1. Commodity market 1

2. Flow of Presentation What do we mean by Commodity Market?
Global classification of commodities.
Commodities not traded in commodity market
How Commodities is an alternate asset class?
Scope of commodities market.
How to Trade in Commodities?
Various commodity Exchanges.
Commodity trading
Risk factors involved
Conclusion 2

3. Commodities
A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a markets.
Key Learning here was the difference between commodity and a brand.
The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer - a barrel of oil is basically the same product, regardless of the producer. Compare this to, say, electronics, where the quality and features of a given product will be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas.
Difference between commodity & a brand is that commodities are produced in large quantities by different producers & each has nearly the same quality whereas brands differ from this aspect.
Another difference being that people are generally emotionally attached with a brand whereas it is not in case of commodities.
Also a commodity generally acts as a raw material for further processing, but it is not so in case of brand which is generally a finished product.
All the differences above lead to the conclusion that why a brand is more costlier than a commodity. 3

4. Global classification of commodities
Metals
Agro-Based Commodities
Soft commodities
Petrochemicals & Energy.
These are some types of commodities generally traded in the Commodity Exchange. 4

5. Commodities not traded in commodity market
Non-tradable commodities
Rare Metals
Agricultural Products
Minerals and other materials

6. Rare metals - Germanium, Cadmium, Cobalt, Chromium, Magnesium, Manganese, Molybdenum, Silicon, Rhodium, Selenium, Titanium, Vanadium, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and Beryllium.

7. Agricultural products - Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Milk, Tomatoes, Grapes, Eggs, Potatoes, and Figs.

8. Asphalt, Aggregate, Arsenic, Borax, Boron, Gypsum, Asbestos, Chlorine, Fluoride, Cement, Sulfuric Acid, Carbon Dioxide, Fluorspar, Bromine, Titanium Dioxide.

9. Commodities – An Alternate Asset Class
Traditional choice of asset allocation includes stocks, bonds and real estate.
Now portfolio has shifted to alternative assets, like hedge funds, private equity, derivatives and commodities.
Traded on spot and forward markets.
Positively correlated with inflation.
Independent risk and return profile.

10. Portfolio Diversification
Low or negative co-relation allows commodities to reduce overall risk.
Hedge against inflation.
An improved risk/return profile in strategic asset allocation.

11. Let’s assume your total portfolio is $250,000 and you invest 80% in stocks and bonds ($200,000) and 20% in managed Commodities ($50,000). Let’s assume at the end of the year you realize a 5% return on your stocks and bonds and a 25% return on Commodities. The result would be as follows:

12. Now let’s assume you earn 10% on the 80% of your portfolio invested in stocks and bonds, but lose 25% in managed futures. The results would be as follows:

13. By investing only 20% of your portfolio in futures, if you were to earn 25%, it would outperform 80% of your portfolio invested in stocks and bonds if the stocks and bonds earned 5%.
You can also see that a 25% loss in futures would still leave you with a net profit of $7,500 if your stock and bond allocation returned 10%.

14. SCOPE OF COMMODITY MARKET
Allowing mutual funds and FII’s to participate in the commodity market
Widening the definition of commodities to include also commodity indices and weather derivatives
Changes in the Banking Regulation Act allowing banks to operate in the commodity exchanges
Allow set-offs on trading losses in the derivatives market.

15. FUTURE PLANS
NCDEX constantly plans to widen the menu of products available for trading to include:-
Other agricultural products,
Base metals,
plastics,
energy products
indices (including weather)

16. WAY AHEAD
Commodity exchanges in India are expected to contribute significantly in strengthening Indian economy to face the challenges of globalization.
Indian markets are poised to witness further developments in the areas of electronic warehouse receipts (equivalent of dematerialized shares), which would facilitate seamless nationwide spot market for commodities.

17. Amendments to Essential Commodities Act and implementation of Value-Added-tax
Options contracts in commodities.
Their may see increased interest from the international players in the Indian commodity markets once national exchanges become operational.

