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Awareness of commodity market A PROJECT REPORT ON MBA FINANCE

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					Awareness of commodity market with reference Derivative investors




                       A PROJECT REPORT ON




“Awareness of commodity market with reference Derivative investors”




BABASAB PATIL MBA FINANCE PROJECT REPORT                       Page 1
Awareness of commodity market with reference Derivative investors

CONTENTS

SL.NO          PARTICULARS

1.        Executive Summary

2.        Research Methodology

3.        Company profile

4.        Introduction to the topic

5.        Analysis and interpretation

6.        Findings

7.        Suggestions

8.        Conclusion

9.        Bibliography




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Awareness of commodity market with reference Derivative investors

                             EXECUTIVE SUMMARY


         A project report containing the ““Awareness of commodity market with
reference to Derivative investors ” a case study of Belgaum city At KARVY Finapolis
Belgaum for fulfillment of requirement of MBA IVth semester in Institute of
Management Education and research. It was an opportunity to learn the practical aspects
of the firm


Objectives of the study
    1. To know the perception of derivative investors towards commodity future market
    2. To find the awareness level of commodity market in Belgaum city
    3. To understand the commodity market and its working mechanism.
    4. To know which commodity they prefer to invest.
    5. To find the potential customer for commodity market

    The project was undertaken at KARVY Finapolis Belgaum the first part of the study
is done by collected information through net, journals, textbooks. And second part of the
study is conducted through survey of the derivative investors.


Scope of the study
         This study is limited to only Belgaum City the study is carried out to know the
awareness level of derivative investors towards Commodity Futures market. This study
also helps to know about trading mechanism of Commodity Market & the future trading
level.




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Awareness of commodity market with reference Derivative investors




                        RESEARCH METHODOLOGY


Title of the Project

   “Awareness of commodity market with reference to Derivative investors”

Sample Size

     The sample size is consist of traders in derivative market of Belgaum city.100
random sample was taken to identify the awareness level of the derivative investors
towards Commodity Future Market

Sample Type        :     Simple random sampling was adopted to select respondents.


Sample Area        :     Belgaum city



Duration of Project:

                        Ist Phase - December
                        IInd Phase - January to April (weekly two days)


TOOLS USED FOR ANALYSIS:

       1. Graphical Representation of Analysis through SPSS. :

               a. Pie charts


DATA COLLECTION APPROACH:

      Primary data has been used to carry out the research successfully. The secondary
data has been collected from NDEX and MCX. For the purpose of gathering primary data
a structure and questionnaire was designed to collect data from the derivative investors.



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Awareness of commodity market with reference Derivative investors

Method of Communication:
In order to minimize the bias in data collection, the method of personal interview was
adopted.

THE SOURCES OF THE DATA COLLECTION ARE AS FOLLOWS

The study relies to a great extent on primary data and to some extent on secondary data:


Primary Data:
      Questionnaire
      Observation and interview technique


Secondary Data:
          Information is collected through internet
          From various text books Journals and magazines


LIMITATION OF THE STUDY:
    Since the study is based on the convenient sampling it may not depict the accurate
       outcome


    Level of accuracy of results of research is restricted to the accuracy level with
       which the customers have given answers and the accuracy level of the answer
       cannot be predicted


    The findings are based solely on the information provided by the respondents and
       there is a possibility of biased results


    The study of project is limited to only Belgaum




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Awareness of commodity market with reference Derivative investors




FINDINGS

• More than 50% of the Traders in are aware about the commodity future
       Market


• Hardly 30% traders are invested in the commodity future market


• Most of the investors are not ready to invest in commodity future market they feel it
   involve high risk.


• Returns and the Risk of the commodity are the most critical factors, which
      Traders will consider while investing in any commodity


• Most of the investors are ready to invest in commodity future market if proper
   information is provided


• As commodity future market is new and emerging ,many investors and farmers are
   not fully aware of this market .as the market helps to trade transparently without
   middlemen and agents


• While finding the reasons why most of the people are not trading in commodity
   market I found that many respondents are not interested at all in this trade this is
   because of unanawareness & mythical perception about commodity market.




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Awareness of commodity market with reference Derivative investors




SUGGESTION

• There is need to create awareness about commodity Future Market. Awareness
   program has to be conducted by Karvy consultants, because since this was new to the
   market .so it can be done through by giving advertisements in local channels,
   Newspapers, by sending E-mail to present customers etc


• From survey it is found that most of the potential customers are concerned about the
   Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage
   it will help to attract more and more customers.


• More agents and marketing executives should be appointed to educate the customers
   because the customers having many myths in there mind


• And also create the awareness of electronic commodity trading


• Firm should approach people who are already into the business of commodities
   .special campaigns / investors meets should be conducted for these people since they
   are aware of rate fluctuation ,market trends etc . They have got market idea that
   benefits them in price prediction. They will be in high spirits when price risk of them
   will be managed.




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Awareness of commodity market with reference Derivative investors




                 Company
                 Overview
                    And
                Information
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Awareness of commodity market with reference Derivative investors




COMPANY PROFILE
       The birth of Karvy was on a modest scale in 1981. It began with the vision and
enterprise of a small group of practicing Chartered Accountants who founded the flagship
company …Karvy Consultants Limited. We started with consulting and financial
accounting automation, and carved inroads into the field of registry and share accounting
by 1985. Since then, we have utilized our experience and superlative expertise to go from
strength to strength…to better our services, to provide new ones, to innovate, diversify
and in the process, evolved Karvy as one of India’s premier integrated financial service
enterprise.


       Thus over the last 20 years Karvy has traveled the success route, towards building
a reputation as an integrated financial services provider, offering a wide spectrum of
services. And we have made this journey by taking the route of quality service, path
breaking innovations in service, versatility in service and finally totality in services.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                                Page 9
Awareness of commodity market with reference Derivative investors

       Our highly qualified manpower, cutting-edge technology, comprehensive
infrastructure and total customer-focus has secured for us the position of an emerging
financial services giant enjoying the confidence and support of an enviable clientele
across diverse fields in the financial world.


       Our values and vision of attaining total competence in our servicing has served as
the building block for creating a great financial enterprise, which stands solid on our
fortresses of financial strength - our various companies.


       With the experience of years of holistic financial servicing behind us and years of
complete expertise in the industry to look forward to, we have now emerged as a premier
integrated financial services provider.


       And today, we can look with pride at the fruits of our mastery and experience
comprehensive financial services that are competently segregated to service and manage
a diverse range of customer requirements.
OVERVIEW:

       KARVY, is a premier integrated financial services provider, and ranked among
the top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporate,
comprising the who is who of Corporate India. KARVY covers the entire spectrum of
financial services such as Stock broking, Depository Participants, Distribution of
financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,
Commodities Broking, Personal Finance Advisory Services, Merchant Banking &
Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional
management team and ranks among the best in technology, operations and research of
various industrial segments.

Value and Vision of Karvy Stock Broking Ltd:




BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 10
Awareness of commodity market with reference Derivative investors

       “Our values and vision of attaining total competence in our servicing has served
as the building block for creating a great financial enterprise, which stands solid on our
fortress of financial strength – our various companies”.



The Karvy Credo:
Our Clients Our Focus
       Clients are the reason for our being. Personalized service, professional care; pro-
activeness are the values that help us nurture enduring relationships with our clients.
Respect for the Individual
      Each and every individual is an essential building block of our organization.
We are the kiln that hones individuals to perfection. Be they our employees, shareholders
or investors. We do so by upholding their dignity & pride, inculcating trust and achieving
a sensitive balance of their professional and personal lives.




Teamwork
       None of us is more important than all of us.Each team member is the face of
Karvy. Together we offer diverse services with speed, accuracy and quality to deliver
only one product: excellence. Transparency, co-operation, invaluable individual
contributions for a collective goal, and respecting individual uniqueness within a
corporate whole, is how we deliver again and again.


Responsible Citizenship
A social balance sheet is as rewarding as a business one. As a responsible corporate
citizen, our duty is to foster a better environment in the society where we live and work.
Abiding by its norms, and behaving responsibly towards the environment, is some of our
growing initiatives towards realizing it.

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 Awareness of commodity market with reference Derivative investors


 Integrity
 Everything else is secondary

 Professional and personal ethics are our bedrock. We take pride in an environment that
 encourages honesty and the opportunity to learn from failures than camouflage them. We
 insist on consistency between works and action




About KARVY Group:




 About KARVY Group




 BABASAB PATIL MBA FINANCE PROJECT REPORT                                      Page 12
Awareness of commodity market with reference Derivative investors

         Karvy has traveled the success route, towards building a reputation as an
integrated financial services provider, offering a wide spectrum of services for over 20
years.

         Karvy, a name long committed to service at its best. A fame acquired through the
range of corporate and retail services including mutual funds, fixed income, equity
investments, insurance ……… to name a few. Our values and vision of attaining total
competence in our servicing has served as a building block for creating a great financial
enterprise.

         The birth of Karvy was on a modest scale in the year 1982. It began with the
vision and enterprise of a small group of practicing Chartered Accountants based in
Hyderabad, who founded Karvy. We started with consulting and financial accounting
automation, and then carved inroads into the field of Registry and Share Transfers.

         Since then, we have utilized our quality experience and superlative expertise to go
from strength to strength to provide better and new services to the investors. And today,
we can look with pride at the fruits of our experience into comprehensive financial
services provider in the Country.




KARVY Group Companies are:



Karvy Consultants Limited


BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 13
Awareness of commodity market with reference Derivative investors

The first securities registry to receive ISO 9002 certification in India. Registered with
SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being
‘Most Admired’ Registrar is one among many of the acknowledgements we received for
our customer friendly and competent services.




Karvy Stock Broking Limited

The company, Member of National Stock Exchange (NSE), offers a comprehensive range
of services in the stock market through the benefits of in-depth research on crucial market
dynamics, done by qualified team of experts. Apart from stock broking activities, the
company also provides Depository Participant Services to its corporate and retail
customers.




Karvy Investor Services Limited

Registered with SEBI as a Category I Merchant Banker and ranked among the top 10
merchant bankers in the country, the company has built a reputation as a professional
advisor in structuring IPO’s take over assignments and buy back exercises.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 14
Awareness of commodity market with reference Derivative investors




Karvy Computershare Private Limited




Karvy Global Services Limited

Karvy Global Services is the global services arm of the Karvy Group of Companies
engaged in the business of offshore business process outsourcing in the areas of human
resource outsourcing, finance and accounting operations outsourcing, research and
analytics and back office processing operations.




Karvy Comtrade Limited

The company provides investment, advisory and brokerage services in Indian
Commodities Markets. And most importantly, we offer a wide reach through our branch
network of over 225 branches located across 180 cities.




