FINAL PROJECT REPORT

                                                 ON

“INVESTOR PERCEPTION REGARDING

COMMODITY TRADING”

                                           Submitted to

PUNJAB TECHNICAL UNIVERSITY

JALANDHAR

In partial fulfillment of the requirement for the

Award of degree of

MASTER OF BUSINESS ADMINISTRATION (MBA)

Submitted by:                                                                Project Guide:

                                              Session (2007-2009)

CT INSTITUTE OF MANAGEMENT

JALANDHAR

                                                   CERTIFICATE

This is to certify that the project entitled “Investor perception regarding Commodity Trading” submitted by …………………….., on partial fulfillment of the requirement for the award of degree of Master of Business Administration, in CT Institute Of Management, affiliated to Punjab Technical University, Jalandhar is a bonified piece of survey work conducted under my supervision and guidance and no part of this project has been submitted by any other degree.          

Date:        Project Guide:

                                                     PREFACE

The most motivating aspect associated with pursuing a course in management or business studies is the dynamism associated with it. Dynamism of adding a new perspective to one’s personality and vision by accumulating wider knowledge, developing analytical skills not only by traditional ways of teaching and learning but by observing “Things at the work”. The project research gives a considerable exposure to students and provides them with an opportunity to see the practical aspects of as well. The project is an opportunity to see the application part of what we study or learn in classrooms. Management is that function of an enterprise that concerns itself with the direction and control of the various activities to attain business objectives. It is the science and art of preparing, organizing and directing human efforts to control the force and utilize the materials of nature for the benefits of men. As a matter of fact, the management thereby provides the scientific technique to deal with the various problems in the areas of management and the manager mixes some art to it and tries to shorten the gap of ignorance. It provides a chain of solution to critical problems of manager.

ACKNOWLEDGEMENT

I would like this opportunity in expressing my deepest gratitude to all those persons who in one way or other help me in making my endeavors a success. Words are not sufficient to reflect my thankfulness and respect towards those persons for their significant contribution in the completion of my project.

I would like to thank the all mighty for his gracious blessings without which I would not be able to complete my project work. I owe my sincere gratitude to ……………… she  took personal interest in spite of her busy schedule to help me to complete this project and provided me the required even more than required information and guidance. Her valuable suggestions and moral support during the making of this project was quite helpful. I am very inspired by my project guide; her caring and hard working nature is quite helpful while learning. She is indeed a genuine guide. Last but not the least how can I forget the helping hand and caring gestures of my parents.                                

TABLE OF CONTENTS

 LIST OF TABLES

LIST OF FIGURES

INTRODUCTION

COMMODITIES TRADING

Commodity trading is characterized by high market volatility and risk. Globalization and advances in technology have significantly changed the way trading is done the factors differencing prices and the frequency with which prices change has increased exponentially timely access to information and analysis is the only way to succeed in commodity.

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 “every kind 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. In India there are three national commodity exchanges these 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.              

HISTORY OF EVOLUTION OF COMMODITY MARKETS

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.

HISTORY OF COMMODITY MARKET IN INDIA:-

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 delivery of 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.

Functions of the FMC

• It advises the central govt. in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the forward contract (regulation) act 1952.
• It keeps forward markets under observation and to take such action in relation to them, as it may consider necessary in exercise of the powers assigned to it by or under the act.
• It collects and whenever the commission thinks. It necessary to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand & prices and to submit to the central govt., periodical reports on the working of forward markets relating to such goods.
• It makes recommendations generally with a view to improving the organization and working of forward markets;
• It undertakes the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever necessary.
• It is a vital link between the central govt. and commodity exchanges for smooth operation of the market by implementing the govt. policies and directives from time to time.

INDIAN COMMODITY EXCHANGES

The major commodity markets are in the United Kingdom and in the USA. In india there are 25 recognised 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 delivery of commodities. The three exchanges are:

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), Indian Farmers 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.

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

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.

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.

INSTRUMENTS AVAILABLE FOR TRADING

In recent years, derivatives have become increasingly popular due to their applications for hedging, speculation and arbitrage. While futures and options are now actively traded on many exchanges, forward contracts are popular on the OTC market. Now, these all will be discussed in detail as under:-

FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are:-

• They are bilateral contracts and hence exposed to counter-party risk.
• Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.
• The contract price is generally not available in public domain.
• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.

 However, forward contracts in certain markets have become very standardized, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions volume. This process of standardization reaches its limit in the organized futures market. Forward contracts are very useful in hedging and speculation. The classic hedging application would be that of an exporter who expects to receive payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations. By using the currency forward market to sell dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer who is required to make a payment in dollars two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward.

