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Commodities Exchange

A commodities exchange is an exchange where variouscommodities and derivatives products are traded.

Most commodity markets across the world trade in

agricultural products and other raw materials (like wheat,barley, sugar, maize, cotton, cocoa, coffee, milk products,pork bellies, oil, metals, etc.) and contracts based on them.

These contracts can include spot prices, forwards, futures

and options on futures. Other sophisticated products mayinclude interest rates, environmental instruments, swaps, orocean freight contracts.

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Commodities exchanges usually trade futures contracts oncommodities, such as trading contracts to receive something, saycorn, in a certain month.

A farmer raising corn can sell a future contract on his corn,which will not be harvested for several months, and guaranteethe price he will be paid when he delivers; a breakfast cereal

producer buys the contract now and guarantees the price will notgo up when it is delivered. This protects the farmer from pricedrops and the buyer from price rises.

Speculators and investors also buy and sell the futures contractsto make a profit and provide liquidity to the system.

Continued

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Commodity Ecosystem

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Commodity Market Structure

Producers

(Farmers/

Co-operatives/

Institutional)

Commodities

Ecosystem

Consumers

(Retail/

Institutional)

QualityCertification

Agencies

Clearing Bank

Warehouses

Transporters/

Support

Agencies

Traders(Speculators)

Arbitrageurs/

Client)

Hedger

(Exporters/

Millers/

Industry)

Gl oba l C ommo di ti esM a r k e t

Spo t Mark et

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COMMODITY MARKETS - OVERVIEW

Indian commodity market set for paradigmshift

Four licenses recently issued by Govt. of India to set-upNational Online Multi Commodity Exchanges to ensure atransparent price discovery and risk management mechanism

List of commodities for futures trade increased from 11 in1990 to over 100 in 2003

Reforms with regard to sale, storage and movement ofcommodities initiated

Shift from administered pricing to free market pricing WTOregime

Overseas hedging has been allowed in metals

Petro-products marketing companies have been allowed tohedge prices

Institutionalization of agriculture

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Indias Place in World Market

COMMODITY INDIA WORLD SHARE RANK

RICE (PADDY) 240 2049 11.71 THIRD

WHEAT 74 599 12.35 SECOND

PULSES 13 55 23.64 FIRSTGROUNDNUT 6 35 17.14 SECOND

RAPESEED 6 40 15.00 THIRD

SUGARCANE 315 1278 24.65 SECOND

TEA 0.75 2.99 25.08 FIRSTCOFFEE(GREEN) 0.28 7.28 3.85 EIGTH

JUTE AND JUTE FIBERS 1.74 4.02 43.30 SECOND

COTTON (LINT) 2.06 18.84 10.09 THIRD

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Participants in Commodity FuturesParticipants in Commodity Futures

Farmers/ Producers

Merchandisers/ Traders

Importers

Exporters

Consumers/ Industry

Commodity Financers

Agriculture Credit providing agencies

Corporate having price risk exposure in commodities

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Commodity Exchange in India

The Government of India permitted establishment of National

level Multi-Commodity exchanges in the year 2002. They are

Multi Commodity Exchange (MCX) located at MumbaiNational Commodity and Derivatives Exchange Ltd

(NCDEX) located at Mumbai

National Board of Trade (NBOT) located at Indore

National Multi Commodity Exchange (NMCE) located atAhmedabad.

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Who regulates the commodity

exchanges?

Just as SEBI regulates the stock exchanges,

commodity exchanges are regulated by Forwards

Market Commission (FMC); Forwards Market

Commission is under the purview of the Ministry

of Food, Agriculture and Public Distribution.

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Different types of commodities that are

traded

Precious Metals: Gold, Silver, Platinum etc

Other Metals: Nickel, Aluminum, Copper etc

Agro-Based Commodities: Wheat, Corn, Cotton,Oils, Oilseeds, etc.

Soft Commodities: Coffee, Cocoa, Sugar etc

Live-Stock: Live Cattle, Pork Bellies etc

Energy: Crude Oil, Natural Gas, Gasoline etc

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Nation-wide Multi Exchanges vis-a-vis

Regional ExchangesBetter Reach in all parts of the country

Wider base for speculators from other markets including securities market

Broad basing of the underlying commodity

Industry diffused in several parts of the country may alsodirectly participate

Few commodities can be projected viable for an international futures

Contract, with participation from global player

Best management practices, end of day mark to market, online marginingand surveillance, daily pay-in & pay-out are some of the features to woo the

players

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How risky are these markets

compared to stock & bond markets?

Commodity prices are generally less volatile than thestocks and this has been statistically proven. Thereforeit's relatively safer to trade in commodities.

Also the regulatory authorities ensure throughcontinuous vigil that the commodity prices are market-driven and free from manipulations.

However all investments are subject to market risk anddepends on the individual decision. There is risk of losswhile trading in commodity futures like any otherfinancial instruments.