Karvy Insurance Broking Private Limited




Karvy Mutual Fund Services




Karvy Securities Limited

The company is into distribution of Financial Products. It distributes a wide range of
financial products and services from insurance to credit cards and loans. The company
provides sound advisory services to suit the different investment needs of customers.

BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 15
Awareness of commodity market with reference Derivative investors




Stock Broking Services:

       It is an undisputed fact that the stock market is unpredictable and yet enjoys a
high success rate as a wealth management and wealth accumulation option. The
difference between unpredictability and a safety anchor in the market is provided by in-
depth knowledge of market functioning and changing trends, planning with foresight and
choosing one & rescue’s options with care. This is what we provide in our Stock Broking
services.

       We offer services that are beyond just a medium for buying and selling stocks and
shares. Instead we provide services, which are multi dimensional and multi-focused in
their scope. There are several advantages in utilizing our Stock Broking services, which
are the reasons why it is one of the best in the country.

       We offer trading on a vast platform; National Stock Exchange, Bombay Stock
Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to
the maximum possible extent, by accounting for several risk factors and planning
accordingly. We are assisted in this task by our in-depth research, constant feedback and
sound advisory facilities. Our highly skilled research team, comprising of technical
analysts as well as fundamental specialists, secure result-oriented information on market
trends, market analysis and market predictions. This crucial information is given as a
constant feedback to our customers, through daily reports delivered thrice daily ; The Pre-
session Report, where market scenario for the day is predicted, The Mid-session Report,
timed to arrive during lunch break , where the market forecast for the rest of the day is
given and The Post-session Report, the final report for the day, where the market and the
report itself is reviewed. To add to this repository of information, we publish a monthly
magazine. The Finapolis, which analyzes the latest stock market trends and takes a close
look at the various investment options, and products available in the market, while a
weekly report, called Karvy Bazaar Baatein keeps you more informed on the immediate
trends in the stock market. In addition, our specific industry reports give comprehensive


BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 16
Awareness of commodity market with reference Derivative investors

information on various industries. Besides this, we also offer special portfolio analysis
packages that provide daily technical advice on scripts for successful portfolio
management and provide customized advisory services to help you make the right
financial moves that are specifically suited to your portfolio.

         Our Stock Broking services are widely networked across India, with the number
of our trading terminals providing retail stock broking facilities. Our services have
increasingly offered customer oriented convenience, which we provide to a spectrum of
investors, high-net worth or otherwise, with equal dedication and competence.

Karvy Commodities Broking Limited

At Karvy Commodities, we are focused on taking commodities trading to new
dimensions of reliability and profitability. We have made commodities trading, an
essentially age-old practice, into a sophisticated and scientific investment option.
Here we enable trade in all goods and products of agricultural and mineral origin that
include lucrative commodities like gold and silver and popular items like oil, pulses and
cotton          through        a         well-systematized         trading        platform.
Our technological and infrastructural strengths and especially our street-smart skills make
us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and
foremost being our legacy of human resources, technology and infrastructure that comes
from being part of the Karvy Group.



Quality Policy:


         To achieve and retain leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide superior
quality financial services. In the process, Karvy will strive to exceed Customer's
expectations.

About Karvy Comodities Broking Limited:




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Awareness of commodity market with reference Derivative investors

    Commodities market, contrary to the beliefs of many people, has been in existence in
India through the ages. However the recent attempt by the Government to permit Multi-
commodity National levels exchanges has indeed given it, a shot in the arm. As a result
two exchanges Multi Commodity Exchange (MCX) and National Commodity and
derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of
their high profile promoters and stakeholders, bundle in themselves, online trading
facilities, robust surveillance measures and a hassle-free settlement system.


    The futures contracts available on a wide spectrum of commodities like Gold, Silver,
Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent
opportunities for hedging the risks of the farmers, importers, exporters, traders and large
scale consumers. They also make open an avenue for quality investments in precious
metals. The commodities market, as the movements of the stock market or debt market
do not affect it provides tremendous opportunities for better diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this market.

    Karvy Commodities Broking Limited is another venture of the prestigious Karvy
group. With our well established presence in the multifarious facets of the modern
Financial services industry from stock broking to registry services, it is indeed a pleasure
for us to make foray into the commodities derivatives market which opens yet another
door for us to deliver our service to our beloved customers and the investor public at
large.

    With the high quality infrastructure already in place and a committed Government
providing continuous impetus, it is the responsibility of us, the intermediaries to deliver
these benefits at the doorsteps of our esteemed customers. With our expertise in financial
services, existence across the lengths and breadths of the country and an enviable
technological edge, we are all set to bring to you, the pleasure of investing in this
burgeoning market, which can touch upon the lives of a vast majority of the population
from the farmer to the corporate alike. We are confident that the commodity futures can
be a good value addition to your portfolio.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                           Page 18
Awareness of commodity market with reference Derivative investors

   The company provides investment, advisory and brokerage services in Indian
Commodities Markets. And most importantly, we offer a wide reach through our branch
network of over 225 branches located across 180 cities.



KARVY Advantage:

Trade from anywhere in India Karvy, with its network of branches across the length and
breadth of the country, is always within your reach, no matter where you are. This gives
you the facility to trade from anywhere in India.


Reliable research
       Karvy has a dedicated team of research analysts who work round the clock to
provide the best research newsletters and advices. We reach your desk daily, weekly and
monthly.

Personalized Services
      Karvy, with its wide array of personalized services from registry to stock broking
takes the pleasure of adding one more service, commodities broking with the same
personal touch
       .
State of Infrastructure
       The strong IT backbone of Karvy helps us to provide customized direct services
through our back office system, nation-wide connectivity and website.


Round the clock operations in commodities trading

   Indian commodities market, unlike stock market keeps awake till 11 in the night and
Karvy is all     poised to offer round the clock services through its dedicated team of
professionals.

   The account opening forms are available at our branch offices and with our business
associates. You are requested to kindly contact a branch nearby your area and complete
the account opening formalities for commodities trading at the branches.


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Awareness of commodity market with reference Derivative investors


   Also you can take a print out and fill out a simple account opening form from our
website and complete the necessary documentation as per the checklist enclosed in the
form. The form after duly filled up may be deposited at the nearest Karvy Branch or
Associate along with a cheque/DD favouring “Karvy Commodities Broking Private
Limited” payable at Hyderabad towards initial margin.Please remember the Member-
Client agreement has to be executed on a non-judicial stamp paper, as per the applicable
by the ‘Stamp Duty Act’ of the relevant state.




DepositInitialMargin:


You need to deposit an initial upfront margin as specified by the exchange (usually
between 5-10% of the contract value).The cheque/DD should be in favour of “Karvy
Commodities Broking Private Limited”

Mark to Market Margin:
      In addition to initial margin, you also need to keep a mark to market margin for
taking care of the adverse price movements, if any.



Achievements
    Among the top 5 stock brokers in India (4% of NSE volumes)
      India's No. 1 Registrar & Securities Transfer Agents
      Among the to top 3 Depository Participants
      Largest Network of Branches & Business Associates
      ISO 9002 certified operations by DNV
      Among top 10 Investment bankers
      Largest Distributor of Financial Products
      Adjudged as one of the top 50 IT uses in India by MIS Asia
      Full Fledged IT driven operations




BABASAB PATIL MBA FINANCE PROJECT REPORT                                       Page 20
   Awareness of commodity market with reference Derivative investors




                          ORGANISATION CHART

                           Managing Director


                          Chief Managing Director



Vice-President    Vice-President    Vice-President       Vice-President




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Awareness of commodity market with reference Derivative investors


Karvy               Karvy                 Karvy                     Karvy

Securities Ltd.   Stock Broking Ltd   Consultants Ltd. Investors Services Ltd.

                                  .
   Deputy            Deputy             Deputy                      Deputy
   General         General            General                     General
   Manager         Manager             Manager                    Manager


 SeniorManager         Senior Manager Senior Manager           SenoirManager


                            Branch Manager



                         Number of Team Leaders


                        Number of Executives




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Awareness of commodity market with reference Derivative investors




         Introduction to the topic




Introduction to derivatives

       The origin of derivatives can be traced back to the need of farmers to protect
themselves against Fluctuations in the price of their crop. From the time it was sown to
the time it was ready for harvest, farmers would face price uncertainty. Through the use
of simple derivative products, it was possible for the farmer to partially or fully transfer
price risks by locking-in asset prices. These were simple contracts developed to meet the
needs of farmers and were basically a means of reducing risk.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                           Page 23
Awareness of commodity market with reference Derivative investors

       A farmer who sowed his crop in June faced uncertainty over the price he would
receive for his harvest in September. In years of scarcity, he would probably obtain
attractive prices. However, during times of oversupply, he would have to dispose off his
harvest at a very low price. Clearly this meant that the farmer and his family were
exposed to a high risk of price uncertainty.
       On the other hand, a merchant with an ongoing requirement of grains too would
face a price risk ñ that of having to pay exorbitant prices during dearth, although
favorable prices could be obtained during periods of oversupply. Under such
circumstances, it clearly made sense for the farmer and the merchant to come together
and enter into a contract whereby the price of the grain to be delivered in September
could be decided earlier. What they would then negotiate happened to be a futures-type
contract, which would enable both parties to eliminate the price risk. In 1848, the
Chicago Board of Trade, or CBOT, was established to bring farmers and merchants
together. A group of traders got together and created the `to arrive’ contract that
permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive
contracts proved useful as a device for hedging and speculation on price changes. These
were eventually standardized, and in 1925 the First futures clearing house came into
existence. Today, derivative contracts exist on a variety of commodities such as corn,
pepper, cotton, wheat, silver, etc. Besides commodities, derivatives contracts also exist
on a lot of Financial underlying like stocks, interest rate, exchange rate, etc.


       Commodity Futures are contracts to buy specific quantity of a particular
commodity at a future date. It is similar to the index futures and stock futures but the
underlying happens to be commodities instead of stocks and indices. Commodity futures
market has been in existence in India for centuries.
       The Government of India banned futures trading in certain commodities in
70s.However trading in commodity futures has banned permitted again by the
government in order to help the commodity products ,traders, and investors. Worldwide,
commodity exchanges originated before the other financial ex\changes. In fact most of
the derivatives instruments had their birth in commodity exchanges. Commodity markets
are markets where raw or primary products are exchanged.

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Awareness of commodity market with reference Derivative investors


These raw commodities are traded on regulated exchanges, in which they are bought and
sold in standardized Contracts. Commodity Future is a Derivative instrument where the
underlying asset is a commodity. Commodity future are exchanges traded contracts to
sell or buy standardized futures contract.


Some commonly used derivatives
Forwards: As we discussed, a forward contract is an agreement between two entities to
buy or sell the underlying asset at a future date, at today's pre-agreed price.


