The document proposes introducing a diamond derivative contract that would allow participants in the diamond industry to hedge price risk. It outlines how the diamond spot price would be determined, how futures and options contracts would be priced and settled, and the payout structures for buyers and sellers of futures and options. It also discusses how the contract could help resolve risks for mining companies, jewelry companies, and traders by allowing them to hedge the value of their diamond inventory or lock in prices for future transactions.
8. Option trading is not allowed in commodity trading.APPENDIX:<br />Polling- Get the price qoute by taking phone call from different participent.It can be done one to three times a day depending upon the volatility of the commodity.<br />BOOTSTRAPING METHOD: For taking price 10-30 sources (including traders, millers, whole sellers, exporters, importers, and different service provider etc.) are selected. In case of higher price volatility, price are polled from large number of participants. In some commodities like menthe oil, potato, pulses prices is polled from minimum 30 sources. The collected BID and ASK quotes are sorted in ascending order. Depending on the market convention the participant provides both BID and ASK quotes or only the ask quote. Extreme quotes are trimmed from the total quote with the the help of the software using an adaptive procedure. Trimming of quotes depends upon the sample size on a given date. Larger the sample size, more number of quotes are trimmed. These value are sampled with replacement multiple number of times, where software gives different averages with their standard deviation. The average with least standard deviation will be determined and disseminated as bootstrapped price.<br />Let us take an example<br />NAMENUMBERPRICE(Rs)REMARKSA1111111200A2222221205A3333331206A4444441200A5555551205A6666661209EliminatedA7777771195EliminatedA8888881206A9999991205Spot Price1203.85<br /> Here out of the range prices i.e. Rs 1209 and Rs 1195 are eliminated from the polled prices and average of remaining prices taken i.e. Rs 1203.85.<br />BIBLIOGRAPHY<br />We have collected information from the following website:<br />www.fmc.gov.in<br />www.mcxindia.com<br />www.ncdex.com<br />
![PROJECT REPORT ON DIAMOND DERIVATIVE<br />SUBMITTED BY: SUBMITTED TO: <br />AVIJIT BHATTACHARYYA - 91PROF. ANANDADEEP MANDAL<br />DIPTAKSHYA BANERJEE - 76<br /> <br />MRIDUL CHATTERJEE - 24<br /> ACKNOWLEDGEMENT<br />We are thankful to Prof.Anandadeep Mandal to give such kind of assignment which help us to innovate a derivative instrument. <br />INDEX<br />TOPIC PAGE NO<br />EXECUTIVE SUMMARY…………………………………………………………………4<br />DIAMOND DERIVATIVE AND ITS NEED …………………………………………….5<br />PARTICIPENTS…………………………………………………………………………….5<br />SPOT PRICE DETARMINATION METHODOLOGY…………………………………5<br />PRICING FUTURES CONTRACTS OF DIAMOND……………………………………7<br />PAYOFF FOR FUTURE CONTRACT……………………………………………………9<br />PAYOFF FOR OPTION CONTRACT……………………………………………………10<br />RISK RESOLVED………………………………………………………………………………...12<br />VARIOUS MANAGERIAL STRATEGY……………………………………………………………………………......13<br />PROS AND CONS OF DIAMOND DERIVATIVE IN INDIA…………………………19<br />APPENDIX…………………………………………………………………………………19<br />EXECUTIVE SUMMARY<br />In India Aluminium,Nickel ,Copper ,Copper Cathode ,Zinc ,Lead ,Tin ,Gold ,Gold-M ,Pure Gold - Mumbai ,Kilo - Gold ,Gold - HNI ,SONA995MUM ,Pure Gold - Mumbai - 1 Kg ,Silver ,Silver-M ,Pure Silver - New Delhi - 30 Kg (Mega),Pure Silver - New Delhi,Silver - HNI , ChandidelSteel, Steel - Long ,Steel - Flat ,Mild Steel Ingots - Ghaziabad ,Steel Long Bhavnagar ,Steel Long Govindgarh ,sponge iron,Gold Ahmedabad,Gold Delhi ,Gold Kolkata ,Gold Mumbai ,Gold Mini Delhi ,Gold Mini Kolkata,Gold Mini Mumbai ,Gold Mini Ahmedabad are traded over different commodity exchange as Metal commodity.But no diamond trading takes palce in the exchange.But diamond has high importance to Indian Economy. It Contributes over 15% exports (USD 16 billion) & 6% imports (USD 10 billion).In India diamond accounts for over 90% volumes & 55% value in cutting & polishing of diamonds.we see that there is Increasing trend in retail appetite for diamond jewellery, high GDP growth, higher net disposable income, Continued Government support to promote this sector. So diamond derivative can be introduce as a hedging tools for trading participents of diamond.How this financial instrument helps to hedge,how price(spot and future) can detarmine, you able to understand to read the report.<br />DIAMOND DERIVATIVES:<br />Derivative is a financial instrument whose value depends on the underlying assets. These underlying assets can be Equity, commodity or forex etc. In case of diamond derivative, underlying asset is diamond.<br />NEED FOR DIAMOND DERIVATIVE:<br />The lack of a structured OTC or listed diamond derivative means that industry players are not able to hedge their future diamond demand or supply, when they know that this will be subject to peaks and troughs at pre-determined times in the future.<br />The lack of a forward market, normally the pre-cursor to the establishment of a derivative market, means that all trades are done for cash or credit settlement, where credit is becoming increasingly extended, so the only way to speculate on future price movements is to increase buys or sales of physical diamonds in the physical portfolio. This has a consequent knock on effect on funding requirements from banks and is a more expensive mechanism than using a hedging tool, where margin is required to be lodged which does not represent the whole value of the stone. Posting margin with a clearer gives leverage to the diamantine since for the same amount of money he would use to buy one stone he is now able to buy additional stones synthetically through the derivative contract. <br />PROBABLE PARTICIPENTS:<br />Mining or Polishing Company <br />Jewelry Company <br />Trader<br />SPOT PRICE DETARMINATION MECHANISM: <br />Diamonds are mostly traded in the western part of the country. The diamond trading centers are concentrated mostly in following areas:<br />,[object Object]](https://image.slidesharecdn.com/diamondderivative-100617121602-phpapp01/85/Diamond-Derivative-1-320.jpg)
