Commodity Futures as an Investment Avenue

Dissertation submitted in partial fulfillment of the requirements of the Two year full-time Post Graduate Diploma in Management Program

Submitted by

Priyam Tripathi FT-FS-10-836

Institute for Integrated Learning in Management

Graduate School of Management 16, Knowledge Park-II Greater Noida 201 306 March,2012

FINAL DISSERTATION DECLARATION FORM

I hereby declare that the Project work entitled Commodity Futures as an Investment Submitted by me for the partial fulfillment of the Post Graduate Diploma in Management Program to Institute for Integrated Learning in Management, Greater Noida is my own original work and has not been submitted earlier either to IILM GSM or to any other Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and incorporated in this report from any earlier / other work done by me or others.

Name : Priyam Tripathi Place : Delhi

Date

: 26th March 2012

Signature of Student

ACKNOWLEDGEMENT
I would like to convey my heartiest gratitude to several people, for their support and guidance, which helped me to complete this project. I wish to take this opportunity to thank Prof. S.P KETKAR(Faculty) for permitting me to carry on this project. Last but not the least, my endless appreciation goes to my family and faculties who has stood by my side and given me moral support whenever I was low and boosted my will power.

Thank you!

Table Of Contents

Declaration Form Title Acknowledgement Introduction Literature Review Objective of the study

Pg. 2 Pg. 3 Pg. 4 Pg. 6 Pg. 11 Pg. 12

Research Design

Methodology Sampling Instruments Factor Analysis Cross Tabulation

Pg. 13 Pg. 16 Pg. 17 Pg. 18 Pg. 19 Pg. 20 Pg. 21 Pg. 25 Pg. 26 Pg. 45 Pg. 51

Industry Profile
Rules governing Commodity derivatives

Analysis & Interpretation Findings, Suggestions & Conclusion Bibliography Annexure

Questionnaire

Pg. 52

Introduction
Commodities have always been a part of our day to day life as one of the finest investment avenues available. But we have been unaware of them. The wheat in our bread, the Cotton in our clothes, our jewels, the oil that runs our Vechile, etc,are all traded across the world in major exchanges. India has a long history of trade in commodity derivatives; this sector remained underdeveloped due to the control over and intervention in commodities prices by the government for many years. The production, supply and distribution of many agricultural commodities are still governed by the state and forwards and futures trading

are selectively introduced with stringent controls. Free trade in many commodity items is restricted under the Essential Commodities Act, 1955 and the Agriculture Productive Marketing Committees Acts of the various state governments. The Mumbai Cotton Trade Association set up the first commodity exchange in India and formally organized futures trading in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trading in various commodities. The Gujarati Vyapari Mandali came into existence in 1900, which undertook futures trading in oilseeds for the first time in the country. The Calcutta Hessian exchange ltd and the East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. A future trading in cotton was organized in Mumbai under the auspices of East India cotton Association in 1921. Simultaneously, several exchanges were set up in major agricultural centers in North India before the World War broke out and they were mostly engaged in wheat futures until it was prohibited in 1921. The existing exchanges Hapur, Muzaffarnagar, Meerut, and Bhatinda etc were established during this period. The Government of India banned trading in commodity futures in the year 1967 in essential commodities. As the result of this, all the commodity futures in the year 1967, in order to have an effective control over the Khusro Committee in 1980, the Government, reintroduced futures trading in some selected commodities. As the result of this, all the commodity exchanges went out of business and many trades started resorting to unofficial and informal trading in futures On the recommendation of Khusro committee in 1980, the Government reintroduced futures trading in some selected commodities including cotton, jute potatoes etc. As the part of economic reforms, the government of India appointed a expert committee on forward markets under the chairmanship of K N Kabra in the year 1993. The committee submitted its report in 1944 and recommended for the reintroduction of futures, with an wider coverage of and scope for more agricultural commodities. In order to give a thrust to the agricultural sector, the National Agricultural Policy 2000 envisaged external and domestic market reforms and the dismantling of all controls and regulations on the agricultural commodity market. It has also proposed enlargement of the coverage of futures market to reduce wide fluctuations in commodity prices and for hedging the risk arising from price fluctuations.