Futures: A futures contract is an agreement between two parties to buy or sell the
underlying asset at a future date at today's future price. Futures contracts differ from
forward contracts in the sense that they are standardized and exchange traded.


Options: There are two types of options - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset, at a given price on
or before a given future date. Puts give the buyer the right, but not the obligation to sell a
given quantity of the underlying asset at a given price on or before a given date.


Warrants: Options generally have lives of upto one year, the majority of options traded
on options exchanges having a maximum maturity of nine months. Longer dated options
are called warrants and are generally traded over the counter.


Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a weighted average of a basket of assets. Equity index options are a form
of basket options.


Swaps: Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts. The two commonly used swaps are :




BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 25
Awareness of commodity market with reference Derivative investors

Interest rate swaps: These entail swapping only the interest related cash flows between
the parties in the same currency


Currency swaps: These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the
opposite direction.
Exchange traded versus OTC derivatives


Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12th century, and may well have
been around before then. These contracts were typically OTC kind of contracts. Over the
counter (OTC) derivatives are privately negotiated contracts. Merchants entered into
contracts with one another for future delivery of specified amount of commodities at
specified price. A primary motivation for pre- arranging a buyer or seller for a stock of
commodities in early forward contracts was to lessen the possibility those large swings
would inhibit marketing the commodity after a harvest Later many of these contracts
were standardized in terms of quantity and delivery dates and began to trade on an
exchange.




The OTC derivatives markets have the following features compared to exchange-
traded derivatives:


1. The management of counter-party (credit) risk is decentralized and located within
individual Institutions.
2. There are no formal centralized limits on individual positions, leverage, or margining.
3. There are no formal rules for risk and burden sharing.
4. There are no formal rules or mechanisms for ensuring market stability and integrity,
and for
Safeguarding the collective interests of market participants.



BABASAB PATIL MBA FINANCE PROJECT REPORT                                           Page 26
Awareness of commodity market with reference Derivative investors

5. The OTC contracts are generally not regulated by a regulatory authority and the
exchange's self-regulatory organization, although they are affected indirectly by national
legal systems, banking supervision and market surveillance.


The OTC derivatives markets have witnessed rather sharp growth over the last few years,
which has accompanied the modernization of commercial and investment banking and
globalization of financial activities. The recent developments in information technology
have contributed to a great extent to these developments. While both exchange-traded
and OTC derivative Contracts offer many benefits, the former have rigid structures
compared to the latter. The largest OTC derivative market is the interbank foreign
exchange market. Commodity derivatives the world over are typically exchange traded
and not OTC in nature.


Exchange traded versus OTC derivatives
Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12th century, and may well have
been around before then. These contracts were typically OTC kind of contracts. Over the
counter (OTC) derivatives are privately negotiated contracts. Merchants entered into
contracts with one another for future delivery of specified amount of commodities at
specified price. A primary motivation for pre- arranging a buyer or seller for a stock of
commodities in early forward contracts was to lessen the possibility those large swings
would inhibit marketing the commodity after a harvest Later many of these contracts
were standardized in terms of quantity and delivery dates and began to trade on an
exchange.




The OTC derivatives markets have the following features compared to exchange-
traded derivatives:


BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 27
Awareness of commodity market with reference Derivative investors

1. The management of counter-party (credit) risk is decentralized and located within
individual Institutions.
2. There are no formal centralized limits on individual positions, leverage, or margining.
3. There are no formal rules for risk and burden sharing.
4. There are no formal rules or mechanisms for ensuring market stability and integrity,
and for
Safeguarding the collective interests of market participants.
5. The OTC contracts are generally not regulated by a regulatory authority and the
exchange's self-regulatory organization, although they are affected indirectly by national
legal systems, banking supervision and market surveillance.
          The OTC derivatives markets have witnessed rather sharp growth over the last
few years, which has accompanied the modernization of commercial and investment
banking and globalization of financial activities. The recent developments in information
technology have contributed to a great extent to these developments. While both
exchange-traded and OTC derivative Contracts offer many benefits, the former have rigid
structures compared to the latter. The largest OTC derivative market is the interbank
foreign exchange market. Commodity derivatives the world over are typically exchange
traded and not OTC in nature.
Commodities trading
Over the modern age of investing, commodity trading has emerged as an important player
in the way that people invest in and speculate. It was developed as a reaction to the way
that business is conducted, and it continues today in the form of commodities trading
online. Many different people turn their business know how into a profitable venture, and
it is commodities and futures trading that helps them get there. Simply put, commodities
are items like, wheat, corn, gold and silver, and cattle and pork bellies, and crude oil.
When farmers take their crop to "market", they are selling commodities. Trading
commodities is the world's one perfect business. The upside potential is unlimited and
you can control the downside. You can trade commodities on a part time basis or a full-
time basis. You can spend as little as an and earn a full time income




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Commodities exchanges usually trade futures contracts on commodities, such as trading
contracts to receive something, say corn, in a certain month. A farmer raising corn can
sell a future contract on his corn, which will not be harvested for several months, and
guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the
contract now and guarantees the price will not go up when it is delivered. This protects
the farmer from price drops and the buyer from price rises.

Speculators and investors also buy and sell the futures contracts to make a profit and
provide liquidity to the system
People have started with a small account and in a short period of time built their account
up to the point that they have been able to quit their jobs and trade commodities full-time
providing themselves with a very comfortable living.


Commodities are raw materials used to create the products consumers buy, from food to
furniture to gasoline. Commodities include agricultural products such as wheat and cattle,
energy products such as oil and gasoline, and metals such as gold, silver and aluminum.
There are also soft commodities, or those that cannot be stored for long periods of time.
Soft commodities are sugar, cotton, cocoa and coffee.


The commodity market has evolved significantly from the days when farmers hauled
bushels of wheat and corn to the local market. In the 1800’s, demand for standardized
contracts for trading agricultural products led to the development of commodity futures
exchanges. Today, futures and options contracts on a huge array of agricultural products,
metals, energy products and soft commodities can be traded on exchanges all over the
world.


Commodities have also evolved as an asset class with the development of commodity
futures indexes and, more recently, the introduction of investment vehicles that track
commodity indexes.




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Commodity prices have been driven higher by a number of factors, including increased
demand from China, India and other emerging countries that need oil, steel and other
commodities to support manufacturing and infrastructure development. The commodity
supply chain has also suffered from a lack of investment, creating bottlenecks and adding
an insurance premium and/or a convenience yield to the returns of many commodity
futures. Over the long term, these economic factors are likely to support continued gains
in commodity index returns.


The potential for attractive returns is probably the most obvious reason for increased
investor interest in commodities, but it isn't the only factor. Commodities may offer
investors other significant benefits, including portfolio diversification and a hedge against
inflation and risk.


Commodities are real assets, unlike stocks and bonds, which are financial assets.
Commodities, therefore, tend to react to changing economic conditions in different ways
than traditional financial assets. For example, commodities are one of the few asset
classes that tend to benefit from rising inflation. As demand for goods and services
increases, the price of those goods and services usually goes up as well, as do the prices
of the
commodities used to produce those goods and services. Because commodity prices
usually rise when inflation is accelerating, investing in commodities may provide
portfolios with a hedge against inflation.


Why invest in commodities?
Leverage is very important to the commodities markets. Unlike the stock market, where
you might have to invest 10,000 dollars to leverage 10,000 dollars. A commodities trader
can leverage tens of thousands of dollars worth of a commodity for pennies on the dollar.
Also unlike stocks, commodities have intrinsic value and will not go bankrupt.




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The futures markets are so crucial to the well being of our nation, that the government
established the Commodity Futures Trading Commission (CFTC) to oversee the industry.
There is also a self-regulatory body, the National Futures Association (NFA), who
monitor the activities of all futures market professionals to ensure the integrity of the
futures markets.


Commodities also give the investor the ability to participate in virtually all sectors of the
world economy and have the potential to produce returns that tend to be independent of
other markets. In fact portfolios that add commodity investments can actually lower the
overall portfolio risk by diversification.


What is the difference between hedging and speculating?
Just about every product that you consume would likely cost dramatically more without
the commodities futures markets. Because of the intrinsic risks associated to being in
business, lacking the ability to shift risk, a manufacturer/producer of goods or services
would be forced to charge higher prices, and the consumer would have to pay those
higher prices. This shifting of risk to someone willing to accept it is called hedging.
Manufacturers could effectively lock in a sales price by going short an equivalent amount
of goods with futures contracts. If a mining company knew that they were going to sell
1000 ounces of gold in several months, they could protect themselves for a future price
decline by going short 10 gold futures contracts today. If the price of gold fell by $30 in
the following months, they would receive that much less in the cash marketplace for their
gold, but earn that much back when they offset their short gold futures position. The
futures price will eventually become the cash price. A user or buyer of goods can use the
futures market in the same manner. They would need to protect themselves from a future
price increase, and therefore go long futures contracts.




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The person willingly accepting a risk does so because of the opportunity to profit from
price movements, this is known as speculating. The cotton in your shirt, the orange juice,
cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home,
the gas or ethanol that you put in your car all would be priced many times higher without
the participation of speculators in the futures markets. Through supply and demand
market forces, equilibrium prices are reached in an orderly and equitable manner within
the exchanges, and world economies, and you, benefit tremendously from futures trading.




What commodity futures markets do?
     A well-developed and effective commodity futures market, unlike physical market,
     facilitates off setting the transactions without impacting on physical goods until the
     expiry of a contract. Futures market attracts
     hedgers who minimize their risks, and encourages competition from other traders
     who possess market information and price judgment. While hedgers have long-term
     perspective of the market, the traders, or arbitragers as they are often called, hold an
     immediate view of the market. A large number of different market players
     participate in buying and selling activities in the market based on diverse domestic
     and global information, such as price, demand and supply, climatic conditions and
     other market related information. All these factors put together result in efficient
     price discovery as a result of large number of buyers and sellers Transacting in the
     futures market. Futures market, as observed from the cross-country experience of
     active commodity futures markets, helps in efficient price discovery of the
     respective commodities and does not impair the long-run equilibrium Price of
     commodities. At times, however, price behavior of a commodity in the futures
     market might show Some aberrations reacting to the element of speculation and
     ‘bandwagon effect’ inherent in any market, but



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        it quickly reverts to long-run equilibrium price, as information flows in, reflecting
        fundamentals of the respective commodity.




        In futures market, speculators play a role in providing liquidity to the markets and
        may sometimes benefit from price movements, but do not have a systematic causal
        influence on prices. An effective architecture for regulation of trading and for
        ensuring transparency as well as timely flow of information to the market
        participants would enhance the utility of commodity exchanges in efficient price
        discovery and minimize price shocks triggered by unanticipated supply demand
        mismatches.


