Commodity Exchange

Anit Chandran(08)Geostany Jose(29)

Commodity Exchange

The exchanges where raw or finished products are traded.

1848-first commodity exchange CBOT1882-New York Mercantile ExchangeAugust 3, 1994,NYMEX and the Commodity Exchange, merged to

become the world's largest physical commodity futures exchange

TraditionalCommodity market VS Derivative market

PRODUCERS

TRADERS AND WAREHOUSE

EXPORTERS & USERS

CLEARING HOUSE

B

B

B

B

S

S

S

S

CLEARING HOUSE

Trading methods

1.) spot trading -where the delivery takes place immediately or in minimum time

2.) forward contract -where the buyer and seller agree to a price for a commodity, which is to be delivered at a mutually agreed date and quantity

3.)futures contract - conditions same as forward contract but transactions are through futures exchange

4.) option contract -option holder has the right, but not the

obligation to buy (or sell) the quantity

Major commodity exchanges

• New York Mercantile Exchange(NYMEX)-Crude Oil, Heating Oil• Chicago Board of Trade -Soy Oil, Soy Beans, Corn• London Metals Exchange -Al, Copper, Tin, Lead• Tokyo Commodity Exchange -Silver, Gold, Crude oil,

Rubber• Malaysian Derivatives Exchange -Rubber, Soy Oil, Palm Oil

WHY COMMODITIES SHOULD BE IN YOUR PORTFOLIO?

For an investor

• Diversification• Less Manipulations• High Leverage

Large scale buyer

• Cost control• Ensured supply• Effective use of discounts on lot sizes

Large scale producer

• Fixed price on future out puts• Demand is assured• Storing can be planned

How the price changes?

• Supply & Demand• Stockpile decisions• Rumors and anticipation• Seasonal

Why regulation?

• Risk on quality• As a backing for insurance• political interest• To check improper marketing

Commodity futures trading commission-USAForward Market Commission -INDIA

INDIAN SCENARIO

Ministry of Food, Agriculture and Public Distribution

Forward Market Commission

MCX NCDEX NMCE regional exchanges

• Multi-Commodity Exchange of India Ltd, Mumbai (MCX).• National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).• National Multi Commodity Exchange, Ahmadabad (NMCE).

Recent news from India

• India Ends Turnover Tax to Foster $1 Trillion Commodity Market

• Turnover on India’s MCX-3rd biggest bullion bourse, and its local rivals may jump from1.08 T to $ 1.28T.

• Overseas funds and institutions are barred from trading commodity futures in India-this rule is under discussion.

INDIA’S PLACE IN COMMODITY MARKET

COMMODITY ECOSYSTEM

COMMODITY MARKET STRUCTURE

Future Market Analysis

A futures contract • is a standardized contract,• to buy or sell • a specified commodity of standardized quality • at a certain date in the future, • at a market determined price-known as

futures price.

Factors of Commodities Market

1. Spot Price- It is a present delivery price of a given commodity being traded on the spot market.

2. Future Prices: - The price at which the two participants in a futures contract agree to transact at on the settlement date

3. Cost of Carrying: - The difference between future prices and spot prices is called cost of carrying or carrying cost. Carrying costs include interest, insurance, storage, transaction cost etc.

4. Volume: - It is the quantity traded of a commodity

Contd…..5. Open Interest: -It is the total number of

outstanding contracts that are held by market participants at the end of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised.

Market Parameters Price Open Interest Interpretation

Rising Rising Market is Strong

Rising Falling Market is Weakening

Falling Rising Market is Weak

Falling Falling Market is Strengthening

Option

• An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date

Types of Options

1. Call Option: -A call gives the holder the right to buy an asset at a certain price within a specific period of time.

2. Put Option:-A put gives the holder the right to sell an asset at a certain price within a specific period of time.

Terminologies

• Strike Price: - The price at which a specific derivative contract can be exercised is called strike price.

• Premium: - The option premium is the price the buyer of the options contract pays for the right to buy or sell a security at a specified price in the future.

Contd….

• Expiration: - The day on which an options or futures contract is no longer valid and, therefore, ceases to exist.

• Naked Position: - A securities position that is not hedged from market risk.

• Open Position: - Any position that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.

Chain of events

NOVEMBER, 1991: U.S. broker David Threlkeld informs the London Metals Exchange that Sumitomo's Yasuo Hamanaka asked him for a confirmation on $425 million in fake trades. The LME claims it found nothing wrong within its jurisdiction.

SEPTEMBER, 1993: A copper "squeeze" develops: Despite plentiful supplies, spot prices are higher

than the three-month futures price. The LME fingers Hamanaka; he denies manipulation. OCTOBER, 1995: Pricing anomalies again appear and rumors circulate that Hamanaka has locked

up a large chunk of the supply. The Commodity Futures Trading Commission begins investigating.

NOVEMBER, 1995: Patrick Thompson, head of the New York Mercantile Exchange, warns that

copper in the LME's Long Beach (Calif.) warehouse is piling up "and may be part of a squeeze or other market misconduct." The LME starts investigating Hamanaka.

APRIL, 1996: CFTC authorities inform Sumitomo that they have uncovered irregularities in the company's trading accounts. $1,860 a metric ton, down from $2,145

MAY 17, 1996: Sumitomo pulls Hamanaka back from his position as top

copper trader and confirms the move after traders hear of it. JUNE 13: Sumitomo announces losses of $1.8 billion.

1998 –CFTC fined SUMITOMO corp. 150M$

Bibliography

• Nymex.com• Investorguide.com• International Research Journal of Finance and

Economics• MCX Website• Investopedia