In the budget speech delivered on 28 February 2002, the then Finance Minister announced an expansion of futures and forward trading to cover all agricultural commodities. This was followed by the removal of the ban on futures trading on 27 (out of 81 items) in oilseeds, oils and their cakes in August 2002. Subsequently, in February 2003, the Government removed the prohibition on the remaining 54 commodities also under the Forward trading in general and the agricultural sector in particular, The Securities Contracts (Regulation) Act, 1956, was also amended in August 2003 to provide for commodity derivatives Exchange (NCDEX ) and Multi Commodity Exchange (MCX), Mumbai. National status was given to those exchanges so that they would be automatically permitted to conduct futures trading in all commodities subject to the clearance of by laws and contract specifications by the FMC, While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operations in October and December 2003 respectively. Over the ages, commodities had been the basis for trade and industry. They have spurred commerce, encouraged exploration and altered the histories of nation. Today they are played a very important role in the world economy with billion of dollars of these commodities traded each day of exchanges across the world, so much so that today the commodity market are roughly 4-5 times the size of the equity market, where ever they are actively traded. Futures trading play a key role in the marketing of many important agricultural commodities and their products. And yet this institution is still perhaps the least understood and often the most condemned part of the entire marketing system. In our own country as well as in those like the U.S.A. and the U.K., where active Futures markets exist, a theoretical debate has been going on for quite some time as to their role and functions. Much of the discussion has naturally centered on the Effects of futures trading on prices. Some affirm that it helps to stabilize prices while others argue that because of the existence of speculation which is inherent in it; its price effects are often destructive. Little empirical evidence, however, has yet been produced in support of either view. The present study is an modest attempt in that direction. Trade in commodity futures contracts via the organized exchanges currently seen in the United States goes back to the 1860s. The basic concept is much older. There are records

of trade in contractual obligations, similar to modern day futures contracts, in China and Japan in earlier centuries. The current widespread and growing interest in commodity futures emerged during the 1970s. Extreme price variability in the grains, oilseeds, fibers, and livestock commodities brought with it an sense of urgency and a need for mechanisms to manage age exposure to price risk. Instability in the economy late in the decade and into the early 1980s brought double-digit inflation, the prime interest rate that exceeded 20 percent, and widespread uncertainty. Farm policy moved away from approaches that pegged specific prices for key agricultural commodities and toward a posture that would allow U.S. prices to trade in futures contracts for such diverse items as the agricultural commodities, treasury bills, lumber, foreign currencies, copper, and heating oil. Options on futures contracts can remove to related and major barrier to the use of commodity futures in the forward-pricing of agricultural commodities. The first is the producers constant fear that forward prices of future sales have been set too low or that forward prices (i.e., costs) of futures purchases have been set too high. Producers often equate bad outcomes, in terms of opportunity costs, with bad decisions. Even if the forward price established is profitable, there is a tendency for producers to view the hedge set early at relatively low prices (or at relatively high costs) to be a bad decision. If the futures side of the hedge loses money, the Tendency is to view the hedge as a mistake and to talk about losing money with the hedge. Second and related barrier to direct use of the futures markets is the need to manage a margin account and answer margin calls as the market rallies against a short position in the futures. Neither producers nor their lenders have always understood the need for a special and additional credit line to answer margin calls. There are countless examples of producers being forced to offset short hedges due to the inability or lack of a willing creditor to provide the needed margin funds. Often, the market turns lower after the upward price move that forced the producer to offset the short hedges. A loss is incurred in the futures account and than the producer is without price protection as the market turns and trends lower. In the budget speech delivered on 28 February 2002, the then Finance minister announced an expansion of futures and forward trading to cover all agricultural commodities. This was followed by the removal of the ban on futures trading on 27 (out

10

of 81 items) in oilseeds, oils and their cakes in August 2002. Subsequently, in February 2003, the Government removed the prohibition on the remaining 54 commodities also an under the Forward Contract (Regulation) Act, 1952, thus removing the statutory hurdles in futures trading in general and the agricultural sector in particular. The Securities Contracts (Regulation) Act, 1956 was also amended in August 2003 to provide for commodity derivatives. Soon thereafter, the Forward Markets Commission granted permission to three national multi-commodity exchanges via National Multi-Commodity Exchange of India Ltd. (NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX) and Multi-commodity Exchanges (MCX), Mumbai. National status was given to those exchanges so that they would be automatically permitted to conduct futures trading in all commodities subject to the clearance of bylaws and contract specification by the FMC. While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operation in October and December 2003 respectively.

Literature Review

11

Futures trading are a device for protection against the price fluctuations which normally arise in the course of marketing of commodities. Stockiest, processors and manufacturers utilize the futures contract to transfer the price risk faced by them. This is use of the futures market is commonly known as hedging. A futures contract is a highly standardize contract, which is invariably entered into for the basis variety, but against which other varieties within a stipulated range can also delivered with appropriate premier or discounts for the differences in their qualities from the basis during a period which, in futures market parlance, called the delivery month. Wherever a futures market is organized, two markets operate side by side, viz., the spot and the futures. For purposes of hedging, those who have bought stocks and are, therefore, long in the ready market sell in the futures market while those who have sold the actual commodity and are shorts in the ready market are buyers in the futures market.

Benefits of literature review

As the study is being formulated on general public, the elements that affect this segment and what are the criteria that this segment follows to safeguard their commodity future. Review of Literature help in understanding preferences and the outlook of general public towards investment. At the same time the theory also helped in understanding the concept of portfolio creation. The review of literature was beneficial for the successful completion of the project work and to carry out the survey in the right direction. The literature review updates the knowledge of the researcher on portfolio creation techniques and the need of the individual. It benefited in the learning of the profile of the respondents and their preferences.