Participants of Commodity Market:
The participants who trade in the commodity derivatives markets can be classified as
follows;
Hedgers: Hedgers are participants who use commodity derivative instruments to hedge /
eliminate the price risk associated with the underlying commodity asset held them.
Hedgers are those who protect themselves from the risk associated with the price of an
asset by using derivatives. A person keeps a close watch upon the prices discovered in
trading and when the comfortable price is reflected according to his wants, he sells
futures contracts. In this way he gets an assured fixed price of his produce.
In general, hedgers use futures for protection against adverse future price movements in
the underlying cash commodity. Hedgers are often businesses, or individuals, who at one
point       or     another     deal     in     the     underlying      cash      commodity.
Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go
up. For protection against higher prices of the produce, he hedges the risk exposure by
buying enough future contracts of the produce to cover the amount of produce he expects
to buy. Since cash and futures prices do tend to move in tandem, the futures position will
profit if the price of the produce rise enough to offset cash loss on the produce.




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Speculators: Speculators are participants who bet on future movements in the price of
an asset i.e. I commodity to make short term gain from the price movements.
Commodity future s gives theme the leverage so to take risks on nominal margin
payments and thereby increasing for bigger gains or losses. Speculators are some what
like a middle man. They are never interested in actual owing the commodity. They will
just buy from one end and sell it to the other in anticipation of future price movements.
They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include
independent floor traders and investors. They handle trades for their personal clients or
brokerage firms.


Buying a futures contract in anticipation of price increases is known as ‘going long’.
Selling a futures contract in anticipation of a price decrease is known as ‘going short’.
Speculative participation in futures trading has increased with the availability of
alternative methods of participation.


Speculators have certain advantages over other investments they are as follows:
If the trader’s judgment is good, he can make more money in the futures market faster
because prices tend, on average, to change more quickly than real estate or stock prices.
Futures are highly leveraged investments. The trader puts up a small fraction of the value
of the underlying contract as margin, yet he can ride on the full value of the contract as it
moves up and down. The money he puts up is not a down payment on the underlying
contract, but a performance bond. The actual value of the contract is only exchanged on
those rare occasions when delivery takes place.




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Arbitrageurs: Arbitrageurs work at making profits by taking advantaged of existence of
difference in prices of the same product across different markets (MCX and NCDEX).


Investors: Investors are participants having a a longer term view as compared to
speculators when they enter into trade in the commodes market. E.g. Farmers, Producers,
consumers, etc.




Major Commodity Exchanges:
The Government of India permitted establishment of National-level Multi- Commodity
exchanges in the year 2002 and accordingly three exchanges have come into picture.


    Multi-Commodity Exchange of India Ltd, Mumbai.(MCX).
    National Commodity and Derivative Exchange of India, Mumbai (NCDEX).
    National Multi Commodity Exchange, Ahemdabad (NMCE).


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   However there is regional commodity exchanges functioning all over the country.
   Karvy commodities Broking Pvt.Ltd has got membership of both the premier
   commodity exchanges i.e. MCX and NCDEX.




The two exchanges (NCEDX&MCX) have seen tremendous growth in less than two
years . the daily average on these two exchanges put together has now grown to a
healthy Rs.7800 Crores. It has been believed by experts that the volumes on these
exchanges would the stock market in the days to come. Commodity exchanges are
regulated by Forwards Market mission (FMC); Forwards Market Commission works
under the purview of the ministry of Food ,Agriculture and Public Distribution.



At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a
holiday the expiry day will be the previous working day.
At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiry
day will be the previous day. The expiry day differs for different commodities in both the
exchanges.
    Generally commodity futures require an initial margin between 5-10% of the contract
value. The exchanges levy higher additional margin in case of excess volatility. The
margin amount varies between exchanges and commodities. Therefore they provide great
benefits of leverage in comparison to the stock and index futures trade on the stock
exchanges. The exchange also requires the daily profits and losses to be paid in/out on
open positions (mark to Market or MTM) so that the buyers and sellers do not carry a risk
of not more than one day.


   Functions of an Exchange


                     Product Conceptualization and Design
                     Price Discovery & Dissemination

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                   Robust Trading & Settlement systems
                   Management of Counter party Credit
                    Risk
                   Self Regulation to ensure
                        Overview of Trading and Surveillance
                        Audit and review of Members
                        Enforcement of Exchange rules



Commodities selected in Phase I
  Bullion
    Gold
    Silver



Agri commodities
                        Soya bean
                        Soya oil
                        Rapeseed/Mustard
                        Seed Rapeseed/
                        Mustard Seed Oil
                        Crude Palm oil
                        RBD Palmolein

40 Commodities introduced in Phase II
                         Rubber
                          Jute
                          Pepper
                          Chana (Gram)
                          Guar
                          Wheat



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                 Commodities exchanges across the world

Main commodity exchanges worldwide:

Americas


        Exchange            Abbreviation    Location            Product Types


Brazilian Mercantile and                                Agricultural, Biofuels, Precious
                            BMF            Brazil
Futures Exchange                                        Metals


                                                        Agricultural, Biofuels, Precious
CME Group                   CME            Chicago
                                                        Metals


Chicago Climate Exchange CCX               Chicago      Emissions


HedgeStreet Exchange                       California   Energy, industrial Metals


Intercontinental Exchange   ICE                         Energy, Emissions


Kansas City Board of Trade KCBT            Kansas City Agricultural


Memphis Cotton Exchange                    Memphis      Agricultural


Mercado a Termino de
                            MATba          Argentina    Agricultural
Buenos Aires


Minneapolis Grain
                            MGEX           Minneapolis Agricultural
Exchange


New York Board of Trade NYBOT              New York     Agricultural, Biofuels




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New York Mercantile                                 Energy, Agricultural, Industrial
                            NYMEX      New York
Exchange                                            Metals, Precious Metals


U.S. Futures Exchange       USFE       Chicago      Energy


Winnipeg Commodity
                            WCE        Winnipeg     Agricultural
Exchange




Asia


        Exchange            Abbreviation Location            Product Types


Bursa Malaysia              MDEX        Malaysia Biofuels


Central Japan Commodity                             Energy, Industrial Metals,
                                        Nagoya
Exchange                                            Rubber


Dalian Commodity
                            DCE         China       Agricultural, Plastics
Exchange


Dubai Mercantile Exchange   DME         Dubai       Energy


Dubai Gold & Commodities
                         DGCX           Dubai       Precious Metals
Exchange


Kansai Commodities
                            KANEX       Osaka       Agricultural
Exchange


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                                                 Energy, Precious Metals,
Multi Commodity Exchange MCX          India
                                                 Metals, Agricultural


National Commodity
                                      Karachi    Precious Metals, Agricultural
Exchange Limited


National Commodity and
                         NCDEX        Mumbai     All
Derivatives Exchange


Singapore Commodity
                         SICOM        Singapore Agricultural, Rubber
Exchange


                                                 Energy, Precious Metals,
Tokyo Commodity Exchange TOCOM        Tokyo
                                                 Industrial Metals, Agricultural


Tokyo Grain Exchange     TGE          Tokyo      Agricultural


Zhen Zhou Commodity
                         CZCE         China      Agricultural
Exchange


Europe


         Exchange        Abbreviation Location         Product Types


Climex                   CLIMEX      Amsterdam Emissions


NYSE Euro next                       Europe      Agricultural


European Climate Exchange ECX        Europe      Emissions


London Metal Exchange    LME         London      Industrial Metals, Plastics


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Risk Management Exchange RMX               Hanover     Agricultural


Oceania


          Exchange             Abbreviation Location Product Types


Australian Securities Exchange ASX            Sydney    Agricultural




Indian Commodities Market

       In India commodity markets have been in existence for decades. However in 1975
the Government banned forward contracts on commodities. Later in 2003 the
Government of India again allowed forward contracts in commodities. There have been
over 20 exchanges existing for commodities all over the country. However these
exchanges are commodity specific and have a strong regional focus. The Government, in
order to make the commodities market more transparent and efficient, accorded approval
for setting up of national level multi commodity exchanges. Accordingly three exchanges
are there which deal in a wide variety of commodities and which allow nation-wide
trading. They are
      Multi Commodity Exchange (MCX)
      National Commodities Derivatives Exchange (NCDEX)
      National Multi Commodity Exchange (NMCE)


       The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd.
MCX allows trading on a host of commodities ranging from bullion to grains. Please


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check the ‘Commodities traded’ menu’. MCX has become the first exchange in the world
to launch futures on steel. Recently on 11th August 2004, MCX crossed a peak daily
turnover of Rs.950 Crores.


       NCDEX is promoted by an elite group of financial institutions including NSE,
LIC, SBI, UBI etc., NCDEX also allows trading of futures on a host of commodities.
National Commodities and Derivatives Exchange, NCDEX At Karvy Commodities, we
are focused on taking commodities trading to new dimensions of reliability and
profitability. We have made commodities trading, an essentially age-old practice, into a
sophisticated and scientific investment option.


       Here we enable trade in all goods and products of agricultural and mineral origin
that include lucrative commodities like gold and silver and popular items like oil, pulses
and cotton through a well-systematized trading platform.




       Our technological and infrastructure strengths and especially our street-smart
skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,
the first and foremost being our legacy of human resources, technology and infrastructure
that comes from being part of the Karvy Group.


       Our wide national network, spanning the length and breadth of India, further
supports these advantages. Regular trading workshops and seminars are conducted to
hone trading strategies to perfection. Every move made is a calculated one, based on
reliable research that is converted into valuable information through daily, weekly and
monthly newsletters, calls and intraday alerts. Further, personalized service is provided
here by a dedicated team committed to giving hassle-free service while the brokerage
rates offered are extremely competitive.




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   Our commitment to excel in this sector stems from the immense importance that
   commodities broking has to a cross-section of investors farmers, exporters, importers,
   manufacturers and the Government of India itself.


       Commodities market essentially represents another kind of organized market just
like the stock market and the debt market. However, commodities market, because of its
unique nature lends to the benefits of a wide spectrum of people like investors, importers,
exporters, producers, corporate etc.




COMMODITY MARKET IN INDIAN PERSPECTIVE.


       India, a commodity based economy where 75% of the one billion populations
depend on agriculture, surprisingly has an underdeveloped commodity market. The
history of commodity markets in India is more than a century old. The institution of
formal commodity market in India is almost as old as the UK and the US.


       The first organized commodity market in India was established in the late 19th
century, Bombay Cotton Association Ltd. was set up in 1875 by the Bombay Cotton
Exchange ltd. In 1893, due to widespread discontent amongst leading cotton mill owners
and merchants over functioning of Bombay Cotton Trade Association.

