Commodities Market Group6
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Transcript of Commodities Market Group6
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Commodity market
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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
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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.
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Globalclassification ofcommodities
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Non-tradable commodities
1) Rare Metals2) Agricultural Products
3) Minerals and other materials
Commodities not traded in commodity
market
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Rare metals - Germanium, Cadmium,
Cobalt, Chromium, Magnesium,
Manganese, Molybdenum, Silicon,Rhodium, Selenium, Titanium, Vanadium,
Niobium, Lithium, Indium, Gallium,
Tantalum, Tellurium, and Beryllium.
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Agricultural products - Fresh Flowers, Cut
Flowers, Melons, Lemons, Tung Oil, Gum
Arabic, Pine Oil, Milk, Tomatoes, Grapes,Eggs, Potatoes, and Figs.
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Asphalt,Aggregate,Arsenic, Borax, Boron,
Gypsum,Asbestos, Chlorine, Fluoride,Cement, Sulfuric Acid, Carbon Dioxide,
Fluorspar, Bromine, Titanium Dioxide.
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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.
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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.
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Lets assume your total portfolio is $250,000
and you invest 80% in stocks and bonds($200,000) and 20% in managed Commodities
($50,000). Lets assume at the end of the year
you realize a 5% return on your stocks and
bonds and a 25% return on Commodities. Theresult would be as follows:
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Now lets assume you earn 10% on the 80% of
your portfolio invested in stocks and bonds, butlose 25% in managed futures. The results would
be as follows:
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B
y investing only 20% of your portfolio infutures, if you were to earn 25%, it wouldoutperform 80% of your portfolio invested instocks 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%.
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SCOPE OF COMMODITY MARKET
Allowing mutual funds and FIIs to participatein the commodity market
Widening the definition of commodities to
include also commodity indices and weatherderivatives
Changes in the Banking Regulation Act
allowing banks to operate in the commodityexchanges
Allow set-offs on trading losses in the
derivatives market.
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FUTURE PLANS
NCDEX constantly plans to widen the menu ofproducts available for trading to include:-
Other agricultural products,
Base metals,
plastics,
energy products
indices (including weather)
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WAY AHEAD
Commodity exchanges in India are expected tocontribute 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.
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Amendments to Essential Commodities Actand implementation of Value-Added-tax
Options contracts in commodities.
Their may see increased interest from theinternational players in the Indian commoditymarkets once national exchanges becomeoperational.
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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 havespecialized in the above markets.
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COMMODITY MARKET
Commodity market is a place where trading incommodities takes place. These are the marketswhere raw and primary products are exchanged.
These raw commodities are traded on regulatedcommodity exchanges, in which they are boughtand sold in standardized contracts. It is similar to
an equity market, but instead of buying or sellingshares one buys or sells commodities.
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HOW TO TRADE IN COMMODITIES
COMMODITY FUTURE
A standardized agreement to buy (or sell) an assetin the future, at a price agreed today
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COMMODITY EXCHANGE TRADED
FUNDS (ETFs)
Commodity ETFs generally are index funds and track
commodities indices.
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COMMODITY STOCKS
Stocks which belongs to commodity related sector
like metals, energy, agriculture etc.
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COMMODITY MUTUAL FUNDS
Mutual funds which invest in stocks belonging to
commodity sectors or fund of funds which invest in
other commodity funds etc.
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COMMODITY EXCHANGE
An entity, usually an incorporated non-profitassociation, that determines and enforces rules and
procedures for the trading of commodities andrelated investments, such as commodity futures.
Commodities exchange also refers to the physical
center where trading takes place
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CONT.
18 existing commodity exchanges in India offeringdomestic contracts in 8 commodities and 2exchanges that have permission to conduct tradingin international (USD denominated) contracts.
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CONT.
