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Commodity market

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Title: Commodity market


1
Commodity market
2
Flow of Presentation
  • What do we mean by Commodity Market?
  • Global classification of commodities.
  • Commodities not traded in commodity market
  • How Commodities is an alternate asset class?
  • Scope of commodities market.
  • How to Trade in Commodities?
  • Various commodity Exchanges.
  • Commodity trading
  • Risk factors involved
  • Conclusion

3
Commodities
  • A commodity is anything for which there is
    demand, but which is supplied without qualitative
    differentiation across a markets.
  • Key Learning here was the difference between
    commodity and a brand.

4
Global classification of commodities
5
Commodities not traded in commodity market
Non-tradable commodities
  1. Rare Metals
  2. Agricultural Products
  3. Minerals and other materials

6
Rare metals - Germanium, Cadmium, Cobalt,
Chromium, Magnesium, Manganese, Molybdenum,
Silicon, Rhodium, Selenium, Titanium, Vanadium,
Niobium, Lithium, Indium, Gallium, Tantalum,
Tellurium, and Beryllium.
7
Agricultural products - Fresh Flowers, Cut
Flowers, Melons, Lemons, Tung Oil, Gum Arabic,
Pine Oil, Milk, Tomatoes, Grapes, Eggs, Potatoes,
and Figs.
8
Asphalt, Aggregate, Arsenic, Borax, Boron,
Gypsum, Asbestos, Chlorine, Fluoride, Cement,
Sulfuric Acid, Carbon Dioxide, Fluorspar,
Bromine, Titanium Dioxide.  
9
Commodities An Alternate Asset Class
  • Traditional choice of asset allocation includes
    stocks, bonds and real estate.
  • Now portfolio has shifted to alternative assets,
    like hedge funds, private equity, derivatives
    and commodities.
  • Traded on spot and forward markets.
  • Positively correlated with inflation.
  • Independent risk and return profile.

10
Portfolio Diversification
  • Low or negative co-relation allows commodities to
    reduce overall risk.
  • Hedge against inflation.
  • An improved risk/return profile in strategic
    asset allocation.

11
  • Lets assume your total portfolio is 250,000 and
    you invest 80 in stocks and bonds (200,000) and
    20 in managed Commodities (50,000). Lets
    assume at the end of the year you realize a 5
    return on your stocks and bonds and a 25 return
    on Commodities. The result would be as follows

12
Now lets assume you earn 10 on the 80 of your
portfolio invested in stocks and bonds, but lose
25 in managed futures. The results would be as
follows
13
  • By investing only 20 of your portfolio in
    futures, if you were to earn 25, it would
    outperform 80 of your portfolio invested in
    stocks and bonds if the stocks and bonds earned
    5.
  • You can also see that a 25 loss in futures would
    still leave you with a net profit of 7,500 if
    your stock and bond allocation returned 10.

14
SCOPE OF COMMODITY MARKET
  • Allowing mutual funds and FIIs to participate in
    the commodity market
  • Widening the definition of commodities to
    include also commodity indices and weather
    derivatives
  • Changes in the Banking Regulation Act allowing
    banks to operate in the commodity exchanges
  • Allow set-offs on trading losses in the
    derivatives market.

15
FUTURE PLANS
  • NCDEX constantly plans to widen the menu of
    products available for trading to include-
  • Other agricultural products,
  • Base metals,
  • plastics,
  • energy products
  • indices (including weather)

16
WAY AHEAD
  • Commodity exchanges in India are expected to
    contribute significantly in strengthening Indian
    economy to face the challenges of globalization.
  • Indian markets are poised to witness further
    developments in the areas of electronic warehouse
    receipts (equivalent of dematerialized shares),
    which would facilitate seamless nationwide spot
    market for commodities.

17
  • Amendments to Essential Commodities Act and
    implementation of Value-Added-tax
  • Options contracts in commodities.
  • Their may see increased interest from the
    international players in the Indian commodity
    markets once national exchanges become
    operational.

18
  • Commodity derivatives as an industry is poised to
    take-off which may provide the numerous investors
    in this country with another opportunity to
    invest and diversify their portfolio. Finally
    their may be greater convergence of markets
    equity, commodities, Forex and debt which could
    enhance the business opportunities for those have
    specialized in the above markets.