Limitations of forward markets

Forward markets world-wide are affected by several problems:

• Lack of centralization of trading:- The main problem here lies with it is that forward markets are too much flexibility and generality.
• Illiquidity:- The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal which are very convenient in that specific situation, but makes the contracts non-tradeable.
• Counterparty risk:-Arises from the possibility of default by any one party to the suffers. Even when forward markets trade standardized contracts, and hence avoid the problem of liquidity, still the counterparty risk remains a very serious issue.

INTRODUCTION TO 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 standardized items in a futures contract are:

• Quantity of underlying
• Quality of the underlying
• The date and the month of delivery
• The units of price quotation and minimum price change
• Location of settlement

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 farmers determines 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.

DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the sane economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. The points of differentiation between two are described as under:

                          Futures                                                               Forwards

1. Futures trade on an organized exchange         but forwards are OTC in nature.
2. Standardized contract terms                            customized contract terms
3. These are more liquid                                     these are less liquid
4. Requires margin payments                             no margin payments are required
5. Follows daily settlement                                 settlement happens at end of period.

INTRODUCTION TO OPTIONS

Options are fundamentally different from forward and futures contracts. An option gives the holder of the option the right to do something. The holder does not have to exercise this right. In contract, in a forward or futures contract, the two parties have committed themselves to doing something. Whereas it costs nothing except margin requirements to enter into a futures contract, the purchase of an option requires an up-front payment.

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

1. PAN card Number
2. Driving License
3. Vote ID
4. 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

1. Know your client form
2. 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.

RULES OF COMMODITY TRADING

What distinguishes successful traders from an unsuccessful trader? Experienced traders will tell you it’s just that, experience comes by learning from one’s own mistakes in actual trading. But also by learning from other’ experiences and mistakes through, books, seminars and research some rules of commodities trading are: -

1. Develop a trading system and stick to it: - successful traders depend on a systematic approach to the market. They have a sound trading plan for every position before they actually place an order. This allows them to determine without emotion when to cut losses and how long to let profits run. Once a position has been established, it is too late to formulate such a plan.

2. Eliminate impulsive and emotional trading: - once you have a trading system in place, don’t deviate from it because of fear or greed condition yourself to act on your expected gain loss ratio, be prepared to accept many small losses and to accept a few large gains when these occurs. Don’t try being beat walks of life; being late can be very disappointing.

3. Don’t go on a margin call: - A margin call means that all the cash left in you are a/c is not enough to cover the margin requirements of your positions. In other words when you are on a margin call, you have over traded either cut losses quickly enough or you are spreading your equity across too many positions.

4. Don’t take delivery of a commodity: - professional traders leave .the delivery situation to the commercials and producers, such as slaughter houses, farmers, oil drillers etc. deliveries are not the way to remain in a market for speculative purposes instead the professional trader is already out of the market or has rolled over his futures position into the next traded contract month well before first notice day. Deliveries are expensive, and most have an element of market risk, which the professional trader does not want to accept merely, for the sake of maintaining the position.

5. Research all you case: - professional trading skill is not acquired overnight time and time again, traders, fail due to their lack of knowledge. Thus, every trader should aspire to gain as much knowledge about the industry as possible, and to remain open to possibilities of new and changing market. The more the research, the easier to evaluate strategies and tactics.

6. Don’t listen to other people:-one have to done one’s own research; so one’s analysis is just as valid as others get to know your personality and trading style, and write down your trading objectives. What works for one trader may not work for another.

ADVANTAGES & DISADVANTAGES OF COMMODITY TRADING

Advantages of Commodity Trading

• Leverage. Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account.
• Commission Costs. It is a lot cheaper to buy/sell one futures contract than to buy/sell the underlying instrument. For example, one full size S&P500 contract is currently worth in excess off $250,000 and could be bought/sold for as little as $20. The expense of buying/selling $250,000 could be $2,500+.
• Liquidity. The involvement of speculators means that futures contracts are reasonably liquid. However, how liquid depends on the actual contract being traded. Electronically traded contracts, such as the e-minis tend to be the most liquid whereas the pit traded commodities like corn, orange juice etc are not so readily available to the retail trader and are more expensive to trade in terms of commission and spread.
• Ability to go short. Futures contracts can be sold as easily as they are bought enabling a speculator to profit from falling markets as well as rising ones. There is no uptick rule for example like there is with stocks.
• No Time Decay. Options suffer from time decay because the closer they come to expiry the less time there is for the option to come into the money. Commodity futures do not suffer from this as they are not anticipating a particular strike price at expiry.

Disadvantages of Commodity Trading

• Leverage. Can be a double edged sword. Low margin requirements can encourage poor money management, leading to excessive risk taking. Not only are profits enhanced but so are losses!
• Speed of trading. Traditionally commodities are pit traded and in order to trade a speculator would need to contact a broker by telephone to place the order who then transmits that order to the pit to be executed. Once the trade is filled the pit trader informs the broker who then then informs his client. This can take some take and the risk of slippage occurring can be high. Online futures trading can help to reduce this time by providing the client with a direct link to an electronic exchange.