The two most important commodity exchanges inIndia are;
1)Multi-Commodity Exchange of India Limited(MCX),
2)National Multi-Commodity & Derivatives Exchangeof India Limited (NCDEX)
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20 Other Regional20 Other RegionalExchangesExchangesNMCENMCE
CommodityCommodity ExchangesExchanges
MCXMCX
Structure of Indian Commodity Futures Exchanges
NationalNationalexchangesexchanges
RegionalRegionalexchangesexchanges
FMCFMC
NBOTNBOTNCDEXNCDEX
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National Commodity & Derivatives ExchangeLimited (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.
NCDEX
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NCDEX currently facilitates trading of 57, commodities including :
Agri-based commodities
Bullion
Energy
Ferrous metals
Non-ferrous metals
Plastics
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Institution Share Domain Expertise
NABARD 15 % Apex bank for agricultural lending
ICICI Bank 8 % Largest private sector bank in India. Listed on NYSE
NSE 15 % Largest stock exchange in India. Highest volume in single stock futures in world.
LIC 15 % Largest life insurance company in India
CRISIL 12% Indias first & largest credit rating agency. Now a Standard & Poor company
IFFCO12% Largest farmer cooperative with affiliation of 36,000 cooperatives
PNB8% Large public sector bank with strong rural reach specially in North India
Canara Bank 8% Large public sector bank with strong rural reach specially in South India
Goldman
Sachs7% Global Expertise in commodity markets
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Multi Commodity Exchange of India Limited (MCX),is an independent and de-mutulised exchange with a
permanent recognition from Government of India.
Key shareholders ofMCX 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 BullionAssociation, Bombay Metal Exchange, Solvent
Extractors Association of India, Pulses Importers
Association and Shetkari Sanghatana.
MCX
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NMCE
National Multi Commodity Exchange of IndiaLimited (NMCE) is the first de-mutualized,Electronic Multi-Commodity Exchange in India.
On 25th July, 2001, it was granted approval by theGovernment to organize trading in the edible oilcomplex.
It has operationalized from November 26, 2002.
It is being supported by Central WarehousingCorporation Ltd., Gujarat State Agricultural
Marketing Board and Neptune Overseas Limited.
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SPOT TRADING
Spot trading is any transaction where deliveryeither takes place immediately, or with a minimum
lag between the trade and delivery due to technical
constraints. Spot trading normally involves visualinspection 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 agreedstandards so that trades can be made without
visual inspection.
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FORWARD CONTRACT
A
forwardcontra
ct or simply a forward is anagreement 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 thefuture 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 thedelivery price, which is equal to the forward pricing
at the time the contract is entered into.
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Futures contract, in refers to a standardized
contract to buy or sell a specified commodityof 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.
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Features ofFuture ..
Futures are used for hedging, particularly in abear 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.
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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.
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Forward Vs. FuturesWhile futures and forward contracts are both
contracts to deliver an asset on a future date at aprearranged 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.
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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.
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KEY PLAYERS IN THE COMMODITY
MARKET
SPECULATOR
HEDGER
BROKER
The Major Actors in commodity market
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FORWARD MARKETS COMMISSION
Forward Markets Commission (FMC) isheadquartered at Mumbai.
It is a regulatory authority which is overseen by
the Ministry of Consumer Affairs, Food and PublicDistribution, 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.
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OBJECTIVES OFFMC
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.
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FUNCTIONS OF THE FMC
FMC advises the central government to eithergrant recognition or to withdraw the recognition of
any association.
It keeps the forward market under strongobservation and takes action wherever necessary.
To make recommendations generally with respect
to improving the organization and working of
forward markets.
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To undertake the inspection of the accountsand other documents of any recognizedassociation or registered association or anymember of such association whenever it
considerers it necessary. To collect and publish the information relating
to trading conditions in respect of goodsincluding information relating to demand,supply and prices.
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Risk factors involved
Changing demandsupply dynamics.
Climatic factors.
Industry related factors.
Geopolitical consideration.
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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 manydeveloping economies
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SUBMITTED BY
Abhinav Kansal
Deepak Jain
Arpit Khandelwal
Apeksha Khandelwal
Saumyadeep Dalal
Aastha Mittal
Ankit Mehta
Divya Jolly
Amit Goel