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       Commodities markets offer immense potential to become a separate asset class
for market savvy investors, arbitrageurs and speculators. Commodities markets are easy
to understand as far as the demand and supply fundamentals are concerned as these are
two things that guide these markets. The investors will have to understand the risks and
the advantages before jumping the band wagon. Commodities futures are less volatile as
compared to equity and bonds. Some of the other advantages linked to commodity futures
are better risk adjusted, good hedge against downfall in equities or bonds as there is no or
very less correlation and also a very effective hedge against inflation.

       The futures market in commodities offers both cash and delivery-based
settlement. Investors can choose between the two. If the buyer chooses to take delivery of
the commodity, a transferable receipt from the warehouse where goods are stored is
issued in favor of the buyer. On producing this receipt, the buyer can claim the
commodity from the warehouse. All open contracts not intended for delivery are cash-
settled. While speculators and arbitrageurs generally prefer cash settlement, commodity
stock lists and wholesalers go for delivery. Trading in any contract month will open on
the twenty first day of the month, three months prior to the contract month. For example,
the December 2005 contracts open on 21 September 2005 and the due date is the 20-day
of the delivery month.




        All contracts settling in cash will be settled on the following day after the
contract expiry date. Commodity trading follows a T + 1 settlement system, where the
settlement date is the next working day after expiry. However, in case of delivery-based
traders, settlement takes place five to seven days after expiry



       Commodities like chana, urad, soya bean oil, guar gum, sugar, pepper, wheat,
jeera, gold, silver and crude oil have found fancy with Indian Investors. Expecting the
turnover on the three online commodity exchanges to spurt to more than Rs.15000 crores
per day, banks are keen to tap the commodity trade-financing front. Commercial banks


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are chasing the commodity industry with attractive lending rates between 8% and 8.5% as
against the normal lending rate between 11% and 14%.

       Commodity exchanges in India will contribute significantly towards the
development of Indian economy as a whole. Commodity market is undergoing some
breakthrough changes like demat, trading of commodities like crude oil and plastics, also
GOI is contemplating of implenting Options trading.

       Today commodity market has provided investors with an opportunity to invest in
an asset class which yields high returns with low risk. In next 5 years time will be seeing
resurgence of the century old commodity market

       The commodity market in India comprises of all palpable markets that we come
across in our daily lives. Such markets are social institutions that facilitate exchange of
goods for money. The cost of goods is estimated in terms of domestic currency . India
Commodity Market can be subdivided into the following two categories:

      Wholesale Market
      Retail Market

Let us now take a look at what the present scenario of each of the above markets is like.




   The traditional wholesale market in India dealt with whole sellers who bought
goods from the farmers and manufacturers and then sold them to the retailers after
making a profit in the process. It was the retailers who finally sold the goods to the
consumers. With the passage of time the importance of whole sellers began to fade out
for the following reasons:

      The whole sellers in most situations, acted as mere parasites who did not add any
       value to the product but raised its price which was eventually faced by the
       consumers.


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          The improvement in transport facilities made the retailers directly interact with
           the producers and hence the need for whole sellers was not felt.

           In recent years, the extent of the retail market (both organized and unorganized)
    has evolved in leaps and bounds. In fact, the success stories of the commodity market of
    India in recent years has mainly centered around the growth generated by the Retail
    Sector. Almost every commodity under the sun both agricultural and industrial is now
    being provided at well distributed retail outlets throughout the country.

           Moreover, the retail outlets belong to both the organized as well as the
    unorganized sector. The unorganized retail outlets of the yesteryears consist of small
    shop owners who are price takers where consumers face a highly competitive price
    structure. The organized sector on the other hand is owned by various business houses
    like Pantaloons, Reliance, Tata and others. Such markets are usually sell a wide range of
    articles both agricultural and manufactured, edible and inedible, perishable and durable.
    Modern marketing strategies and other techniques of sales promotion enable such
    markets to draw customers from every section of the society. However the growth of
    such markets has still centered on the urban areas primarily due to infrastructural
    limitations.

           Considering the present growth rate, the total valuation of the Indian Retail
    Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for
    commodities is likely to become four times by 2010 than what it presently is.




    What can commodity market offer?

       If you are an investor, commodities futures represent a good form of investment
       because of the following reasons..

   High Leverage – The margins in the commodity futures market are less than the F&O
    section of the equity market.




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   Less Manipulations - Commodities markets, as they are governed by international price
    movements are less prone to rigging or price manipulations.
   Diversification – The returns from commodities market are free from the direct influence
    of the equity and debt market, which means that they are capable of being used as
    effective hedging instruments providing better diversification.
    If you are an importer or an exporter, commodities futures can help you in the following
    ways…
   Hedge against price fluctuations – Wide fluctuations in the prices of import or export
    products can directly affect your bottom-line as the price at which you import/export is
    fixed before-hand. Commodity futures help you to procure or sell the commodities at a
    price decided months before the actual transaction, thereby ironing out any change in
    prices that happen subsequently.
    If you are a producer of a commodity, futures can help you as follows:
   Lock-in the price for your produce – If you are a farmer, there is every chance that the
    price of your produce may come down drastically at the time of harvest. By taking
    positions in commodity futures you can effectively lock-in the price at which you wish to
    sell your produce
   Assured demand – Any glut in the market can make you wait unendingly for a buyer.
    Selling commodity futures contract can give you assured demand at the time of harvest.
    If you are a large scale consumer of a product, here is how this market can help you:
   Control your cost – If you are an industrialist, the raw material cost dictates the final
    price of your output. Any sudden rise in the price of raw materials can compel you to
    pass on the hike to your customers and make your products unattractive in the market. By
    buying commodity futures, you can fix the price of your raw material.




   Ensure continuous supply – Any shortfall in the supply of raw materials can stall your
    production and make you default on your sale obligations. You can avoid this risk by
    buying a commodity futures contract by which you are assured of supply of a fixed
    quantity of materials at a pre-decided price at the appointed time.



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          The effective mechanism of settlement and delivery procedures adopted and
employed by MCX has once again undergone rigorous tests and have come out extremely
successful. This is signified with the surging trading volume in bullion contracts and high
open interest entering the settlement period resulting in healthy quantities getting
physically delivered. This whole process underscores the efficacy & transparency of the
complete trading, settlement and delivery process employed by MCX.
          The complete delivery procedure right from getting the possession of the precious
metal from the sellers, necessary quality certifications, consignment movement, handing
over the precious metal to the buyers, etc was completed in flat 5 days period. The
complete process has been worked out at a very optimal cost and on an average each
participant involved in the delivery process had incurred only Rs. 350/- per transaction.


          When the MCX Gold Contract entered into settlement period the Open Interest in
Gold was 670 Kgs after reducing from over 4000 Kgs few days ago. This open interest
resulted in 152 Kgs of gold getting delivered and the balance gold, which entered into the
delivery period, was squared up. The total volume in MCX Gold December futures
contract was 230233 Kgs valuing around Rs. 14577 crores.
On the same pattern Open Interest in Silver was 16,740 Kgs after reducing from over
1,60,000 Kgs few days back. However, the actual delivery in Silver was 12,698 kgs and
the balance Silver that entered into the delivery period was squared up. The total volume
in MCX Silver December futures contract was 22950 M. Tons valuing around Rs. 25024
crores.
          In all the previous settlements also MCX platform has always seen appropriate
percentage of open interest position resulting in physical delivery. Gold has seen a
cumulative physical delivery of 245 Kgs and Silver 2190 Kgs across all the settlements
completed before the current settlement.
          Gold & silver futures contracts are getting recognized as the most reliable &
dependable investment options that are today available to traders and investors who are
looking to widen their portfolio beyond equity instruments. This is because of the
credibility that these commodities have enjoyed globally and the technical & fundamental
analysis that has gone in arriving at various trading strategies.

BABASAB PATIL MBA FINANCE PROJECT REPORT                                           Page 48
Awareness of commodity market with reference Derivative investors

India is the largest importer for Gold in the world, around 800 tons per year, realizing this
potential of Gold, Government of India has set up a committee to examine the regulatory
structure of the gold industry to make India a gold trading hub. This committee is
constituted under the Chairmanship of Secretary, Department of Commerce, and Ministry
of Commerce & Industry. MCX is a member of the committee and looks forward to
contributing suggestions on the role that Futures market can play in making India a global
gold trading hub.
       The first meeting for the Gold Committee is being held under the Chairmanship
of Commerce Secretary on 10th December 2004.


Problems Facing by Commodity Future market

1. The spot/physical markets are fragmented. This may be because of the restrictions
    on the free movement of commodities in the physical form under the Essential
    Commodities Act, APMC Act, Licensing restrictions, etc. Hence, the creation of an
    integrated and vibrant domestic market for physical trading in commodities with
    adequate infrastructure and transparent trading system is a pre-requisite for broad
    based commodity derivatives markets.


2. Lack of mechanism for standardization of warehousing receipts. The absence of the
    regulatory authority for accreditation of warehouses and for setting standards for
    scientific grading, packaging, storage and preservation. As a result, though Banks
    grant credit against warehouse receipts now, they are largely restricted to the ones
    issued by the Central Warehousing Corporation and those promoted by the State
    Governments. However, this problem is being sorted out by the Food Ministry,
    which is in the process of drafting a Warehouse Development and Regulation Act to
    promote warehouse receipts-based lending and commodity derivative transactions.

3. Dematerialized settlement system for commodities which has the standardization of
    warehouse receipts as a pre-requisite. A system of physical delivery of commodities
    backed by warehouse receipt system can help eliminate the quality risk and price
    risk. It will facilitate seamless nation wide spot market for commodities.

BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 49
Awareness of commodity market with reference Derivative investors


4. Creation of depository system for electronically facilitating transfer and delivery of
    commodities in dematerialized form.


5. Need to make warehouse receipts transferable. We understand that a bill to amend
    the Forward Contracts (Regulation) Act, 1952 is slated to be taken up during the
    current budget session of the Parliament, which proposes to permit the transferability
    of warehouse receipts by scrapping Section 18(2) of the Act. This will also easy
    access to finance from banks and financial institutions against produce stored in
    warehouses.


6. Most of the commodity exchanges function as specialized product bourses. This is
    even true of the national multi commodity exchanges because of lack of volumes in
    many commodities in spite the trading being allowed in many formally. While
    NCDEX technically trades in 35 commodities, about 90 per cent of its volume comes
    from just 8 products. In case of MCX, gold and silver account for a major share in
    the trading volume, though it trades in 41 commodities. Pepper, cardamom, rubber,
    coffee and jute products are the five products that are prominently traded in NMCE
    even though about 59 commodities are traded here. This may be attributed to the fact
    that there are different players for different commodities.

7. There are no uniform contract specifications for the same commodity traded on
    various exchanges. As a result, there is no proper mechanism to assess price of the
    same commodity across various exchanges, as price depends on the contract
    specification.