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

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.

THE FUTURE OF COMMODITY MARKET IN INDIA

As funds seamlessly flow from one market to the other and the Indian commodity market begins to integrate with the global market, the risk perception is beginning to heighten. Adoption of risk management or risk mitigation tools is now sine qua non for success in businesses with exposure to commodities. A serious look at futures trading as a tool for price discovery and price risk management is inevitable.

Before we examine commodities futures trading — its principles and benefits — it may be worthwhile to crystal gaze into the future of this market. Some features of the emerging scenario in India as far as the commodity market is concerned:

Expansion of commodity trade: Very clearly, trade volumes are set to expand rapidly. Demand for a wide variety of commodities covering food, fibre, metals and energy is certain to expand. India is likely to produce many of the aforesaid commodities, as investment in production facility expands. If demand growth outstrips domestic supply growth, imports will become inevitable. The possibility exporting certain commodities also exists. In commodity production, consumption and trade, India will become an important player in the international market. This will lead to a massive expansion in commodity trade volumes over the next, say, 15-20 years.

Competition from imports: Whether or not domestic producers like it, the competition from imported commodities is inevitable. This could be true in case of food crops, metals and energy. In the short/medium-term, indigenous output will trail consumption demand because of the lagged effect of investment. To fuel growth and rein in inflation, the government and the business houses will have to resort to imports. As imports are unrestricted (Quantitative Restrictions have been abolished), there will be liberal inflow of goods from abroad. Often, imports from developed countries are low-priced and subsidised. Such competition will result in inefficient domestic units falling by the wayside, but will eventually lead to greater efficiency among domestic producers.

Role of MNCs: Multinational corporations cannot be wished away. They bring with them a certain superior knowledge of operating in developing or emerging economies. They also have deep pockets and, often, are long-term players. In the Indian commodities sector, global companies will increasingly play a role as producers, suppliers, traders and service providers. Indian producers will have to learn to face competition from MNCs.

Consolidation of fragmented capacities: It is well-known that commodity producers and industrial consumers in India suffer poor scale economies because of their small size. Fragmentation of business that is resulting in scale-diseconomies and other infirmities is likely to give way to consolidation. Competition is now driving smaller players to explore opportunities for merger. Bigger companies with expansion plans follow the acquisition route. Mergers and acquisitions will lead to consolidation of fragmented businesses, albeit slowly.

Dominance by a few large firms: In the developed economies, a handful of companies share a big slice of the business pie. Typically, four-five companies would account for, say, 60-75 per cent of aggregate business and several smaller players compete for the rest. The commodity sector will inevitably move towards such a situation. The process of consolidation and dominance by a few large firms is already visible, however incipient. Take edible oil imports, for instance. Of the total imports of 45-50 lakh tonnes a year worth over Rs 10,000 crore, five companies (of which two are MNCs) account for roughly 70 per cent of business; the rest being shared by over 20 importers.

Waning role of government: As part of the economic liberalisation process, the Government has not only freed the commodities market of controls and restrictions but has also, by and large, distanced itself from the market. The interventionist role of the government is now minimal. Of course, some restrictions still remain, like those on the sugar industry.

The government's role is changing from controller to facilitator. It must, however, be mentioned that "liberalisation is not licence''.

Use of information technology: Very clearly, IT will play a key role in bringing about greater transparency in the commodities market. The country's strengths in IT will increasingly be leveraged to connect stakeholders and link markets.

IT will be used for delivering price and market information to primary producers (farmers). E-commerce will be the modern way of doing business. Several corporates have already begun to employ IT to derive value, ITC's e-chaupal being a remarkable initiative. The agricultural produce markets (numbering nearly 7,500 across the country) will soon be networked so that growers can get to know prices prevailing in various marketing yards or mandis.

Strong cash market: These developments will result in a stronger cash market for commodities. Initiatives are already underway to launch electronic spot trading in farm commodities that will help growers and others not only discover prices almost real time, but also help capture value by taking trading positions. A strong and vibrant cash market is a pre-condition for a successful and transparent futures market.

REVIEW OF LITERATURE

Various reviews of literature have been studied in order o know about the flaws and gaps in the previous studies basically related to the concept of commodity trading.

• Layno. (2000) in the study stated that The disclosed trading game is comprised of a clearing house setting up specific contracts defined as issues each having no innate financial value but of local, national or international interest and involving social, financial, business, political, sports, or general, etc. matters that can be influenced by the actual or potential occurrence of different events or factors. The value of the issue contract might change in value, up or down, depending on how the participants, individually and collectively, believe the resolution of the issue has been advanced, via bids/offers tendered on the contract and trading via the Internet. An important aspect of the trading would be the periodic polling by the clearing house of the interested traders as how-each believes the known current events or factors might influence the subsequent trading prices of the contract, tabulating and reporting the poll results, giving a predicted bias for all participants to evaluate and act on, and monitoring continued open trading of the contract at bid/ask/traded prices.

