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COMMODITIES MARKET IN INDIA
BY Learning group 1 (Finance Major)
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INTRODUCTION
India, a commodity based economy, surprisingly has an
underdeveloped commodity market
A commodity may be defined as an article, product or material that
is bought and sold
A commodity market is the market where a wide range of products,
viz., precious metals, base metals, crude oil, energy and soft
commodities like palm oil, coffee etc. are traded
Different segments in commodities market:
- Over The Counter (OTC) Market
- Exchange Based Market
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HISTORY OF COMMODITY MARKET
Bombay Cotton Trade Association Ltd., set up in 1875, was the first
organized futures market
The Futures trading in oilseeds started in 1900 with the
establishment of the Gujarati Vyapari Mandali, which carried on
futures trading in groundnut, castor seed and cotton
The most notable futures exchange for wheat was chamber of
commerce at Hapur set up in 1913
Calcutta Hessian Exchange Ltd. was established in 1919 for futurestrading in raw jute and jute goods
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DIFFERENT TYPES OF COMMODITIES TRADED
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities:W
heat, Corn, Cotton, Oils, Oilseeds. Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc
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STRUCTURE OF COMMODITY MARKET
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LEADING COMMODITY MARKETS
Leading commodity markets of world:
York Mercantile Exchange (NYMEX)
London Metal Exchange (LME)
Chicago Board of Trade (CBOT) Leading commodity markets of India:
Multi Commodity Exchange (MCX) located at Mumbai
National Commodity and Derivatives Exchange Ltd (NCDEX)
located at Mumbai National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located at
Ahmedabad
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MAJOR PLAYERS IN THE FUTURES MARKET
The players in the futures market fall into two categories:
a) Hedgers
b) Speculators
LONG HOLDER SHORT HOLDER
HEDGER
Secure a price now to
protect against future
rising prices
Secure a price now to
protect against future
declining prices
SPECULATOR
Secure a price now in
anticipation of rising
prices
Secure a price now in
anticipation of
declining prices
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COMMODITIES ECOSYSTEM
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ADVANTAGES OF COMMODITIES TRADING
A good low risk portfolio diversifier.
A highly liquid asset class, acting as counterweight to stocks, bonds
and real estate.
Less volatile compared with equities and bonds.
Investors can leverage their investment and multiply potential
earnings.
High co-relation with changes in inflation.
You no longer need to put the whole amount for trading; only the
margin is required.
Traders can short sell and profit from falling prices.
Huge potential for the participants to earn profit.
Extended trading hours.
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RECENT TRENDS IN COMMODITY MARKET
The 2008 global boom in commodity prices for everything from
coal to corn was fueled by heated demand from the likes of China
and India.
Speculation in forward markets.
The maximum quantum of business has come from the futures trade
in farm items such as guar seed, soyabean, soy oil and mustard seed
as well as commodities such as energy and crude oil
The turnover of 23 commodity exchanges surged by over 50% to
Rs69.70 lakh crore till February of the current fiscal due to a sharprise in participation of agricultural and other commodities, the
Forward Markets Commission (FMC) has said.
The turnover of commodity bourses had stood at Rs46.40 lakh crore
in the same period last year, it said.
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The country's leading exchange Multi Commodity Exchange (MCX)'s
turnover soared by 42% to Rs57.70 lakh crore during April-February
of FY10, against Rs40.60 lakh crore in the same period last year.
The business of the leading agri-commodity bourse National Commodity
& Derivatives Exchange (NCDEX) rose significantly by 69% to Rs8.30lakh crore from Rs4.90 lakh crore
National Multi-Commodity Exchange of India Limited (NMCE)'s turnover
scaled up by five-folds to Rs1.90 lakh crore from Rs39,625 crore.
The new entrant, Indian Commodity Exchange (ICEX), made business of
Rs1 lakh crore since the launch of the exchange on 21 November 2009.
The turnover of regional exchange National Board of Trade has risen
sharply to over Rs25,000 crore so far this fiscal.
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INDUSTRY GROWTH
India is among the top-3 producers of most of the commodities, in
addition to being a major consumer of bullion and energy products.
50 times increases in last 3 year (source :- business standard)
Consumption increases 30 times
From Rs. 66,000 crore in 2002 to Rs. 33lakhs crore in 2007, is now
expected to grow at a steady speed of about 30% by 2010 and
touch a volume of Rs. 74lakhs crore ( ASSOCHAM)
ASSOCHAM has predicted that commodity market will see a growth
of 252% by end of 2011 and would generate about 10lakhemployment opportunities a huge industry which is new untapped ,
and as a replacement of equity market in the coming future .
Its has touched 3 times the volume of equity market globally with
proven track record of growing constantly
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TRADING OF COMMODITIES : AN EXAMPLE
Price of gold per gram : 1900
Price of gold per Kg (1900*1000) : 19,00,000
Suppose there is increase of Rs 20 per gram of gold
Then price of gold per gram is Rs 1920
Price of gold per Kg (1920*1000) : Rs19,20,000
The difference between previous price of gold with current price is Rs
20000
By 19 lakhs of investment earning is 20000.
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COMMODITY DERIVATIVES
India is among the top 5 producer of the most of the commodities in
addition to being a major consumer of bullion and energy products.
Agriculture contributes more than 23% to be GDP of Indian
economy.
It employees around 57% of the labour force on a total of 185
million hectares of land.
Agriculture sector is an important factor to achieving a GDP growth
of 8.10. All this indicates that India can be promoted as a major
centre for trading of commodity derivatives.
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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 possibilities of adverse price change in future creates risk for
business.
Derivatives are used to reduce or eliminate price risk arising from
unforeseen price change.
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TWO IMPORTANT DERIVATIVES
1. COMMODITY FUTURE CONTRACT
A future contract is an agreement for buying or selling a commodity
for a predetermined delivery price at a specific future time.
2. COMMODITY OPTION CONTRACT
Like futures, option 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 specified quantity of a commodity
at specified price on or before a specified date
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ROLE OF COMMODITY FUTURES IN INDIAS
ECONOMY (FUTURE PROSPECTS)
We could have major benefits from liberalization of the agricultural
sector
A system of futures markets will improve cropping patterns
Commodity futures markets are a part and parcel of a program for
agricultural liberalization.
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