1. SYNOPSIS OF
FINANCIAL
MANAGEMENT
TRADING IN
COMMODITIES
SUBMITTED TO: SUBMITTED BY:
MS.PALLAVI DAWRA DEEPAK
JASLEEN
NEHA
TASHNEET
2. INTRODUCTION
Commodity trading in India is regulated by the Forward Markets Commission
(FMC) headquartered at Mumbai, it is a regulatory authority which is overseen by
the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a
statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
COMMODITY TRADING
Commodity markets are quite like equity markets. The commodity market also has two
constituents i.e. spot market and derivative market. In case of a spot market, the commodities
are bought and sold for immediate delivery. In case of a commodities derivative market, various
financial instruments having commodities as underlying are traded on the exchanges. It has
been seen that traditionally in India people have hedged their risks with Gold and Silver.
COMMODITY FUTURES
Commodity future is a derivative instrument for the future delivery of a commodity on a fixed
date at a particular price. The underlying in this case is a particular commodity.
If an investor purchases an oil future, he is entering into a contract to buy a fixed quantity of oil
at a future date. The future date is called the contract expiry date. The fixed quantity is called
the contract size. These futures can be bought and sold on the commodity exchanges.
COMMODITIES TRADING
Spot trading
Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag
between the trade and delivery due to technical constraints. Spot trading normally involves visual
inspection of the commodity or a sample of the commodity, and is carried out in markets such
as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards
so that trades can be made without visual inspection.
Forward contracts
A forward contract is an agreement between two parties to exchange at some fixed future date a given
quantity of a commodity for a price defined today. The fixed price today is known as the forward price.
Early on these forward contracts were used as a way of getting products from producer to the consumer.
These typically were only for food and agricultural products.
Futures contracts
A futures contract has the same general features as a forward contract but is standardized and
transacted through a futures exchange. Although more complex today, early forward contracts for
example, were used for rice in seventeenth century Japan.
In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept
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the terms in regards to product, grade, quantity and location and are only free to negotiate the price.
3. Hedging
Hedging, a common practice of farming cooperatives, insures against a poor harvest by
purchasing futures contracts in the same commodity. If the cooperative has significantly less of its product
to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall
supply of the crop is short everywhere that suffered the same conditions.
Delivery and condition guarantees
In addition, delivery day, method of settlement and delivery point must all be specified. Typically, trading
must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be
finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.
TYPES OF COMMODITY EXCHANGES IN INDIA
National Commodity & Derivatives Exchange Limited (NCDEX)
Multi Commodity Exchange of India Limited (MCX)
National Multi-Commodity Exchange of India Limited (NMCEIL)
All the exchanges have been set up under overall control of Forward Market Commission (FMC) of
Government of India.
NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED (NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited
company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations
on December 15, 2003.
This is the only commodity exchange in the country promoted by national level institutions.
NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other
legislations.
MULTI COMMODITY EXCHANGE OF INDIA LIMITED (MCX)
Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-
mutulised exchang with a permanent recognition from Government of India.
Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India,
Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement
operations for commodity futures markets across the country.
NATIONAL MULTI-COMMODITY EXCHANGE OF INDIA LIMITED (NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized,
Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by
the Government to organise trading in the edible oil complex.
It has operationalised from November 26, 2002. It is being supported by Central Warehousing
Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It
got its recognition in October 2002.
4. STEPS FOR TRADING IN COMMODITY FUTURES
Step One: Choosing a Broker
Step Two: Depositing the Margin
Step Three: Access to Information and a Trading Plan
Process Flow In Commodity Futures Trading.
STEP ONE: CHOOSING A BROKER
The broker you choose should be a member of the exchanges you wish to trade in. Other than this, one should keep
the following factors in mind while choosing a broker:
Competitive edge provided by the broker.
Broker's knowledge of commodity markets.
Credibility of the broker.
Experience of the broker.
Net-worth of the broker.
Quality of broker's trading platforms.
STEP TWO: DEPOSITING MARGIN IN COMMODITY TRADING
To begin trading, the investor needs to deposit a margin with his broker. Margin requirements are of two types, the
initial margin and the maintenance margin. These margin requirements vary across commodities and exchanges but
typically, the initial margin ranges from 5-10% of the contract value.
The maintenance margin is usually lower than the initial margin. The investor's position is marked to market daily and
any profit or loss is adjusted to his margin account. The investor has the option to withdraw any extra funds from his
margin account if his position generates a gain. Also, if the account falls below the maintenance margin, a margin call
is generated from the broker and the investor needs to replenish his account to the initial level.
