Price Risk Management of Cotton using Exchange Futures

Commodity, futures, contract? “Commodity” is a product having commercial value and which can be produced,bought, sold and consumed “Futures” are standardized forward contracts traded on regulated exchanges. “Futures contract” is a contractual agreement between two parties to buy or sell an asset of a specified quantity and quality at a specific time in future at a specific price through the Exchange • The “main functions” of an Exchange traded futures contract are – Ø Trade Guarantee Ø Risk Management Ø Price Discovery Ø Transactional Efficiency Ø Liquidity

Cotton Contracts (Important Features): PARAMETER SPECIFICATION Price Quote Rs./ Bale Trading Unit 25 Bales Tick Size Rs. 10 Contract Months Oct, Nov, Dec, Jan, Feb, Mar, Apr, May, Jun, Jul Expiry Date Last trading day of month Delivery Unit 100 Bales Delivery Logic Compulsory Delivery Maximum Allowable Open Position For Individual Client: 1,50,000 bales. For a member collectively for all clients: 15,00,000 bales or 15% of the market wide open position whichever is higher. For Near Month Delivery: For Individual Client: 37,500 bales. For a member collectively for all clients: 3,75,000 bales or 15% of the market wide open position whichever is higher.

Trading..

ICE-MCX Price Correlation (Year wise)

Cotton snapshot App Indian market size : Rs. 60,000 Crores Annualized price volatility in 2015: 17% Exposure to price risk: More than Rs. 10,000 Crores Since launch MCX has witnessed trading about 10 crore bales Highest single day volume : 5,56,000 bales More than 6 lac bales are delivered through MCX since launch Market share almost 100% More than 90% correlation with ICE prices Contract specifications covers more than 75% of cotton grown in India Minimum impact cost due to high liquidity

MCX Cotton 2015 Onwards Volume & Open Interest

Who are all...? Producers: to sell Consumers: to buy Traders : to buy or sell Arbitragers : to exploit the differences between markets Speculators/Investors gain or loose from the preconceived desirous price movement

And you are … ? to transfer / manage /mitigate the undesired price risk Ginners – by selling Yarn mills/ spinning mills – by buying / selling

To put it simple … Stocks in hand – risk of price falling Sell NOW in exchange Stocks required for future – risk of price rising Buy NOW in exchange

Why this works…? Future price = spot price + carrying cost Future and spot prices move in tandem But in past it was different..!!!! Future price < spot price

Let us get into reality.. # price Rs / candy source :SIMA Date SPOT price# MCX price (july) Apr’15th 34100 36470 Apr’29th 34700 37285 May’16th 34800 36888 May’31st 36800 38393 Jun’15th 39700 41193 Jun’30th 42700 42468 Jul'15th 48000 47171 Jul’29th 46600 47004 # price Rs / candy source :SIMA

Spot and futures.. Last 4months Spot (sankar 6) price (rs/candy) – source – SIMA -CBE

You bought stock on Apr 15th for future ( July ) consumption You bought stock on Apr 15th for future ( July ) consumption.. (worried of price going down) In MCX.. 1.On 15th April – sell MCX @ 36470 2. On 15th July – buy MCX @ 47171 You are in loss of Rs 10701 (47171 – 36470) In your business … 1. On 15th Feb – bought @34100 2. On 15th Apr – consumed @ 48000 You are in a Profit of Rs.13900 (48000– 34100) NET Profit Rs.3199 (13900-10701) Date SPOT price MCX price Apr’15th 34100 36470 Apr’29th 34700 37285 May’16th 34800 36888 May’31st 36800 38393 Jun’15th 39700 41193 Jun’30th 42700 42468 Jul'15th 48000 47171 Jul’29th 46600 47004

You want to buy on Apr29th for Jul29th consumption … You want to buy on Apr29th for Jul29th consumption …. ( worried of price going up ) In MCX.. 1.On Apr 29th – buy MCX may @ 37285 2. On July 29th – sell MCX may @ 47004 You are in Profit of Rs.9719 (47004-37285) In your business … 1. On Apr 29th – price @34700 2. On July 29th – procured @ 46600 Date SPOT price MCX price Apr’15th 34100 36470 Apr’29th 34700 37285 May’16th 34800 36888 May’31st 36800 38393 Jun’15th 39700 41193 Jun’30th 42700 42468 Jul'15th 48000 47171 Jul’29th 46600 47004 You are in a loss of (34700-46600) Rs.11900 at business The Net Loss of Rs.2181 (9719-11900) against the price rise

