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 change. This could dent the profitability of their business.
Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers,
exporters, importers etc.
3. Import- Export competitiveness: - The exporters can hedge their price risk
and improve their competitiveness by making use of futures market. A majority
of traders which are involved in physical trade internationally
intend to buy forwards. The purchases made from the
physical market might expose them to the risk of price risk resulting to losses.
The existence 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 consuming and costly physical transactions.
4. Predictable Pricing: - The demand for certain commodities is highly price
elastic. The manufacturers have to ensure that the prices should be stable in
order to protect their market share with the free entry of imports. Futures
contracts will enable predictability in domestic prices. The manufacturers can,
as a result, smooth out the influence of changes in their input prices very
easily. With no futures market, the manufacturer can be caught between
severe short-term price movements of oils and necessity to maintain price
stability, which could only be possible through sufficient financial reserves
that could otherwise be utilized for making other profitable investments.
5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on
farmers in the absence of futures market. There would be no need to have
large reserves to cover against unfavorable price fluctuations. This
would reduce the risk premiums associated with
the marketing or processing margins
enabling more returns on produce. Storing more and being more active in the
markets. The price information accessible to the farmersdetermines the

extent to which traders/processors increase price to
them. Since one of the objectives of futures exchange is to make available
these prices as far as possible, it is very likely to benefit the farmers. Also, due
to the time lag between planning and production, the market-determined price
information disseminated by futures exchanges would be crucial for their
production decisions.
6. Credit accessibility: - The absence of proper risk management tools would
attract the marketing and processing of commodities 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 degree of reluctance
among banks to fund commodity traders, especially those who do not manage
price risks. If in case they do, the interest rate is likely to be high and terms
and conditions very stringent. This posses a huge obstacle in the smooth
functioning and competition of commodities market. Hedging, which is possible
through futures markets, would cut down the discount
rate in commodity lending.
7. Improved product quality: - The existence of warehouses for facilitating
delivery with grading facilities along with other related 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 uniform standardization of
commodity trade, including the terms of quality
standard: the quality certificates that are issued by the exchange-
certified warehouses have the potential to become the norm for physical trade.

Chapter 2
History of Evolution of commodity market
Commodities future trading was evolved from need of assured continuous supply of
seasonal agricultural crops. The concept of organized trading in commodities evolved in
Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store
Rice in warehouses for future use. To raise cash warehouse holders sold receipts
against the stored rice. These were known as “rice tickets”. Eventually, these rice
tickets become accepted as a kind of commercial currency. Latter on rules came in to
being, to standardize the trading in rice tickets. In 19th
century Chicago in United States
had emerged as a major commercial hub. So that wheat producers from Mid-west
attracted here to sell their produce to dealers & distributors. 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 farmers and dealers to transact in spot
grain to deliver wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the
produce for cash in future and thus contract for “futures trading” evolved. Whereby
the producer would agree to sell his produce to the buyer at a future delivery date at
an agreed upon price. In this way producer was aware of what price he would fetch
for his produce and dealer would know about his cost involved, in advance. This kind
of agreement proved beneficial to both of them. As if dealer is not interested in taking
delivery of the produce, he could sell his contract to someone who needs the same.
Similarly producer who not intended to deliver his produce to dealer could pass on
the same responsibility to someone else. The price of such contract would
dependent on the price movements in the wheat market. Latter on by making some
modifications these contracts transformed in to an instrument to protect involved
parties against adverse factors such as unexpected price movements and unfavorable
climatic factors. This promoted traders entry in futures market, which had no
intentions to buy or sell wheat but would purely speculate on price movements in
market to earn profit.
Trading of wheat in futures became very profitable which encouraged
the entry of other commodities in futures market. This created a platform for
establishment of a body to regulate and supervise these contracts. That’s why
Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the
New York Coffee, Cotton and Produce Exchanges were born. Agricultural
commodities were mostly traded but as long as there are buyers and sellers, any
commodity 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, pricing, and transfer of agricultural

products. In 1933, during the Great Depression, the Commodity Exchange, Inc.
was established in New York through the merger of four small exchanges – the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk
Exchange, and the New York Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade,
The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New
York Commodity Exchange and New York Coffee, sugar and cocoa Exchange.
Worldwide there are major futures trading exchanges in over twenty countries
including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

