CHAPTER 1

1

Introduction

Commodities have always been a part of our day to day existence 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 gold jewels, the oil that runs our

cars, 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 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. 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, 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 Committeee in 1980, the Government, reintroduced futures trading in some

selected commodities. As a 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 the Khusro committee in 1980, the Government The journal of accounting and finance volume 20. No. 2

2

reintroduced futures trading in some selected commodities including cotton, jute

potatoes etc. As a part of economic reforms, the government of India appointed an

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 a 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

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,1

National status was given to these 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 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

Evolution of futures trading Indian economy

3

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 a 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 the 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 a 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, a 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 two related and major barrier to

the use of commodity futures in the forward-pricing of agricultural commodities. The

Basics of commodity futures page no 6. chapter 6

4

first is the producer’s 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 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 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.

Robert E Fink and Robert B Feduniak, Futures trading ; New york, institute of finance

5

National status was given to these 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.

6

CHAPTER 2

2.1 Introduction

7

Unknown to us 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 gold 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.

2.2 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 prime reason for extra volatility in commodity prices in the presence of natural

shocks that are not predictable and mostly relate to the previous year’s production or

consumption in price, followed by a slow or rapid reduction depending on the nature of

the commodity. Commodity price cycles mostly have flat bottoms with occasional

sharp peaks.

The following are four important commodity price problems:

a) Short-term fluctuations: These are 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.

8

c) Permanent changes: These are affecting 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 well is 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.

2.1 Need of the study

There have been a large 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.

2.3 Review of literature

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 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, is 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.

9

Benefits of review of literature

As the study is being formulated on general public it is very much essential to

understand the elements that affect this segment and what are the criteria that this

segment follows to safeguard their commodity future.

Review of Literature helped 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.

2.4 Scope of the study

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

2.5 Objectives of the study

1. To examine the various risk factors in using commodity future.

2. To study the influence 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

10

2.6 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

2.7 Methodology

According to Clifford woody research comprises of “defining, redefining

problem, formulating hypothesis or suggested solution, collecting, organizing and

evaluating data, making deductions and reading conclusions to determine whether they

fit the formulating hypothesis.”

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 respondents

to rethink about their investment criteria and upgrade it to maximize their returns.

7.1 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 any data collection for obtaining a sample from a given

population.11

7.2 Sampling Technique

This study is purposive in nature as the research is concentrating on the various

issues 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 responses 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.

7.3 Sampling unit

The sample size consists of different units like businessman, professionals,

government employees, and private employee’s .others and head of departments of

various streams. Thus the population selected was of faculties consisting of both males

and females of different age groups, holding different qualifications.

7.4 Sampling size

The sample size consists of 60 respondents of various financial institutions. The

sample size is drawn using convenience sampling method.

7.5 Sample design

Sample design or sample procedure 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.

12

7.6 Instruments

An open-ended questionnaire has been administered, supported 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.

7.7 Tools for data collection

In dealing with real life problems it is often found that data at hand are

inadequate, and hence, it becomes necessary to collect data that are appropriate. The

data can be of two types- Primary data and 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.

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.

7.8 Limitations of the study

Only a percentage of total investors in each financial institute could be

interviewed but the analysis is generalized.

Some of the potential investors were reluctant to disclose their financial data

and the personal details.

The findings and conclusions drawn out of the study will reflect only existing

trends in the sector.

The accuracy and authenticity of the observations made and conclusions drawn

largely depend upon the corresponding accuracy and authenticity of the

information supplied by the respondents at large.13

The respondents being investors, who are basically very busy people,

most of them were in hurry during the survey. So some errors may have occurred in

filling of the questionnaires.

7.9 Plan of the analysis

The data collected through questionnaire and the secondary data available was

examined 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 Word

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.

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

14

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 one’s company for an overseas assignment.

The technique uses tables having rows and columns that correspond to the levels or

values of each variable’s 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.

15

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.

16

CHAPTER 3

Industry profile

17

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

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.

SHORT HEDGE

A short hedge is a 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 asset is 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.

18

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. 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, a 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 wasn’t much he could do to profit from his opinion.

Today all he needs to do is sell commodity futures.