• Kevin (2002) in the study stated that This Paper provides a summary of what is known about trends in international commodity market integration during the second half of the second millennium. The range of goods that have been traded between continents since the Voyages of Discovery has steadily increased over time, and there has been substantial commodity market integration over the period, driven by technology in the 19th century and politics in the late 20th century. This trend towards greater market integration was not, however, monotonic; it was periodically interrupted by shocks such as wars and world depressions, or by endogenous political responses to the distributional effects of globalization itself. In some periods politics has reinforced the effects of technology, while in other periods it has offset them. In several cases, severe shocks have had long-run effects on the international integration of commodity markets, as a result of politically induced hysteresis. Finally, we know remarkably little about international commodity market integration during the 20th century
• Larson (2003) in the study stated that Since the early 1980s, dramatic changes in export commodity markets, shocks associated with resulting price declines, and changing views on the role of the state have ushered in widespread reforms to agricultural commodity markets in Africa. The reforms significantly reduced government participation in the marketing and pricing of commodities. Akiyama, Baffes, Larson, and Varangis examine the background, causes, process, and consequences of these reforms and derive lessons for successful reforms from experiences in markets for four commodities important to Africa -cocoa, coffee, cotton, and sugar. The authors' commodity focus highlights the special features associated with these markets that affect the reform process. They complement the current literature on market reforms in Africa, where grain-market studies are more common. The authors suggest that the types of market interventions prior to reform are more easily classified by crop than by country. Consequently, there are significant commodity-specific differences in the initial conditions and in the outcomes of reforms related to these markets. But there are general lessons as well. The authors find that the key consequences of reform have been significant changes in or emergence of marketing institutions and a significant shift of political and economic power from the public to the private sector. In cases where interventions were greatest and reforms most complete, producers have benefited from receiving a larger share of export prices. Additionally, the authors conclude that the adjustment costs of reform can be reduced in most cases by better understanding the detailed and idiosyncratic relationships between the commodity subsector, private markets, and public services. Finally, while there are significant costs to market-dependent reforms, experiences suggest that they are a necessary step toward a dynamic commodity sector based on private initiative. This is particularly true in countries and sectors where interventions were greatest and market-supporting institutions the weakest.
• Gregoriou (2005) in the study stated  that the trading efficiency of commodity trading advisors (CTAs) during the period January 1998–June 2004. The 90 largest CTAs are analysed using the basic Data Envelopment Analysis (DEA) model, followed by the cross-efficiency and super-efficiency models. A detailed efficiency analysis of CTAs is provided, and the results indicate that only a handful of CTAs are efficient in terms of minimising trading to attain the highest compounded return
• Robert (2005) in the study stated that an auction server node is described for a computer network having user nodes for conducting an auction run by an auction adviser for awarding securities from an issuer to bidders of the auction. There is real-time monitoring of the auction as it occurs, a bid mechanism for receiving competitive bids from the bidders at the user nodes, including a quantity of securities to be purchased, an initial price revealed to the other bidders, and a firm price not revealed to the other bidders and within a predetermined range of the initial price. A single market clearing price is determined that allocates to the bidders all of the securities in the auction. An incremental adjustment of the market clearing price may be made by at least one of the auction advisor and the issuer, and an allocation made of the securities to the bidders at the adjusted clearing price.
• Lakshmi (2007) in the study stated that The Government of India is contemplating allowing the Institutional investors like Foreign Institutional Investors, Mutual funds and Banks to trade in a few selected products of commodity derivatives markets in India. This paper argues that if the institutional investors are allowed to operate in all the products of the commodity derivative markets, it has implications for both the liquidity and broad basing of commodity derivatives markets given the assets under management of these investors. Their entry into commodity derivatives markets is also expected to benefit them given the portfolio diversification opportunities. This paper discusses the implications of the grant of permission to these institutional investors to operate in commodity derivative markets
• Shih-Fen (2007) in the study stated that propose to design a market game that (a) can be used in modeling and studying commodity trading scenarios, and (b) can be used in capturing human traders' behaviors. Specifically, we demonstrate the usefulness of this commodity trading game in a single-commodity futures trading scenario. A pilot experiment was run with a mixture of human traders and an autonomous agent that emulates the aggregated market condition, with the assumption that this autonomous agent would hint each of its action through a public announcement. We show that the information collected from this simulation can be used to extract the pattern of successful human traders. Finally, we elaborate on the potential of this market game in studying autonomous commodity trading.