19
COMMODITY MARKET
  • Commodity market is a place where trading in
    commodities takes place. These are the markets
    where raw and primary products are exchanged.
  • These raw commodities are traded on regulated
    commodity exchanges, in which they are bought and
    sold in standardized contracts. It is similar to
    an equity market, but instead of buying or
    selling shares one buys or sells commodities.

20
HOW TO TRADE IN COMMODITIES
  • COMMODITY FUTURE
  • A standardized agreement to buy (or sell) an
    asset in the future, at a price agreed today

21
COMMODITY EXCHANGE TRADED FUNDS (ETFs)
  • Commodity ETFs generally are index funds and
    track commodities indices.

22
COMMODITY STOCKS
  • Stocks which belongs to commodity related
    sector like metals, energy, agriculture etc.

23
COMMODITY MUTUAL FUNDS
  • Mutual funds which invest in stocks belonging
    to commodity sectors or fund of funds which
    invest in other commodity funds etc.

24
COMMODITY EXCHANGE
  • An entity, usually an incorporated non-profit
    association, that determines and enforces rules
    and procedures for the trading of commodities and
    related investments, such as commodity futures.
  • Commodities exchange also refers to the physical
    center where trading takes place

25
CONT.
  • 18 existing commodity exchanges in India offering
    domestic contracts in 8 commodities and 2
    exchanges that have permission to conduct trading
    in international (USD denominated) contracts.

26
CONT.
  • The two most important commodity exchanges in
    India are
  • 1)Multi-Commodity Exchange of India Limited
    (MCX),
  • 2)National Multi-Commodity Derivatives
    Exchange of India Limited (NCDEX)

27
Structure of Indian Commodity Futures Exchanges
FMC
Commodity Exchanges
National exchanges
Regional exchanges
20 Other Regional Exchanges
NMCE
MCX
NBOT
NCDEX
28
NCDEX
  • National Commodity Derivatives Exchange
    Limited (NCDEX) is an online commodity exchange.
    It has commenced its operations on December 15,
    2003.
  • LIC, NABARD NSE are Promoter Shareholder.
  • NCDEX is regulated by Forward Markets Commission.

29
  • NCDEX currently facilitates trading of
    57, commodities including
  • Agri-based commodities
  • Bullion
  • Energy
  • Ferrous metals
  • Non-ferrous metals
  • Plastics

30
Institution Share Domain Expertise
NABARD 15 Apex bank for agricultural lending
ICICI Bank 8 Largest private sector bank in India. Listed on NYSE
NSE 15 Largest stock exchange in India. Highest volume in single stock futures in world.
LIC 15 Largest life insurance company in India
CRISIL 12 Indias first largest credit rating agency. Now a Standard Poor company
IFFCO 12 Largest farmer cooperative with affiliation of 36,000 cooperatives
PNB 8 Large public sector bank with strong rural reach specially in North India
Canara Bank 8 Large public sector bank with strong rural reach specially in South India
Goldman Sachs 7 Global Expertise in commodity markets
31
MCX
  • Multi Commodity Exchange of India Limited (MCX),
    is an independent and de-mutulised exchange with
    a permanent recognition from Government of India.
  • Key shareholders of MCX are Financial
    Technologies (India) Ltd., State Bank of India,
    Union Bank of India, Bank of India and Canara
    Bank.
  • MCX started offering trade in November 2003 and
    has built strategic alliances with Bombay Bullion
    Association, Bombay Metal Exchange, Solvent
    Extractors Association of India, Pulses
    Importers Association and Shetkari Sanghatana.

32
NMCE
  • National Multi Commodity Exchange of India
    Limited (NMCE) is the first de-mutualized,
    Electronic Multi-Commodity Exchange in India.
  • On 25th July, 2001, it was granted approval by
    the Government to organize trading in the edible
    oil complex.
  • It has operationalized from November 26, 2002.
  • It is being supported by Central Warehousing
    Corporation Ltd., Gujarat State Agricultural
    Marketing Board and Neptune Overseas Limited.