19

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 the 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

1

20

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

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

21

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 journal of accounting and finance volume 20. No. 2

22

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 Committeee in 1980, the Government, reintroduced futures trading in some

selected commodities. As a result of this, all the commodity exchanges went out of

business and many trades started resorting to unofficial and informal trading in futures

23

On the recommendation of the Khusro committee in 1980, the

Government reintroduced futures trading in some selected commodities including

cotton, jute potatoes etc. As a part of economic reforms, the government of India

appointed an expert committee on forward markets under the chairmanship of K N

Kabra in the year 1993.

24

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 the companies Act, Stamp Act, Contracts Act, Forward commission Act

and various other legislations, which impinge on their working.

25

Forward Markets Commission provides regulatory oversight in order to

ensure financial integrity, market integrity and to protect and promote interest of

customers/ non-members. 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 operator-

wise, 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.

26

CHAPTER 4

27

DATA ANALYSIS AND EVALUATION OF PEDIATRECIANS

1. Cross tabulation between income group and age group.

Case Processing Summary

Cases

Valid Missing Total

N Percent N Percent N Percentincome * age 60 92.3% 5 7.7% 65 100.0%

Table No 1

Income * age Cross tabulation

age Total

.25 25 to 40 40 to 50 50 above income

>200000 Count8 7 0 0 15

% within income 53.3% 46.7% .0% .0% 100.0% % within age 100.0% 43.8% .0% .0% 25.0% 200000 to

300000Count

0 9 3 0 12

% within income .0% 75.0% 25.0% .0% 100.0% % within age .0% 56.3% 25.0% .0% 20.0% 300000 to

375000Count

0 0 9 6 15

% within income .0% .0% 60.0% 40.0% 100.0% % within age .0% .0% 75.0% 25.0% 25.0% 375000 & ab Count 0 0 0 18 18 % within income .0% .0% .0% 100.0% 100.0% % within age .0% .0% .0% 75.0% 30.0%

Total Count 8 16 12 24 60

28

% within income 13.3% 26.7% 20.0% 40.0% 100.0% % within age 100.0% 100.0% 100.0% 100.0% 100.0%

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

375000 & ab300000 to 375000200000 to 300000>200000

income

20

15

10

5

0

Co

un

t

50 above40 to 5025 to 40.25age

29

2. Cross tabulation between income and occupation.

Case Processing Summary

Cases

Valid Missing Total

N Percent N Percent N Percentincome * occupation

60 92.3% 5 7.7% 65 100.0%

Table No .2

Income * occupation Cross tabulation

occupation Total

Pvt. emp govt emp businessman professional income >200000 Count 0 0 15 0 15 % within income .0% .0% 100.0% .0% 100.0% % within

occupation.0% .0% 75.0% .0% 25.0%

200000 to 300000

Count0 0 5 7 12

% within income .0% .0% 41.7% 58.3% 100.0% % within

occupation .0% .0% 25.0% 70.0% 20.0%

300000 to 375000

Count12 0 0 3 15

% within income80.0% .0% .0% 20.0% 100.0%

% within occupation 57.1% .0% .0% 30.0% 25.0%

30

375000 & above

Count9 9 0 0 18

% within income

50.0% 50.0% .0% .0% 100.0%

% within occupation

42.9% 100.0% .0% .0% 30.0%

Total Count21 9 20 10 60

% within income35.0% 15.0% 33.3% 16.7% 100.0%

% within occupation 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Primary Data

INFERENCE:

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

31

3. Do you trade in commodity futures?

Statistics

trader1 N Valid 60 Missing 5Minimum 1.00Maximum 2.00

Table No 3

Traders in Commodity futures

Respondent Frequency Percent Valid PercentCumulative Percent

Valid regular trader 49 75.4 81.7 81.7

potential customer 11 16.9 18.3 100.0

Total 60 92.3 100.0 Missing System 5 7.7 Total 65 100.0

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 %.

32

Figure No .3

potential customerregular trader

trader1

100

80

60

40

20

0

Per

cen

t

trader1

33

4. if they trade regularly, why

Table No .4

Attributes of satisfaction

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

Options No of Respondent Percentage

Trade on an organized exchange

1224.48%

Standardized contract terms 17 34.69%

follows of daily settlement

12 24.48%

location of settlement 8 13.33%

Total 49 100%

34

Standardized contract signifies more 34.69% when compare to other variable.

