Abstract on commodities trading

8/7/2019 Abstract on commodities trading

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About KARVY Group

Karvy has traveled the success route, towards building a reputation as an integrated

financial services provider, offering a wide spectrum of services for over 20 years.

Karvy, a name long committed to service at its best. A fame acquired through the range

of corporate and retail services including mutual funds, fixed income, equity investments,

insurance ……… to name a few. Our values and vision of attaining total competence inour servicing has served as a building block for creating a great financial enterprise.

The birth of Karvy was on a modest scale in the year 1982. It began with the vision and

enterprise of a small group of practicing Chartered Accountants based in Hyderabad, whofounded Karvy. We started with consulting and financial accounting automation, and

then carved inroads into the field of Registry and Share Transfers.

Since then, we have utilized our quality experience and superlative expertise to go fromstrength to strength to provide better and new services to the investors. And today, we

can look with pride at the fruits of our experience into comprehensive financial services

provider in the Country.

KARVY Group companies are:

Karvy Consultants Limited

The first securities registry to receive ISO 9002 certification in India. Registered with

SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being

‘Most Admired’ Registrar, is one among many of the acknowledgements we received for

our customer friendly and competent services.



Karvy Stock Broking Limited

The company, Member of National Stock Exchange (NSE), offers a comprehensive range

of services in the stock market through the benefits of in-depth research on crucial marketdynamics, done by qualified team of experts. Apart from stock broking activities, the

company also provides Depository Participant Services to its corporate and retail

customers.

Karvy Investor Services Limited

Registered with SEBI as a Category I Merchant Banker and ranked among the top 10

merchant bankers in the country, the company has built a reputation as a professional

advisor in structuring IPO’s take over assignments and buy back exercises.

Karvy Computershare Private Limited

Karvy Global Services Limited

Karvy Global Services is the global services arm of the Karvy Group of Companies

engaged in the business of offshore business process outsourcing in the areas of humanresource outsourcing, finance and accounting operations outsourcing, research and

analytics and back office processing operations.



Karvy Comtrade Limited

Commodities market, contrary to the beliefs of many people, has been in existence in

India through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a result

two exchanges Multi Commodity Exchange (MCX) and National Commodity andderivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading

facilities, robust surveillance measures and a hassle-free settlement system. The futures

contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel,Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for

hedging the risks of the farmers, importers, exporters, traders and large scale consumers.

They also make open an avenue for quality investments in precious metals. The

commodities market, as it is not affected by the movements of the stock market or debtmarket provides tremendous opportunities for better diversification of risk. Realizing this

fact, even mutual funds are contemplating of entering into this market.

Karvy Comtrade Limited is another venture of the prestigious Karvy group. With our

well established presence in the multifarious facets of the modern Financial services

industry from stock broking to registry services, it is indeed a pleasure for us to makeforay into the commodities derivatives market which opens yet another door for us to

deliver our service to our beloved customers and the investor public at large.

With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of us, the intermediaries to deliver

these benefits at the door-steps of our esteemed customers. With our expertise in financialservices, existence across the lengths and breadths of the country and an enviable

technological edge, we are all set to bring to you, the pleasure of investing in this

burgeoning market, which can touch upon the lives of a vast majority of the populationfrom the farmer to the corporate alike.



The company provides investment, advisory and brokerage services in Indian

Commodities Markets. And most importantly, we offer a wide reach through our branch

network of over 225 branches located across 180 cities.

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

The company is into distribution of Financial Products. It distributes a wide range of

financial products and services from insurance to credit cards and loans. The company provides sound advisory services to suit the different investment needs of customers.



Why Commodities?

Commodities market essentially represents another kind of organized market just like the

stock market and the debt market. However, commodities market, because of its unique

nature lends to the benefits of a wide spectrum of people like investors, importers,

What can commodities market offer?

If you are an investor, commodities futures represent a good form of investment because

of the following reasons.

• High Leverage – The margins in the commodity futures market are less than the

F&O section of the equity market.

• Less Manipulations - Commodities markets, as they are governed by

international price movements are less prone to rigging or price manipulations.•

Diversification – The returns from commodities market are free from the directinfluence of the equity and debt market, which means that they are capable of

being used as effective hedging instruments providing better diversification.

If you are an importer or an exporter, commodities futures can help you in the followingways…

• Hedge against price fluctuations – Wide fluctuations in the prices of import or

export products can directly affect your bottom-line as the price at which youimport/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 change in prices that happen subsequently.

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

• Lock-in the price for your produce – If you are a farmer, there is every chancethat the price of your produce may come down drastically at the time of harvest.

By taking positions in commodity futures you can effectively lock-in the price at

which you wish to sell your produce

• Assured demand – Any glut in the market can make you wait unendingly for a

buyer. Selling commodity futures contract can give you assured demand at the

time of harvest.

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 material cost 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 your customers and make your products

unattractive in the market. By buying commodity futures, you can fix the price of

your raw material.

Ensure continuous supply – Any shortfall in the supply of raw materials can stall your

production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed

quantity of materials at a pre-decided price at the appointed time.