12

Objectives of the study

1. To find out the various risk factors in using commodity future.

2. To study the influences of futures trading, on price and price variation

3. To evaluate the effectiveness of the various measures of commodity futures as

investment avenues in India.

13

14

Introduction
The commodities that have always been a Part of our day to day existence are also one of the finest Investment avenues available. The wheat in our bread, the Cotton in our cloths, our g jewels, the oil that runs our cars, etc; are all trades across the world in major exchanges. Over the ages, commodities have been the basis for trade and industry. They have spurred commerce, encouraged exploration and altered the histories of nation. Today they play a very important role in the world economy with billion of dollars of these commodities traded each day of exchanges across the world, so much so that today the commodity market are roughly 4-5 times the size of the equity market, where ever they are actively traded.

Statement of the problems

Primary commodity prices and their markets are known to behave differently from those of the manufactured goods or services. Theoretical analysis suggests that commodity prices will fall relative to others because of the inelastic demand. Thus, the real income of the commodity producers falls because inelastic demand prevents them from offsetting price movements with volume changes. The reason for extra volatility in commodity prices in the presence of natural shocks that are not predictable and majorly relate to the previous years production or consumption in price, followed by a slow or rapid reduction depending on the nature of the commodity. Commodity price cycles mainly have flat bottoms with occasional sharp peaks.

15

The following are four important commodity price problems:

a) Short-term fluctuations: These are some common among the agriculture

products, either within a year due to seasonal variations or from year to year because of abnormal weather variations and conditions. b) Medium-term changes: As seen often in oil or other mineral markets, responding to multi-year business cycles in the world economy.

c) Permanent changes: These are affecting the one or a few countries owing to
technological changes or the discovery of a new technology which alters competitiveness.

d) Long-term declining commodity prices: Normally, the behavior of commodity

prices short-term in nature and show a sudden rise or fall and this asymmetric behavior tends to impose costs on any scheme meant for balancing price fluctuations. All this exposes producers to the dual problem of lower returns and higher risks.

Need of the study

There have been a number of studies made in the field of investment and creation of portfolios. All the studies made are in reference with income levels in general. Income levels even though same but the field of work and the life style of a particular segment differ from others, which in turn affects the saving and investment priorities.

Scope of the study

16

This study focuses on futures alone among derivative. Among futures, only commodity future has been assessed. The main focus on potential investors and those who invest regularly commodity futures there return, risk and expectation towards commodity futures of this study is to asses to examine the various risk factors in using commodity futures by inflation and price fluctuation, and to evaluate the future trading on price and price variation

Hypothesis statement:
Testing: For hypothesis testing Chi square test is used. The total no of respondents who are involved in the survey are 60 out of which 45 respondents are regular investors in commodity futures remaining 15 were potential investors Hypothesis to be tested:

Ho-Commodity futures are not excellent vehicle for investment Hi-Commodity future are excellent vehicle for investment

Methodology

According to Clifford woody research comprises of defining, redefining problem, formulating hypothesis or suggested solution, collecting, organizing and evaluating data, making deductions and conclusions to determine whether they fit the formulating hypothesis.

17

It is a way to systematic solution of the research problem. The researcher needs to understand the assumption underlying various techniques and procedures that will be applicable to certain problem. This means that it is necessary for the researcher to design its methodology. There are various factors such as the personal factors as well as the market factors that motivate a person to save and invest. Thus, the questionnaire will be directed towards the respondents to give the feed back about their savings interest and the various investment opportunities they are aware about and it also give us respondents to rethink about their investment criteria and upgrade it to their maximize returns.

Sampling
All items under study in any field of survey are known as a universe or population. A complete enumeration of all items in the population is census enquiry, which is not practically possible. Thus sample design is done which basically refers to the definition plan defined by data collection for obtaining a sample from a given population.

Sampling Technique
This study is purposive in nature as the research is focusing on the various matters that are related to general investment avenue .Research is not trying to reach a conclusion by making any assumption and findings are based on the results of the respondents that enrich our database with a focus on the creation of certain portfolios in general investment avenue Convenient Sampling approach is adopted here. This is due to the fact that the respondents were available only at the colleges and only at the duty time, to get the clear idea of their approach the nearest colleges were selected and the study was made.

Sampling unit
The sample size consists of professionals. Thus the population selected was of Professionals consisting of both males and females of different age groups, holding

18

different qualifications.

Sampling size
The sample size consists of 60 respondents of various financial institutions. The sample size is drawn using convenience sampling method.

