1. Price Risk Management of Cotton using Exchange Futures

2. 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

3. 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.

4. Trading..

5. ICE-MCX Price Correlation (Year wise)

6. 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

7. MCX Cotton 2015 Onwards Volume & Open Interest

8. 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

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

10. 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

11. 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

12. 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

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

14. 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 (47171 – 36470)
In your business …
1. On 15th Feb –
2. On 15th Apr – 48000
You are in a Profit of Rs (48000– 34100)
NET Profit Rs.3199 ( )
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

15. 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 37285
2. On July 29th – sell MCX 47004
You are in Profit of Rs.9719 ( )
In your business …
1. On Apr 29th –
2. On July 29th – 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 ( ) Rs at business
The Net Loss of Rs.2181 ( ) against the price rise

16. 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…?

17. 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

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

19. Oh..quality..premium discount?
STAPLE LENGTH
MICRONAIRE
Below 28 mm = Rejected
Below 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

20. 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

21. 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 Rs 1.50/bale/day
150/day
Standard deduction for one month 0.35%
(Assume price Rs 20,000/bale)
7000
Total
12150

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

23. 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

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

25. 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.