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Are the trades/ settlement

guaranteed by the exchanges?YES, the commodity exchanges have got some of the most highprofile corporate as their promoters.

Multi Commodity exchange of India, promoted by FinancialTechnologies Ltd has got on board institutions such as SBI, HDFCBank, Canara Bank, Corporation Bank, Bank of India, Union Bankof India, Bank of Baroda.

The National Commodity and Derivatives Exchange (NCDEX) hasgot NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as themajor share-holders.

Such a high profile share-holding provides these exchanges valuableexperience, knowledge and also high standards of operations .

Also the exchange guarantees the settlement of trades and soeliminates the counter-party risk in the transactions.

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Different segments in the

commodities marketThe commodities market exits in two distinct formsnamely the Over the Counter (OTC) market and theExchange based market.

Also, as in equities, there exists the spot and thederivatives segment. The spot markets are essentiallyover the counter markets and the participation isrestricted to people who are involved with thatcommodity say the farmer, processor, wholesaler etc.

Majority of the derivative trading takes place throughexchange-based markets with standardized contracts,settlements etc.

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What are Commodity Futures?

Commodity Futures are contracts to buy specific quantity of a particularcommodity at a future date.

It is similar to the Index futures and Stock futures but the underlyinghappens to be commodities instead of Stocks and indices.

Commodity futures market has been in existence in India for centuries.The Government of India banned futures trading in certain commoditiesin 70s.

However trading in commodity futures has been permitted again by thegovernment in order to help the Commodity producers, traders and

investors.World-wide, commodity exchanges originated before the other financialexchanges. In fact, most of the derivatives instruments had their birth incommodity exchanges.

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Who benefits from dealing in

commodity futures and how?If you are an investor, commodities futures represent a good form ofinvestment because of the following reasons:

Diversification The returns from commodities market are free from

the direct influence of the equity and debt market, which means thatthey are capable of being used as effective hedging instrumentsproviding better diversification.

Less Manipulations - Commodities markets, as they are governed byinternational price movements are less prone to rigging or pricemanipulations by individuals.

High Leverage The margins in the commodity futures market areless than the F&O section of the equity market.

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Continued.

If you are an importer or an exporter, commodities futures can helpyou in

the following ways:

Hedge against price fluctuations Wide fluctuations in the

prices of import or export products can directly affect yourbottom-line as the price at which you import/export is fixed

before-hand.

Commodity futures help you to procure or sell the commodities

at a price decided months before the actual transaction, thereby

ironing out any fluctuation in prices that happen subsequently

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Continued

If you are a producer of a commodity, futures can help you asfollows:

Lock-in the price for your produce If you are a farmer, there isevery chance that the price of your produce may come downdrastically at the time of harvest. By taking positions in commodity

futures you can effectively lock-in the price at which you wish tosell your produce.

Assured demand Any glut in the market can make you waitunendingly for a buyer. Selling commodity futures contract can giveyou assured demand at the time of harvest.

Increase in holding power You can store the underlyingcommodity in exchange approved warehouse and sell in the futuresto realize the future value of the commodity.

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Continued.

If you are a large scale consumer of a product, here is how this

market can help you:

Control your cost If you are an industrialist, the raw materialcost dictates the final price of your output. Any sudden rise in the

price of raw materials can compel you to pass on the hike to yourcustomers and make your products unattractive in the market. By

buying commodity futures, you can fix the price of your rawmaterial.

Ensure continuous supply Any shortfall in the supply of raw

materials can stall your production and make you default on yoursale obligations. You can avoid this risk by buying a commodityfutures contract by which you are assured of supply of a fixedquantity of materials at a pre-decided price at the appointed time.

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Are there physical deliveries in

commodity futures exchanges?

YES, the exchanges, in order to maintain the futures prices

in line with the spot market, have made available

provisions of settlement of contracts by physical delivery.

They also make sure that the price of futures and spot

prices coincide during the settlement so that the arbitrage

opportunities do not exist.

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How the deliveries are made

possible?

The exchange has enlisted certain cities for specific commodities asthe delivery centers.

The seller of commodity futures, upon expiry of the contract may

choose to deliver physical stock instead of settling the positions bycash, in which case he would be required to deliver the stocks to thespecified warehouses.

The buyer of the commodity futures, if he is interested in physicaldelivery would be matched with a seller and would be required to

take delivery of the specified quantity of stock from the designatedwarehouse.

In case of NCDEX it is mandatory to open a Demat account with anapproved DP by the buyer and seller if they wish to take/ givedelivery of goods.

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Opportunities

Speculation

HedgingArbitrage

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Working of Commodity Exchange

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Settlement Of Future Contracts

How would contracts settle?

What would be the settlement period?

Are deliveries compulsory?How would the settlement take place in

commodity futures market?

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Neat Trading terminal

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Delivery Information

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Thank You