12 Zibermr Vol1 Issue 2

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ZENITH International Journal of Business Economics & Management ResearchVol.1 Issue 2, Nov 2011, ISSN 2249 8826Online available at http://zenithresearch.org.in/

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earch.org.in

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AN EMPERICAL INVESTIGATION ON THE INVESTORS

PERCEPTION TOWARDS COMMODITIES FUTURES TRADING IN

INDIA WITH SPECIAL REFERENCE TO PUDUCHERRY, INDIA

DR. R. T. NIRMAL KUMAR*; MR. BALAJI.K**

*Professor, School of management Studies,Surya Group of Institutions, Anna University Tharamani,

Chennai, Tamil Nadu, India.**Assistant Professor,

School of management Studies,Surya Group of Institutions,

Anna University Tharamani,

Chennai, Tamil Nadu, India.

ABSTRACT

This paper empirically investigates the Investors Perception towards commodities Futurestrading in India. Since 2004, the development of commodity derivatives markets has beenimpressive. It was observed that though derivatives trading commenced in the securities market

only in June 2000 it was growing at great speed while the commodity derivatives markets which

were operational for about 48 years by then was only gradually waking up. It is very evident thatInstitutional players are restricted to participate in Commodities futures trading in India. Thus the

major player in Commodities Futures market is the Retail Investors. This study has been taken to

identify the Investors perception towards Commodities futures trading and the level of awarenesstowards Commodities Futures trading. The research design chosen is descriptive. The data was

collected using a questionnaire that consists of closed and open ended questions. Convenient

sampling method is employed. The statistical analyses were performed by using Chi Square,

Weighted average Method, One Way ANOVA and Rank Correlation.

This paper also deals with the historical perspective of Commodities Derivatives Market, the

scope of strengthening the Commodities derivatives trading and its regulations. The majoroutcome of this paper is that there is no significant relationship between the Gender and the

Category of Investment. There is significant difference between the perceptions and the saving

percentage for the commodity futures. Despite a long history of commodity futures trading in the

country, futures markets are still viewed with suspicion by many investors. Against suchconflicting views, commodity futures markets present a rich research agenda on identifying the

retail investors perception towards Commodities Futures trading.

KEYWORDS: Investors Perception, Commodities Futures, Financial Engineering.______________________________________________________________________________

INTRODUCTION

Commodity derivative markets have traditionally been a contentious issue at various policy

forums across the world, particularly with the imbroglio created by allegations from variouscorners that they encourage excessive speculation and are therefore responsible for the recent


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commodity price escalation. While this suspicion of excessive speculation in the commodity

markets has always been there among policymakers in developing nations like India, it has

become more widespread since 2008 in the wake of worldwide inflationary pressures on foodand energy. The sudden deflation in the value of various assets underlying different derivatives,

which includes commodity derivatives, in the wake of the global meltdown has provoked greater

apprehension about the economic utility of futures markets. The suspicion has reached such ahigh pitch that even the U.S., the biggest proponent of market forces with the most activecommodity exchanges in the world, is considering new modes of regulation, and is also

investigating the role of commodity derivative trading in the wake of steep rise in prices of

wheat, rice, and crude oil.

On the other hand, ever since commodity derivative trading was allowed in India in the new

millennium, there has always been a hue and cry against such markets, with the alleged notion of

excessive speculation. Rather than recognizing the potential economic utility of commodityderivative markets in price discovery and risk management, the government has been more

apprehensive about its alleged ill-effects. As a result, over time, a future trading has been

subjected to strict regulations, and certain commodities have been inflicted with occasional bans.Thus, while the disutility of the market is yet to be proven, the overcautious behaviour of the

government has never really allowed the market to develop and prove its utility.

Hence, in the midst of doubts and debates on the utility of commodity futures markets andagainst the background of conflicting views and vista, there is a need to identify the Investors

perception towards commodities market and this presents the agenda for research on commodity

futures.