8. Online trading at the national level is mandatory only in respect of National level
    multi commodity exchanges, while such a compulsion is not applicable to the
    regional ones. Hence transparency suffers.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 50
    Awareness of commodity market with reference Derivative investors

    9. Demutualization is yet to happen completely. Many exchanges are associations of
        members who retain trading rights and ownership. This interest of the promoters as
        traders has serious implications for the integrity of these exchanges.


    10. Residents in India, engaged in import and export trade, may hedge the price risk of
        commodities in the international commodity exchanges/markets. Applications for
        commodity hedging are to be forwarded to RBI. A one-time approval will be given
        by RBI along with the guidelines for undertaking this activity. The Reserve Bank of
        India, which is considering a proposal to grant blanket approval to Indian companies
        that have an exposure to commodities to freely hedge in the international exchanges,
        must also ensure that they use the products available in the Indian commodity
        derivatives markets.


    11. Options trading in commodities are prohibited as of now which puts constraints on
        the markets. Introduction of options trading in commodities is a necessary condition
        for institutional investors to trade in commodity derivatives trading, as this would
        make it easier for the institutional investors to convert the commodity derivatives
        products as financial products.


      If the institutional investors, like banks and mutual funds, whose presence as of now is
    only in capital markets need to start operating in commodity derivatives markets as well
    then these additional issues are also required to be addressed.


        12. Convergence of the regulators of capital markets and commodity markets is a pre-
        requisite for free flow of funds between markets.


    13. The players in capital markets must acquire the required expertise for trading in
        commodity markets and vice versa to have an integrated view of all markets.



Why are Commodity Derivatives Required?


    BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 51
   Awareness of commodity market with reference Derivative investors

           India is among the top-5 producers of most of the commodities, in addition to
being a major consumer of bullion and energy products. Agriculture contributes about 22%
to the GDP of the Indian economy. It employees around 57% of the labor force on a total of
163 million hectares 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 center for trading
of commodity derivatives.


           It is unfortunate that the policies of FMC during the most of 1950s to 1980s
suppressed the very markets it was supposed to encourage and nurture to grow with times. It
was a mistake other emerging economies of the world would want to avoid. However, it is
not in India alone that derivatives were suspected of creating too much speculation that
would be to the detriment of the healthy growth of the markets and the farmers. Such
suspicions might normally arise due to a misunderstanding of the characteristics and role of
derivative product.


   It is important to understand why commodity derivatives are required and the role they
can play in risk management. It is common knowledge that prices of commodities, metals,
shares and currencies fluctuate over time. The possibility of adverse price changes in future
creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from
unforeseen price changes. A derivative is a financial contract whose price depends on, or is
derived from, the price of another asset.




   BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 52
   Awareness of commodity market with reference Derivative investors




Two important derivatives are futures and options.


(i) Commodity Futures Contracts:
    A futures contract is an agreement for buying or selling a Commodity for a
predetermined delivery price at a specific future time. Futures are standardize contracts that
are traded on organized futures exchanges that ensure performance of the contracts and thus
remove the default risk. The commodity futures have existed since the Chicago Board of
Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants
together. The major function of futures markets is to transfer price risk from hedgers to
speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two
months time, but is worried that the price of wheat may decline in this period. In order to
minimize his risk, he can enter into a futures contract to sell his crop in two months’ time at a
price determined now. This way he is able to hedge his risk arising from a possible adverse
change in the price of his commodity.


 (ii) Commodity Options contracts:
            Like futures, options are also financial instruments used for hedging and
speculation. The commodity option holder has the right, but not the obligation, to buy (or
sell) a specific quantity of a commodity at a specified price on or before a specified date.
Option contracts involve two parties – the seller of the option writes the option in favour of
the buyer (holder) who pays a certain premium to the seller as a price for the option. There
are two types of commodity options: a ‘call’ option gives the holder a right to buy a
commodity at an agreed price, while a ‘put’ option gives the holder a right to sell a
commodity at an agreed price on or before a specified date (called expiry date).


           The option holder will exercise the option only if it is beneficial to him; otherwise
he will let the option lapse. For example, suppose a farmer buys a put option to sell 100
Quintals of wheat at a price of $25 per quintal and pays a ‘premium’ of $0.5 per quintal (or a
total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise

   BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 53
   Awareness of commodity market with reference Derivative investors

his option and sell his wheat at the agreed price of $25 per quintal. However, if the market
price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to
sell it directly in the open market at the spot price, rather than exercise his option to sell at
$25 per quintal




   Modern Commodity Exchanges
           To make up for the loss of growth and development during the four decades of
   restrictive government policies, FMC and the Government encouraged setting up of the
   commodity exchanges using the most modern systems and practices in the world. Some
   of the main regulatory measures imposed by the FMC include daily mark to market
   system of margins, creation of trade guarantee fund, back-office computerization for the
   existing single commodity Exchanges, online trading for the new Exchanges,
   demutualization for the new Exchanges, and one-third representation of independent
   Directors on the Boards of existing Exchanges etc.
   Unresolved Issues and Future Prospects
           Even though the commodity derivatives market has made good progress in the
   last few years, the real issues facing the future of the market have not been resolved.
   Agreed, the number of commodities allowed for derivative trading have increased, the
   volume and the value of business has zoomed, but the objectives of setting up commodity
   derivative exchanges may not be achieved and the growth rates witnessed may not be
   sustainable unless these real issues are sorted out as soon as possible. Some of the main
   unresolved issues are discussed below.


   a. Commodity Options:
            Trading in commodity options contracts has been banned since 1952. The market
   for commodity derivatives cannot be called complete without the presence of this
   important derivative. Both futures and options are necessary for the healthy growth of the
   market. While futures contracts help a participant (say a farmer) to hedge against
   downside price movements, it does not allow him to reap the benefits of an increase in
   prices. No doubt there is an immediate need to bring about the necessary legal and

   BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 54
 Awareness of commodity market with reference Derivative investors

 regulatory changes to introduce commodity options trading in the country. The matter is
 said to be under the active consideration of the Government and the options trading may
 be introduced in the near future.




b. The Warehousing and Standardization:
        For commodity derivatives market to work efficiently, it is necessary to have a
 sophisticated, cost-effective, reliable and convenient warehousing system in the country.
 The Habibullah (2003) task force admitted, “A sophisticated warehousing industry has
 yet to come about”. Further, independent labs or quality testing centers should be set up
 in each region to certify the quality, grade and quantity of commodities so that they are
 appropriately standardized and there are no shocks waiting for the ultimate buyer who
 takes the physical delivery. Warehouses also need to be conveniently located. Central
 Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses
 across the country with a storage capacity of 10.4 million tonnes. This is obviously not
 adequate for a vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural
 Warehousing Plan) has been introduced to construct new and expand the existing rural
 godowns. Large scale privatization of state warehouses is also being examined.


 c. Cash versus Physical Settlement:
        It is probably due to the inefficiencies in the present warehousing system that only
 about 1% to 5% of the total commodity derivatives trade in the country are settled in
 physical delivery. Therefore the warehousing problem obviously has to be handled on a
 war footing, as a good delivery system is the backbone of any commodity trade. A
 International Research Journal of Finance and Economics - Issue 2 (2006) 161
 particularly difficult problem in cash settlement of commodity derivative contracts is that
 at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of
 outstanding contracts at maturity is not allowed. In other words, all outstanding contracts
 at maturity should be settled in physical delivery. To avoid this, participants square off
 their positions before maturity. So, in practice, most contracts are settled in cash but

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Awareness of commodity market with reference Derivative investors

before maturity. There is a need to modify the law to bring it closer to the widespread
practice and save the participants from unnecessary hassles.




d. The Regulator:
       As the market activity pick-up and the volumes rise, the market will definitely
need a strong and independent regular, similar to the Securities and Exchange Board of
India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent
body, the Forwards Markets Commission (FMC) is under the Department of Consumer
Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it
for funds. It is imperative that the Government should grant more powers to the FMC to
ensure an orderly development of the commodity markets. The SEBI and FMC also need
to work closely with each other due to the inter-relationship between the two markets.


e. Lack of Economy of Scale:
        There are too many (3 national level and 21 regional) commodity exchanges.
Though over 80 commodities are allowed for derivatives trading, in practice derivatives
are popular for only a few commodities. Again, most of the trade takes place only on a
few exchanges. All this splits volumes and makes some exchanges unviable. This
problem can possibly be addressed by consolidating some exchanges. Also, the question
of convergence of securities and commodities derivatives markets has been debated for a
long time now. The Government of India has announced its intention to integrate the two
markets. It is felt that convergence of these derivative markets would bring in economies
of scale and scope without having to duplicate the efforts, thereby giving a boost to the
growth of commodity derivatives market. It would also help in resolving some of the
issues concerning regulation of the derivative markets. However, this would necessitate
complete coordination among various regulating authorities such as Reserve Bank of

BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 56
Awareness of commodity market with reference Derivative investors

India, Forward Markets commission, the Securities and Exchange Board of India, and the
Department of Company affairs etc.




f. Tax and Legal bottlenecks:
         There are at present restrictions on the movement of certain goods from one state
to another. These need to be removed so that a truly national market could develop for
commodities and derivatives. Also, regulatory changes are required to bring about
uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005,
but has not yet been uniformly implemented by all states.
To study the Trading mechanism of Commodity Future market and Wholesale/ Local
market
Second objective is completed by Collecting Primary as well as secondary data. Primary
data is collected through personal interview and discussion with the Wholesale merchants
in APMC yard Belgaum and secondary data is collected through Web sites. The
following Chart Shows the Present Trading System of Local /Wholesale market.


             Chart showing Trading System of Local Mark

                                       Consumer


         Super Markets            Local Retail                   Ration/Fair
                                  Stores                         Price Shops




     Large retailers            Sub Wholesaler                Food Corporation of
                                                              India


                                Wholesaler
BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 57
Awareness of commodity market with reference Derivative investors




                                 Market Yard                 Operated be either Govt
                                                             Mandis or Private Players

           Village level
           Consolidation
                                    Small & Marginal
                                    Farmers

The emergence of organized sector retail chain stores and a rise in competition is likely to
be a catalyst for bringing about much needed reform in the agriculture-related supply
chain. The large players in the retail sector and fast moving consumer goods are also
influencing the government to liberalize the regulations, which hitherto have constricted
the operational environment. In addition, political pressure is rising, invoking a response
from the government to change the regulations so as to enable farmers to operate more
productively.


    First, instead of using the current chain, which results in large mark-ups due to a
       multiple number of intermediaries, the farmers are beginning to transact directly
       with the large corporate, reducing inefficiencies.
    Second, some of the large retail players will start contract manufacturing with
       farmers, providing them with the right quality inputs (fertilizers and seeds),
       capital support and signals on the mix of output they need to produce to earn
       maximum returns.
    Third, an increase in direct sourcing by large players will also encourage the
       private sector to invest in the logistics and infrastructure needed to improve the
       productivity and efficiency of the supply chain.