Chapter
-3
India and the commodity
market
Histo r y of Commodit y Mar ket in I ndia:-
The history of organized commodity derivatives in India goes back
to the nineteenth century when Cotton Trade Association started futures trading in
1875, about a decade after they started in Chicago. Over the time
datives market developed in several commodities in
India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw
jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay
(1920).
However many feared that derivatives fuelled unnecessary speculation
and were detrimental to the healthy functioning of the market for the underlying
commodities, resulting in to banning of commodity options trading and cash
settlement of commodities futures after independence in 1952. The parliament
passed the Forward Contracts (Regulation) Act, 1952,
which regulated contracts in Commodities all over the India. The
act prohibited options trading in Goods along with cash settlement of forward
trades, rendering a crushing blow to the commodity derivatives market. Under the act
only those associations/exchanges, which are granted reorganization from the
Government, are allowed to organize forward trading in regulated commodities. The
act envisages three tire regulations: (i) Exchange which organizes forward trading in
commodities can regulate trading on day-to-day basis; (ii) Forward
Markets Commission provides regulatory oversight under the powers
delegated to it by the central Government. (iii) The Central Government- Department
of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is
the ultimate regulatory authority.
The commodities future market remained dismantled and
remained dormant for about four decades until the new
millennium when the Government, in a complete change in a policy, started actively
encouraging commodity market. After Liberalization and Globalization in 1990, the
Government set up a committee (1993) to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra)recommended allowing
futures trading in 17 commodity groups. It also
recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act 1952, particularly
allowing option trading in goods and registration of brokers with Forward Markets
Commission. The Government accepted most of these recommendations and
futures’ trading was permitted in all recommended commodities. It is timely decision
since internationally the commodity cycle is on upswing and the next decade being
touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way. Earlier only the buyer of produce and
its seller in the market judged upon the prices. Others never had a say.
Today, commodity exchanges are purely speculative in nature.
Before discovering the price, they reach to the producers, end- users, and even the retail
investors, at a grassroots level. It brings a price transparency and risk management in
the vital market. A big difference between a typical auction,
where a single auctioneer announces the bids and the
Exchange is that people are not only competing to buy but also to sell. By
Exchange rules and by law, no one can bid under a higher bid, and no one can offer
to sell higher than someone else’s lower offer. That keeps the 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 commodities future market in India has
experienced an unexpected boom in terms of modern exchanges, number of
commodities allowed for derivatives trading as well as the value of futures trading in
commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002
commodity datives market was virtually non- existent, except some negligible
activities on OTC basis.
In India there are 25 recognized future exchanges, of which there
are three national level multi-commodity exchanges. After a gap of almost three
decades, Government of India has allowed forward transactions in
commodities through Online Commodity Exchanges, a modification
of traditional business known as Adhat and Vayda Vyapar to facilitate better
risk coverage and deliveryof commodities. The three exchanges
are: National Commodity & Derivatives Exchange Limited (NCDEX)
Mumbai, Multi Commodity Exchange of India Limited (MCX)
Mumbai and National Multi- Commodity Exchange of India Limited
(NMCEIL) Ahmedabad.There are other regional commodity exchanges situated in
different parts of India.
Legal framework for regulating commodity futures in India:-
The commodity futures traded in commodity exchanges are
regulated by the Government under the Forward Contracts
Regulations Act, 1952 and the Rules framed there under. The regulator for the
commodities trading is the Forward Markets Commission, situated at Mumbai,
which comes under the Ministry of Consumer Affairs Food and Public Distribution
Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward Contracts
(Regulation) Act, 1952. Commission consists of minimum two and maximum four
members appointed by Central Govt. Out of these members there is one nominated
chairman. All the exchanges have been set up under overall control of Forward Market
Commission (FMC) of Government of India.
National Commodities & Derivatives Exchange Limited (NCDEX)
National Commodities & Derivatives Exchange Limited (NCDEX)
promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC), National Bank of Agriculture and Rural Development (NABARD) and
National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit
Ratting Information Service of India Limited (CRISIL), IndianFarmers
Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman
Sachs by subscribing to the equity shares have joined the promoters as a share
holder of exchange. NCDEX is the only Commodity Exchange in the country
promoted by national level institutions.
NCDEX is a public limited company incorporated on 23
April 2003. NCDEX is a national level technology driven on line Commodity
Exchange with an independent Board of Directors and professionals not having any
vested interest in Commodity Markets.
It is committed to provide a world class commodity exchange platform for market
participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and
transparency.
NCDEX is regulated by Forward Markets Commission (FMC).
NCDEX is also subjected to the various laws of land like the Companies Act,
Stamp Act, Contracts Act, Forward Contracts
Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members
in more than 550 centers through out India. NCDEX
currently facilitates trading of 57 commodities.
Commodities Traded at NCDEX:-
Bullion:-
Gold KG, Silver, Brent
Minerals:-
Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots
Oil and Oil seeds:-

Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil,
Cotton, Mentha oil, RBD Pamolein, RM seed oil cake, Refined soya oil, Rape seeds,
Mustard seeds, Caster seed, Yellow soybean, Meal
Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,
Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow red maize
Spices:-
Jeera, Turmeric, Pepper
Plantation:-
Cashew, Coffee Arabica, Coffee Robusta
Fibers and other:-
Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian
31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green Cottons, ,
, Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
Energy:-
Crude Oil, Furnace oil
Multi Commodity Exchange of India Limited (MCX)
Multi Commodity Exchange of India Limited (MCX) is an independent
and de-mutulized exchange with permanent
reorganization from Government of India, having Head Quarter in Mumbai. Key
share holders of MCX are Financial Technologies (India) Limited, State Bank of India,
Union Bank of India, Corporation Bank of India, Bank of India and Cnnara Bank.
MCX facilitates online trading, clearing and settlement operations for commodity
futures market across the country.
MCX started of trade in Nov 2003 and has built strategic alliance with
Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors
Association of India, pulses Importers Association and Shetkari Sanghatana.
MCX deals wit about 100 commodities.
Commodities Traded at MCX:-
Bullion:-
Gold, Silver, Silver Coins,
Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead
Oil and Oil seeds:-
Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein,
Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy
meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower

Oil cake, Tamarind seed oil,
Pulses:-
Chana, Masur, Tur, Urad, Yellow peas
Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger,
Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee,
Fiber and others:-
Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple),
Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar,
Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute,
Jute Goods, Jute Sacking,
Petrochemicals:-
High Density Polyethylene (HDPE), Polypropylene (PP), Poly
Vinyl Chloride (PVC)
Energy:-
Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas
National Multi Commodity Exchange of India Limited
(NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL)
is the first de-mutualised Electronic Multi Commodity Exchange in India. On
25th
July 2001 it was granted approval by Government to organize trading in
edible oil complex. It is being supported by Central warehousing Corporation
Limited, Gujarat State Agricultural Marketing Board and
Neptune Overseas Limited. It got reorganization in Oct 2002.
NMCEIL Head Quarter is at Ahmedabad.
Chap ter 4

INTERNATIONAL COMMODITY EXCHANGES
Futures’ trading is a result of solution to a problem related to the
maintenance of a year round supply of commodities/ products that are seasonal as is
the case of agricultural produce. The United States, Japan, United Kingdom, Brazil,
Australia, Singapore are homes to leading commodity futures exchanges in the world.
The New York Mercantile Exchange (NYMEX):-
The New York Mercantile Exchange is the world’s biggest exchange
for trading in physical commodity futures. It is a primary trading forum for energy
products and precious metals. The exchange is in existence since last 132 years and
performs trades trough two divisions, the NYMEX division, which deals in energy and
platinum and the COMEX division, which trades in all the other metals.
Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline,
RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum,
Palladium, etc.
London Metal Exchange:-
The London Metal Exchange (LME) is the world’s premier
non-ferrous market, with highly liquid contracts. The exchange was formed in
1877 as a direct consequence of the industrial
revolution witnessed in the 19th
century. The primary focus of LME is in providing a
market for participants from non-ferrous based metals related industry to safeguard
against risk due to movement in base metal prices and also arrive at a price that
sets the benchmark globally. The exchange trades 24 hours a day through an inter
office telephone market and also through a electronic trading platform. It is famous for
its open-outcry trading between ring dealing members that takes place on the market
floor.
Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum
Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear
Low Density Polyethylene, etc.
The Chicago Board of Trade:-
The first commodity exchange established in the world was the
Chicago Board of Trade (CBOT) during 1848 by group of Chicago merchants who
were keen to establish a central market place for trade. Presently, the Chicago Board
of Trade is one of the leading exchanges in the world for trading futures and options.
More than 50 contracts on futures and options are being offered by CBOT currently
through open outcry and/or electronically. CBOT initially dealt only in Agricultural