RISE OF DERIVATIVES

The global economic order that emerged after World War II was a system where many lessdeveloped countries administered prices and centrally allocated resources. Even the developed

economies operated under the Bretton Woods system of fixed exchange rates.The system of

fixed prices came under stress from the 1970s onwards. High inflation and unemployment ratesmade interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing

exchange rates to fluctuate. Less developed countries like India began opening up their

economies and allowing prices to vary with market conditions. Price fluctuations make it hardfor businesses to estimate their future production costs and revenues. Derivative securities

provide them a valuable set of tools for managing this risk.

DEFINITION AND USES OF DERIVATIVES

A derivative security is a financial contract whose value is derived from the value of something

else, such as a stock price, a commodity price, an exchange rate, an interest rate, or even an

index of prices. In the Appendix, I describe some simple types of derivatives: forwards, futures,options and swaps Ashutosh Vashishtha & Satish Kumar International Research Journal of

Finance and Economics ISSN 1450-2887 Issue 37 (2010)


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Commodities Futures Contracts: A future contract is an agreement for buying or selling a

commodity for predetermined delivery price at a specific future time.Futures are standardized

contract that are traded on organized future exchange that ensures performance of thecontractsand thus remove the default risk. Dr. Narendar L.Ahuja (2005)

Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge somepreexisting risk by taking positions in derivatives markets that offset potential losses in theunderlying or spot market. In India, most derivatives users describe themselves as hedgers

(FitchRatings, 2004) and Indian laws generally require that derivatives be used for hedging

purposes only. Another motive for derivatives trading is speculation (i.e. taking positions toprofit from anticipated price movements). In practice, it may be difficult to distinguish whether a

particular trade was for hedging or speculation, and active markets require the participation of

both hedgers and speculators.

A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot

and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003)

describe Indias long history in arbitrage trading, with line operators and traders arbitragingprices between exchanges located in different cities, and between two exchanges in the same

city. Their study of Indian equity derivatives markets in 2002 indicates that markets were

inefficient at that time. They argue that lack of knowledge, market frictions and regulatory

impediments have led to low levels of capital employed in arbitrage trading in India. However,more recent evidence suggests that the efficiency of Indian equity derivatives markets may have

improved (ISMR, 2004).

EVOLUTION OF COMMODITY DERIVATIVE MARKETS

Commodity Derivative markets were set up in India in cotton in 1875 and in oilseeds in 1900 at

Bombay. Forward trading in raw jute and jute goods started at Calcutta in 1912. ForwardMarkets in Wheat had been functioning at Hapur since 1913, and in bullion at Bombay, since

1920. In 1919, the government of Bombay passed Bombay Contract Control (War Provision)

Act and set up the Cotton Contracts Board. With a view to restricting speculative activity incotton market, the Government of Bombay issued an Ordinance in September 1939 prohibiting

option business. Bombay Options in Cotton Prohibition Act, 1939, later replaced the Ordinance.

In 1943, the Defence of India Act was utilized on a large scale for the purpose of prohibitingforward trading in some commodities and regulating such trading in others on an all India basis.

In the same year oilseeds forward contracts prohibition order was issued and forward contracts in

oilseeds were banned. Similarly orders were issued banning forward trading in food-grains,

spices, vegetable oils, sugar and cloth. These orders were retained with necessary modificationsin the Essential Supplies Temporary Powers Act 1946, after the Defence of India Act had lapsed.

With a view to evolve the unified systems, Bombay enacted the Bombay Forward Contract

Control Act, 1947.

STRENGTHENING THE SCOPE OF COMMODITY DERIVATIVE TRADING

The issue of expanding the scope of commodity derivative trading is apparently normative andvalue judgmental. This is primarily because of a large group of people who feel that commodity


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derivative trading should not be allowed at all and hence the question of expanding its scope

does not arise. However, there are enough strong arguments in favour of strengthening

commodity derivatives markets and developing supportive market institutions and awareness.

