1. Need To Hedge for Cotton Ginners, Spinners, Exporters/Importers and Farmers etc

2. Type Of Commodity Market
There are different type of Commodity Market:
Spot Market: bought & sold for cash and the delivery takes place immediately. Physical contracts for cotton are not standardized and specific to each transaction (volume, quality, location, etc).
2) Forward Market: The trading takes place directly between the buyer & seller. Terms such as
Qty, Quality, Delivery date and price and negotiated between buyer & Seller (two person
only).
3) Futures Trading: Future trading in commodities results in transparent and fair price
discovery due to the large scale participation from all entities associated with the value
chains involved.
Future market/ financial markets have uniformed standard contracts:
1) Delivery location/place, 2) Delivery procedures, 3) Quantity (Lot size), 4) Quality (like length, mic, moisture, trash, grade) and 6) Price etc
Did you Know?
The first organized futures market – Bombay Cotton Trade Association was started in Trading in certain commodities was stopped in 1960’s and 1970’s and resumed only in

3. What is Commodity Exchange ?
In simple terms, a commodity exchange is a market place where different commodities are traded.
Commodities are traded in standardized contracts of different maturities call futures contract
It is regulated by SEBI
Exchange has no role in pricing of contracts
Buyers and sellers determine the price.
In future markets, one trader’s gain is another’s loss (Zero Sum Game)
What is the need of Commodity Futures Exchange ?
A future exchange provides future price signals .
In the absence of price signals, one has access only to current prices.
a) he can not plan for the future and
b) policy makers would not be able to prepare for future plan.
Price Discovery
Price Risk Management/Hedging.

4. Fund based Arbitragers (Cash & Carry)
Participation Reach
Exporters
Brokers/ Traders
Ginners
Millers
Retail & HNI
Jobbers
Spreaders
Fund based Arbitragers (Cash & Carry)
Other financial
Value Chain
Financial Players

5. Cotton Snapshot Approximate Indian market size : Rs. 68,000 Crores
Annualized price volatility in : 19.3%
Exposure to price risk: More than Rs. 13,000 Crores
Just for example 29 MM Cotton which is being traded on MCX covers more than 75% of cotton grown in India
Minimum impact cost due to high liquidity

6. Price Risk Management (Hedging)
Price risk management is very important and essential for market participants, such as farmers, ginners, traders, exporters, spinners and textile companies etc.
The Concept of Hedging:
Hedging is the process of reducing or controlling risk. It involves, taking equal and opposite positions in two different markets (such as physical and futures market), with the objective of minimising or reducing risks associated with price changes.
It is a two step process, where a gain or loss in the physical position due to changes in price will be offset by changes in the value on the futures platform, thereby reducing or limiting risks associated with unpredictable changes in price.
Reducing risk may not always improve earnings, but failure to manage risk will have direct repercussion on the risk bearers long term income.
Finally, the purpose of HEDGING is to REDUCE price uncertainty and the impact of adverse Cotton price movements. It can enhance credit worthiness, ability to borrow and improve stability in profits.

7. Need to Hedge
For reducing the price risk due to volatility, cotton stakeholders need hedging. Though, insurance companies offer suitable policies to cover the risk of physical commodity losses due to fire, theft, transport mishaps etc., similarly they do not cover the risks of value losses resulting from adverse price variations.
Cotton stakeholder are exposed to heavy risk from adverse price increases on their overseas or domestic sale commitments of Cotton/yarn for delivery at a later date.
Price volatility, no doubt, also brings in its wake windfall gains to market functionaries. In the long run, such gains may even offset the losses from unfavorable price changes. But the losses when incurred are sometimes so large that they may even lead to insolvencies/bankruptcies.
Hence Cotton stakeholders need price hedging through the use of commodity price risk management instruments like futures contracts.

