TIPOLOGÍA LÁMPARAS AP04
HORARIO DE FUNCIONAMIENTO
37% 30% 20% 13% Bullion Metals Agricultural Fossils/Energy
Above data revels that majority of commodity investors like to invest in Bullion (Gold & Silver).
25% 25% 50% Less Risky Risky Very Risky
Analysis of data shows that majority of people who are aware about commodity market; feel that investment in commodity market is very risky. So efforts should be done to minimize the risk in commodity investment and make peoples about minimum risk in commodity investment.
6. Opinion about Commodity Market Advertisements (Expressed by those who know commodity market)
100
Not Informative
There is no second opinion amongst commodity investors, that commodity market advertisements do not give all the necessary information.
Qualitative Analysis 1. Investment preferences: -
Most of the investors prefer least risky investment which gives higher returns. That is why majority (70% of sample) of people interested in investments other than Share and commodity market.
Very less number of people (only 7%) showed their interest in investment in commodity market. Main reason for this is lack of awareness and complete information about commodity market.
2. Commodity Exchanges: -
People who are interested in commodity investment showed more concern towards NCDEX; for its brand name and people think there might be surety of transaction at NCDEX.
3. Commodities: -
Bullion is most preferred commodity for investment. Because one can expect maximum returns from such investment due to rapidly increasing prices of bullion in market.
4. Advertisements: -
Commodity market Advertisements should be more informative. And it is the failure of commodity market’s advertisement campaign to attract people’s attention; as majority of people are not aware about commodity market.
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Questionnaire for Brokers 1. Since how many years you are working as a broker?
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a. MCX b. NCDEX c. NMCE d. Other (specify) 4. Why do you prefer the specific Commodity Exchange?
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5. In which commodities do you deal?
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6. Why do you prefer those commodities?
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7. If one wants to invest in Commodity Market, how to go about it?
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10. What is your perception about Commodity Market? a. Less Risky b. Risky c. Very Risky
11. Any suggestion for commodity market? --- --- --- --- 12. Gender a. Male b. Female 13. Age Group a. Below 21 years b. 21 years – 30 years c. 31 years – 40 years d. 41 years – 50 years e. Above 50 years 14. Income Group (per year) a. Below 1,00,000/- b. 1,00,000 – 1,50,000/- c. 1,50,000 - 2,50,000/- d. Above 2,50,000/- --- --- COMMODITY MARKET Questionnaire for Officials 1. What is MCX/ NCDX/ NMCE/…….
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2. History behind formation of MCX/ NCDX/ NMCE/………..
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3. What are the departments at MCX/ NCDX/ NMCE/……….
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4. How work is done in each department? --- --- --- --- ----
5. How one can become broker at MCX/ NCDX/ NMCE/………….
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6. How one can become member of MCX/ NCDX/ NMCE………..
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Terms and Definitions related to Commodity Market: -
• Accruals:- Commodities on hand ready for shipment, storage and manufacture
• Arbitragers: - Arbitragers are interested in making purchase and sale in different markets at the same time to profit from price discrepancy between the two markets.
• At the Market: - An order to buy or sell at the best price possible at the time an order reaches the trading pit.
• Basis: - Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures.
• Basis grade: - Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures
• Bear: - A person who expects prices to go lower.
• Bid: - A bid subject to immediate acceptance made on the floor of exchange to buy a definite number of futures contracts at a specific price.
• Breaking: - A quick decline in price.
• Bulging: - A quick increase in price.
• Bull: - A person who expects prices to go higher.
• Buy on Close: - To buy at the end of trading session at the price within the closing range.
• Buy on opening: - To buy at the beginning of trading session at a price within the opening range.
• Call: - An option that gives the buyer the right to a long position in the underlying futures at a specific price, the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call.
• Cash commodity: - The actual physical product on which a futures contract is based. This product can include agricultural commodities, financial instruments and the cash equivalent of index futures.
• Close: - The period at the end of trading session officially designated by exchange during which all transactions are considered made “at the close”.
• Closing price: - The price (or price range) recorded during the period designated by the exchange as the official close.
• Commission house: - A concern that buys and sells actual commodities or futures contract for the accounts of customers.
• Consumption Commodity: - Consumption commodities are held mainly for consumption purpose. E.g. Oil, steel
• Cover: - The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract.
• Cross hedge: - When a cash commodity is hedged by using futures contract of other commodity.
• Day orders: - Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or “good till canceled” order.