commodities like corn, wheat, non storable agricultural commodities and non-
agricultural products like gold and silver. Commodities Traded: - Corn, Soybean, Oil,
Soybean meal, Wheat, Oats, Ethanol, Rough Rice, Gold, Silver etc.
Tokyo Commodity Exchange (TOCOM):-
The Tokyo Commodity Exchange (TOCOM) is the second largest
commodity futures exchange in the world. It trades in to metals and energy
contracts. It has made rapid advancement in commodity trading globally since its
inception 20 years back. One of the biggest reasons for that is the initiative
TOCOM took towards establishing Asia as the benchmark for price discovery
and risk management in commodities like the Middle East Crude Oil. TOCOM’s
recent tie up with the MCX to explore cooperation and business opportunities is
seen as one of the steps towards providing platform for futures price discovery in
Asia for Asian players in Crude Oil since the demand-supply situation in U.S. that
drives NYMEX is different from demand-supply situation in Asia. In Jan 2003,
in a major overhaul of its computerized trading system, TOCOM fortified its
clearing system in June by being first commodity exchange in Japan to introduce an in-
house clearing system. TOCOM launched options on gold futures, the first option
contract in Japanese market, in May
2004.
Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,
Aluminum, Rubber, etc
Chicago Mercantile Exchange:-
The Chicago Mercantile Exchange (CME) is the largest futures
exchange in the US and the largest futures clearing house in the world for futures and
options trading. Formed in 1898 primarily to trade in Agricultural commodities, the
CME introduced the world’s first financial futures more than 30 years ago. Today it
trades heavily in interest rates futures, stock indices and foreign exchange futures. Its
products often serves as a financial benchmark and witnesses the largest open
interest in futures profile of CME consists of livestock, dairy and forest products and
enables small family farms to large Agri- business to manage their price risks.
Trading in CME can be done either through pit trading or electronically.
Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen
pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium
Nitrate, etc
Chapter
5

How Commodity market works?
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
second is futures trade. The underpinning for futures is the warehouse
receipt. A person 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 warehouse. 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 exchange based on his expectation of where the price will go. Futures
have something 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 account 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 contract 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 India very few warehouses provide delivery for specific
commodities.
Following diagram gives a fair idea about working of the
Commodity market.
Today Commodity trading system is fully computerized. Traders
need not visit a commodity market to speculate. With online commodity trading they
could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed
steps or stages as follows:
I. Trading: - At this stage the following is the system implemented-
- Order receiving
- Execution
- Matching
- Reporting
- Surveillance
- Price limits
- Position limits
II. Clearing: - This stage has following system in place-
- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.
III. Settlement: - This stage has following system followed as follows-
- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.

Chapter
6
How to invest in a Commodity
Market?
With whom investor can transact a business?
An investor can transact a business with the approved clearing member of
previously mentioned Commodity Exchanges. The investor can ask for the details from
the Commodity Exchanges about the list of approved members.
What is Identity Proof?
When investor approaches Clearing Member, the member will ask for identity
proof. For which Xerox copy of any one of the following can be given
a) PAN card Number b)
Driving License
c) Vote ID
d) Passport

What statements should be given for Bank Proof?
The front page of Bank Pass Book and a canceled cheque of a concerned
bank. Otherwise the Bank Statement containing details can be given.
What are the particulars to be given for address proof?
In order to ascertain the address of investor, the clearing member will insist on
Xerox copy of Ration card or the Pass Book/ Bank Statement where the address of
investor is given.
What are the other forms to be signed by the investor?
The clearing member will ask the client to sign a) Know
your client form
b) Risk Discloser Document
The above things are only procedure in character and the risk involved and
only after understanding the business, he wants to transact business.
What aspects should be considered while selecting a
commodity broker?
While selecting a commodity broker investor should ideally keep certain aspects
in mind to ensure that they are not being missed in any which way. These factors
include
Net worth of the broker of brokerage firm. The
clientele.
The number of franchises/branches. The
market credibility.
The references.
The kind of service provided- back office functioning being most
important.
Credit facility.
The research team.
These are amongst the most important factors to calculate the credibility
of commodity broker.
Broker:-
The Broker is essentially a person of firm that liaisons between individual
traders and the commodity exchange. In other words the
Commodity Broker is the member of Commodity Exchange, having direct
connection with the exchange to carry out all trades legally. He is also known as the
authorized dealer.
How to become a Commodity Trader/Broker of Commodity

Exchange?
To become a commodity trader one needs to complete certain legal and
binding obligations. There is routine process followed, which is stated by a unit of
Government that lays down the laws and acts with regards to commodity trading. A
broker of Commodities is also required to meet certain obligations to gain such a
membership in exchange.
To become a member of Commodity Exchange the broker of brokerage
firm should have net worth amounting to Rs. 50 Lakh. This sum has been determined
by Multi Commodity Exchange.
How to become a Member of Commodity Exchange?
To become member of Commodity Exchange the person should
comply with the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by
statutory/regulatory authority,
There are following three types of Memberships of Commodity
Exchanges

Trading-cum-Clearing Member (TCM):-
A TCM is entitled to trade on his own account as well as on account of his clients,
and clear and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu
Undivided Family (HUF), a corporate entity, a cooperative society, a public sector
organization or any other Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to
transferable non-deposit based membership and TCM-2 refers to non-transferable deposit
based membership.
A person desired to register as TCM is required to submit an
application as per the format prescribed under the business rules, along with all
enclosures, fee and other documents specified therein. He is required to go through
interview by Membership Admission Committee and committee is also empowered to
frame rules or criteria relating to selection or rejection of a member.
Institutional Trading-cum-clearing Member (ITCM):-
Only an Institution/ Corporate can be admitted by the Exchange as a member,
conferring upon them the right to trade and clear through the clearing house of
exchange as an Institutional Trading- cum-clearing Member (ITCM). The member
may be allowed to make deals for himself as well as on behalf of his clients and clear
and settle such deals. ITCMs can also appoint sub-brokers, authorized persons and
Trading Members who would be registered as trading members.
Professional Clearing Member (PCM):-
A PCM entitled to clear and settle trades executed by other members of the
exchange. A corporate entity and an institution only can apply for PCM. The member
would be allowed to clear and settle trades of such members of the Exchange who
choose to clear and settle their trades through such PCM.