8. Hedging Illustration ( Falling Prices)
Scenario 1: Assume a ginner is holding stocks of 1000 bales of cotton (29mm) in March. By hedging, he can lock in the price for his stock in March itself and protect himself against the possibility of falling prices. The spot price of cotton today is Rs 19,000/bale and the price of May 2018 futures contract is Rs a bale.
The ginner sells (short) 40 lots of May 2018 contract in March (today) at Rs 19,500 for a delivery in May He deposits/pays only 5% of the contract value as initial margin to the exchange for entering a position in the futures market.
The prices fall in May. The ginner sells his stock in physical market for Rs a bale and takes an opposite position in the futures market, by buying 40 lots of May 2018 futures contract at Rs a bale (square off).
Time
Cash
Futures
Today
Spot market at Rs 19,000 a bale
Sells 40 lots (1 lot = 25 bales) of May at Rs. 19,500 a bale
May 2018
Sells 1,000 bales of cotton at Rs. 18,500 a bale
Buys 40 lots of May 2018 at Rs. 19,000 a bale
Result
Loss of Rs. 500 a bale
Gain of Rs. 500 a bale
Thus, ginners/traders/stockists/ hedged himself from the falling prices.

9. Hedging Illustration ( Rising Prices)
Hedging Strategy for Buyers (Exporters, Spinners, Traders):
Buyers can buy their requirement of the years in a futures contract by paying a margin of only 5% and lock their prices for the entire year. They can keep on procuring cotton in the physical market round the year and square off the corresponding position in futures. Thus, even if the cotton prices goes up, they don’t incur any loss, because the profit from furfures market offsets their increased cost of procurement.
Example: Suppose that today (in the month of March), an exporter receives an order to export 1000 bales of cotton in May. He is planning to buy cotton from spot market and export it in May. Assume, today’s spot prices is Rs 19,000 a bale and May contract trading at and he is worried that prices would rise by May. By hedging, he can lock in the purchase price in March itself, and protect himself from rise in prices in the spot market.
He can exit before expiry of the contract (square off). Exporter buy from the physical Rs. 20,000 a bale (loss of Rs 1000/bale) and sell (short) 40 lots of March 2018 contract at Rs. 21,000 a bale (gains Rs 500/bale).
Time
Cash
Futures
Today
Spot market at Rs 19,000 a bale
Buy 40 lots (1 lot = 25 bales) of May at Rs. 20,000 a bale
March 2018
Buy 1,000 bales of cotton at Rs. 20,000 a bale
Sell 40 lots of May 2018 at Rs. 21,000 a bale
Result
Loss of Rs a bale
Gain of Rs a bale
Thus, exporter hedged himself from the rising prices in the cash market.

10. Benefits of Hedging on MCX
India’s No.1 Commodity Exchange to trade cotton futures.
Only liquid cotton contract in India.
The contract is attuned to the physical market requirements in terms of staple length, Micronaire, tensile strength, trash etc.
Delivery Centers at major producing area in Gujarat, Maharashtra and Telangana.
High Correlation with prices at benchmark international exchanges (about 85%).
Exemption from CTT: Cotton has been put under list of commodities exempted from paying Commodities Transaction Tax (CTT).
Evening Trading Permitted: The market is operational both during morning and evening, and thus participants can take part in price discovery when global markets are active.
Early Pay-in: If a hedger makes an early pay-in of commodity, he is exempted from paying all applicable margins.

11. 29 MM Cotton Contract PARAMETER SPECIFICATION Price Quote Rs./ Bale
Trading Unit
25 Bales
Tick Size
Rs. 10/ Bale
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: 3,60,000 bales.
For a member collectively for all clients: 36,00,000 bales or 15% of the market wide open position whichever is higher.
For Near Month Delivery:
For Individual Client: 90,000 bales.
For a member collectively for all clients: 9,00,000 bales or 15% of the market wide open position whichever is higher.