Trading System of NCDEX




BABASAB PATIL MBA FINANCE PROJECT REPORT                                           Page 58
Awareness of commodity market with reference Derivative investors

The trading system on the NCDEX provides a fully automated screen based trading for
futures on commodities on a nationwide basis as well as an online monitoring and
surveillance mechanism. It supports an order driven market and provides complete
transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to
4.00 p.m. After hours trading has also been proposed for implementation at a later stage.




The NCDEX system supports an order driven market, where orders match automatically.
Order matching is essentially on the basis of commodity, its price, time and quantity. All
quantity Fields are in units and price in rupees. The exchange specifies the unit of trading
and the delivery unit for futures contracts on various commodities. The exchange notifies
the regular lot size and tick size for each of the contracts traded from time to time. When
any order enters the trading system, it is an active order. It tries to find a match on the
other side of the book. If it finds a match, a trade is generated. If it does not find a match,
the order becomes passive and gets queued in the respective outstanding order book in
the system. Time stamping is done for each trade and provides the possibility for a
complete audit trail if required.


NCDEX trades commodity futures contracts having one month, two month and three
Month expiry cycles. All contracts expire on the 20th of the expiry month. Thus a
January expiration contract would expire on the 20th of January and a February expiry
contract would cease trading on the 20th of February. If the 20th of the expiry month is a
trading holiday, the contracts shall expire on the previous trading day. New contracts will
be introduced on the trading day following the expiry of the near month contract.

Contract cycle

The following figure shows the contract cycle for futures contracts on NCDEX. As can
be seen, at any given point of time, three contracts are available for trading ñ a near-
month, a middle-month and a far-month. As the January contract expires on the 20th of



BABASAB PATIL MBA FINANCE PROJECT REPORT                                              Page 59
Awareness of commodity market with reference Derivative investors

the month, a new three month contract starts trading from the following day, once more
making available three index futures contracts for trading.




INTRODUCTION TO PULSE MARKET


India is the world's largest pulse producer, consumer and importer accounting for 27% of
the global pulse production. However, stagnant production has led to declining per capita
consumption over the past 20 years. The per capita availability has progressively declined
from 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led the
Government of India to ease the norms related to importing of pulses.


In India, pulses are grown on 22-23 million hectares area with an annual production of
13-15 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19%
of the gross cropped area and less than 8% of the total food grain production of the
country. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas
(Gram or Desi Chana). Their share in the total pulses production is about 20% and 33%

BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 60
Awareness of commodity market with reference Derivative investors

respectively. Important Pulse Markets in India are Mumbai, Delhi, Chennai, Indore,
Kanpur, Bikaner, Hapur, Hyderabad, Jaipur, Jalandhar, Ludiana, and Sangrur.


Indian pulse market is very price sensitive market. There is a great deal of substitutability
between pulse crops. If pigeon peas are high priced, more yellow peas will be consumed.
If desi chickpeas are low priced, more chickpeas will be consumed. This dynamic pulse
consumption pattern combined with the large, and sometimes variable, domestic
production makes Indian market demand difficult to predict on a year-to-year basis.


Pulse Market Volatility

Global pulse trade has expanded rapidly in the last twenty years. However, the trade
history is somewhat volatile due to supply and demand variability. Trade patterns have
also shifted during this time period. Former exporters (like Chile as a lentil exporter) 12
have disappeared and new exporters have developed. The next twenty-year period is
likely to see these types of changes continue as Canada puts pressure on the supply side.


   The prices in the domestic market fluctuate according to the domestic and
international demand and supply scenario. Generally, the prices drop when the new crop
comes in the market. The analysis of five years price trend of gram at Indore reveal that
the prices are on an increasing trend from June to September, while it starts falling from
November, with the lowest prices being reported in March and April, when the new crop
arrives in the market.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 61
Awareness of commodity market with reference Derivative investors




     Analysis & Interpretation




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Awareness of commodity market with reference Derivative investors




                                        occupation

                                                                          Cumulativ e
                                 Frequenc y   Percent    V alid Percent    Percent
       V alid   busines s               24        24.0             24.0         24.0
                prof ess ion            13        13.0             13.0         37.0
                govt s erv ice          37        37.0             37.0         74.0
                private s ervice        25        25.0             25.0         99.0
                others                   1         1.0              1.0        100.0
                Total                  100       100.0           100.0




                                      occupation

       others
       1.0%
                                                                             business
       private service
                                                                               24.0%
       25.0%




                                                                           profession

                                                                               13.0%



       govt service
       37.0%




BABASAB PATIL MBA FINANCE PROJECT REPORT                                                Page 63
Awareness of commodity market with reference Derivative investors




Interpretation: the above graph depicts that 37% of the respondents are government
employees ,25% are from private service,1% are from others like agriculturist , 24% are
businessmen & 13% are private service
Inference: most of the respondents are were from government service & business men




                                     Annual income
                                 Aannual incom e

                                                                       Cumulativ e
                              Frequenc y   Percent    V alid Percent    Percent
  V alid   below 50000                6         6.0              6.0           6.0
           5000-100000               37        37.0             37.0         43.0
           10001-200000              38        38.0             38.0         81.0
           200001-400000             14        14.0             14.0         95.0
           more than 400001           5         5.0              5.0        100.0
           Total                    100       100.0           100.0




BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 64
Awareness of commodity market with reference Derivative investors
                      Aannual income

     more than 400001
                                                                below 50000
     5.0%
                                                                       6.0%
     200001-400000
     14.0%




                                                               50000-100000

                                                                      37.0%




     10001-200000

     38.0%




Interpretation: above graph depicts that most of the investors income lies between
10001-200000 followed by 38%,37% investors income lies between 50000-100000,14%
of the investors lies between 20001-400000,6% of the investors lies below 50000 & 5%
of the investors lies more than 400000




BABASAB PATIL MBA FINANCE PROJECT REPORT                                      Page 65
Awareness of commodity market with reference Derivative investors



                            Investment criteria they prefer to invest
                        Inves tm e nt crete ria the y pre fe r ot inves t

                                                                                      Cumulativ e
                                     Frequenc y      Percent     Valid Percent         Percent
  Valid     Bank deposit                    10           10.0             10.0              10.0
            Real estate                      4            4.0              4.0              14.0
            stoc ks                         32           32.0             32.0              46.0
            commodity f uture market         7            7.0              7.0              53.0
            mutual f und                     5            5.0              5.0              58.0
            lif e insuranc e                 8            8.0              8.0              66.0
            deriv itiv e market             32           32.0             32.0              98.0
            bonds                            2            2.0              2.0             100.0
            Total                          100          100.0           100.0




            Investment creteria they prefer ot invest
                                                                       Bank deposit
    bonds
                                                                             10.0%
    2.0%
                                                                        Real estate
                                                                              4.0%
    derivitive market
    32.0%




                                                                             stocks

                                                                             32.0%

    life insurance
    8.0%
                                                                commodity future mar
    mutual fund
                                                                              7.0%
    5.0%




Interpretation: From this chart it is known that 32% of the respondents prefer to invest
in derivative and stocks,       10% of the respondents in bank deposit, 8% & 7% in life
insurance & commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds




BABASAB PATIL MBA FINANCE PROJECT REPORT                                                        Page 66
Awareness of commodity market with reference Derivative investors




                   Aw arenes s of de rivitive m ark et

                                                           Cumulativ e
                  Frequenc y    Percent    Valid Percent    Percent
  Valid   yes           100        100.0          100.0         100.0




                Awareness of derivitive market




                                                              yes

                                                           100.0%




Interpretation: as my targeted customer is derivative investors the above diagram
depicts about the awareness level of the derivative investors is 100%




BABASAB PATIL MBA FINANCE PROJECT REPORT                                 Page 67
Awareness of commodity market with reference Derivative investors




                Have you inves ted in future & options

                                                             Cumulativ e
                  Frequenc y   Percent    Valid Percent       Percent
  Valid   yes           100       100.0          100.0            100.0




          Have you invested in future & options




                                                             yes

                                                          100.0%




Interpretation: as my targeted customer is derivative investors the above diagram
depicts about the investment level of the derivative investors is 100% that is respondents
are purely from derivative market

BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 68
Awareness of commodity market with reference Derivative investors




           factors cons ide re d w hile inve sting in de rivitive m ark e t

                                                                         Cumulativ e
                             Frequenc y     Percent     Valid Percent     Percent
  Valid   price                      9           9.0              9.0            9.0
          ris k                     39          39.0             39.0          48.0
          return                    45          45.0             45.0          93.0
          demand & supply            7           7.0              7.0         100.0
          Total                    100         100.0           100.0




BABASAB PATIL MBA FINANCE PROJECT REPORT                                               Page 69
Awareness of commodity market with reference Derivative investors


 factors considered while investing in derivitive market

    demand & supply                                              price
    7.0%                                                         9.0%




                                                                  risk
    return
                                                                39.0%
    45.0%




Interpretation: Most of the investors consider 45% of return,39% of risk,9% price& 7%
demand and supply .while investing in derivatives mainly they considered returns & risk




               Awareness level of commodity market




BABASAB PATIL MBA FINANCE PROJECT REPORT                                        Page 70
Awareness of commodity market with reference Derivative investors
                    Aw re nes s of com m odity m ark et

                                                            Cumulativ e
                    Frequenc y   Percent    Valid Percent    Percent
  Valid     yes            64        64.0            64.0         64.0
            no             36        36.0            36.0        100.0
            Total         100       100.0          100.0




                    Awreness of commodity market
    no
    36.0%




                                                                            yes
                                                                          64.0%




Interpretation: The above pie chart depicts that 64% of the trader aware about the
Commodity Future market and 36% of them are not aware about Commodity Future
Market. So there is a need to create awareness about the commodity future market and its
benefits. There is a lot of potential is there to create customer and influence them to
invest in Commodity Future market




BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 71
Awareness of commodity market with reference Derivative investors

                have you inves ted in com m odity m arke t

                                                             Cumulativ e
                    Frequenc y   Percent    Valid Percent     Percent
  Valid     yes            39        39.0            39.0          39.0
            no             61        61.0            61.0         100.0
            Total         100       100.0          100.0




            have you invested in commodity market



                                                                     yes
                                                                   39.0%




    no

    61.0%




Interpretation: From the above diagram we can say that out of 100 traders only 39%
have invested in commodity market 61% have not invested in commodity market so even
though the most of the traders are aware about Commodity Future market they are not
trading in Future market traders feel there is a high risk involved in the future market.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 72
Awareness of commodity market with reference Derivative investors




                   how do you cam e to k now about com m odity m ark et

                                                                                   Cumulativ e
                                        Frequenc y   Percent    Valid Percent       Percent
  Valid      not attempted                     61        61.0            61.0            61.0
             f rnds/colleauges                 12        12.0            12.0            73.0
             bill boards/advt/broc hure         9         9.0             9.0            82.0
             agents                            18        18.0            18.0           100.0
             Total                            100       100.0          100.0




 how do you came to know about commodity market


    agents
    18.0%




    bill boards/advt/bro
    9.0%


                                                                   not attempted
    frnds/colleauges
                                                                         61.0%
    12.0%




Interpretation: most of the investors came to know about the commodity by agents the
respondents who have invested in commodity market from them 18% of the people came
to know by agents ,9% from the bill boards /advertisement/brochure &12% people came
to know by there friends and colleagues. Here not attempted indicates the people who
have not invested in commodity market have not attempted this question.