18. Commodity derivatives as an industry is poised to take-off which may provide the numerous investors in this country with another opportunity to invest and diversify their portfolio. Finally their may be greater convergence of markets – equity, commodities, Forex and debt – which could enhance the business opportunities for those have specialized in the above markets.

19. COMMODITY MARKET
Commodity market is a place where trading in commodities takes place. These are the markets where raw and primary products are exchanged.
These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities.

20. HOW TO TRADE IN COMMODITIES
COMMODITY FUTURE
A standardized agreement to buy (or sell) an asset in the future, at a price agreed today

21. COMMODITY EXCHANGE TRADED FUNDS (ETFs)
Commodity ETFs generally are index funds and track commodities indices.

22. COMMODITY STOCKS
Stocks which belongs to commodity related sector like metals, energy, agriculture etc.

23. COMMODITY MUTUAL FUNDS
Mutual funds which invest in stocks belonging to commodity sectors or fund of funds which invest in other commodity funds etc.

24. COMMODITY EXCHANGE
An entity, usually an incorporated non-profit association, that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures.
Commodities exchange also refers to the physical center where trading takes place

25. CONT…….
18 existing commodity exchanges in India offering domestic contracts in 8 commodities and 2 exchanges that have permission to conduct trading in international (USD denominated) contracts.

26. CONT…. The two most important commodity exchanges in India are;
1)Multi-Commodity Exchange of India Limited (MCX),
2)National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)

27. Structure of Indian Commodity Futures Exchanges
FMC
Commodity Exchanges
National exchanges
Regional exchanges
NCDEX
NMCE
MCX
NBOT
20 Other Regional Exchanges

28. NCDEX
National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity exchange. It has commenced its operations on December 15, 2003.
LIC, NABARD & NSE are Promoter Shareholder.
NCDEX is regulated by Forward Markets Commission. 28

29. NCDEX currently facilitates trading of 57, commodities including :
Agri-based commodities
Bullion
Energy
Ferrous metals
Non-ferrous metals
Plastics 29

30. 30 Institution Share Domain Expertise NABARD 15 %
Apex bank for agricultural lending
ICICI Bank
8 %
Largest private sector bank in India. Listed on NYSE
NSE
Largest stock exchange in India. Highest volume in single stock futures in world.
LIC
Largest life insurance company in India
CRISIL
12%
India’s first & largest credit rating agency. Now a Standard & Poor company
IFFCO
Largest farmer cooperative with affiliation of 36,000 cooperatives
PNB 8%
Large public sector bank with strong rural reach specially in North India
Canara Bank
Large public sector bank with strong rural reach specially in South India
Goldman Sachs 7%
Global Expertise in commodity markets 30

31. MCX
Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutulised exchange with a permanent recognition from Government of India.
Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Bank of India and Canara Bank.
MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana.

32. NMCE
National Multi Commodity Exchange of India Limited (NMCE) is the first de-mutualized, Electronic Multi-Commodity Exchange in India.
On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex.
It has operationalized from November 26, 2002.
It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited.

33. SPOT TRADING
Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.

34. FORWARD CONTRACT
A forward contract or simply a forward is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed. It costs nothing to enter a forward contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward pricing at the time the contract is entered into.

35. Futures contract, in refers to a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price).
The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.

36. Features of Future ……..
Futures are used for hedging, particularly in a bear market.
Futures are exchange-traded derivatives.
The particular asset as well as the quantity are specified in the futures contract.
The currency in which the contract is to be executed is also specified in future contracts.
Futures are used for hedging, particularly in a bear market. Those who have an interest in the underlying asset can protect themselves from the risk of price changes via futures contracts.
Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. 36

37. Futures have lower transaction costs than other debt instruments.
Future contracts have high liquidity, since buyers and sellers of futures contracts can be found easily.
Futures are highly standardized.
Settlement - The delivery month and the last trading date are also mentioned in the contract. 37