Rutten, L. (2009): Researching Commodity Futures Markets, in Pavaskar, M. (ed.), Effects of

Futures Markets on Agricultural Commodities (Mumbai: Takshashila Academia of Economic

Research Limited).The role of commodity futures markets becomes even more compelling withIndia moving toward greater trade liberalization, particularly in the context of agriculture, andgetting further exposed to the volatilities of international trade and finance. Commodity futures is

a market mechanism that is viable for risk management and price discovery, and such institutions

can help bail out the economy from the vagaries of international trade. Ghosh, N. (2008a):Ruthlessness and Generosity of Markets: Futures as Instruments for Combating Agricultural

Price Volatility, Commodity Vision, 2(1), 12-18.

COMMODITY FUTURES MARKET IN 2009-10A REVIEW

The Indian Commodity Futures Markets continued to grow, despite the suspension of futures

trading in a few agricultural commodities. During the year 109 commodities were regulatedunder the auspices of the recognized Exchanges. During 2009-10, 21 recognized exchanges were

functioning. Out of the 109 commodities, regulated by the FMC, in terms of value of trade, Gold,

Silver, Copper, Nickel, Zinc, Lead, Guarseed, Soy Oil, Chana, Jeera and Guargum were the

prominently traded commodities.

SOURCES: FORWARD MARKETS COMMISSION ANNUAL REPORT 2009-10


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SOURCES: FORWARD MARKETS COMMISSION ANNUAL REPORT 2009-10

Against this backdrop the purpose of this paper is to study on Investors perception

towards Commodities futures trading, the level of awareness towards Commodities

Futures trading and to analysis the factors considered by investors, which

ultimately influence their investments. Empirical research was conducted and thedata was collected through survey method. Questionnaire was constructed which

consists of close ended questions. Sample size is 200 (Traders trading at

Puducherry, Union Territory, India). Convenient sampling method is employed.


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After an in depth review of literature, the statistical analysis were performed by

using Percentage Analysis, Chi Square, Weighted average Method, One Way

ANOVA and Rank Correlation.

FINDINGS AND DISCUSSIONS

PERCENTAGE ANALYSIS

40% of the respondents are having good experience in the practice of investment.

In commodity futures nearly 40% of the respondents are investing weekly once.40% of the respondents preferring medium term positions in trading

In commodity futures 44% of the respondents have invested 10 20% of their

savings.

30% of the respondents are trading in commodity futures through their self

research.

56% of the respondent feels that the felicitation fee charged by the company is

reasonable.

50% of the respondents feel that the margin requirement charged by the company is

high.

70% of the respondents feel that the commodity future trading is good investment

option.

30% of the respondents are selected gold as commodity for the investment infuture.

Most of the respondents are like to do the cash settlements instead of the physicalsettlement that is 80%.

Investors annual incomes are seem to be between the ranges of 2 3 lakhs.

ANALYSIS OF TWO VARIABLES

The following hypotheses were taken for testing:

By comparison between gender wise and category of investment (Excluding commodities

futures)

(H0): There is no significant relationship between the gender and category of investment.

(H1): There is significant relationship between the gender and category of investmentTABLE :I


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Level of significance = 0.05For testing the Hypothesis

Oi = Observed Frequency, Ei = Expected Frequency

EXPECTED VALUE

TABLE :II


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TABLE : III

Calculated Value = 3.847

Degree of freedom = (r-1) (c-1)

= (2-1) (7-1)

Degree of freedom = 6

Table Value = 12.59

Calculated Value < Table Value

3.847 < 12.59

INFERENCE

Since calculated value is less than table value we accepted the (H0) and rejected alternativehypothesis (H1).So there is no significant relationship between the gender and category of

investment.


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ONE WAY ANNOVA

Comparison made between the perceptions and the saving percentage for the commodity futures.

(H0): There is no significant difference between the perceptions and the saving percentage for thecommodity futures.

(H1):There is significant difference between the perceptions and the saving percentage for the

commodity futures.