Sample design
Sample design refers to a definite plan followed for the collection of sample from a given population. The process followed was, firstly a questionnaire was prepared with the objective in mind. The respondent from various financial institutions were determined. The second step includes convenience sampling whereby the selected population was considered and the questionnaire was administered.

Instruments
An open-ended questionnaire has been administered, backed by a personal interview to draw detailed explanations on the investment pattern. The instrument used to collect the data from primary source is structured questionnaires which consist of number of questions printed in a systematic form. Information was collected from regular investors and potential investors.

Tools for data collection

In dealing with real life problems it is often found that the data at hand are inadequate, and hence, it becomes necessary to collect sufficient data that are appropriate. The data can be of two types- Primary data as well as Secondary data. In this study the Primary data is collected by means of personnel interview with the help of questionnaires which is designed in such a manner that the faculties of all streams can use it easily.

19

The secondary data are those data which already exist. This data is also an important input for the study, and in this case the secondary data is collected from various records, magazines, text books, internet, discussion with various in house faculties etc.

Plan of the analysis

The data collected through questionnaire and the secondary data available was researched in detail; it was further classified and tabulated for the purpose of analysis to generalize percentages. Based upon the information and objectives of the study, conclusions were drawn, suggestions and recommendations are made which can be used in providing appropriate training and development programs. Graphs and Charts have been used wherever necessary. The tabulated data is being graphically represented for the better analysis. Software use for data analysis

MS Excel

&

SPSS

Factor analysis
Factor analysis is a general term for several specific computational techniques. All have the objective of reducing to a manageable number many variables that belong together and have overlapping measurement characteristics.

20

The predictor- criterion relationship that was found in the dependence situation is replaced by a matrix of inter correlations among several variables, none of which is viewed as being dependent on another. For example, one may have data on 100 employees with scores on six attitude scale items.

Method
Factor analysis begins with the construction of a new set of variables based on the relationships in the correlation matrix. While this can be done in a number of ways, the most frequently used approach is principal components analysis. This method transforms a set of variables into a new set of composite variables or principal components that are not correlated with each other. These linear combinations of variables, called factors, account for the variance in the data as a whole. The best combination makes up the first principal component and is the first factor. The second principal component is defined as the best linear combination of variables For explaining the variables not accounted for by the first factor. In turn, there may be a third, fourth, and component, each being the best linear combination of variables not accounted for by the previous factors.

Cross tabulation

Cross tabulation is a technique for comparing two classification

variables, such as

gender and selection by ones company for an overseas assignment. The technique uses

21

tables having rows and columns that correspond to the levels or values of each variables categories. An example of a computer-generated cross-tabulation. This table has two rows for gender and two columns for assignment selection. The combination of the variables with their values produces four cells. Each cell contains a count of the cases of the joint classification and also the row, column, and total percentages. The number of row cells and column cells is often used to designate the size of the table, as in this 2*2 table. The cells are individually identified by their row and column numbers, as illustrated. Row and column totals, called marginal, appear at the bottom and right margins of the table. They show the counts and percentages of the separate rows and columns. When tables are constructed for statistical testing, we call them contingency tables, and the test determines if the classification variables are independent. Of course, tables may be larger than 2*2.

22

For a market to succeed, it must have all three kinds of participants-hedgers, speculators and arbitragers. The confluence of these participants ensures liquidity and efficient price discovery on the market. Commodity markets give opportunity for all three kinds of participants. In this chapter we look at the use of commodity derivatives for hedging, speculation and arbitrage. HEDGING Many participants in the commodity futures market are hedgers. They usually use the futures market to reduce a particular risk that they face. This risk might relate to the price of wheat or oil or any other commodity that the person deals in. The classic hedging example is that of wheat farmer who wants to hedge the risk of fluctuations in the price of wheat around the time that his crop is ready for harvesting. By selling his crop forward, he obtains a hedge by locking in to a predetermined price. Hedging does not necessarily improve the financial outcome; indeed, it could make the outcome worse. What it does however is, that it makes the outcome more certain. Hedgers could be government institutions, private corporations like financial institutions, trading companies and even other participants in the value chain, for instance farmers, extractors, ginners, processors etc., who are influenced by the commodity prices.

23

SHORT HEDGE A short hedge is the hedge that requires a short position in futures contracts. As we said, a short hedge is appropriate when the hedger already owns the asset, or is likely to own the asset and expects to sell it at sometime in the future. For example, a short hedge could be used by a cotton farmer who expects the cotton crop to be ready for sale in the next two months. A short hedge can also be used when the assets are not owned at the moment but is likely to be owned the future. For example, an exporter who knows that he or she will receive a dollar payment three months later. He makes a gain if the dollar increases in a value relative to the rupee and makes a loss if the dollar decreases in value relative to the rupee. A short futures position will give him the hedge he desires.

