Final Project of Commodity

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III.4 ABOUT NCDEX

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally

managed on-line multi commodity exchange promoted by ICICI Bank Limited (ICICI

Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and

Rural Development (NABARD) and National Stock Exchange of India Limited

(NSE). Canara Bank (PNB), CRISIL Limited (formerly the Credit Rating Information

Services of India Limited), Goldman Sachs, Indian Farmers Fertilizer CooperativeLimited (IFFCO) and Punjab National Bank by subscribing to the equity shares have

joined the initial promoters as shareholders of the Exchange. NCDEX is the only

commodity exchange in the country promoted by national level institutions. This

unique parentage enables it to offer a bouquet of benefits, which are currently in short

supply in the commodity markets. The institutional promoters and shareholders of

NCDEX are prominent players in their respective fields and bring with them

institutional building experience, trust, nationwide reach.

NCDEX is a public limited company incorporated on April 23, 2003 under the

Companies Act, 1956. It obtained its Certificate for Commencement of Business on

May 9, 2003. It commenced its operations on December15, 2003.

NCDEX is a nation-level, technology driven de-mutualised on-line commodity

exchange with an independent Board of Directors and professional management, both

not having any vested interest in commodity markets. It is committed to provide a

world class commodity exchange platform for market participants to trade in a widespectrum of commodity derivatives driven by best global practices, professionalism

and transparency.


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NCDEX is regulated by Forward Markets Commission. NCDEX is subjected tovarious laws of the land like the Forward Contracts (Regulation) Act, Companies Act,Stamp Act, Contract Act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members about 550 centres

throughout India.

Metals : -

Aluminum Ingot, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel

Cathode, Silver, Sponge Iron, Zinc Ingot.

III.5 REGULATORY FRAMEWORK:

At present there are three tiers of regulations of forward/future trading systems in

India namely Government of India, Forward Markets Commission (FMC) and

Commodity Exchanges . The need for regulations arises on account of the fact that

the benefits of the future markets accrue in competitive conditions. Proper regulation

is needed to create competitive conditions. In the absence of regulation, unscrupulous

participants could use these leveraged contracts for manipulating prices. This could have

undesirable influence on the spot prices, thereby affecting interests of society at large.

Regulation is also needed to ensure that the market has appropriate risk management

system. In the absence of such a system, a major default could create a chain reaction.

The resultant financial crisis in a futures market could create systematic risk Regulation is

also needed 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, non-member users or the market.


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III.6 RULES GOVERNING COMMODITY DERIVATIVES

EXCHANGES:

Forward Market Commission (FMC) regulates the trading of commodity derivatives

on the NCDEX. Under the Forward Contracts (Regulation) Act, 1952, forward tradingin commodities notified under section 15 of the Act can be conducted only on the

exchanges, which are granted recognition by the central government (Department of

Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution). 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 (Regulation) Act and various other

legislations, which impinge on their working.

Forward Market Commission provides regulatory oversight in order to ensure financial

integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and

supply conditions) and to protect and promote interest of customers/ non-members. It

prescribes the following regulatory measures:

1. Circuit-filters or limit on price fluctuations are allowed for cooling of market

in the event of abrupt upswing or downswing in prices.

2. 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.

3. Circuit breakers or minimum/maximum prices: These are prescribed to prevent

future prices from falling below as rising above not warranted by prospective

supply and demand factors. This measure is also imposed on the request of the

exchange.

Besides, these regulatory measures, the F.M.C(R) Act provides that a client's position

cannot be appropriated by the member of the exchange, except when a written consent is

taken within three days time. The F.M.C is persuading increasing number of exchanges

to switch over to electronic trading, clearing and settlement, which are more customers


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friendly. The FMC has also prescribed simultaneous reporting system for the exchanges

following open out-cry system. These steps facilitate audit trail and make it difficult for the

members to indulge in malpractices like trading ahead of clients, etc. The FMC has also

mandated all the exchanges following open out-cry system to display at a prominent place

in exchange premises, the name, address, and telephone number of the officer of thecommission who can be contacted for any grievance. The website of the commission also

has a provision for the customers to make complaint and send comments and suggestions

to the FMC. Officers of the FMC have been instructed to meet the members and clients

on a random basis, whenever they visit exchanges, to ascertain the situation on the

ground, instead of merely attending meetings of the board of directors and holding

decisions with the office-bearers.