• Josep (2008) in the study stated that the problem of a trader who purchases a commodity in one market and resells it in another. The trader is capacitated: the trading volume is limited by operational constraints, e.g., logistics. The two markets quote different prices, but the spread is reduced when trading takes place. We are interested in finding the optimal trading policy across the markets so as to obtain the maximum profit in the long-term, taking into account that the trading activity influences the price processes, i.e., market power. As in the no-market-power case, we find that the optimal policy is determined by three regions, where 1) move as much as possible from one market to the other; 2) the same in the opposite direction; or 3) do nothing. Finally, we use the model to analyze kerosene price differences between New York and Los Angeles.

                                      NEED OF THE STUDY

The need of the study arises due to lack of knowledge about the commodity market because now-a-days, commodity trading has become an important investment avenue and  most of the investors are still unaware about its advantages and shortcomings. Huge amount of investment is required for trading in commodity market. To know the impact of other markets on commodity market, it became necessary to understand the trading of commodity market. So commodity trading covers the meaning of commodity market, its trading, clearing and settlement, the various commodities being traded on NCDEX and MCX. It further includes the various market participators in commodity market and instruments available for trading like future contracts, forward contracts and options.

                                     SCOPE OF THE STUDY 

This project on ‘Investors Perception Regarding Commodity Trading’ has a wide scope and is indeed a great help in understanding the core concept of trading in various commodities. The scope of my study was confirmed to current time period. For the sake of study survey was laid in Jalandhar, Hoshiarpur and Ludhiana. A limited sample was selected to fulfill the various objectives of the study. Scope was related to have a general view of the investors towards the commodity trading.

                                          OBJECTIVES OF THE STUDY

• To know about the commodity in which the investors mostly trade.

• To know about the Commodity Exchanges preferred by investors.

• To know the purpose of investment in commodity market.

• To know the impact of commodity trading on commodity prices.

• To find out the problems regarding trading in commodity market.

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. The research methodology includes the various methods and techniques for conducting a research. “Marketing Research is the systematic design, collection analysis and reporting of data and finding relevant solution to a specific marketing situation or problem.” D. Slesinger and M. Stephenson in the encyclopedia of social sciences define Research as “the manipulation of things, concept or symbols for the purpose of generalizing to extend, correct or verify knowledge, whether that knowledge aid n construction of theory and practice of an art.

Research is thus an original contribution to the existing stock of knowledge making for its advancement. The purpose of research is to discover the answers to the questions through the application of scientific procedures.

4.1 Defining the Research Problem and Objectives: It is said, “A problem well defined is half solved”. The first step in research methodology is to define the problem and deciding the research objective. The objective of the study is to know about the Investor perception regarding Commodity Trading

4.2 Research Design: Research Design is a blueprint or framework for conducting the research project. It specifies the details of the procedures necessary for obtaining the information needed to structure and solve research problem. The research design used in present study is descriptive research.

4.3 Sampling design: sampling can be defined as the section of some part of an aggregate or totality on the basis of which judgment or an inference about aggregate or totality is made. The steps involved in sampling design are as follows:

4.4 Universe: Universe refers to the total of the units in field of inquiry. Universe of the present study is all the investors who trading in Commodity market

4.5 Sampling unit: Sampling unit of the present study is Investors of Jalandhar, Hoshiarpur & Ludhiana city.

4.6 Sampling size: sampling size is the total no. of units which we covered in the study. In present study sample size is 100.

4.7 Sampling Technique: Sampling Technique used in the study is Convenient Sampling.

Convenient sampling: it is that type of sampling where the researcher selects the sample according to his or her convenience.

4.8 Data Collection and Analysis: Data can be collected in two ways

1. Primary data: Primary data are those, which are collected afresh and for the first time, and thus happen to be original in character. It is the backbone of any study.
2. Secondary data:  Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. In this case one is not confronted with the problems that are usually associated with the collection of original data. Secondary data either be published data or unpublished data.  

4.9 Source of data: source of the present research is both primary and secondary data. Primary data is obtained from respondents with the help of widely used and well-known method of survey, through a well-structured questionnaire. And the secondary data is collected from the internet.

4.10 Research instrument: Research instrument is that with the help of which the researcher collect the data from respondents. The questionnaire of the present research consists of close ended and Likert Scale.