Indian Commodities Market

In India commodity markets have been in existence for decades. However in 1975 theGovernment banned forward contracts on commodities. Later in 2003 the Government of

India again allowed forward contracts in commodities. There have been over 20

exchanges existing for commodities all over the country. However these exchanges arecommodity specific and have a strong regional focus. The Government, in order to make

the commodities market more transparent and efficient, accorded approval for setting up

of national level multi commodity exchanges. Accordingly three exchanges are there

which deal in a wide variety of commodities and which allow nation-wide trading. Theyare

1. Multi Commodity Exchange (MCX)

2. National Commodities Derivatives Exchange (NCDEX)3. National Multi Commodity Exchange (NMCE)

The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd. MCXallows trading on a host of commodities ranging from bullion to grains. Please check the

‘Commodities traded’ menu’. MCX has become the first exchange in the world to launchfutures on steel. Recently on 11th August 2004, MCX crossed a peak daily turnover of

Rs.950 Crores.

NCDEX is promoted by an elite group of financial institutions including NSE, LIC, SBI,

UBI etc., NCDEX also allows trading of futures on a host of commodities.



Commodity Derivatives

A commodity derivative derives its value from an underlying asset which is necessarily a

commodity. To understand the commodity derivatives markets it’s necessary to clear about commodities’.

Commodities, in simple words are any goods that are common and unbranded. Gold,silver, rubber, pepper, jute, wheat, sugar, cotton etc., are some of the common

commodities. For e.g. apple juice can be a commodity whereas the ‘Real’ apple juice

cannot be called a commodity. You may be surprised to know that in the US commoditiesmarkets there are futures available even on cattle. Another feature of commodities is that

they are commonly available.

Commodity markets represent the formal system for the interplay of demand for and

supply of commodities. These markets can be broadly classified into spot market andfutures market. Commodities for immediate delivery are traded through the spot market.

The players in the spot market are the actual producers and the consumers of thecommodities.

The other type of market called the ‘Futures market’ is for facilitating contracts for futuredelivery. (Please go through the material on ‘Futures and Options’ to understand about

futures) These markets make available for trading, the various derivatives based on

commodities. Usually traded ones are the futures and options. However in India options

on commodities are not available and are expected to be introduced soon. The players inthe futures markets are Hedgers, Arbitragers and investors.

Hedgers are those who hold simultaneous positions in the spot market also. These aregenerally the actual consumers or the producers of the commodities. For eg: A wheat

farmer who expects his harvest to be over in 3 months time may sell a futures contract

with an expiry of three months, so that even if the prices happen to fall after threemonths, he can still manage to sell at the price at which the contract was struck.

The large scale consumers of the products can also make use of the futures to secure their

purchase. For eg: A cool drinks can manufacturing company may buy tin futures, so thateven if the prices happen to rise later, thy can be assured of the supply of raw materials at

the pre-determined price.

The other major group of participants in the commodity futures market is the importersand the exporters. Since they have confirmed obligations to export/import fixed quantity

of commodities at a particular period of time, they can take opposite positions in the

futures market.

Arbitrage is a process of making profits using the price differences between two markets

without exposing oneself to any risk. Arbitraging is a very profitable business. It is possible to arbitrage between two different futures markets or between the futures market



and the spot market. However in an ‘efficient’ market arbitraging is not possible, because

any price gap is closed immediately as soon the arbitragers enter the market.

Investors are those who participate in the market for profits and are ready to face the risk

involved in the market. An investor can be anyone from an individual who has a small

surplus income to the treasury desks of banks and corporate.Most commonly traded derivatives around the world are futures, options and option

futures. Some of the most popular commodity exchanges in the world are listed below:

London Metals Exchange, London

New York Mercantile Exchange, New York

Chicago Mercantile Exchange, Chicago

Chicago Board of Trade, ChicagoLondon International Financial Futures and Options Exchange (LIFFE), London

Tokyo Commodity Exchange, Tokyo

Winnipeg Commodity Exchange, Canada

Futures and Options

Futures and options represent two of the most common form of “Derivatives”.

Derivatives are financial instruments that derive their value from an ‘underlying’. The

underlying can be a stock issued by a company, a currency, Gold etc., The derivativeinstrument can be traded independently of the underlying asset. The value of the

derivative instrument changes according to the changes in the value of the underlying.

Derivatives are of two types – exchange traded and Over the Counter.Exchange traded derivatives, as the name signifies are traded through organized

exchanges around the world. These instruments can be bought and sold through theseexchanges, just like the stock market. Some of the common exchange traded derivative

instruments are futures and options.

Over the counter (popularly known as OTC) derivatives are not traded through theexchanges. They are not standardized and have varied features. Some of the popular OTC

instruments are forwards, swaps, swaptions etc.,

Futures

A ‘Future’ is a contract to buy or sell the underlying asset for a specific price at a pre-

determined time. If you buy a futures contract, it means that you promise to pay the price

of the asset at a specified time. If you sell a future, you effectively make a promise to

transfer the asset to the buyer of the future at a specified price at a particular time. Everyfutures contract has the following features



- Buyer

- Seller

- Price- Expiry

Some of the most popular assets on which futures contracts are available are equitystocks, Indices, Commodities and Currency.