• Delivery: - The tender and receipt of actual commodity, or in case of agriculture commodities, warehouse receipts covering such commodity, in settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions are marked to market on last day of contract based on cash market close.
• Delivery month: - Specified month within which delivery may be made under the terms of futures contract.
• Delivery notice: - A notice for a clearing member’s intention to deliver a stated quantity of commodity in settlement of a short futures position.
• Derivatives: - These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodity, foreign exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange or over the counter.
• Differentials: - The premium paid for grades batter than the basis grade and the discounts allowed for the grades. These differentials are fixed by the contract terms on most exchanges.
• Exchange: - Central market place for buyers and sellers. Standardized contracts ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are acting on behalf of their clients, companies or themselves.
• Forward contract: - It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing agreement. Forward contract is not traded on an exchange. This is oldest form of derivative contract. It is traded in OTC Market. Not on an exchange. Size of forward contract is customized as per the terms of agreement between buyer and seller. The contract price of forward contract is not transparent, as it is not publicly disclosed. Here valuation of open position is not calculated on a daily basis and there is no requirement of MTM. Liquidity is the measure of frequency of trades that occur in a particular commodity forward contract is less liquid due to its customized nature. In forward contracts, counter- party risk is high due to customized & bilateral nature of the transaction. Forward contract is not regulated by any exchange. Forward contract is generally settled by physical delivery. In this case delivery is carried out at delivery center specified in the customized bilateral agreement.
• Futures Contract:- It is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. It is standardized in terms of quantity as specified by exchange. Contract price of futures contract is transparent as it is available on centralized trading screen of the exchange. Here valuation of
Mark-to-Mark position is calculated as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is traded on the exchange. In futures contracts the clearing-house becomes the counter party to each transaction, which is called novation. Therefore, counter party risk is almost eliminated. A regulatory authority and the exchange regulate futures contract. Futures contract is generally cash settled but option of physical settlement is available. Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange.
• Futures commission merchant: - A broker who is permitted to accept the orders to buy and sale futures contracts for the consumers.
• Futures Funds: - Usually limited partnerships for investors who prefer to participate in the futures market by buying shares in a fund managed by professional traders or commodity trading advisors.
• Futures Market:-It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physical commodity itself. The formulation of futures contract is very specific regarding the quality of the commodity, the quantity to be delivered and date for delivery. However it does not involve immediate transfer of ownership of commodity, unless resulting in delivery. Thus, in futures markets, commodities can be bought or sold irrespective of whether one has possession of the underlying commodity or not. The futures market trade in futures contracts primarily for the purpose of risk management that is hedging on commodity stocks or forward buyers and sellers. Most of these contracts are squared off before maturity and rarely end in deliveries.
• Hedging: - Means taking a position in futures market that is opposite to position in the physical market with the objective of reducing or limiting risk associated with price.
• In the money: - In call options when strike price is below the price of underlying futures. In put options, when the strike price is above the underlying futures. In-the-money options are the most expensive options because the premium includes intrinsic value.
• Index Futures: - Futures contracts based on indexes such as the S & P 500 or Value Line Index. These are the cash settlement contracts.
• Investment Commodities: - An investment commodity is generally held for investment purpose. e.g. Gold, Silver
• Limit: - The maximum daily price change above or below the price close in a specific futures market. Trading limits may be changed during periods of unusually high market activity.
• Limit order: - An order given to a broker by a customer who has some restrictions upon its execution, such as price or time.
• Liquidation: - A transaction made in reducing or closing out a long or short position, but more often used by the trade to mean a reduction or closing out of long position.
• Local: - Independent trader who trades his/her own money on the floor of the exchanges. Some local act as a brokers as well, but are subject to certain rules that protect customer orders.
• Long: - (1) The buying side of an open futures contract or futures option; (2) a trader whose net position in the futures or options market shows an excess of open purchases over open sales.
• Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures contract (not a down payment).
• Margin call: - Demand for additional funds or equivalent because of adverse price movement or some other contingency.
• Market to Market: - The practice of crediting or debating a trader’s account based on daily closing prices of the futures contracts he is long or short.
• Market order: - An order for immediate execution at the best available price.
• Net position: - The difference between the open contracts long and the open contracts short held in any commodity by any individual or group.
• Offer: - An offer indicating willingness to sell at a given price (opposite of bid).
• On opening: - A term used to specify execution of an order during the opening.
• Open contracts: - Contracts which have been brought or sold without the transaction having been completed by subsequent sale, repurchase or actual delivery or receipt of commodity.