LONG HEDGE Hedges that involve taking a long position in futures contract are known as long hedges. A long hedge is appropriate when a company knows it will have to purchase a certain asset in the future and wants to lock in a price now. SPECULATION An entity having an opinion on the price movements of a given commodity can speculate using the commodity market. While the basics of speculation apply to any market, speculation in commodities is not as simple as speculating on stocks in the financial market. For a speculator who thinks the shares of a given company will rise, it is easy to buy the shares and hold them for whatever duration he wants to. However, commodities are bulky products and come with all the costs and procedures of handling these products.

24

The commodities futures markets provide speculators with an easy mechanism to speculate on the price of underlying commodities. To trade commodity futures on the NCDEX, the customer must open a futures trading account with a commodity derivatives broker. Buying futures simply involves putting in the margin money. This enables futures traders to take a position in the underlying commodity without having to actually hold that commodity. With the purchase of futures contract on a commodity, the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future.

Speculation: Bearish commodity, sell futures

Commodity futures can also be used by a speculator who believes that there is likely to be excess supply of a particular commodity in the near future and hence the prices are likely to see a fall. How can he trade based on this opinion? In the absence of a deferral product, there wasnt much he could do to profit from his opinion. Today all he needs to do is sell commodity futures.

ARBITRAGE A central idea in modern economics is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of a same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. Indian commodity exchange and progress

25

The Bombay Cotton Trade Association set up the first commodity exchange in India and formally organized futures trading in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trading in various commodities. The Gujarati Vyapari Mandali came into existence in 1900, which undertook futures trading in oilseeds for the first time in the country. The Calcutta Hessian exchange ltd and the East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. Futures trading in cotton were organized in Mumbai under the auspices of East India cotton Association in 1921. Simultaneously, several exchanges were set up in major agricultural centers in North India before the World War broke out and they were mostly engaged in wheat futures until it was prohibited in 1921. The existing exchanges Hapur, Muzaffarnagar, Meerut, Bhatinda etc were established during this period. The Government of India banned trading in commodity futures in the year 1966 in essential commodities. As a result of this, all the commodity futures in the year 1966, in order to have an effective control over the Khusro Committee in 1980, the Government, reintroduced futures trading in some selected commodities. As the result of this, all the commodity exchanges went out of business and many trades started resorting to unofficial and informal trading in futures.

Rules governing commodity derivatives exchanges

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the exchanges, which are granted recognition by the central government. All the exchanges, which deal with forward contracts, are required to obtain certificate of registration from the FMC. Besides, they are subjected to various laws of the land like

26

the companies Act, Stamp Act, Contracts Act, Forward commission Act and various other legislations, which impinge on their working. Forward Markets Commission provides regulatory oversight in order to ensure financial integrity, market integrity and to protect and promote interest of customers/ nonmembers. It prescribes the following regulatory measures:

1. Limit on net open position as on the close of the trading hours. Some times limit
is also imposed on intra- day net open position. The limit is imposed operatorwise, and in some cases, also member-wise. 2. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. 3. Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the exchange.

4. Circuit breakers or minimum/maximum prices these are prescribed to prevent

futures prices from falling below as rising above not warranted by prospective supply and demand factors.

5. Skipping trading in certain derivatives of the contract, closing the market for a
specified period and even closing out the contract.

27

DATA ANALYSIS AND EVALUATION OF PEDIATRECIANS 1. Cross tabulation between income group and age group.
Case Processing Summary Cases Valid N Percent N Missing Percent N Total Percent

28

income * age

60

92.3%

7.7%

65

100.0%

Table No 1

Income * age Cross tabulation

age .25 Incom e >200000 Count % within income % within age 200000 to 300000 Count % within income % within age 300000 to 375000 Count % within income % within age 375000 & ab Count % within income % within age Total Count % within income % within age 8 53.3% 100.0% 0 .0% .0% 0 .0% .0% 0 .0% .0% 8 13.3% 100.0% 25 to 40 7 46.7% 43.8% 9 75.0% 56.3% 0 .0% .0% 0 .0% .0% 16 26.7% 100.0% 40 to 50 0 .0% .0% 3 25.0% 25.0% 9 60.0% 75.0% 0 .0% .0% 12 20.0% 100.0% 50 above 0 .0% .0% 0 .0% .0% 6 40.0% 25.0% 18 100.0% 75.0% 24 40.0% 100.0% 15 100.0% 25.0% 12 100.0% 20.0% 15 100.0% 25.0% 18 100.0% 30.0% 60 100.0% 100.0% Total

Source: Primary Data

INFERENCE: According to the survey most of the investors are falling under there income more than375000 and age group 50 & above are regular investors among other age and income group because it could be they are more aware about trading system and their annual income also high.

