Derivative market: commodity market in nepal, covering Mercantile exchange, Ndex, cfx etc.

2. Commodity Derivative
Market in Nepal
23rd Aug. 2012, Uniglobe college
Presentation by:- MBA 1st Trimester
-Somnath Kandel
-Avash Bhattarai
-Baburam Subedi

3. Contents
 Introduction
 History/ global commodity exchange
 Commodity exchanges in Nepal
 Proposed structure in Nepal
 Importance/Advantage of Market
 Participants of Derivative market
 Commodity market condition In Nepal
 Risk of Market
 Factors affect trading decision
 Why investors are loosing ?
 Conclusion

4. Derivativ
es
 It has no independent value.
 Its value is entirely derived from the value of
an underlying asset.
 The underlying asset can be securities,
commodities, bullions and currencies,
Livestock or anything else.

5. To qualify as a
commodity
 Not a complicated manufacturing process
 Standardized quality
 Available in large volumes
 Presence of many competing buyers & sellers
 It should be unbranded

6. Types of Derivatives & its Classification
Derivatives
Forwards Futures Options Swaps
Commodities Financial
Food Grains
Oil Seeds Interest rates Currencies
& Allied Products
Edible Oil Fiber Crops Indices Bonds
Energy Precious Metals
Industrial Metals Livestock

7. Commodities
Agriculture Base Metals Energy Bullion

8. History/ global commodity exchange
CBOT DCE
NYBOT
CME LME LIFFE
NYMEX TOCOM
DGCX
MCX
SICOM
SFE
• The history of derivative market began with establishment of According to us report of Oct. 2008, size
Chigao Board o f Trade in 1848, USA
of derivative market of world was $791
• Chicago Mercantile Exchange (CME) established in 1874-USA
trillions where as size of share market
• New York Mercantile Exchange (NYMEX)-U.S.A
• London Metal Exchange (LME)- U.K.
was only $37 trillions.
• Dalian Commodities Exchange(DCE)-China The size of the derivative market is 11
• Dubai Gold and Commodities Exchange (DGCX) -Dubai times greater than the size of world
• Sydney Futures Exchange (SFE)-Australia economy.
• Multi Commodities Exchange(MCE)-India

9. Commodity exchanges in
Nepal
 Commodities and Metal Exchange Nepal
(COMEN) established in 14 Dec 2006.
 Mercantile Exchange Nepal Limited(MEX)
established in 2008
 Nepal Derivative Exchange Limited (ndex)
established in Nov 20, 2008
 Commodities Future Exchange(CFX)
established in June 2011

10. Proposed Structure
Government of Nepal
Ministry of Finance
Regulator ( Must probably SEBON)
Derivative Exchanges
Clearing Member (CM)
Banking Partner
Trading member(TM) Sub-Trading Member
Trader/Client Trader/Client

11. Importance/Advantage of
Market
 Alternative in Nepalese
Investment portfolio
 Risk minimization (Hedging
Mechanism)
 Fair Price discovery ( large no.
of buyer and seller/ huge
volume)
 High leverage(Margin trading)
 High liquidity
 Speculation and arbitraging.

12. Participants of Derivative
market
Hedgers
Investors who attempt to minimize the risk of
financial loss from adverse price changes by
assuming futures positions opposite to cash
positions.

13. Speculators
Who wish to invest on the future movement in
the price of an asset. They use derivatives to
get an extra leverage. A speculator will buy and
sell in anticipation of future price movements,
but has no desire to actually own the physical
commodity.

14. Arbitragers
They are in the business to take advantage of
a discrepancy between prices in two different
markets. If , for example, they see the future
prices of an asset getting out of line with the
cash price, they will take offsetting positions in
the two markets to lock in profit.

15. Commodity market condition In
Nepal
 Commodities and Metal Exchange Nepal (COMEN)
 In the budget of fiscal year 2066/2067, government of
Nepal addressed commodity market first time, and lay
down the 10% capital gain tax form profit amount.
 Due to the lack of regulatory body exchanges are
doing what ever they want, e.g. there are different
commission rate in different exchange of same
contract.
 What is the system of exchange rate between us
dollar and NC(because in software price is coated in
NC but market is of us dollar) ? There is no fix rule.
 What is the liquidity position of exchanges(e.g.

16. Contd..
 Today's commodities exchange in Nepal
are like the existence of banks without
having central bank.
 What is the TAX paying system (e.g.
COMEN tax evasion).
 People are investing blindly without any
research because of which they are
loosing the money.
 No provision of physical delivery.

17. Risk of Market
Legal risk
Credit risk
Market risk
Liquidity risk
Operational risk

18. Factors affect trading
decision
 Fundamental Factors
 Demand & Supply Equation
 Inflationary pressures
 Money supply
 Political events
 Weather
 Transportation costs
 Data announcements
 Performance of key commodities
 Technological changes
 Taxes

19. Example of fundamental analysis:
Factors affects for gold price
 Price of Crude oil increases= Price of
gold increases and vice-versa
 Inflation increase= Price of gold
increases and vice-versa
 Interest rate rises= Price of gold
decrease and vice-versa
 Overall output increase= Price of gold
decrease and vice-versa

20. Factors affect trading
decision
 Technical Factors
 Charts
 Trend lines
 Technical indicators
 The study of historical price patterns to
help forecast futures prices.
 Market Sentiment
 Marketpsychology(Fear, greed &
emotion)

21. Basic Trading
strategy
Marke Bu
t y
Marke Sell
t

22. Why Investors are Loosing?
Investment Information
x √
Information Interaction Investment Interaction

23. Conclusion
 Commodity derivative market in Nepal
is very young.
 It is an great alternative for an investor
to diversify their portfolio.
 Market is very volatile.
 Impatient trader lose a lot.
 Good trader trade a lot, lose a lot and
eventually earn a lot.