BABASAB PATIL MBA FINANCE PROJECT REPORT                                                     Page 73
Awareness of commodity market with reference Derivative investors




                       com m odity you pre fer for tr ading

                                                                      Cumulativ e
                             Frequenc y   Percent    V alid Percent    Percent
  V alid   not attempted            64        64.0             64.0         64.0
           A gro products           10        10.0             10.0         74.0
           Base metals               5         5.0              5.0         79.0
           Precious metals          16        16.0             16.0         95.0
           Energy products           5         5.0              5.0        100.0
           Total                   100       100.0           100.0




BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 74
Awareness of commodity market with reference Derivative investors


                  commodity you prefer for trading

    Energy products
    5.0%
    Precious metals
    16.0%



    Base metals

    5.0%

    Agro products                                                    not attempted
    10.0%
                                                                           64.0%




Interpretation: among the persons who have invested in commodity in them 10% prefer
to trade in agro products, 5% in base metals, 16% in precious metals & 5 % in energy
products .here not attempted indicates the people who have not invested in commodity
market have not attempted this question.




            Factors considere d w hile trading in com m odity m arke t

                                                                      Cumulativ e
                            Frequenc y   Percent    V alid Percent     Percent
  V alid    not attempted          65        65.0             65.0          65.0
            price                   3         3.0              3.0          68.0
            seas on                 8         8.0              8.0          76.0
            ris k                  13        13.0             13.0          89.0
            return                 11        11.0             11.0         100.0
            Total                 100       100.0           100.0




BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 75
Awareness of commodity market with reference Derivative investors



Factors considered while trading in commodity market

    return
    11.0%


    risk
    13.0%



    season
    8.0%
                                                         not attempted
    price
                                                               65.0%
    3.0%




Interpretation: Most of the investors consider 11% of return,13% of risk,3% price& 8%
of season. While investing in commodities mainly they considered returns & risk while
investing in commodity market they mainly consider returns & risk. here not attempted
indicates the people who have not invested in commodity market have not attempted this
question.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                      Page 76
Awareness of commodity market with reference Derivative investors

                     com m odity future m kt provide s benefit

                                                                      Cumulativ e
                             Frequenc y   Percent    V alid Percent    Percent
  V alid      not attemted          62        62.0             62.0         62.0
              strongly agree         9         9.0              9.0         71.0
              agree                 10        10.0             10.0         81.0
              neutral               18        18.0             18.0         99.0
              disagree               1         1.0              1.0        100.0
              Total                100       100.0           100.0




               commodity future mkt provides benefit

    disagree
    1.0%

    neutral
    18.0%




    agree
    10.0%

                                                                      not attemted
    strongly agree                                                         62.0%
    9.0%




Interpretation: most of the investors say it is in neutral position & some who are
benefited lot they will go for factors like agree & strongly agree & percentage of
disagree is very less among invested people




BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 77
Awareness of commodity market with reference Derivative investors




                Reasons w hy the y have not inve s ted in com m odity m k t

                                                                                Cumulativ e
                                    Frequenc y   Percent    Valid Percent        Percent
  Valid     thos e w ho hv invested        39        39.0            39.0             39.0
            Not inters ted                  5         5.0             5.0             44.0
            Inf o non availability         10        10.0            10.0             54.0
            high inv estment                7         7.0             7.0             61.0
            complex unders tanding         33        33.0            33.0             94.0
            high risk                       6         6.0             6.0            100.0
            Total                         100       100.0          100.0




Reasons why they have not invested in commodity mkt
    high risk

    6.0%



                                                            those who hv investe
    complex understandin                                                   39.0%
    33.0%




    high investment                                                 Not intersted

    7.0%                                                                    5.0%

                                                               Info non availabilit
                                                                           10.0%




Interpretation: The above pie chart shows that most of the traders are not interested to
invest in Commodity Future Market due to complex understanding involved in it around
33% of the traders are given this reason and 5% of them are not interested in investing in

BABASAB PATIL MBA FINANCE PROJECT REPORT                                                      Page 78
Awareness of commodity market with reference Derivative investors

this market, 6 & 7% think that it involves high risk and high investment So there is great
need to create awareness about Commodity Future market by telling its advantages.




            planning for trading in com m odity m k t in future

                                                            Cumulativ e
                    Frequenc y   Percent    Valid Percent    Percent
  Valid     yes            67        67.0            67.0         67.0
            no             33        33.0            33.0        100.0
            Total         100       100.0          100.0




      planning for trading in commodity mkt in future
    no
    33.0%




                                                                            yes

                                                                          67.0%




Interpretation: From the above graph we conclude that most of the traders are interested
to invest in Commodity Future Market if proper awareness is created among them and

BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 79
Awareness of commodity market with reference Derivative investors

other 33% are not interested to invest .These 67% of traders are the potential customers
for the company.




                                     Findings


• More than 50% of the Traders in are aware about the commodity future
       Market


• Hardly 30% traders are invested in the commodity future market


• Most of the investors are not ready to invest in commodity future market they feel it
   involve high risk.


• Returns and the Risk of the commodity are the most critical factors, which
      Traders will consider while investing in any commodity


• Most of the investors are ready to invest in commodity future market if proper
   information is provided


• As commodity future market is new and emerging ,many investors and farmers are
   not fully aware of this market .as the market helps to trade transparently without
   middlemen and agents


• While finding the reasons why most of the people are not trading in commodity
   market I found that many respondents are not interested at all in this trade this is
   because of unawareness & mythical perception about commodity market.

BABASAB PATIL MBA FINANCE PROJECT REPORT                                          Page 80
Awareness of commodity market with reference Derivative investors


• Most of the respondents are were from government service & business men




                                     Suggestion

• There is need to create awareness about commodity Future Market. Awareness
   program has to be conducted by Karvy consultants, because since this was new to the
   market .so it can be done through by giving advertisements in local channels,
   Newspapers, by sending E-mail to present customers etc


• From survey it is found that most of the potential customers are concerned about the
   Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage
   it will help to attract more and more customers.


• More agents and marketing executives should be appointed to educate the customers
   because the customers having many myths in there mind


• And also create the awareness of electronic commodity trading


• Firm should approach people who are already into the business of commodities
   .special campaigns / investors meets should be conducted for these people since they
   are aware of rate fluctuation ,market trends etc . They have got market idea that
   benefits them in price prediction. They will be in high spirits when price risk of them
   will be managed.



BABASAB PATIL MBA FINANCE PROJECT REPORT                                         Page 81
Awareness of commodity market with reference Derivative investors




                                  CONCLUSION
Commodity futures markets are new and emerging market. The awareness of the market
is very less among the investors who can use this trade to sell there products without the
middlemen or agents it also help the actual buyers too. Here trader also can transfer his
risk to some other who can handle it or can appetite the risk through hedging techniques
                         Compared to capital market commodity market is less risky in
volatility context here the prices do not change within a fraction of second .significantly,
minimum margin ready physical possession, no manipulation & fraud, maximum
profitability is available over here since the commodity market helps all such as farmers,
industries and individuals investors it is growing at a faster rate in global outlook.




BABASAB PATIL MBA FINANCE PROJECT REPORT                                             Page 82
Awareness of commodity market with reference Derivative investors




                       BIBLOGRAPHY

News Papers;

   Business Line
   Economic times
   Times of India


Web site
   www.moneycontrol.com
   www.google.com
   www.MCX.com
   www.NCDEX.com



BABASAB PATIL MBA FINANCE PROJECT REPORT                      Page 83
Awareness of commodity market with reference Derivative investors

Text books

Futures & Options second addition by Vohra & Bagri




                                 QUESTIONNAIRE



      NAME      : __________________________________
      AGE       : __________________________________
      ADDRESS   : __________________________________
      CONTACT NO: __________________________________

   1) Which of the following will best describe your occupation
     (Note: please tick below the option you want to choose)

Business           Profession       Govt.services     Private service      Others specify


   2) What is your annual income?

Below 50000       50000-100000   100001-200000 200001-400000         More than 400001


   3) Which among these investment criteria you usually prefer?

  Bank deposits                                           Mutual fund

  Real estate                                             Life insurance

  Stocks                                                  Derivative market

BABASAB PATIL MBA FINANCE PROJECT REPORT                                        Page 84
Awareness of commodity market with reference Derivative investors


  Commodity future trading                                    Bonds

   4) Are you aware about the derivative market?

        Yes                                       No

   5) If yes have you invested in future & option?

        Yes                                          No

   6) Which factors would you consider while investing in derivative market?

Price                Risk                     Return               Demand & supply




   7) Are you aware of commodity market?

        Yes                                     No

   8) If yes have you invested in commodity market?
             (If no directly go to question 13)

        Yes                                     No

   9) How do you come to know about commodity future trading?

Friends/colleagues     Billboards                Agents/ brokers           Other specify
                       /advt/brochure


   10) Which commodity you prefer for trading?

Agro              Base metals           Precious          Energy            Ferrous         total
products(Jeera,   (aluminum, nickel)    metals(gold/      Products(crude    metals
Soybean etc)                            Silver)           oil               (iron, steel)



   11) Which factor do you normally consider while trading in commodity market?

Price              Season              Risk                Return           Demand & supply




BABASAB PATIL MBA FINANCE PROJECT REPORT                                            Page 85
Awareness of commodity market with reference Derivative investors

   12) Commodity future market provides benefits?
Strongly agree  Agree              Neutral             Disagree           Strongly dis
                                                                          agree


   13) What made you not to invest in commodity future trading?

Not interested    Info non          High               Complex            High risk
                  availability      investment         understanding



  14) Are you planning for investing &trading in commodity future market in future?

            Yes                         No



                                                             Respondent signature

                                    Thank you
                                          .




BABASAB PATIL MBA FINANCE PROJECT REPORT                                      Page 86

				
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