The difference between the price of the underlying asset in the spot market and thefutures market is called ‘Basis’. (As ‘spot market’ is a market for immediate delivery)

The basis is usually negative, which means that the price of the asset in the futures

market is more than the price in the spot market. This is because of the interest cost,

storage cost, insurance premium etc., That is., if you buy the asset in the spot market, youwill be incurring all these expenses which are not needed if you buy a futures contract.

This condition of basis being negative is called as “Contango”. Sometimes it is more

profitable to hold the asset in physical form than in the form of futures. For eg: if you

hold equity shares in your account you will receive dividends, whereas if you hold equityfutures you will not be eligible for any dividend. When these benefits overshadow the

expenses associated with the holding of the asset, the basis becomes positive (i.e., the price of the asset in the spot market is more than in the futures market). This condition is

called ‘Backwardation’. Backwardation generally happens if the price of the asset is

expected to fall.

It is common that, as the futures contract approaches maturity, the futures price and the

spot price tend to close in the gap between them ie., the basis slowly becomes zero.

Options

Options contracts are instruments that give the holder of the instrument the right to buy or

sell the underlying asset at a predetermined price. An option can be a ‘call’ option or a

‘put’ option.

A call option gives the buyer, the right to buy the asset at a given price. This ‘given price’

is called ‘strike price’. It should be noted that while the holder of the call option has a

right to demand sale of asset from the seller, the seller has only the obligation and not theright. For eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have

a right.

Similarly a ‘put’ option gives the buyer a right to sell the asset at the ‘strike price’ to the

buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

So in any options contract, the right to exercise the option is vested with the buyer of the

contract. The seller of the contract has only the obligation and no right. As the seller of

the contract bears the obligation, he is paid a price called as ‘premium’. Therefore the

price that is paid for buying an option contract is called as premium.



The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of

the asset in the spot market is less than the strike price of the call. For eg: A bought a callat a strike price of Rs.500. On expiry the price of the asset is Rs.450. A will not exercise

his call. Because he can buy the same asset from the market at Rs.450, rather than paying

Rs.500 to the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of

the asset in the spot market is more than the strike price of the call. For eg: B bought a put at a strike price of Rs.600. On expiry the price of the asset is Rs.619. A will not

exercise his put option. Because he can sell the same asset in the market at Rs.619, rather

than giving it to the seller of the put option for Rs.600



Contract Specification of Gold

Symbol GOLD

Description GOLDMMMYY

Trading Period Mondays through Fridays

Trading Session1st session: 10 am to 5.00 pm

2nd session: 5.45 pm to 11.15 pm

Trading Unit 1 Kg

Quotation/Base Value 10 grams

Maximum Order Price 10 Kg

Tick Size (minimum price movement) Re. 1 per 10 grams

Price Quote

Ex-Mumbai (inclusive of all taxes and

levies relating to import duty, customs

and sales tax calculated @ 1% onlanded cost but excluding any other

additional tax or surcharge on sales

tax, local taxes and octroi.

Initial Margin 3.5 %

Special Margin

In case of additional volatility, a

special margin of 2 % or such other

percentage, as deemed fit, will be

imposed immediately on both buy andsale side in respect of all outstanding

position, which will remain in force

for next 3 days, after which the specialmargin will be relaxed.

Delivery Period Margin25% of the value of the open positionduring the delivery period

Maximum Allowable Open Position

For individual client: 1 MTFor a member collectively for all

clients: Not more than 25 % of the

market's open position in a contract at

any point of time

Delivery Unit 1 Kg

Delivery Center(s)Mumbai and Ahmedabad atdesignated Clearing House facilities of

Group 4 Securities

Quality Specifications995 purity

It should be serially numbered Gold



Contract Specification for Silver

Symbol SILVER

Description SILVERMMYYTrading Period Mondays through Fridays

Trading Session1st session: 10 am to 5.00 pm

2nd session: 5.45 pm to 11.15 pm

Trading Unit 30 Kg

Quotation/Base Value 1 Kg

Maximum Order Price 600 Kg

Tick Size (minimum price movement) Re. 1 per 1 Kg

Price Quote

Ex-Ahmedabad (inclusive of all taxesand levies relating to import duty,

customs and sales tax calculated @

1% on landed cost but excluding anyother additional tax or surcharge on

sales tax, local taxes and octroi.

Initial Margin 5 %

Special Margin

In case of additional volatility, aspecial margin of 2 % or such other

percentage, as deemed fit, will be

imposed immediately on both buy and

sale side in respect of all outstanding position, which will remain in force

for next 3 days, after which the special

margin will be relaxed.

Delivery Period Margin25% of the value of the open position

during the delivery period

Maximum Allowable Open Position

For individual client: 50 MT

For a member collectively for allclients: Not more than 25 % of the

market's open position in a contract at

any point of time

Delivery Unit 30 Kg

Delivery Center(s)Ahmedabad at designated Clearing

House facilities of Group 4 Securities

Quality Specifications

999 purity

It should be serially numbered Silver bars approved by LBMA

Abstract on commodities trading

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