Figure No .1

29

20

age .25 25 to 40 40 to 50 50 above

15

Count
10 5 0 >200000 200000 to 300000 300000 to 375000 375000 & ab

income

2. Cross tabulation between income and occupation.

30

Case Processing Summary

Cases Valid N income * occupati on 60 Percent 92.3% N 5 Missing Percent 7.7% N 65 Total Percent 100.0%

Table No .2

Income * occupation Cross tabulation

occupation Pvt. Emp 0 .0% .0% 0 .0% .0% 12 % within income % occupation 375000 & above Count % within income 50.0% % occupation Total Count % within income % occupation within within 42.9% 100.0% .0% .0% 30.0% 50.0% .0% .0% 100.0% within 80.0% 57.1% 9 within govt emp 0 .0% .0% 0 .0% .0% 0 .0% .0% 9 businessman 15 100.0% 75.0% 5 41.7% 25.0% 0 .0% .0% 0 professional 0 .0% .0% 7 58.3% 70.0% 3 20.0% 30.0% 0 Total

income

>200000

Count % within income % occupation Count within

15 100.0% 25.0% 12 100.0% 20.0% 15 100.0% 25.0% 18

200000 to 300000

% within income % occupation 300000 to 375000 Count

21 35.0% 100.0%

9 15.0% 100.0%

20 33.3% 100.0%

10 16.7% 100.0%

60 100.0% 100.0%

Source: Primary Data

INFERENCE: 31

According to the survey income and occupation among that income falling above 375000 per alum and occupation pvt .employees are regularly investors because there income may be high when compare to other income group.

Figure No 2

14

12

Occupation pvt emp govt emp Businessman proffessional

Count

10

0 >200000 200000 to 300000 300000 to 375000 375000 & ab

Income

32

3. Do you trade in commodity futures?

Statistics trader1 N Valid Missing 60 5 1.00 2.00

Minimum Maximum

Table No 3
Traders in Commodity futures Cumulative Percent 81.7 100.0

Respondent Valid regular trader potential customer Total Missing Total System

Frequency 49 11 60 5 65

Percent 75.4 16.9 92.3 7.7 100.0

Valid Percent 81.7 18.3 100.0

Source: Primary Data

INFERENCE:

According to the survey commodity traders are high. That is regular traders more significant among two variables. So it got 49% out of 60 %.

33

Figure No .3

trader1

100

80

Percent

60

40

20

0 regular trader potential customer

trader1

34

4. If they trade regularly, why

Table No .4

Attributes of satisfaction
Options
Trade on exchange an organized

No of Respondent 12

Percentage

24.48%

Standardized contract terms

17

34.69%

follows of daily settlement

12

24.48%

location of settlement

13.33%

Total

49

100%

35

Source: Primary Data

INFERENCE:

According to above definition it is clear that regular investors in commodity futures are satisfied about its facilities and futures contract. Among all these attributes Standardized contract signifies more 34.69% when compare to other variable.

Figure No 4

36

regular investors in commodity futures

Regular trader Trade on an organised axchange Standardized contract terms follows of daily settlement location of settlement

5. Do you think futures trading influence the price and price variation?
Influences Valid Missing Std. Deviation

60 5 .49717

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Table No 4.1

Future trading influences price and price variation

Sources Primary Data

Frequency Valid influences the price variation not influence the price variation Total Missing Total System 25 35 60 5 65

Percent 38.5 53.8 92.3 7.7 100.0

Valid Percent 41.7 58.3 100.0

Cumulative Percent 41.7 100.0

INFERENCE:

According to the survey most of the investors believe that price and price variation dose not influence the price variation. Survey indicated that the major influencing factor that is 35% says that price dose not influence the commodity futures.

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Figure No 5

influences
influences the price veriation not influence the price veriation Missing

39

6. If price and price variation influences the fluctuation, how Summery

N Minimum Maximum Valid Missing 25 40 1.00 4.00

Table No .6

Attributes of influences in price and price variation

Frequency 10 5 5 5 25 40 65 Percent 15.4 7.7 7.7 7.7 38.5 61.5 100.0 Valid Percent 40.0 20.0 20.0 20.0 100.0 Cumulative Percent 40.0 60.0 80.0 100.0

Valid

seasonal price variation inter and intra seasonal fluctuation in price short term oscillation in prices average received by producers and paid by consumers Total

Missing Total

System

INFERENCE:

According to the survey most of the investors believe that price and price variation influences the fluctuation of the market. Survey indicated that the major influencing factors, seasonal price variation that influence in short term volatility in the market so table shows that 15.4 % among other variables got for seasonal price variation.

40

Figure No 6

10

Frequ ency

0 0.00 2.00 4.00

Mean =2.20 Std. Dev. =1.19024 N =25

Influence

41

7 .if price and price variation dose not influence commodity futures by various commodity trading.

Table No .7

Methods of risk avoiding

Options By hedging By speculation By arbitrage No of Respondent 12 15 8 35 Percentage 30 40

30 100

TOTAL

Source: Primary Data

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Price and variation

Table No .8

Respondent .