STEP THREE: ACCES TO INFORMATION AND TRADING PLAN
As commodity futures are not long-term investments, their performance needs to be monitored. The investor should
have access to the prevailing prices on the exchanges as well as market information that can help predict price
movements. Brokers provide research and analysis to their clients. Other information sources are financial dailies,
specialized magazines on commodities and the internet. Further, an investor requires a trading plan. Such a trading
plan can be developed in consultation with the broker. In any case, the investor has to remember to ride his profits
and cut his losses by using stop loss orders.
PROCESS FLOWS IN COMMODITY FUTURES TRADING
After the process of opening account is done the investor may want to trade in commodity. IT is important to
understand the process after the trade is placed.
An investor places a trade order with the broker (at the dealing desk) on phone. The dealer puts the order in
exchange trading system. At the initiation of the trade, a price is set and initial margin money is deposited in the
account. At the end of the day, a settlement price is determined by the clearing house (Exchange). Depending on if
5. the markets have moved in favor or against the investors' position the funds are either being drawn from or added to
the client's account. The amount is the difference in the traded price and the settlement price. On next day, the
settlement price is used as the base price. As the spot market prices changes every day, a new settlement price is
determined at the end of every day. Again, the account will be adjusted by the difference in the new settlement price
and the previous night's price in the appropriate manner.
Why commodities trading?
Well, let's suppose you want to buy gold because you believe that the price of gold will rise.
You could then buy gold ingots, store them, wait for them to go up in price, and then sell them at a profit.
But, you have to be sure that the gold you buy is pure, you have to find a place to store it, you have to provide the
security, transport it to vault and other such hassles.
A far better way to invest in gold would be to buy gold futures from the commodities exchange.
How do you do that?
When you buy a Gold Futures contract, you undertake to do three things.
1. Buy the amount of gold specified in the contract.
2. Buy it at the price specified in the contract.
3. Buy it on the expiry of the contract. This could be after one month, two months, three months and so on. Of course,
if you sell the Gold Futures contract before it expires, then you don't have to worry about actually buying the gold.
How it works
When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known
as the margin.
Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 gms. 100 gms of
gold may be worth Rs 72,000.
The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520.
The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the
price.
So you bought the Gold Futures contract when it was Rs 72,000 per 100 gms.
The next day, the price of gold rose to Rs 73,000 per 100 gms.
Rs 1,000 (Rs 73,000 – Rs 72,000) will be credited to your account.
The following day, the price dips to Rs 72,500.
Rs 500 will get debited from your account (Rs 73,000 - Rs 72,500).
6. What you need to know
Compared to stocks, trading in commodities is much cheaper, because margins are much lower than in stock
futures.
Brokerage is low for commodity futures. It ranges from 0.05% to 0.12%.
BENEFITS OF COMMODITIES FUTURES
To producer: A producer of a commodity can sell the futures of the commodity, thereby ensuring that
he can sell a particular quantity of his commodity at a particular price at a particular date.
To investors: An investor has alternative investment instruments where he can take a position as to
future price and the spot price at a particular date in future and buys and sells options. He is not
interested in taking deliveries of the commodities.
To commodity trader: A commodity trader can use these to ensure that he is protected against any
adverse changes in the prices. He can enter into a futures contract for purchase of a certain quantity of
the underlying at a particular price on a particular date, or he can enter into a futures contract for sale of a
particular quantity on a particular date at a particular price and be assured of the margins because both
his purchase price as well as the sale price are fixed. Whenever they find Gold moving up, they short
silver and similarly whenever they find silver moving up and gold likely to move down, they hedge.
To exporters: Future trading is very useful to the exporters as it provides an advance indication of the
price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk
by operating in futures market.
INDIAN COMMODITIES MARKETS: A BIG OPPORTUNITY
India’s self sufficiency in commodities has brought to the fore its role in developing from an emerging
economy to a developed one. The commodities market is the “Future investment Market” of India.
Even though it is in a nascent stage, it is bound to surpass even the capital market’s trading volumes
due to its core role. It has brought transparency and integrated it into the economy through a structure.
The overall Commodity Trading operates through a market structure governed under the Forward
Market Contracts (Regulation) Act, 1952. Forward Market Commission approves commodities, which
are being traded. Futures contracts are entered into under the auspices of an exchange. The
commodity markets operate through a list of exchanges in India like Multi Commodity Exchange
National Multi-commodity Exchange and the National Commodity & Derivatives Exchange Limited .
ANMOL FINSEC RIDE THE FUTURE IN COMMODITIES
In order to cater to the growing interest of investors in commodity trading, Anmol Finsec has taken
direct membership of all the three leading commodity exchanges of India, namely, NCDEX, MCX and
NMCE. Where NCDEX is popular platform for Agro based products, and MCX is popular for bullion.
Commodity trading is one of the high potential return-giving instruments in India. Anmol Finsec
possesses the right experience and tailor made solutions to effectively advice on commodity trading. It
is present in the area of future.