4.11 Tools of Analysis: In present study pie charts, graphs and percentage use to analyze the collected data.  

Limitations of the Study

Although the sincere efforts have been done to collect authentic and relevant information, the study may have the following limitations -:

• Hard Enough to Fetch Information: It was not an easy task to get information from investors who invest in commodity. The investors were not always open and forthcoming with their views, even agitated and not disclosing.
• Limited Scope: Scope of study is limited to Hoshiarpur, Ludhiana, Jalandhar only and because of limited time and money, the results of study may not be generalized for India as a whole.
• Results may be Inaccurate: This study is based on the assumption that perceptions are true and factual although at times that may not be the case.
• Existence of Biases: Though every care has been taken to eliminate such biases, but considering the human factor the possibility of small bias having come up cannot be ruled out altogether.
• Investor Behavior: investor behavior is dynamic in nature and thus over the time, finding of today may become invalid tomorrow.
• Small Sample Size: The sample size taken is small and may not be sufficient to predict the result with 100% accuracy and hence findings may not be generalized.

DATA ANALYSIS AND INTERPRETATION

1. Commodities in which investors mostly invest.

Table 5.1: Commodities in which Investors mostly invest        

Figure 5.1 Commodities in which Investors mostly invest

Analysis:

100 respondents who currently invest the money in commodity are surveyed in research. This question is used to screen the respondents about the various commodities in which they invest and from the figures we can see that 57% investors have the invested  in Bullions, 43% in Pulses, 35% in Minerals, 36% in Spices and  47% in Oil & Oil seeds. Investors also invest in other resources like Plantations, Grains, Fibers and Energy.

Interpretation:

From the above data it is found that most of the investors are invest in Bullions, Pulses, Minerals, Spices, Oil and Oil seeds. Only the few investors are invest in Plantation, Grains, Fibers and Energy.

2. Commodity Exchanges Preferred by Investors.

This has been asked investors to know that which commodity exchange they preferred for trading. From the MCX, NCDEX, NMCE, NBOT.

Table 5.2: Commodity Exchanges Preferred by Investors

Analysis:

59% investors preferred NCDEX for investment purposes, 41% investors preferred MCX for investment purposes. No one prefer to use other exchanges like NMCE and NBOT.

Interpretation:

From the above data it is found that most of the investors preferred NCDEX and MCX for the investment in commodities and no one preferred any other exchange.

3. Purpose  behind investment

Table 5.3: Purpose  behind investment

Analysis:

41% investors invest in commodities for Speculation, 22% for Capital appreciation, 18% for Hedging, 12% for Return and 7% for Risk management

Interpretation:

From the above data it is found that the main purpose for investment in commodities is speculation whereas capital appreciation also gets a good percentage, and the other purposes are hedging, return and risk management

4. Month Future in which investors invest.

Table 5.4: Month Future in which investors invest

Figure 5.4: Month Future in which investors invest

Analysis:

61% investors trade in first month future, 42% trade in second month future, 38% trade in third month future, 29% in fourth month future, 17% in fifth month and just 12% investors trade in sixth month future.

Interpretation:

From the above data it is found that most of the investors trade for first month future, investors also invest for second and third month future. For fourth, fifth and sixth month future only some investors trade.

5. Impact of commodity trading on commodity prices.

Table 5.5: Impact of commodity trading on commodity prices

Figure 5.5 Impact of commodity trading on commodity prices.

Analysis:

39% investors said that commodity trading highly fluctuate the prices of commodities, 28% investors said commodity trading increase the speculation, 16% investors said that commodity trading help to bring stability in commodities price, 10% were of the view that commodity trading create low fluctuation and at last 7 % investors said commodity trading unnecessary increase in prices of commodities.

Interpretation:

From the above data it is found that most of the investors think commodity trading highly fluctuate the prices of commodities, while some investors think that commodity trading increases the speculation and the remaining investors were of the view that it helps in stability of prices and creation of low fluctuation.

6. Satisfaction level of investors with the return.

Likert Scale

               Scale 1: Satisfaction level of investors with the return

Maximum range: 500

Average Range:  300

Minimum Range: 100

Table 5.6: Satisfaction level of investors with the return

Likert scale: (5*15+4*43+3*27+2*12+1*3) =385

Analysis:

From likert scale summated score  385, which is above the natural level  we can say most of investors  are satisfied with the return. In the above table we can see that agree and neutral options get maximum rating. And we can also see that only  3% investors are highly dissatisfied with the return.

Interpretation:

As shown by the result of likert scale, it is clear that most of investors are satisfied with the return.

7. Impact of banned commodities on their prices and trading.

Table5.7: Impact of banned commodities on their prices and trading

Figure5.6: Impact of banned commodities on their prices and trading

Analysis:

35% investors said banned commodities have positive impact on prices and trading, 26% investors think due to the banned commodities the traders have to bear the loss, 24% investors think banned commodities have effect on volume of trade and 15% investors were of the view that due to banned commodities the broking exchange have to bear the loss.

Interpretation:

From the above data it is found that most of the investors think banned commodities have positive impact on prices and trading of particular commodity, and the other equal number of investors think due to banned commodities the traders have to bear the loss and banned commodities effect the volume of trade.