33
SPOT TRADING
Spot trading is any transaction where delivery
either takes place immediately, or with a minimum
lag between the trade and delivery due to
technical constraints. Spot trading normally
involves visual inspection of the commodity or a
sample of the commodity, and is carried out in
markets such as wholesale markets. Commodity
markets, on the other hand, require the existence
of agreed standards so that trades can be made
without visual inspection.
34
FORWARD CONTRACT
A forward contract or simply a forward is an
agreement between two parties to buy or sell an
asset at a certain future time for a certain
price agreed. It costs nothing to enter a forward
contract. The party agreeing to buy the
underlying asset in the future assumes a long
position, and the party agreeing to sell the
asset in the future assumes a short position. The
price agreed upon is called the delivery price,
which is equal to the forward pricing at the time
the contract is entered into.
35
  • Futures contract, in refers to a standardized
    contract to buy or sell a specified commodity of
    standardized quality at a certain date in the
    future, at a market determined price (the futures
    price).
  • The price is determined by the instantaneous
    equilibrium between the forces of supply and
    demand among competing buy and sell orders on the
    exchange at the time of the purchase or sale of
    the contract.

36
Features of Future ..
  • Futures are used for hedging, particularly in a
    bear market.
  • Futures are exchange-traded derivatives.
  • The particular asset as well as the quantity are
    specified in the futures contract.
  • The currency in which the contract is to be
    executed is also specified in future contracts.

37
  • Futures have lower transaction costs than other
    debt instruments.
  • Future contracts have high liquidity, since
    buyers and sellers of futures contracts can be
    found easily.
  • Futures are highly standardized.
  • Settlement - The delivery month and the last
    trading date are also mentioned in the contract.

38
Forward Vs. Futures
  • While futures and forward contracts are both
    contracts to deliver an asset on a future date at
    a prearranged price, they are different in
    different respects
  • Futures are margined, while forwards are not.
  • Forward contracts are private agreements. Futures
    contracts have clearing houses.
  • For forward contracts, settlement of the
    contract occurs at the end of the contract.
    Futures contracts are marked-to market daily,
    which means that daily changes are settled day by
    day until the end of the contract.

39
  • Futures contracts are quite frequently employed
    by speculators. On the other hand, forward
    contracts are mostly used by hedgers.
  • Futures are exchange-traded, while forwards are
    traded over-the-counter.
  • Thus futures are standardized and face an
    exchange, while forwards are customized and face
    a non-exchange counterparty.

40
The Major Actors in commodity market
KEY PLAYERS IN THE COMMODITY MARKET
  • SPECULATOR
  • HEDGER
  • BROKER

41
FORWARD MARKETS COMMISSION
  • Forward Markets Commission (FMC) is headquartered
    at Mumbai.
  • It is a regulatory authority which is overseen by
    the Ministry of Consumer Affairs, Food and Public
    Distribution, Govt. of India.
  • It was set up in 1953 under the Forward Contracts
    (Regulation) Act, 1952.
  • The Act provides that the Commission shall
    consist of not less than two but not exceeding
    four members appointed by the Central Government.

42
OBJECTIVES OF FMC
  • To create competitive conditions so that no
    unscrupulous participants could use these
    leveraged contracts for manipulating prices.
  • To ensure that the market has appropriate risk
    management system.
  • To ensure fairness and transparency in trading,
    clearing, settlement and management of the
    exchange so as to protect and promote the
    interest of various stakeholders.

43
FUNCTIONS OF THE FMC
  • FMC advises the central government to either
    grant recognition or to withdraw the recognition
    of any association.
  • It keeps the forward market under strong
    observation and takes action wherever necessary.
  • To make recommendations generally with respect to
    improving the organization and working of forward
    markets.

44
  • To undertake the inspection of the accounts and
    other documents of any recognized association or
    registered association or any member of such
    association whenever it considerers it necessary.
  • To collect and publish the information relating
    to trading conditions in respect of goods
    including information relating to demand, supply
    and prices.

45
Risk factors involved
  • Changing demandsupply dynamics.
  • Climatic factors.
  • Industry related factors.
  • Geopolitical consideration.

46
Conclusion
  • Commodities are the distinct class of assets that
    are largely independent of equity and bond
    returns.
  • Long term fundamentals of commodity companies
    appears bright given the supply demand mismatch ,
    emphasis on infrastructure development in many
    developing economies

47
SUBMITTED BY
  • Abhinav Kansal
  • Deepak Jain
  • Arpit Khandelwal
  • Apeksha Khandelwal
  • Saumyadeep Dalal
  • Aastha Mittal
  • Ankit Mehta
  • Divya Jolly
  • Amit Goel
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