TABLE: IV

0-10% 10-20% 20-30% Above 30% Total

Friends/family 10 27 7 8 52

Self-research 25 20 8 7 60

Media 24 19 2 3 48

Others 13 22 3 2 40

Total 72 88 20 20 200

TABLE: V

X1 X2 X3 X4 X1

X2

X3

X4

Total

Friends/family 10 27 7 8 100 729 49 64 942

Self-research 25 20 8 7 625 400 64 49 1138

Media 24 19 2 3 576 361 4 9 950

Others 13 22 3 2 169 484 9 4 666

Total 72 88 20 20 1470 1974 126 126 3696

C.F=T2

/N

= 2002/16

= 2500

TSS = C.F


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= 3696-2500

= 1196

SSC= ( C.F

= (72)2/4+ (88)2/4+ (20)2/4+ (20)2/4-2500

= 3432-2500

= 932

SSE = SST-SSC:

= 1196-932

= 264

TABLE: VI

ANOVA TABLE

V1=3, v2=12

F-table value = 5.95

Calculated value >Tabulated value

14.12 > 5.95

INFERENCE

Since the calculate value is greater than the table value. So we reject null hypothesis and accept

alternative hypothesis. There is significant difference between the perceptions and the savingpercentage for the commodity futures.


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APPLYING WEIGHTED AVERAGE METHOD

TABLE: VII

Weightings: 7 6 5 4 3 2 1

Factors No. of Respondents W.A Rank

Gold

86 56 21 13 8 10 6 40.89 I

Silver 80 51 20 15 16 8 10 39.28 III

Aluminum 21 15 10 51 80 11 12 27.32 V

Barley 10 13 56 11 45 55 10 25.96 VI

Crude oil 56 86 21 13 8 10 6 40 II

Flakementh 20 45 9 11 5 60 50 24.42 VII

Others 30 21 25 70 20 19 15 30.5 IV

Calculation of Weighted Average:

Formula = R1*7 + R2*6+ R3*5+ R4*4 + R5*3+R6*2+R7*1

Total weights

Sample Calculation:

Group Discussion = 86*7+56*6+21*5+13*4+8*3+10*2+6*1

28

= 40.89

INFERENCE

From the above table it is inferred that many investors prefers to take future contract in gold

rather than others and the minimum goes for the flakementh.


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APPLYING WEIGHTED AVERAGE METHOD

TABLE:VIII

Weightings: 6 5 4 3 2 1

Factors No. of Respondents W.A Rank

Market

conditions

70 21 30 45 15 19 21 VI

Profits 80 60 13 21 14 12 44.52 I

Speculator 40 35 10 20 45 50 31.19 V

Hedging 35 20 40 50 30 25 33.57 IV

Investmentopportunities

45 30 25 30 40 30 37.38 II

Arbitrage 50 30 35 40 20 25 36.90 III

Calculation of Weighted Average:

Formula = R1*6+ R2*5+ R3*4+ R4*3 + R5*2+R6*1

Total weights

Sample Calculation:

Group Discussion = 70*6+21*5+30*4+45*3+15*2+19*1

21

INFERENCE

From the above table it is inferred that futures contract are taken by investors for making profits.

Thus profit is considered to be the important factor for taking future contract and Minimumconsidering factor goes for market condition.


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CORREALATON CO-EFFICIENT

By comparing the frequent usage about the commodity futures and type of trade

(Ho): There is no significant relation with the frequent usage about the commodity futures andtype of trade.

(H1): There is significant relation with the frequent usage about the commodity futures and type

of trade.

TABLE: IX

X 72 80 48

Y 64 80 56

TABLE:X

r =

r = +0.733

INFERENCE

Since r is +ve there is no significant relation with the frequent usage about the

commodity futures and type of trade.

This study identifies that a perception lies with majority of investors that future trading will lead

to profits and it is not used for other purpose like hedging. The nature of the derivativesinstruments are to reduce the risk involved in trading but in real time investors are not taking

derivatives trading for reducing their risk involved in trading and profit making is considered to

be an important factor for the them. On the other side without focusing the market condition if aninvestor takes future contract how he/ she will book profit? The above study identified that less

X Y Xy

72 64 5184 4096 4608

80 80 6400 6400 6400

48 56 2304 3136 2688

=200 =200 =13888 =13632 =13696


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weights are given towards market condition and it is not considered as an important factor

among the investors while taking future contracts. Thus it reveals that without having proper

knowledge about derivatives, derivatives instruments many investors are trading. The studyfurther identified that only 30% of the respondents are trading in commodity futures through

their self research and majority are looking for sources of information from media, brokers,

friends etc. Majority of the investors do not know why and when to take commodities futurescontract. The perception about the Commodities futures trading should be drastically redefined,reshaped and repositioned among the retail investors, through constant education, training and

awareness program.