Figure No 4

regular investors in commodity futures

Regular trader

Trade on an organisedaxchange

Standardized contract terms

follows of daily settlement

location of settlement

35

5. Do you think futures trading influence the price and price variation?

Influences

Table No 4.1

Future trading influences price and price variation

Sources Primary Data

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.

N Valid 60

Missing 5 Std. Deviation .49717

Frequency Percent Valid PercentCumulative

PercentValid influences the

price variation 25 38.5 41.7 41.7

not influence the price variation 35 53.8 58.3 100.0

Total 60 92.3 100.0Missing System 5 7.7Total 65 100.0

36

Figure No 5

Missing

not influence the price veriation

influences the price veriation

influences

37

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

Summery

N Valid 25

Missing 40Minimum 1.00Maximum 4.00

Table No .6

Attributes of influences in price and price variation

Frequency Percent Valid PercentCumulative

PercentValid seasonal price variation 10 15.4 40.0 40.0

inter and intra seasonal fluctuation in price 5 7.7 20.0 60.0

short term oscillation in prices 5 7.7 20.0 80.0

average received by producers and paid by consumers

5 7.7 20.0 100.0

Total 25 38.5 100.0Missing System 40 61.5Total 65 100.0

INFERENCE:

38

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.

Figure No 6

4.002.000.00

Influence

10

8

6

4

2

0

Fre

qu

ency

Mean =2.20Std. Dev. =1.19024

N =25

39

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

Table No .7

Methods of risk avoiding

Source: Primary Data

Options No of Respondent PercentageBy hedging 12 30

By speculation 1540

By arbitrage8 30

TOTAL 35 100

40

Price and variation

Table No .8

Respondent

Observed

No

.

Expected

No. (O – E) (O- E )2 ( O-E )2\E

By hedging

30 30 0 0 0

By

speculation 40 30 10 100 3.333

By arbitrage

30

30 - 10 100 3.333

Total

90 90

0 6.666

Source: Primary Data

41

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

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

Source: Primary Data

INFERENCE:

Options No of Respondent Percentage

R110 16.66

R215

25

R310 16.66

R410 16.66

R5 10 16.66

R6 5 8.33

TOTAL 60 100

42

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

satisfied future trding

10

15

10

10

55

future trading

Transparent trading

Fair price discovery

automated tradingsystem

unique identificationnumber

to prouide nationwidereach

to bring trust

Attributes

R1-Transparent trading43

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

Source: Primary Data

Attributes

Options No of Respondent Percentage

R1 10 16.66%

R2 1830%

R3 8 13.33%

R4 12 20%

R5 12 20%

Total 60 100%

44

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.

45

Figure No.10

0

2

4

6

8

10

12

14

16

18

Repondents

Reguletrymechanism

R2 R4

attributes

Reguletery mechanism

Series1

46

CHAPTER 5

47

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.

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.

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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.

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

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.

49

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 “kissan”of

the nation.

Developing countries have large exposure to commodity price risk.

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 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.

50

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

51

52

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 contrarian’s 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 2003 edited by susan Thomas.

Websites Visited:

www.mcx.com

www.sbi.com

www.google.com

www.ncdex.Com

www.capitaline.com

53

54

PART- A Personal Information

SEX MALE FEMALE

AGE GROUP : BELOW 25 YEARS 40 TO 50

25 TO 40 50AND ABOUE

QULIFICATION : BELOW PUC DEGREE

POST GRA OTHERS……..

OCCUPATION PVT .EMPLOYEE BUSINESSMAN

GOVT.EMPLOYEE PROFESSIONAL

ANNUAL INCOME : BELOW 2500 RS50000TO75000

55

RS 25000TO5000 RS 75000TABOUE

Part – B

1. Do you trade in commodity futures?

Yes No

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 No

4. If yes, why?

i. Seasonal price variation

ii. Inter and intra-seasonal fluctuation in price

iii. Short term oscillation in prices

56

iv. Average prices received by producers and paid by consumer

5. If no, why?

a. By hedging

b. By speculation

c. By arbitrage

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

Yes No

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.

57

b) Limit on price fluctuation to allow cooling of market in the event of abrupt upswing or downswing prices.

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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