Membership Details for NCDEX:-1
Trading-cum-clearing Member: - TCM
Sr.
No.
Particulars NCDEX: TCM
1
Interest Free Cash
Security Deposit
15.00 Lakhs
2 Collateral Security Deposit 15.00 Lakhs
3 Admission Fee 5.00 Lakhs
4 Annual Membership Fees 0.50 Lakhs
5 Advance Minimum 0.50 Lakhs
1
www.ncdex.com
Transaction Charges
6 Net worth Requirement 50.00 Lakhs

Professional Clearing Membership: - PCM
Sr.
No.
Particulars NCDEX: PCM
1
Interest Free Cash
Security Deposit
25.00 Lakhs
2
Collateral Security Deposit
25.00 Lakhs
3
Annual Subscription
Charges
1.00 Lakhs
4
Advance Minimum
Transaction Charges
1.00 Lakhs
5 Net worth Requirement 5000.00 Lakhs
Membership Details for MCX:-2
Category
Admission
Fees
Initial
Security
Deposit
Annual
Subscription
Net worth Criteria
Corporate Partnership Individual
TCM-1
Rs. 10
Lakhs
Rs. 15
Lakhs
Rs 50,000 Rs 50 Lakhs Rs. 50 Lakhs
Rs. 50
Lakhs
TCM-2
Rs. 5
Lakhs
Rs. 50
Lakhs
Rs 50,000
Rs. 50
Lakhs
Rs. 50 Lakhs
Rs. 50
Lakhs
ITCM
Rs. 10
Lakhs
Rs. 50
Lakhs
Rs 50,000
Rs. 50
Lakhs
N.A. N.A.
PCM Nil
Rs. 50
Lakhs
Rs 1,00,000 Rs. 5Crores N.A. N.A.
Chapter 7
MCX Certified Commodity Professional Reference Material

Current Scenario in Indian Commodity Market
Need of Commodity Derivatives for India:-
India is among top 5 producers of most of the Commodities, in addition to
being a major consumer of bullion and energy products. Agriculture contributes
about 22% GDP of Indian economy. It
employees around 57% of the labor force on total of 163 million hectors of land
Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this
indicates that India can be promoted as a major centre for trading of commodity
derivatives.
Trends in volume contribution on the three National
Exchanges:-
Pattern on Multi Commodity Exchange (MCX):-
MCX is currently largest commodity exchange in the country in terms of trade
volumes, further it has even become the third largest in bullion and second largest in
silver future trading in the world.
Coming to trade pattern, though there are about 100 commodities
traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total
trade volume. As per recent data the largely traded commodities are Gold, Silver,
Energy and base Metals. Incidentally the futures’ trends of these commodities are
mainly driven by international futures prices rather than the changes in domestic
demand-supply and hence, the price signals largely reflect
international scenario.
Among Agricultural commodities major volume contributors include Gur,
Urad, Mentha Oil etc. Whose market sizes are
considerably small making then vulnerable to manipulations.
Pattern on National Commodity & Derivatives Exchange
(NCDEX):-
NCDEX is the second largest commodity exchange in the country after
MCX. However the major volume contributors on NCDEX are agricultural
commodities. But, most of them have common inherent problem
of small market size, which is making them vulnerable to
market manipulations and over speculation. About 60 percent trade on NCDEX
comes from guar seed, chana and Urad (narrow commodities as specified by FMC).
Pattern on National Multi Commodity Exchange (NMCE):-

NMCE is third national level futures exchange that has been largely
trading in Agricultural Commodities. Trade on NMCE had
considerable proportion of commodities with big market size as jute rubber etc. But, in
subsequent period, the pattern has changed and slowly moved towards commodities
with small market size or narrow commodities.
Analysis of volume contributions on three major national commodity
exchanges reveled the following pattern,
Major volume contributors: - Majority of trade has been
concentrated in few commodities that are
Non Agricultural Commodities (bullion, metals and energy) Agricultural
commodities with small market size (or narrow commodities) like guar,
Urad, Mentha etc.
Trade strategy:-
It appears that speculators or operators choose commodities or contracts
where the market could be influenced and extreme
speculations possible.
In view of extreme volatilities, the FMC directs the exchanges to impose
restrictions on positions and raise margins on those
commodities. Consequently, the operators/speculators chose another commodity and
start operating in a similar pattern. When FMC brings restrictions on those
commodities, the operators once again move to the other commodities. Likewise, the
speculators are moving from one commodity to other (from methane to Urad to guar
etc) where the market could be influenced either individually or with a group.
Beneficiaries: - So far the beneficiaries from the current nature of trading are
Exchangers: - making profit from mounting volumes
Arbitragers
Operators
In order to understand the extent of progress the trading the trading in
Commodity Derivatives has made towards its specified objectives (price discovery
and price risk management), the current trends are juxtaposed against the specification
Specified and actual pattern of futures trade:-3

Process Aught to be Actual
3
FMC & TECL research
Commodities There should be large demand
for and supply of the commodity-
no individual or a group of
persons acting in concert should
be in a position to influence the
demand or supply, and
consequently the price
substantially Towards this, the
major Produced or consumed
Commodities in the Country
such as wheat,
rice, jute etc. and India is the
top first or second
producer of these
Commodities.
Largely Traded are
Bullion, Metals and
Commodities with small
market size (or narrow
Commodities) like guar,
Burmese Urad, Mentha etc.
Trade
Strategy
Hedging together with
Moderate speculation to
Smoothen the price
Fluctuations.
Over speculation and
Manipulation leading to wide
Fluctuations.
Beneficiaries Farmers/producers,,
Consumers and traders
Either through direct
Participation or through
Price signals.
So far exchangers,
arbitrageurs,
Operators etc.,
Further there were instances of Wrong
price signals accruing
losses to farmers in case of menthe,
and to traders in case Of imported
pulses.
Objectives
Price Discovery Pure replication of
International trends not
Taking in account of
Domestic D-S in case of Non-
agril. Commodities Wide
fluctuations from Over
speculation and Manipulation
in case of Largely traded agril.
commodities

Risk Management No such evidences and
contrarily, the extreme
volatilities in certain
commodities are making
futures
More risky for participants.
Thus it is evident that the realization of specified objectives is still a distinct
destination. It is further, evident from the nature of the commodities largely traded on
national exchanges that the factors driving the current pattern of futures trade are purely
speculative.
Reasons for prevailing trade pattern:-
No wide spread participation of all stake holders of commodity markets. The
actual benefits may be realized only when all the stake holders in commodity market
including producers, traders, consumers etc trade actively in all major commodities like
rice, wheat, cotton etc.
Some Suggestions to make futures market as a level playing field for all stake holders:-
Creation of awareness among farmers and other rural
participants to use the futures trading platform for risk mitigation.
Contract specifications should have wider coverage, so that
a large number of varieties produced across the country could be
included.
Development of warehousing and facilities to use the
warehouse receipt as a financial instrument to encourage participation
farmers.
Development of physical market through uniform grading
and standardization and more transparent price
mechanisms.
Delivery system of exchanges is not good enough to attract investors. E.g.-
In many commodities NCDEX forces the delivery on people with long
position and when they tend to give back the delivery in next month
contract the exchange simply refuses to accept the delivery on pretext of
quality difference and also auctions the product. The traders have to take a
delivery or book losses at settlement as there are huge differences between
two contracts and also sometimes few contracts are not available for trading
for no reason at all.
Contract sizes should have an adequate range so that smaller traders
can participate and can avoid control of trading by few big parties.
Setting of state level or district level commodities trading
helpdesk run by independent organization such as reputed
NGO for educating farmers.