Thus the FMC has to conduct lot of training program for the investors to strengthen commodities

futures trading volume. This training program should cover the basic of commodities futures,how to do analysis for choosing the type of trade (Fundamentally and technically).The retail

investors should not drop their hope in futures trading on commodities because they are the

major player in the market because financial and foreign institutional investors are prohibited to

do trading in Commodities Futures for the long term sustainment of Commodities futures tradingFMC has to play pivotal role. On the other side a number of reforms and initiatives are still

needed in promoting India as a major futures trading hub in tune to the status of being amongst

the top five producers of most of the commodities. In addition India is also a major consumer of

bullion and energy products. A resurrected futures market ready to accelerate as a bullet traincannot run on the traditional tracks. Therefore, issues which would facilitate shifting the

commodity futures markets on to a modern track are to be tackled on an urgent basis. But at the

same time, the FMC and the Union Ministry of Consumer Affairs in India are consideringseriously reviving the Bill to amend the FCRA, since it lapsed after the dissolution of the last

Lok Sabha. The Bill seeks to not only strengthen, enlarge, and upgrade the FMC, with more

regulatory powers, but also legalize options, permit trading in intangibles with cash settlement

provisions, and allowing the entry of financial institutions, including foreign financial institutes,in commodity derivative trading business to broaden and deepen the markets. This research

paper throws open the lacunae and the pitfalls in Commodities Futures Trading, and how the

perception of investors should undergo drastic change.

REFERENCES

[1]Commodity Research Bureau (2008), The CRB Commodity Yearbook 2008, Hoboken: John

Wiley & Sons Inc.

[2]Deaton, A. and G. Laroque (1992), On the behaviour of commodities prices, Review ofEconomic Studies, No. 59, pp. 1-23

[3]Development of Financial Derivatives Market in India- A Case Study International ResearchJournal of Finance and Economics ISSN 1450-2887 Issue 37 (2010)

[4]Govt. of India (1952) Forward Contracts (Regulation) Act, 1952

[5]Government of India Forward Markets Commission, Annual Report 2009-10

[6]Hirani, Kapil (2007), Understanding Derivatives, available

at:http://kapilhirani.com/News5.php (accessed on May 20,2009)


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[7] Introduction to derivatives in India, available at:

http://business.mapsofindia.com/investmentindustry/introduction-to-derivatives.html(accessed

on May 27, 2009).

[8]Kannan, R. (2008), Onset of Derivatives Trading in Derivatives market, available at:

www.geocities.com/kstability/content/derivatives/first.html (accessed on May 20, 2009).

[9]Naik, Gopal and Jain, S.K (1999) A Study on the Performance of Indian Commodity FuturesMarkets, Indian Institute ofManagement, Ahmedabad.

[10]Dr. Narendar L.Ahuja : Commodities Derivatives market in India: Development,Regulations and Future prospectus (2005)

[11]Nair C.K.G: Commodities market Ready for take off? www.nseindia.com

[12]Piero Cinquegrana: The Need for Transparency in Commodity and Commodity DerivativesMarkets, ECMI Research Report No. 3/December 2008

[13]R.T. Nirmal and Balaji.K, 2011, Derivatives Market in India and the Role of Retail InvestorsICBSM 2011, Hyderabad, India

[14]S.M. Lokare Commodity Derivatives and Price Risk Management: An Empirical Anecdote

from India, Reserve Bank of India Occasional Papers Vol. 28, No. 2, Monsoon 2007

[15]Survey of the World's Commodity Exchanges 2005, UNCTAD Expert Meeting "Enabling

small commodity producers in developing countries to reach global markets"

[16]Telser, L.G. (1981): Why there are Organised Futures Markets, Journal of Law and

Economics, 24, 1-22.
http://www.nseindia.com/http://www.nseindia.com/

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