12. Quality Specifications
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 to 31 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 3%
42-3=Discount 5%
MOISTURE
Basis = 8.5%
Up to 9.5% = 1:1 Discount
Above 9.5% = Rejected
STRENGTH
Minimum 28 GTex

13. Delivery Centers With Location Discount
Kadi
(- 50)
Mundra (0)
Rajkot
(Basis)
Yavatmal
(- 100)
Jalna/Jalgaon
(- 75)
Adilabad
(- 150)
Warangal
(- 150)

14. Month-Wise Delivery & Stocks
Month-wise Delivery of cotton at MCX Platform
Expiry date
Qty (Bales)
October 31, 2016
0.00
November 30, 2016
1,200
December 30, 2016
4,100
January 31, 2017
February 28, 2017
17,400
March 31, 2017
22,400
April 28, 2017
5,600
May 31, 2017
4,800
June 30, 2017
13,100
July 2017
23,500
Total (October 2016 to July 2017)
96,200
October 31, 2017
November 30, 2017
11,300
December 29, 2017
30,900
January 31, 2018
27,700
February 28, 2018
29,100
Stocks as on March 20, 2018
Stock eligible for Exchange Delivery
1,22,900
Stock in process for delivery
6,400
Capacity of warehouse
1,52,700

15. Testing Agency (Wakefield)
Delivery Process (WSPs: Yamada Logistcs, Orogo and Navjyoti Commodity Logistics)
DEPOSITOR WH
Moisture Testing at WH
Samples Drawn
(5 Bales)
Staking
Lab Testing
(5 Samples)
Testing Agency (Wakefield)
EXCHANGE ACCREDITED WH
Goods Deposited
WH Receipts Issued

16. Impact of Commodity Futures
Synopsis of Evaluation Studies
a) Study by Deloitte India (2013): Commodity futures market directly generates employment for around 1.5 million personnel in India – 0.93% of India’s service sector labor force
d) Study by Tata Institute of Social Sciences (2012): Futures platform has ensured stable and fair prices for the SMEs. Fairer prices reduce the cost of production and import bill, boost growth of the SMEs and provide accurate demand-supply signals that reduce risks in SMEs.
b) Study by The Nielsen Company (2013): Assessing the Impact of Dabba Trading on Commodity markets in India – The Dabba Market (trades outside the regulated markets) is more than 3 times of the trading through regulated Exchanges
e) Study by UNCTAD (2009): Number of intermediaries in Mentha value chain has reduced after introduction of futures market, reducing the price spread in the marketing channel from 11-12% to %. In case of Cardamom, it has helped to stabilize prices in the spot market.
c) Study by IIM Calcutta and NISTADS, New Delhi (2012): Mentha Oil futures facilitated rise of India as major exporter of processed mentha crystals – transitioning from raw material exports.
f) Study by IIM Lucknow (2007): Potato and Mentha Oil markets showed substantial improvements in increased price realization to farmers during the period after the introduction of futures.

17. How Can You Participate on Mcx
Choose the Member Broker
Fulfill KYC at Broker level
Arrange for minimum initial margin requirement
Update yourself on Mark-to-Margin requirements
Know MCX regulations and byelaws
Select the commodity/ product to trade
Read the Dos and Don’ts
Know and distinguish among:
Brokerage and Transaction Charges
Margins, Taxation and Stamp Duty
Default Penalties and Arbitration

18. Do’s & Don’ts in Commodity Derivative Markets
Trade only through Registered Members of the Exchange.
Visit MCX web site for Members Details to check if the member is registered with Exchange
Fill standard 'Know Your Client’ (KYC) form before you commence trading
Update your mobile number and/or id with your broker
Insist with your Broker to upload your mobile number and/or -id in the Exchange UCC database.
Insist on getting a Unique Client Code (UCC) and ensure all your trades are done in UCC
Insist on reading the standard 'Risk Disclosure Document (RDD)’ & ‘Rights & Obligation of Investor’
DON’TS
Do not be influenced by indicative returns or promises made
Do not get carried away by luring advertisements, rumors, hot tips
Do not make payments in cash/take any cash towards margins and settlement
Do not sign blank DPs while furnishing securities deposits
Do not pay brokerage in excess of the rates prescribed by the Exchange

21. Thank You