2. Why Commodity?
Diversification
Less Manipulations
/ Intrinsic Value
High Leverage
3. History of Commodity Derivative
Market
Chicago businessman formed CBOT in1848
In 1898 Chicago Mercantile Exchange start trading on Future
Contract
For Spot Market Forward Market Commission (FMC) setup in
1953
In 1875 establishment of Cotton Trade Association
4 National level exchanges MCX, NCDEX, NMCE, ICEX
4. Benefits
1. • Driven on demand & supply
2. • Easy to understand & invest
3. • Less investment i.e. 5 - 7 %
4. • Market timing 10 am – 11.55 pm
• Price manipulation not possible because
5.
of global market
• Volatility gives chance for easy entry
6.
and exit
7. Multi Commodity Exchange of
India Ltd.
An independent and demutualised exchange
Promoted by Financial Technologies (India)
Limited
Introduced a state –of –the –art, online digital
exchange for commodities trading
On the first week of November, 2004 signed
MOU with the Tokyo commodity Exchange
8. National Commodity & Derivatives
Exchange Limited (NCDEX)
A public limited company incorporated on April 23,
2003 under the Companies Act,1956
Professionally Managed online Multi Commodity
Exchange
A only commodity exchange promoted by National
Level Institution
Regulated by Forward Market Commission
9. Difference & Similarities between
MCX & NCDEX
MCX NCDEX
Month Different for each commodity Normally monthly
Expiry day Different for commodities 20th of each contract month
Timing Summer (May to October) : All Summer (May to October): All
Commodities : 10 am to 5 pm Commodities : 10 am to 5 pm
International Commodities : International Commodities :
5 pm to 11.30 pm 5 pm to 11.30pm
Winter (Nov to April) : Winter (Nov to April) :
10 am to 5 pm 10 am to 5 pm
International Commodities: International Commodities :
5 pm to 11.55 pm 5 pm to 11.55
Active Commodity Gold, Silver, Crude, Oil, Copper, Pulses, Sugar, Wheat, Spices, Gold,
Natural Gas, Nickel, Ref. Oil, Menthe Silver, Steel, Soy Complex
Oil
11. Classification of Commodities
Bu l l i on Gol d an d S i l ve r
Me tal s Zi n c,Le ad, C oppe r, Ni ck e l , S te e l i n gots
En e rgy C ru de O i l , Natu ral Gas, He ati n g oi l , Gasol i n e
Pu l se s C h an a
Ru bbe r, Gu ar S e e d , Gu argu m , C ash e w,
O th e rs Al mon d,Gu r, C offe e
O il & C astor S e e ds, S oy S e e ds, C astor O i l , Re fi n e d S oy
O i l se e ds O i l , S oyme al , Mu stard S e e d
S pi ce s Pe ppe r, Re d C h i l l i , Je e ra,Tu rme ri c
15. New York Mercantile Exchange
(NYMEX)
Biggest exchange for trading in Physical Commodity
Future
NYMEX COMEX
Natural
Crude oil Gold Silver
Gas
16. London Metal Exchange (LME)
1877 as a direct consequence of the industrial revolution witnessed in Britain in 19th 1877
Primary focus on base metals
LME trades 24 hours a day
LME also offer option contract (Trade Average Price Option Contract – TAPOC) based
on Monthly Average Settlement Price (MASP)
Trading turnover value is more than US $ 2,000 billion per annual
Commodity traded –Aluminum, Coppers, Nickel, Lead, Tin, Zinc
17. Chicago Mercantile Exchange
(CME)
Trade heavily Commodities
1898 interest rate trade –
primarily to future, stock Butter, Milk,
trade in indices & Frozen Pork
agricultural foreign bellies, live,
commodities exchange cattle, Non –
futures fat Dry Milk
18. Tokyo Commodity Exchange (TOCOM)
• Second largest commodity future exchange
1.
• TOCOM initiative towards establishing Asia as the benchmark
2. for price discovery & risk management in commodities
• Platform for future price discovery in Asian for Asian players in
3. Crude Oil
• Commodity Traded- Crude Oil, Gasoline
4.
19. Market Players
Exporters /
Producers HNI / F & O
Importers
Traders /
Consumers
Brokers
20. Concept of Commodity
Derivative
Gold Jeweler
Example:-
For making jewellery XYZ buy 1 kg gold at 21000 for &
it sell jewellery in 3 month cycle after 3 month gold
prices are 19000.
21. Strategy
XYZ Buy Spot Price 21000 / 10gm
XYZ Sell 1 kg hold short Future Price 21050
Net Payoff – 21,000*100 + Initial Margin
= 21,00,000 + 5% of 21,00,000
Expiry 3 months = 1,05,000 + 21,00,000
= 22,05,000
22. Pay Off Schedule
On Expiry Physical Gold Future Net Payoff
Closes At Position
(21,050)
17000 -4,00,000 +4,05,000 +5000
18000 -3,00,000 +3,05,000 +5000
19000 -2,00,000 +2,05,000 +5000
20000 -1,00,000 +1,05,000 +5000
21000 0 0 0
22000 1,00,000 -95000 +5000
23000 2,00,000 -85000 +5000
24000 3,00,000 -75000 +5000
23. Mechanism of Hedging (Agent)
•Agree to sell flour to bread
APRIL manufacturer
•Buy wheat futures contract
WHEAT MILLER
•Sell wheat futures contact
•Buy wheat in the physical
JULY market for delivery of flour
to Bread Manufacturer
24. Mechanism of Hedging
(Producer)
•Sell Guar seed November
SEPTEMBER
Futures
FARMER
•Buy Guar seed November
Future to square off
NOVEMBER transaction
•Sell Guar seed Harvest
25. Mechanism of Hedging(Exporter)
•Export contract to sell
JUNE (export) automobiles in
October
•Buy steel futures contract
AUTOMOBILE
MANUFACTURER
•Sell steel futures contract to
square off transaction
•Buy steel from Physical
SEPTEMBER
market to meet export
requirement
26. Commodity V/S Financial
Derivatives
Commodity Financial
Derivative Derivative
Settlement Physical / Cash Cash
Delivery Notice Yes No
Period
Warehousing Yes No
Quality Of Assets Issue No Issue
27. Parity Calculation
Crude
NYMEX Crude 76.30
Present Exchange Rates 46.50
3547.95
Parity Price Of MCX Crude 3547.95
Natural Gas
NYMEX Natural Gas ($/mmbtu) 5.14
Present Exchange Rates 46.50
239.01
Parity Price Of MCX Natural Gas 239.01
28. Brokerage Calculation
Brokerage for Clients
Gold Per 1 Kg
Gold price per 10 gm 17600/- 1760000
Brokerage 0.03% 528
Service Tax (10.2%) 54
Turnover Charges (0.004%) 70
Service Tax on Turnover Charges (10.2%) 7
Stamp Duty on Turnover (0.001%) 18
Total Cost 677
29. Learning the Commodities
Global
Demand &
Seasonity Commodity
Supply
Prices
Global Political
Fx Currency
/ economic INR V/S - $
movement - $
events
Indian
economic data / Weather
policies
30. Factor Effecting Gold /Silver /
Crude / Coppers Prices
Employment Data First Friday of month
GDP Last Friday of month
ISM Mfg. Index First working day of month
Trade Deficit Third week of month
Consumer Price Index Third week
Production Price Index Third week
Industrial Production Third week
Retail Sale Third week of month
Durable Goods Order Last week of month
Federal Bank Meeting Eight times in year