Warehousing and logistics management structure also needs to be created at
state or area level whenever commodity production is above a certain share
of national level.
Though over 100 commodities are allowed for Derivatives
trading, in practice only a few commodities derivatives are popular for
trading. Again most of the trade takes place only on few exchanges. This
problem can possibly solved by consolidating some exchanges.
Only about 1% to 5% of total commodity derivatives traded in country are
settled in physical delivery due to
insufficiencies in present warehousing system. As good
delivery system is the back bone of any Commodity trade, warehousing
problem has to be handled on a war footing.
At present there are restrictions in movement of certain
goods from one state to another. These needs to be
removed so that a truly national market could develop for commodities and
derivatives.
Regulatory changes are required to bring about uniformity in Octri and sales
tax etc. VAT has been introduced in country in 2005, but, has not yet been
uniformly implemented by all states.
A difficult problem in Cash settlement of Commodities
Derivatives contract is that, under Forward Contracts
Regulation Act 1952 cash settlement of outstanding contracts
at maturity is not allowed. That means outstanding contracts at maturity
should be settled in physical delivery. To avoid this participants square
off their their positions before maturity. So in practice contracts are settled
in Cash but before maturity. There is need to modify the law to bring it closer
to the wide spread practice and save participants from unnecessary hassle.
Chapter 8
Commodities
Steel: -
General Characteristics: -
Steel is an alloy of iron and carbon, containing less than 2% carbon, 1%

manganese and small amount of silicon, phosphorus, sulphur and
oxygen. Steel is most important engineering and
construction material in the world. It is most important, multi
functional and the most adaptable of materials. Steel production is 20 times higher a
compared to production of all non-ferrous metals put together.
Steel compared to other materials of its type has low production
costs. The energy required for extracting iron from ore is about 25% of what is needed
for extracting aluminum.
There are altogether about 2000 grades of steel developed of
which 1500 grades are high-grade steels. The large number of grades gives steel the
characteristics of basic production material.
Categories of Steel: -
Steel market is primarily divided in to two main categories- flat and long. A
flat carbon steel product is a plate product or a (hot or cold) rolled strip product. Plate
products vary in dimensions from 10 mm to 200 mm and thin flat rolled products
from 1 mm to 10 mm. Plate products are used for ship building, construction, large
diameter welded pipes and boiler applications. Thin flat products find end use
applications in automotive body panels, domestic ‘white goods’
products, ‘tin cans’ and the whole host of other products from office furniture to heart
pacemakers. Plates, HR coils and HR Sheet, CR Sheet and CR coils, GP/GC
(galvanized plates and coils) pipes etc. are included in this category.
A long steel product is a road or a bar. Typical rod product are the
reinforcing rods made from sponge iron for concrete, ingots, billets, engineering
products, gears, tools, etc. Wiredrawn products and seamless pipes are also part of
the long products group. Bars, rods, structures, railway materials, etc are included in this
category.
Sponge Iron/ Direct reduced iron (DRI): This is a high quality
product produced by reducing iron ore in a solid state and is primarily used as an
iron input in electric arc furnace (EAF) steel making process. This industry is an
integral part of the steel sector.
India is one of the leading countries in terms of sponge iron
production. There are a number of coal-based sponge iron/DRI plants (in the eastern
and central region) and also three natural gas based plants (in western part of the
country) in the country.
Global Scenario: -
The total output of the word crude steel in 2006 stood at 945 million tons,
resulting in a growth of 6.7% over the previous year.
China is the word’s largest crude steel producer in the year
2006 with around 220.12 million tons of steel production, followed by Japan and USA.
USA was largest importer of steel products, both finished and semi finished, in 2005,
followed by China and Germany.

The words largest exporter of semi-finished and finished steel was Japan in
2005, followed by Russia and Ukraine.
China is the largest consumer now and consumption of steel by
China is estimated to increase by 12-13% in 2007.
Indian Scenario: -
India is the 8th
largest producer of the steel with an annual production of
36.193 million tons, while the consumption is around 30 million tons.
Iron & steel can be freely exported and imported from India. India is a net
exporter of steel.
The Government of India has taken a number of policy measures,
such as removal of iron & steel industry from the list of industries reserved for
public sector, deregulation of price and
distribution of iron & steel and lowering import duty on capital goods and raw
materials, since liberalization for the growth and development of Indian iron & steel
industry.
After liberalization India has seen huge scale addition to its steel making
capacity. The country faces shortage of iron and steel materials.
Factors Influencing Demand & Supply of Steel Long and Steel
Flat: -
The demand for steel is dependent on the overall health of the economy and the
in fracture development activities being undertaken. The steel prices in the Indian market
primarily depend on the domestic demand and supply conditions, and international
prices. Government and different producer and consumer associations regularly
monitor steel prices.
The duty imposed on import of steel and its fractions also have an impact on
steel prices. The price trend in steel in Indian markets has been a function of
World’s economic activity. Prices of input
materials of iron and steel such as power tariff, fright rates and coal prices, also
contribute to the rise in the input costs for steel making. Monthly Variations in Steel
Prices from Feb 2005- Dec 2006: -4
Percentage Change > 5% 2-5% < 2%
No. of Times
Ingots- Mandi 2 10 10
HRC 2.5 Mumbai 8 3 11
HRC 2.0 Imported 12 4 6
HRC fob- Europe 5 9 8

Contract specifications of Steel Flat
Symbol STEELFLAT
Description STEELFLATMMMYY
Trading Period Mondays through Saturdays
Trading session Monday to Friday:
1st
session: 10.00 am to 5.00 pm
2
nd
session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading
Trading unit 25 MT
Price Quote Rs./ton, Ex-Taloj Kalambo
(excluding execise duty and sales tax).
Maximum order size 200 MT
Tick size (minimum
Price movement)
Rs. 10
Daily price limits 4%
Initial margin 5%
Special margin In case of additional volatility, a special
margin of 2% or such other percentage, as deemed fit,
will be imposed immediately on, both buy and sale
side in respect of all
4
MCX certified Commodity Professional Reference Material.
outstanding position, which will remain in force of
next three days, after which the special margin will be
relaxed.
Maximum Allowable Open
Position
For individual clients: 1,00,000 MT
For a member collectively for all clients:
25% of open market position.
Delivery
Delivery unit 25 MT with tolerance limit
Between 23.5 MT to 26.5 MT
Delivery Center(s) Warehouses at Taloja/ Kalamboli
Quality Specifications