Observed No

Expected No.

(O E)

(O- E )2

( O-E )2\E

30 By hedging

30

By speculation

40

30

10

100

3.333

By arbitrage

30

30

- 10

100

3.333

Total 43

90

90

6.666

Source: Primary Data

2 =

d. f. = 3-1= 2 Tabulated value

[(O-E) 2/E] =6.666

= 5.991

Since calculated value of 2 = 6.666 is greater than the tabulated value 5.991, it is significance. Hence we conclude that the future trading dose not influence the price and price variation.

8. Are you satisfied about future trading in commodity exchange?

Ranks about satisfaction levels

Table No: 9

Options R1 R2 R3 R4 R5 R6 TOTAL

No of Respondent 10 15 10 10 10 5 60

Percentage 16.66 25 16.66 16.66 16.66 8.33 100

44

Source: Primary Data

INFERENCE: According to the survey most of the investors are satisfied above mentioned options i.e. R1, R2, R3, R4, R5, R6. Survey indicated that the major influencing factors for commodity futures are fair price discovery and transparent trading. So it helps investors to track the current fluctuation in price and proper price discovery.

Figure No .9

45

satisfied future trding

future trading Transparent trading 5 5 10 Fair price discovery automated trading system 15 10 unique identification number to prouide nationwide reach to bring trust

10

Attributes
R1-Transparent trading R2- Fair price discovery R3- Automated trading system R3- Unique identification number R4- To provide nationwide reach and consistent offering R5- To bring together the entities that the market can trust 9. Current regulatory mechanism of commodity futures in India
Table No: 10

46

Options R1 R2 R3 R4 R5

No of Respondent 10 18 8 12 12

Percentage 16.66% 30%

13.33% 20% 20%

Total

60

100%

Source: Primary Data

47

Attributes
R1- Limit on net open position as on the close of the trading hours. R2- Limit on price fluctuation to allow cooling of market in the event of abrupt upswing or downswing prices. R3- Special margin deposit to be collected on outstanding purchase or sales when price fluctuate. R4- Minimum\maximum prices-these are prescribed to prevent futures prices from falling below as rising above not warranted prospective supply or demand. R5- Skipping trading in certain derivatives of the contract, closing the market for a special period and even closing out the contract. Inference: According to the survey most of the investors are satisfied current regulatory measures that is above mentioned options i.e. R1, R2, R3, R4, and R5. Survey indicated that the major influencing factors for commodity futures are Minimum\maximum prices-these are prescribed to prevent futures prices from falling below as rising above not warranted prospective supply or demand. Skipping trading in certain derivatives of the contract, closing the market for a special period and even closing out the contract. So it helps investors to track the current regulatory measure in price and proper price discovery.

Figure No.10

48

Reguletery mechanism
18 16 14 12 Repondents 10 8 6 4 2 0 Reguletry mechanism R2 attributes R4 Series1

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Findings and Inferences

The following prerequisites are certain to give a big boost to commodity futures trading in India: A.)A negotiable document, may be in demat form, is to be created for the underlying asset of the futures being traded so that the title of the goods can be transferred from one individual to another without undertaking the physical delivery of stocks. 50

b.) An agency is to be set up to help the seller and buyer by grading the stocks being offered by them for sale and certify their quality so that the buyer can be sure of buying them. C.)There must be a Clearing House that takes care of the commodity that is being traded in the derivatives exchanges and ensures that quality is maintained till the stock under the traded contact is delivered to the ultimate buyer, at a reasonable cost. D.)Commodities trading must be settled in determined form so that traders from across the country can trade futures being certain of the underlying commodity in terms of its quality, grade, quantity and its maintenance during the intervening period. E.)Banks can come forward to sanction agriculture produce loans to farmers against the pledge of warehouse receipts and futures contracts of national derivatives exchanges. They should also explore the possibility of offering hedge prospects to farmers on a pooled basis, with banks as intermediaries between exchanges and farmers and thus pave the way for active futures trading in agriculture commodities so that farmers can enjoy the benefit of dependable price discovery well in advance to their planting and sowing season. G.) The market must be efficient with widespread awareness amongst various market players. The liquidity would increase further with a well-diversified basket of commodities.

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I.)The union Finance Minister, in his Budget-2005 speech, pleaded for a single regulatory regime. It will find very difficult to tackle complexities in the socio economic dimensions of the fledging commodity future. J.)Healthy competition is always beneficial to catalyze the growth in any market. In this case too, the government has to take necessary steps for the implementation of online commodity trading on the regional exchanges also. K.)The market should be made broader based by allowing banks and FIIs to participate in commodity futures. Options should be allowed to be traded as that will give one more efficient tool to the participants to apply various hedging strategies for averting their price risks.