38. Forward Vs. Futures
While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in different respects:
Futures are margined, while forwards are not.
Forward contracts are private agreements. Futures contracts have clearing houses.
For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to market daily, which means that daily changes are settled day by day until the end of the contract.
Forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.
Futures are margined daily, every day to the daily spot price of a forward with the same agreed-upon delivery price and underlying asset whereas forwards are not. 38

39. Futures contracts are quite frequently employed by speculators
Futures contracts are quite frequently employed by speculators. On the other hand, forward contracts are mostly used by hedgers.
Futures are exchange-traded, while forwards are traded over-the-counter.
Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty.
Futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place.  39

40. The Major Actors in commodity market
KEY PLAYERS IN THE COMMODITY MARKET
The Major Actors in commodity market
SPECULATOR
HEDGER
BROKER
A Speculator is one who attempts to anticipate the price changes and to make profits through buying and selling contracts. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.
A Hedger is a producer or users of the commodity or financial product that enter into the future market to offset potential price changes in the spot market by buying or selling a futures contract.
For example, a cereal manufacturer may want to hedge against rising wheat prices by buying a futures contract that promises delivery of September wheat at a specified price. If, in August, the crop is destroyed, and the spot price increases, the manufacturer can take delivery of the wheat at the contract price, which will probably be lower than the market price.
A Broker is a party that mediates between a buyer and a seller. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. 40

41. FORWARD MARKETS COMMISSION
Forward Markets Commission (FMC) is headquartered at Mumbai.
It is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.
It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government.
Forward Markets Commission (FMC) is headquartered at Mumbai. It is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government. 41

42. OBJECTIVES OF FMC
To create competitive conditions so that no unscrupulous participants could use these leveraged contracts for manipulating prices.
To ensure that the market has appropriate risk management system.
To ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders.
The objectives of the FMC are as follows:-
1. To create competitive conditions so that no unscrupulous participants could use these leveraged contracts for manipulating prices.
2. To ensure that the market has appropriate risk management system.
3. To ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders. 42

43. FUNCTIONS OF THE FMC
FMC advises the central government to either grant recognition or to withdraw the recognition of any association.
It keeps the forward market under strong observation and takes action wherever necessary.
To make recommendations generally with respect to improving the organization and working of forward markets.
The functions of the forward market commission are:-
To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.
To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
To make recommendations generally with a view to improving the organization and working of forward markets.
To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods.
To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. 43

44. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
To collect and publish the information relating to trading conditions in respect of goods including information relating to demand, supply and prices.

45. Risk factors involved Changing demand–supply dynamics.
Climatic factors.
Industry related factors.
Geopolitical consideration.
Risk factors involved generally impact prices of various commodities.
Risk affects commodities prices as follows:
Changing demand supply dynamics can be best explained by using the example of crude oil when prices last year shot up nearly to $ 150 a Barrel, but as soon as the market conditions detiorated & demand for crude oil fell, the prices of crude oil then fall to nearly $ 40 a Barrel.
Climatic factors effect the prices of a commodity to a great extent. Due to drought like conditions in many parts of our country, the prices of various food grains & cereals are rising & the CPI is in double digits despite the fact that WPI is in negative.
Industry related factors also affect a great deal in prices of commodities. Eg. Prices of steel were at all time high at the time around Beijing Olympics due to huge infrastructure development, but post this event the prices of steel reduced drastically due to sudden decrease in its demand.
Formation of cartel by oil producing countries (OPEC) explains best the geopolitical considerations affecting the commodity prices. 45

46. Conclusion
Commodities are the distinct class of assets that are largely independent of equity and bond returns.
Long term fundamentals of commodity companies appears bright given the supply demand mismatch , emphasis on infrastructure development in many developing economies

47. SUBMITTED BY Abhinav Kansal Deepak Jain Arpit Khandelwal
Apeksha Khandelwal
Saumyadeep Dalal
Aastha Mittal
Ankit Mehta
Divya Jolly
Amit Goel