HR coil conforming to the following specification:
Thickness 2 mm
Width either 1250mm or 910 mm at seller’s option.
It should confirm to IS 11513 Grade D/SAE 1008 (International equivalent)
Delivery is acceptable only in coil form.
Contract specifications of Steel Long
Symbol STEELLONG
Description STEELLONGMMMYY
1
st
session: 10.00 am to 5.00 pm
2nd
session: 5.30 pm to 8.00 pm
Saturday: 10.00 am to 2.00 pm
No. of contracts a year 12
Contact Duration 4 months
Trading
Trading unit 15 MT
Price Quote Rs./ton, Ex- Mandi Gobindgarh (including
excise duty but excluding sales tax).
Tick size (minimum
Price movement)
Rs. 10
Initial margin 5%
margin of 2% or such other percentage, as
deemed fit, will be imposed immediately on,
both buy and sale side in respect of all
outstanding position, which will remain in force of
next three days, after which the special margin will be
relaxed.
Position
For individual clients: 1,00,000 MT
For a member collectively for all clients:
25% of open market position.
Delivery

Delivery unit 15 MT with tolerance limit
Between 13.5 MT to 16.5 MT
Delivery Center(s) Warehouses at Mandi Gobindgarh
Mild steels ingots “3 ½ * 4 ½ inch” Carbon
composition: Below 0.25%
Manganese: Above 0.45%
Material should be physically sound. It should have no hollowness, no piping no rising.
Its surface should be plain.
Quality Specifications: -
Sponge Iron Futures
Sponge Iron Lumps
Chemical Properties (only Magnetic Portion): -
Degree of Metallization: 88 +/- 2%. Total
Iron: 91%.
Carbon: 0.2% to 0.3%.
Sulphur: 0.05% Max.
Phosphorus: 0.06 Max.
Sio2 + Al2o3: 6% or Max.
Char & other process Contaminants: 1% Max. Size: 3 to
20 mm
Undersize arising during tailings (-3mm): 5% Max
Steel Flat: -
HR Coil confirming to the following specification: - Thickness
2mm
Width either 1250 mm or 910 mm at seller’s option.
It should confirm to IS 11513 Grade D/ SALE 1008
(international equivalent)
Delivery is acceptable only in coil form.
Steel Long (Bhavnagar): -

Mild steel ingots 3 ½ * 4 ½ inch. Carbon
composition: Below 0.25% Manganese:
Above 0.45%
Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.
Steel Long (Govindgarh): -
Mild steel ingots 3 ½ * 4 ½ inch. Carbon
composition: Below 0.25% Manganese:
Above 0.45%
Material should be physically sound. It should have no
hollowness, no piping and no rising. Its surface should be plain.
WHEAT
Wheat is cereal grain and consumed worldwide. Wheat is more popular
than any other cereal grain for use in baked goods. Its popularity stems from the gluten
that forms when lour is mixes with water. Wheat is the most widely grown cereal grain
in the world.
Global and Indian Scenario: -
The world wheat production in the recent years has been observed to be
hovering between 555 million tons to 625 million tons a year. The biggest cultivators of
wheat are EU 25, China, India, USA, Russia, Australia, Canada, Pakistan, Turkey
and Argentina. EU 25,
China, India and US are the four largest producers account for around
60% of total global production.
World’s wheat consumption is continuously growing with growth in a
population, as it is one of the major staple foods across the world. The major
consuming countries of wheat are EU, China, India, Russia, USA and Pakistan. India
has largest area in the world under wheat. However, in terms of production, India is
second largest behind China. In India, Wheat is sown during October to December and
harvested during March to May. The wheat marketing season in India is assumed to
begin from April every year.
The major wheat producing states in India are Utter Pradesh, Punjab, Haryana,
Madhya Pradesh, Rajastan and Bihar. Which together account for around 93% of total
production. In terms of productivity, Punjab stands first followed by Haryana, Rajastan,
UP, Gujarat, Bihar and MP. Indian wheat is largely soft/medium hard, medium
protein, bread wheat. India is also produces around 1.5 million tons of durum wheat,

mostly in central and western India, which is not segregated and marketed separately.
India consumes around 72-74 million tons of Wheat every year.
There are around 1000 large flourmills in India, with a milling capacity of
around 15 million tons. The total procurement of wheat by Government agencies during
last 15 years from 8 to 20 million tons, accounting for only 15-20% of the total
production. India exported around 5 m illion tons subsidized by Government in 2004-
05, as a result of surplus stock. Recently Govt. took decision to import wheat in view of,
declining stocks and increasing demand.
Key market moving Factors: -
Price tends to be lower as harvesting progresses and produce starts coming
in to the market. At the time sowing and before harvesting price tend to rise in
a view of tight supply situation. Weather has profound influence on wheat
production. Temperature plays crucial role towards maturity of wheat and productivity.
Change in Minimum Support Price (MSP) by Govt. and the stock available with
Food corporation of India and the release from official stock influence of the price.
Though, international trade is limited, the ups and downs in the
production and consumption at all the
major/minor producing and consuming nation dose influence the long
term price trend.
Contract specifications of Wheat
Contract Period Five Months
10.00 am to 5.00 pm
Saturday:
10.00 am to 2.00 pm
Trading
Trading unit 10 MT
Quotation based value 1 Quintal
Tick size (minimum
Price movement)
10 Paise
Price Quotation Ex-warehouse Delhi (including all taxes, levies and sales
tax/ VAT, as the case may be)

Initial margin 5%
margin at such other percentage, as deemed fit will be
imposed immediately on, both buy and sale side in
respect of all outstanding position, which will remain in
force of next 2 days, after which the special margin
will be relaxed.
Position
Clientwise- 20000 MT, Member wise-80000 MT
or 20% of open position, which ever is higher.
Delivery
Delivery unit 10 MT with tolerance limit of 5%
Delivery Margin 25%
Delivery Center(s) Warehouses at Delhi
Wheat of Standard Mill variety confirming to the following quality standerds will
be delieverable. The material will be tested using a 3mm sieve.

