Title: Commodity market
1Commodity market
2Flow 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
3Commodities
- 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.
4Global classification of commodities
5Commodities not traded in commodity market
Non-tradable commodities
- Rare Metals
- Agricultural Products
- Minerals and other materials
6Rare metals - Germanium, Cadmium, Cobalt,
Chromium, Magnesium, Manganese, Molybdenum,
Silicon, Rhodium, Selenium, Titanium, Vanadium,
Niobium, Lithium, Indium, Gallium, Tantalum,
Tellurium, and Beryllium.
7Agricultural products - Fresh Flowers, Cut
Flowers, Melons, Lemons, Tung Oil, Gum Arabic,
Pine Oil, Milk, Tomatoes, Grapes, Eggs, Potatoes,
and Figs.
8Asphalt, Aggregate, Arsenic, Borax, Boron,
Gypsum, Asbestos, Chlorine, Fluoride, Cement,
Sulfuric Acid, Carbon Dioxide, Fluorspar,
Bromine, Titanium Dioxide.
9Commodities 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.
10Portfolio 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
12Now 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.
14SCOPE 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.
15FUTURE 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)
-
16WAY 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.
19COMMODITY 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.
20HOW TO TRADE IN COMMODITIES
- COMMODITY FUTURE
- A standardized agreement to buy (or sell) an
asset in the future, at a price agreed today
21COMMODITY EXCHANGE TRADED FUNDS (ETFs)
-
- Commodity ETFs generally are index funds and
track commodities indices.
22COMMODITY STOCKS
-
- Stocks which belongs to commodity related
sector like metals, energy, agriculture etc.
23COMMODITY MUTUAL FUNDS
- Mutual funds which invest in stocks belonging
to commodity sectors or fund of funds which
invest in other commodity funds etc.
24COMMODITY 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
25CONT.
- 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.
26CONT.
- 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)
27Structure of Indian Commodity Futures Exchanges
FMC
Commodity Exchanges
National exchanges
Regional exchanges
20 Other Regional Exchanges
NMCE
MCX
NBOT
NCDEX
28NCDEX
- 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
30Institution 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
31MCX
- 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.
32NMCE
- 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.
33SPOT 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.
34FORWARD 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.
38Forward 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.
40The Major Actors in commodity market
KEY PLAYERS IN THE COMMODITY MARKET
41FORWARD 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.
42OBJECTIVES 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.
43FUNCTIONS 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.
45Risk factors involved
- Changing demandsupply dynamics.
- Climatic factors.
- Industry related factors.
- Geopolitical consideration.
46Conclusion
- 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
47SUBMITTED BY
- Abhinav Kansal
- Deepak Jain
- Arpit Khandelwal
- Apeksha Khandelwal
- Saumyadeep Dalal
- Aastha Mittal
- Ankit Mehta
- Divya Jolly
- Amit Goel