CONCLUSION

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The agriculture industry requires increasing formation, improved availability of agriculture inputs, infrastructure facility agricultural business, etc A conductive environment also helps in bringing cost effectiveness by influencing the existence of commodity exchange will strengthen the market based trading system, which could also be used for by the Government. Definitely, commodity exchange will create an environment where farmers will have many options of selling their commodities like spot market, future market and future market referred OTC forward market. Due to future market being executable at national level in electronic format, integration of banks and institutional traders in commodities market would create several institutional traders in farmers. Thus MCX is likely to play a pivotal role in the process enable Second Green Revolution. With all its attendant benefits, we are confident that the commodity exchange will initiate the Second Green Revolution by making it the development mantra of the country in the 21st century. Therefore, the challenge right now for us is to take the fruits of the commodity futures make a difference by establishing a sustainable model for the development of kissanof the nation. Developing countries have large exposure to commodity price risk and can be eliminated by speculation hedging and arbitrage and seasonal price fluctuation. Exports are often concentrated in a few primary commodities with positively correlated price movements. The dependence on a few commodities and uncertain commodity prices expose such countries to uncertain revenues and expenditures. This has varied consequences such as affect the government revenue, have an adverse impact on commodity financing in terms of increased cost of debt or no or low debt due to poor credit worthiness etc. The beta calculation reflects a measure of historical alignment of the price of a stock with that of the market. Hence many regard it as a measurement of past relationship that cannot be naively used as an estimate of future risk. Why? Two reasons are commonly given; To overcome this limitation, some adjustment may be required. A procedure that is sometimes recommended is to take a weight average of the historical beta, on 53

the one hand, and 1.0 (the value of market beta) on the other. The weighting scheme should take into account the degree of historical estimation error and the dispersion of individual firms around the average. If the historical estimation error is large, the weight assigned to the historical beta should be small. The future is certainly bright for the Indian commodities market. Once the much awaited institutional participation enters the market, it will create speculation, arbitration and hedging for all kinds of players in the market

SUGGESTION

Delay the transfer of commodities in the name of transferee Effect take part either directly or indirectly transactions, which are likely to have effect of artificially, raising or depressing spot or derivatives contract. Miss calculation creates a false or misleading appearance of trading, resulting in reflection of prices which are not genuine. Buy, sell commodities contracts on his own behalf or on behalf of a person associated with him pending the execution of the order of his constituent

Indulge in falsification of his books accounts and records for the purpose of manipulation

54

55

BIBLIOGRAPHY

Books Referred: P. j. Kaufman commodity trading system and methods, john Wiley & sons, New York, 1978.The author include a chapter on behavioral techniques. He discusses contrarians strategies and demonstrates the use of the Elliott wave theory and measurement of moves and correction in future markets. Future and options in risk management by Terry j.Watsham. Derivative markets in India edited by susan Thomas.

Websites Visited: www.mcx.com www.sbi.com www.google.com www.ncdex.Com www.capitaline.com

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57

PART- A Personal Information

SEX

MALE

FEMALE

AGE GROUP

BELOW 25 YEARS 25 TO 40

40 TO 50 50AND ABOUE

QULIFICATION

BELOW PUC

DEGREE

POST GRA OTHERS.. OCCUPATION PVT .EMPLOYEE GOVT.EMPLOYEE PROFESSIONAL BUSINESSMAN

ANNUAL INCOME RS50000TO75000

BELOW 25000

RS 25000TO50000 75000&ABOVE 58

RS

Part B
1. Do you trade in commodity futures? Yes 2. If yes, why? i. Trade on an organized exchange ii. Standardized contract terms iii. Follows of daily settlement iv. Location of settlement 3. Do you think futures trading influence the price and price variation? Yes 4. If yes, why? i. Seasonal price variation ii. Inter and intra-seasonal fluctuation in price iii. Short term oscillation in prices iv. Average prices received by producers and paid by consumer No No

59

5. If no, why? a. By hedging b. By speculation c. By arbitrage 6. Are you satisfied about future trading in commodity exchange? Yes 7. If yes, please rank from 1 to 6 a. Transparent trading b. Fair price discovery c. Automated trading system d. Unique identification number e. To provide nationwide reach and consistent offering f. To bring together the entities that the market can trust 8. If no, comment i. ---------------------------------------------------------------------ii. -------------------------------------------------------------------9. How do you rank current regulatory mechanism of commodity futures in India a) Limit on net open position as on the close of the trading hours. b) Limit on price fluctuation to allow cooling of market in the event of abrupt upswing or downswing prices. No

60

c) Special margin deposit to be collected on outstanding purchase or sales when price fluctuate. d) Minimum\maximum prices-these are prescribed to prevent futures prices from falling below as rising above not warranted prospective supply or demand. e) Skipping trading in certain derivatives of the contract, closing the market for a special period and even closing out the contract.

THAK YOU FOR YOUR KIND CO-OPRATION.

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