Defects
(a) Foreign Matter
(organic/inorganic)
2.0% (Max)
(b) Damaged Kernels 2.00 (Max) provided that infestation damaged
not to exceed 1 per 100 kernels.
(c) Shrunken Shriveled
& broken grains
3.00% (Max)
Total defects (a+b+c)
Acceptable up to
Rejected total defect is
Below 6%
8% With rebate on 1:1 basis
Above 8%
Teat weight up to 76 kg/hl 76kg/hl. Min. acceptable with rebate of 150
grams per kg/hl or pro-rata variance in hector liter weight
deducted per quintal Below 74 kg/hl
Rejected Below 74 kg/hl
Moisture
Acceptable
Reject able
11%
(Max)13% With rebate 1:1
Above 13%
Quality Specifications: -
Wheat of Standard Mill variety conforming to the following quality standards will be
deliverable; The material will be tested by using 3 mm sieve.
Defects: -
1. Foreign Matter
(organic/inorganic)
2. Damaged Kernel
3. Sunken, Shriveled and
Broken grains
2.0% (maximum)
2.0% (maximum)
provided that
infestation damaged not exceed
1
Per 100 kernels.
3.00% (maximum)

ANALYSIS
Survey was conducted across Mumbai City (in areas like Andheri,
Santacruz, Bandra Church gate) to judge the awareness of peoples regarding investment in
Commodity Market.
Sample size 30 peoples
COMMODITY MARKET
Questionnaire for
Investors
1. Do you have any investment plan?
a. YES b. NO
(if no move to question no. 4)
2. If, yes, where you would like to invest your money?
a. Bank F.D. b. Share Market c. Commodity Market d. Other (specify)
3. Why you prefer specific investment?
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
--
4. If no, why?
a. Not aware about invest avenues b. Insufficient income c. Other (specify)
Total Defects (a+b+c)
Acceptable
Rejected if total defects
Below 6%
Up to 8% with rebate on 1:1 basis
Above 8%
Total Weight
Up to 74 kg/hl
Below 74 kg/hl
76 kg/hl. (minimum)
Acceptable with rebate of 150
grams per kg/hl or pro-rata
variance in hector liter weight
deducted per quintal weight
delivered.
Rejected
Moisture
Acceptable
Reject able
11% (maximum)
Up to 13% with rebate 1:1
Above 135
Packing Packing should be in B Twill once used
100kg jute bags, the tare
weight deduction per bag for net
weight calculation shall be 1 kg per quintal
of gross weight.

5. Do you aware about Commodity Market?
a. YES b. NO
(if no move to question no 12)
6. Are you willing to invest in Commodity Market? (If
in Q. 2 Commodity Market, skip this question)
a. If YES, why? ------------------------------------------------------------------------------ b.
If NO, why? ------------------------------------------------------------------------------ (If no
move to the Question no.10)
7. If yes, which Commodity Exchange you will prefer for investment?
a. MCX b. NCDEX c. NMCE d. Other (specify) f. Can’t Say
8. Why you prefer specific Commodity Exchange for investment? (if
answer to Q.7 f, skip this question)
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
--
9. In which Commodities you will prefer to Invest? And why?
a. Bullion b. Agricultural c. Metals d. Fossils/Energy
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
---
10. What is your perception about Commodity Market?
a. Less Risky b. Risky c. Very Risky
11. What you think Commodity Market Advertisements (hoardings, prints etc) are
explanatory enough to give needed useful information?
a. YES b. NO
12. Gender
a. Male b. Female
13. Age Group
a. Below 21 Years b. 21 years – 30 years c.31 years – 40 years d.
41 years – 50 years e. Above 50 years
14. Occupation
a. Govt. Job b. Private Job c. Business d. Other (specify)

15. Income Group (Per month)
a. Nil b. Below 10,000/- c. 10,000 – 20,000/-
d. 20,000 – 30,000/- e. Above 30,000/-
---------------------------------------------------------------------------
Quantitative Analysis
1. Investor’s preferences: -
Other
7%
23% Share
Market
Bank F.D.
27%
3%
30%
6
Commodity
Mark
Re al Estate
Jwe lary
Not Spe cifie d
I
n
v
e
s
t
m
e
n
t
Pref
renc
es
spec
ified
in
othe
r

c
a
t
e
g
o
r
y
Analysis of data revels that majority of
people prefer investment in Real Estate (28.81% of total sample)
which specified in other category investment and
it is greater than share market
investment preference.
2. People’s knowledge about Commodity Market: -
1
3
%
K
n
o
w
Don’t Know
87%
Very few people heard of commodity market. Vast
majority of people are unaware about Commodity Market.

3. Investor’s interested to invest in Commodity Market: -
(Out of those, who know Commodity Market)
Inte r e s te d
50% %

N ot Inte re s te d
Though some people heard of commodity market due to lack of
complete knowledge about it half of then are not interested
in investing in Commodity Market.

4.Commodity
Market Investors
P
r
e
f
e
r
e
n
c
e
s
20%
13
%
3
0
%
3 Bullion
Metals
Agricul
tural
Fossils/
Energy

Above data revels that majority of commodity investors like to invest in
Bullion (Gold & Silver).
5. Perception about Commodity Market
25%
50%
L
e
s
s
R
i
s
k
y
R
i
s
k
y
V
e
r
y
R
i
s
k
y

25%
Analysis of data shows that majority of people who are aware about
commodity market; feel that investment in commodity market is very risky. So efforts
should be done to minimize the risk in commodity investment and make peoples
about minimum risk in commodity investment.
6. Opinion about Commodity Market Advertisements
(Expressed by those who know commodity market)
No t Info rmative
100
There is no second opinion amongst commodity investors, that commodity
market advertisements do not give all the necessary information
Qualitative Analysis

1. Investment preferences: -
Most of the investors prefer least risky investment which gives higher
returns. That is why majority (70% of sample) of people interested in
investments other than Share and commodity market.
Very less number of people (only 7%) showed their interest in
investment in commodity market. Main reason for this is lack of awareness and
complete information about commodity market.
2. Commodity Exchanges: -
People who are interested in commodity investment showed more
concern towards NCDEX; for its brand name and people think there might be
surety of transaction at NCDEX.
3. Commodities: -
Bullion is most preferred commodity for investment. Because one can
expect maximum returns from such investment due to rapidly increasing prices of
bullion in market.
4. Advertisements: -
Commodity market Advertisements should be more informative.
And it is the failure of commodity market’s
advertisement campaign to attract people’s attention; as majority of people are not
aware about commodity market.
Terms and Definitions related to Commodity Market: -
Accruals:- Commodities on hand ready for shipment, storage and manufacture
Arbitragers: - Arbitragers are interested in making purchase and sale in
different markets 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 negative 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
Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor of exchange to
buy a definite number of futures contracts at a specific price.
Breaking: - A quick decline in price.
Bulging: - A quick increase in price.
Bull: - A person who expects prices to go higher.
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 option 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 in 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 include agricultural commodities, financial
instruments and the cash equivalent of index futures.
Close: - The period at the end of trading session officially designated by
exchange during which all transactions are
considered made “at the close”.
Closing price: - The price (or price range) recorded during the period
designated by the exchange as the official close.
Commission house: - A concern that buys and sells actual commodities or
futures contract for the accounts of customers.
Consumption Commodity: - Consumption commodities are held mainly for
consumption 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 contract
of other commodity.