• Open interest: - The number of “open contracts”. It refers to unliquidated purchases or sales and never to their combined total.
• Option: - It gives right but not the obligation to the option owner, to buy an underlying asset at specific price at specific time in the future.
• Out-of-the money: - Option calls with the strike prices above the price of the underlying futures, and puts with strike prices below the price of the underlying futures.
• Over the counter: - It is alternative trading platform, linked to network of dealers who do not physically meet but instead communicates through a network of phones & computers.
• Pit: - An octagonal platform on the trading floor of an exchange, consisting of steps upon which traders and brokers stand while trading (if circular called ring).
• Point: - The minimum unit in which changes in futures prices may be expressed (minimum price fluctuation may be in multiples of points).
• Position: - An interest in the market in the form of open commodities.
• Premium: - The amount by which a given futures contract’s price or commodity’s quality exceeds that of another contract or
commodity (opposite of discount). In options, the price of a call or put, which the buyer initially pays to the option writer (seller).
• Price limit: - The maximum fluctuation in price of futures contract permitted during one trading session, as fixed by the rules of a contract market.
• Purchase and sales statement: - A statement sent by FMC to a customer when his futures option has been reduced or closed out (also called ‘P and S”)
• Put: - In options the buyer of a put has the right to continue a short position in an underlying futures contract at the strike price until the option expires; the seller (writer) of the put obligates himself to take a long position in the futures at the strike price if the buyer exercises his put.
• Range: - The difference between high and low price of the futures contract during a given period.
• Ratio hedging: - Hedging a cash position with futures on a less or more than one-for-one basis.
• Reaction: - The downward tendency of a commodity after an advance.
• Round turn: - The execution of the same customer of a purchase transaction and a sales transaction which offset each other.
• Round turn commission: - The cost to the customer for executing a futures contract which is charged only when the position is liquidated.
• Scalping: - For floor traders, the practice of trading in and out of contracts through out the trading day in a hopes for making a series of small profits.
• Settlement price: - The official daily closing price of futures contract, set by the exchange for the purpose of setting margins accounts.
• Short: - (1) The selling of an option futures contract. (2) A trader whose net position in the futures market shows an excess of open sales over open purchases.
• Speculator: - Speculator is an additional buyer of the commodities whenever it seems that market prices are lower than they should be.
• Spot Markets:-Here commodities are physically brought or sold on a negotiated basis.
• Spot price: - The price at which the spot or cash commodity is selling on the cash or spot market.
• Spread: - Spread is the difference in prices of two futures contracts.
• Striking price: - In options, the price at which a futures position will be established if the buyer exercises (also called strike or exercise price).
• Swap: - It is an agreement between two parties to exchange different streams of cash flows in future according to predetermined terms.
• Technical analysis (charting): - In price forecasting, the use of charts and other devices to analyze price-change patters and changes in volume and open interest to predict future market trends (opposite of fundamental analysis).
• Time value: - In options the value of premium is based on the amount of time left before the contract expires and the volatility of the underlying futures contract. Time value represents the portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the options draws near and/or if the underlying futures become less volatile.
• Volume of trading (or sales): - A simple addition of successive futures transactions (a transaction consists of a purchase and matching sale).
• Writer: - A sealer of an option who collects the premium payment from the buyer.
Summary
This decade is termed as Decade of Commodities. Prices of all commodities are heading northwards due to rapid increase in demand for commodities. Developing countries like China are voraciously consuming the commodities. That’s why globally commodity market is bigger than the stock market. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. This should act as a major lesson for policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world.
As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. Concerned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGO’s should come forward to educate the people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market.
BIBLIOGRAPHY
• Trading Commodities and Financial Futures: A Step by Step guide to Mastering the Market, 3rd Edition by George
Kleinman
• Options, Futures and Other Derivatives by Johan C. Hull
• http://commodities.in
• http://finance.indiamart.com/markets/commodity/
• http://www.commoditiescontrol.com
• http://www.mcxindia.com
• http://www.ncdex.com
• MCX Certified Commodity Professional Reference Material
• Business World (15th September 2003)
• Business World (4th December 2006)
• http://investmentz.co.in
• http://trade.indiainfoline.com
Speaker 1: - Introduction:- What is commodity? commodity exchange? what is commodity futures? objective of commodity futures
Speaker 2: - Benifits of commodity futures, Evalution of history of commodity markets
Speaker 3: -India and commodity markets history + legal frame work+ FMC
Speaker 4: -Commodity Exchanges in India & International exchanges