Then delivery…??? Take at the price you bought for the future date (no matter price goes up / down!!!) And you get at Rajkot (Base), Kadi, Mundra (Gujarat), Yavatmal, Jalna, Jalgaon (Maharashtra), Sirsa (Haryana), Raichur (Karnataka) and Adilabad (Telugana) Don’t need hedging.. need only physical stock … how do I do…?

Delivery Process Yamada/Origo DEPOSITOR WH Moisture Testing at WH Samples Drawn (5 Bales) Staking Lab Testing (5 Samples) LAB (WAKEFIELD) EXCHANGE ACCREDITED WH Goods Deposited WH Receipts Issued

DELIVERY CENTERS WITH LOCATION DISCOUNT Sirsa (-250) Kadi (- 50) Mundra Rajkot (Basis) Yavatmal (- 200) Jalna/Jalgaon (- 150) Adilabad(-200) Raichur (- 200)

Oh..quality..premium discount? STAPLE LENGTH MICRONAIRE Below 28 mm = Rejected Below 28.50 to 28.0 = Discount of 2% 28.5 to 29.0 = No Premium/ Discount Above 29.0 to 30.0 = Premium 1% Above 30 mm = Premium 2% Below 3.5 = Rejected Below 3.6 and up to 3.5 = Discount of 0.3% 3.6 to 4.8 = No Premium/ Discount Above 4.8 and upto 4.90 = Discount of 0.3% Above 4.9 = Rejected TRASH ` COLOR GRADE Below 3.5% and up to 2% = Premium Of 1:0.5 Basis = 3.5% Up to 5% = Discount 1:1 Above 5% = Rejected Up to 31-3=No premium/discount 41-3 = Discount 5% 42-3=Discount 6% MOISTURE Basis = 8.5% Up to 9.5% = 1:1 Discount Above 9.5% = Rejected STRENGTH Minimum 28 GTex

MCX Transaction Charge Lot Size 25 bales Price Quote Rs. Per Bale (of 170 kg. each) Tick Size 10 Tick value 250 Price (assumed) 20,000 Contract Value 5,00,000 Turnover (both sides) 10,00,000 MCX Transaction Charge 50 Paisa/ L T. O. Charge/ Lot (Buy + Sell) Rs 5.00

Cost of Delivery ( Indicative) Approximate cost for giving delivery of 100 bales Rs/100 bale Sampling & Assayer 's charges (per 100 bale) 3000 Unloading & Stacking at Ware house Rs 20/bale 2000 Ware house charges @ Rs 1.50/bale/day 150/day Standard deduction for one month 0.35% (Assume price Rs 20,000/bale) 7000 Total 12150

Key liquidity dimensions MEASURES DEPTH Trading volumes Increased Liquidity in mid-months Number of participants Impact cost

MONTH-WISE DELIVERY & STOCKS Month-wise Delivery of cotton at MCX Platform Expiry date Qty (Bales) October, 30, 2015 600 November 30, 2015 4,600 December 31, 2015 5,500 January 30, 2016 9,700 February 29, 2016 7,800 March 31, 2016 14,500 April 29, 2016 14,100 May 31, 2016 19,700 June 30, 2016 2,700 July 29, 2016 4,200 Total (October 2015 to July 2016) 83,400

What is in it for me…? Margin money (5%) Volumes Assured quality Assured delivery Brokers at your next door KOTAK –CBE.

Thank You All views expressed in this presentation are based on the personal opinion of the author, looking at historical data, past trends and own understanding of market, and are not to be construed as an assurance or guarantee of any kind of return or profit. Market participants are expected to conduct all due diligence on their own before trading. The author or sender or presenter of this presentation shall not be liable for any trading loss incurred, under any circumstances, whatsoever.