Day orders: - Orders at a limited price which are understood 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 in case of
agriculture commodities, warehouse receipts covering such
commodity, in 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 may be made under
the terms of futures contract.
Delivery notice: - A notice for a clearing member’s intention to deliver a stated
quantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from an
underlying asset. (Underlying assets can be equity, commodity, 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 premium 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.
Exchange: - Central market place for buyers and sellers.
Standardized contracts ensure 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 acting on behalf of their
clients, companies or themselves.
Forward contract: - It is an agreement between two parties to buy or sell an
asset at a future date for 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 Market. 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 is
not transparent, as it is not publicly disclosed. Here valuation of open position
is not calculated on a daily basis and there is no requirement of MTM.
Liquidity 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 contracts, counter- party risk is high due to customized & bilateral
nature of the transaction. Forward contract is not regulated by any exchange.
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 time 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 price of futures contract is
transparent as it is available on centralized trading screen 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 contracts the clearing-house becomes the
counter party to each transaction, which is called novation. Therefore, counter

party risk is almost eliminated. A regulatory
authority and the exchange regulate futures contract.
Futures contract is generally cash settled but option of physical settlement
is available. Delivery tendered in case of futures contract should be of
standard quantity and quality as specified by the exchange.
Futures commission merchant: - A broker who is permitted to accept the
orders to buy and sale futures contracts for the consumers.
Futures Funds: - Usually limited partnerships for investors who prefer to
participate in the futures market by buying shares in a fund managed by
professional traders or commodity trading advisors.
Futures Market:-It facilitates buying and selling of standardized contractual
agreements (for future delivery) of underlying asset as the specific commodity
and not the physical commodity itself. The formulation of futures contract is
very specific regarding the quality of the commodity, the quantity to be
delivered and date for delivery. However it does not involve immediate
transfer of ownership of commodity, unless resulting in delivery. Thus, in
futures markets, commodities can be bought or sold irrespective of whether one
has possession of the underlying commodity or not. The futures market trade
in futures contracts primarily for the purpose of risk management that is
hedging on commodity stocks or forward buyers and sellers. Most of these
contracts are squared off before maturity and 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 reducing 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. In-the-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. These are the cash settlement contracts.
Investment Commodities: - An investment commodity is
generally held for investment purpose. e.g. Gold, Silver
Limit: - The maximum daily price change above or below the price close in a
specific futures 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 transaction made in reducing or closing out a long or short
position, but more often used by the trade to mean a reduction or closing out of
long position.
Local: - Independent trader who trades his/her 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 net position in the futures or options market shows an excess
of open purchases over open sales.
Margin: - Cash or equivalent posted as guarantee of fulfillment of 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 trader’s
account based on daily closing prices of the futures contracts he is long or
short.
Market order: - An order for immediate execution at the best available price.
Nearby: - The futures contract closest to expiration.
Net position: - The difference between 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 brought or sold without the
transaction having been completed by subsequent sale, repurchase or actual
delivery or receipt of commodity.

Open interest: - The number of “open contracts”. It refers to unliquidated
purchases or sales and never to their combined total.
Option: - It gives right but not the obligation to the option owner, to buy
an underlying asset at specific price at specific time in the future.
Out-of-the money: - Option calls with the strike prices above the price of the
underlying futures, and puts with strike prices below the price of the underlying
futures.
Over the counter: - It is alternative trading platform, linked to network of
dealers who do not physically meet but instead communicates through a
network of phones & computers.
Pit: - An octagonal platform on the trading floor of an exchange, consisting of
steps upon which traders and brokers stand while trading (if circular called
ring).
Point: - The minimum unit in which changes in futures prices may be
expressed (minimum price fluctuation may 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 contract’s price or
commodity’s 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 price of futures contract
permitted during one trading session, as fixed by the rules of a contract market.
Purchase and sales statement: - A statement sent by FMC to a customer when
his futures option has been reduced or closed out (also called ‘P and S”)
Put: - In options the buyer of a put has the right to continue a short position in
an underlying futures contract at the strike price until the option expires; the
seller (writer) of the put obligates himself to take a long position in the futures
at the strike price if the buyer exercises his put.
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 execution of the same customer of a purchase
transaction and a sales transaction which offset each other.
Round turn commission: - The cost to the customer for executing a
futures contract which is charged only when the position is liquidated.
Scalping: - For floor traders, the practice of trading in and out of contracts
through out the trading day in a hopes for making a series of small profits.
Settlement price: - The official daily closing price of futures contract, set by
the exchange for the purpose of setting margins accounts.
Short: - (1) The selling of an option futures contract. (2) A trader whose net
position in the futures market shows an excess of open sales over open purchases.
Speculator: - Speculator is an additional buyer of the
commodities whenever it seems that market prices are lower than they should be.
Spot Markets:-Here commodities are physically brought 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 difference in prices of two futures contracts.
Striking price: - In options, the price at which a futures position will be
established if the buyer exercises (also called strike or exercise price).
Swap: - It is an agreement between two parties to exchange different
streams of cash flows in future according to
predetermined terms.
Technical analysis (charting): - In price forecasting, the use of charts and
other devices to analyze price-change patters and changes in volume and open
interest to predict future market trends (opposite of fundamental analysis).
Time value: - In options the value of premium is based on the amount of time
left before the contract expires and the volatility of the underlying futures
contract. Time value represents the portion of the premium 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.
Volume oftrading (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.
Summary
This decade is termed as Decade of Commodities. Prices of all
commodities are heading northwards due to rapid increase in demand for
commodities. Developing countries like China are voraciously consuming the

commodities. That’s why globally commodity market is bigger than the stock
market.
India is one of the top producers of large number of commodities
and also has a longhistory of trading in commodities
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. Interestingly, this has happened only after the
Government protection was removed from a number 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 and 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 investors are not aware of organized
commodity market; their perception about is of risky to very risky investment.
Many of them have wrong impression about commodity market in
their minds. It makes them specious towards
commodity market. Concerned authorities have to take initiative to make
commodity trading process easy and simple. Along with Government efforts
NGO’s should come forward to educate the 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 Indian farmers rather than
spot market. And producers, traders as well as consumers will be benefited
from it. But for this to happen one has to take initiative to standardize and
popularize the Commodity Market.
BIBLIOGRAPHY
http://commodities.in
http://finance.indiamart.com/markets/commodity/
http://www.commoditiescontrol.com
http://www.mcxindia.com

http://www.ncdex.com
http://investmentz.co.in
http://trade.indiainfoline.com
http://www.finance.indiamart.com

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