8. Agreement or Disagreement on Factors effect the volume of trade.

Various statements were asked from the investors to know their level of agreement like what they feel about every statement whether they strongly agree, agree, neutral, disagree and strongly disagree.

 Table 5.8: Agreement or Disagreement on Factors effect the volume of trade

Figure 5.7: Agreement or Disagreement on Factors effect the volume of trade

Maximum range: 500

Average Range:  300

Minimum Range: 100

Analysis & Interpretation

From above summated score it is found that most of the investors are agree with all statements, these statements are ask investors to know about the agreement or disagreement for statements. Like first statement asked from investors to know that is the surplus money in economy affected the volume of trade in commodity trading the summated score for this statement is 384 that is above the neutral level, in second statement which was asked to investor to know their agreement or disagreement for future expectation of commodity prices affected the volume of trade the summated score for this is 391, the third statement was asked to know the affect of margin money the summated score for this statement is 387, the next statement was asked to know the affect of objectives of investors the summated score is 369, the next statement was asked to investors to know the affect of brokerage charges here the summated score is 362, the next statement was asked to know the affect of turnover her e the summated score is 374 and the last statement was asked to investors to know the affect of availability of commodity future on volume here the summated score is 356. so summated score for the all above statements are above the average range so it is found that all investors all agree with all statements.

9.1 Introduction of new commodities.

This has been asked from investors to know about the whether new commodities should introduce in commodity market or not.

Table 5.9: Introduction of new commodities

Figure 5.8: Introduction of new commodities

Analysis:

63% investors said new commodities should be introduced in commodity market, on the other hand 37% investors said new commodities should not be introduced.

Interpretation:

From the above data it is found that most of the investors think that new commodities should be introduced in commodity market and some investors think that there is no need to introduce new commodities.

9.2 Reason behind introduce new commodities

The investors who say yes for the above question whether new commodities should be introduced or not in commodity market asked another question to know the reasons why new commodities should introduced.

Table 5.10: Reason behind introduce new commodities

Figure 5.9: Reason behind introduce new commodities

Analysis:

57% investors said the introduction of new commodities help to decrease fluctuations in the market and 43% investors said the introduction of new commodities help to enhance the volume of trading.

Interpretation:

From the above data it is found that most of the investors think the introduction of new commodities decrease the fluctuation in the market and some other investors think it help to enhance the volume of trading.

10. Steps to improve commodity trading in India

Table5.11: Steps to improved commodity trading in India

Figure 5.10: Steps to improved commodity trading in India

Analysis:

57% investors said commodity trading can be improved in India by increasing the awareness, 51% said trading can be improved by decreasing brokerage charges, 42% were of the view that trading can be improved by reducing the lot size and 33% said trading in India can be improved by introducing new commodities.

Interpretation:

From the above data it is found that most of the investors said the commodity trading in India can be improved by increasing the awareness, other investors think that trading can be improved by decreasing brokerage charges and by reducing the lot size and the segmentation of introducing new commodities for improving the trading gets the lowest percentage.

FINDINGS OF THE STUDY

            Findings derived from the data collected from respondents are as follows:

1. The investors mostly invest in Bullions, Pulses, Minerals, Spices, Oil and Oil seeds while some of them invest in Plantation, Grains, Fibers and Energy.
2. The investors prefer NCDEX and MCX for the investing in commodities while no one prefer to invest in the exchanges like NMCE, NBOT.
3. The main purpose for investment in commodities is speculation whereas various other reasons are capital appreciation, hedging, return and risk management.
4. Investors generally trade for first month future and also for second and third month future while some trade for fourth, fifth and sixth month future.
5. Commodity trading highly fluctuate the prices of commodities, increases the speculation and also helps in stability of prices and creation of low fluctuation.
6. Most of investors are satisfied with the return in commodity market.
7. Most of the investors think banned commodities have positive impact on prices and trading of particular commodity, and the other investors think due to banned commodities the traders have to bear the loss which ultimately  affect the trade.
8. Most of the investors agree with the statement that the volume of trade in commodity market is affected by the surplus money in economy, Future Expectation of prices, Margin money charges, Objectives of investors, Brokerage Charges, Turnover on commodities, Availability of commodity future etc.
9. Most of the investors think that new commodities should be introduced in market because it will decrease the fluctuation in the market and  will  help to enhance the volume of trading.
10. Most of the investors said the commodity trading in India can be improved by increasing the awareness, while others think that it can be improved by decreasing brokerage charges and by reducing the lot size and the segmentation of introducing new commodities for improving the trading will be helpful

CONCLUSION

In spite of more then a century long experience in commodity future business, India still continue with a nascent market in terms of physical infrastructure, systems and procedures. Creation of a liquid and vibrant domestic market with adequate infrastructure and transparent trading practice should be the priority of regulator.    

The investors though are satisfied by the returns from the commodity market but still there is a need to create awareness among them and new commodities should be introduced in order to decrease the fluctuation in the market. There are chances of improvement in commodity trading by decreasing brokerage charges and by reducing the lot size. Commodity trading is characterized by high market volatility and risk. Globalization and advances in technology have significantly changed the way trading is done  and the factors differencing prices and the frequency with which prices change has increased exponentially timely access to information and analysis is the only way to succeed in commodity.

RECOMMENDATIONS

Everything has its own advantages and shortcomings. Shortcomings can be removed by making some changes in the system .Some suggestions are there to make commodity trading more efficient, which are following:

• As the Lot size to trade in commodities is very large, so investors with the small amount cant trade in commodities .The lot size should be reduced, so that more retail investors can participate in commodity market..
• Margin to be deposited by the brokers for the commodity trading is very high. Cash margin should be reduced, so that broker can trade more in commodities on behalf of the investors.
• Commodity trading is a complex system. Complexity in commodity trading should be reduced and people should make aware about the commodity market by delivering time to time seminars on it.
• Some people are still unaware about the various advantages of commodity market, they should be provided with complete information, so that there will be more and more investment by people in commodity market.

• Commodity trading in India can be improved by increasing the awareness, decreasing brokerage charges and by reducing the lot size.
• New commodities should be introduced to decrease the fluctuation in the market and to enhance the volume of trading.
• Some commodity exchanges should spend some money on advertisement for promotion purposes.

BIBLIOGRAPHY

• A.Sathish (2004),” Commodity Market: A View”; available at: http://www .indianmb a.com/Faculty_Column/FC165/fc165.html; accessed on:04/01/2009
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• Chakravarty.S (2006), “How commodity trading works”, available at: http://in. rediff.com/getahead/2006/jan/19com.htm; accessed on 05/01/2009
• Chandrashekhar.G (2007) The future of commodity market ; available at: http://www.thehindubusinessline.com/iw/2007/04/15/stories/2007041500851300.htm; accessed on:19/01/09
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• Josep M (2008) “A capacitated commodity trading model with market power” available at:- http://ideas.repec.org/p/ebg/iesewp/d-0728.html; access on: 08/11/08
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• Shih-Fen Cheng (2007) “Designing the Market Game for a Commodity Trading Simulation” available at:- http://portal.acm.org/citation.cfm?id=1331593; access on: 08/11/2008

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• Lakshmi.K,(2007),” Institutional Investors in Indian Commodity Derivative Markets – Prospects for the Future”, available at:  http://papers.ssrn. com/sol3/papers. cfm?abstract_ id=977129; accessed on: 10/02/2009

QUESTIONNAIRE

I, GAGANDEEP SINGH, student of MBA in CT institute of management Jalandhar    conducting a research on “Investor Perception regarding Commodity Trading” please help me by fill this questionnaire

Q.1 In which type of commodity do you mostly trade?

        a) Bullion                        b)  Pulses                        c) Plantation                

d)  Minerals                        e)  Grains                        f)  Fibers

        g)  Spices                        h)  Energy                        i)  Oil & oil seeds

Q.2 In which commodity exchange o you prefer to trade?

a)  MCX                        b)  NCDEX

c)  NMCE                        d)  NBOT

Q.3 For what purpose do you trade?

a)  Speculation                                b)  Risk management

c)  Hedging                                d)  Capital appreciation

e)  Return                                f)  any other……………

Q.4 For which month future do you trade?

        a)  First                        b)  Second                        c)  Third

        d)  Fourth                        e)  Fifth                        f)  Sixth

Q.5 What impact do you think commodity trading have on commodity prices?

        a)  Increase speculation                          b)  Stability in prices

        c)  High fluctuation                                d)  Low fluctuation

        e)  Unnecessary increase in prices

Q.6 Indicate the satisfaction level with the return by trade in commodity?

        a)  High satisfied                        b)  Satisfied

        c)  Neutral                                d)  Dissatisfied

        e)  Highly dissatisfied

Q.7  Impact of banned commodity on their prices and trading.

        a)  Positive impact on prices of commodity

b)  Effect on volume of trade on these specific commodities

c)  Loss to trader which deals in these commodities

d)  Loss of broking to exchange

e)  Any other

Q.8 Factors which affect the volume of trade in commodity market?

Q.9  Do you agree that new goods should be introduced in commodity market?

        a)  Yes                                b)  No

       If yes than because

1. To enhance the volume of trading
2. To decrease fluctuations in the market
3.  Other

Q.10 Commodity trading in India can be improved by?

        a)  Reducing the lot size

        b)  Introducing new commodities

        c)  Decreasing brokerage charges

        d)  Increasing awareness in investors

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