(A) Ru les governing intermediaries:

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules

framed, exchanges are governed by its own rules and bye laws (approved by the FMC).

In this section we have brief look at the important regulations that govern NCDEX. For the

sake of convenience, these have been divided into two main divisions pertaining to trading

and clearing. The detailed bylaws, rules and regulations are available on the NCDEX

home page.

III. 7 TRADING:

The NCDEX provides an automated trading facility in all the commodities admitted for

dealing on the spot market and derivative market. Trading on the exchange is allowed

only through workstations(s) located at the locations of the office(s) of a trading

member as approved by the exchange. If LAN or any other way to other workstations at

any place connects an approved workstation of a trading member , it shall require an

approval of the exchange.


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Each trading member is required to have a unique identification number which is

provided by the exchange and which will be used to log on (sign on) to the trading

system. A trading member has a non-exclusive permission to use the trading system as

provided by the exchange in the ordinary course of business as trading member. He does

not have any title rights or interest whatsoever with respect to trading system, its facilities,software and the information provided by the trading system.

For the purpose of accessing the trading system, the member will install and use

equipment and software as specified by the exchange at its own cost. The exchange has the

right to inspect equipment and software used for the purpose of accessing the trading

system at any time. The cost of the equipment and software supplied by the exchange,

installation and maintenance of the equipment is borne by the trading member.

III. 8 TRADING MEMBERS AND USERS :

Trading members are entitled to appoint, (subject to such terms and conditions, as may

be specified by the relevant authority) from time to time-

9 Authorized members and 9 Approved users.

Trading members have to pass a certification program, which has been prescribed by the

exchange. In case of trading members, other than individuals or sole proprietorships,

such certification program has to be passed by at least one of their directors/ employees/

partners/ members of governing body. Each trading member is permitted to appoint a

certain number of approved users as notified from time to time by the exchange.

The appointment of approved users is subject to the terms and conditions prescribed by

the exchange. Each approved user is given a unique identification number through which

he will have access to the trading system. An approved user can access the trading

system through a password and can change the password from time to time.


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III.9 TRADING DAYS:

The exchange operates on all days except Saturday and Sunday and on holidays that it

declares from time to time.

Other than the regular trading hours, trading members are provided a facility to place

orders off-line i.e. outside trading hours. These are stored by the system but get traded

only once the market opens for trading on a following working day.

The type of order books, trade books, price limits, matching rules and other parameters

pertaining to each or all of these sessions is specified by the exchange to the members

via its circulars or notices issued from time to time. Members can place orders on the

trading system during these sessions, within the regulations prescribed the exchange as

per these bye laws, rules and regulations, from time to time.

III.10 TRADING HOURS AND TRADING CYCLE:

The exchange announces the normal trading hours/ open period in advance from time to

time. In case necessary the exchange can extend or reduce the trading hours by notifying

the members. Trading cycle for each commodity/ derivative contract has a standard period

during which it will be available for trading.

(A) Contract expiration:

Derivatives contract expire on a pre-determined date and time up to which the contract

is available for trading. This is notified by the exchange in advance. The contract

expiration period will not exceed twelve months or as the exchange specifies time to time.

(B) Trading parameters:

The exchange from time to time specifies various trading parameters relating to the

trading system. Every trading member is required to specify the buy or sell orders as

either an open order or a close order for derivatives contract. The exchange also

prescribes different order books that shall be maintained on the trading system and also

specifies various conditions on the order that will make it eligible to place it in those

books.


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The exchange specifies the minimum disclosed quantity for orders that will be allowed

for each commodity/derivatives contract. It also prescribes the number of days after

which Good Till Cancelled orders will be cancelled by the system. It specifies

parameters like lot size in which orders can be placed, price steps in which orders shall

be entered on the trading system, position limits in respect of each commodity etc.

(C) Trade operations:

Trading members has to ensure that appropriate confirmed order instructions are obtained

from the constituents before placement of an order on the system. They have to keep

relevant records or documents concerning the order and trading system order number

and copies of the order confirmation slip/ modification slip must be made available to the

constituents.

The trading member has to disclose to the exchange at the time of order entry whether

the order is on his own account or on behalf of constituents and also specify orders for

buy or sell as open or close orders. Trading members are solely responsible for the

accuracy of the details of orders entered into the trading system including orders entered

on behalf of their constituents.

Trades generated on the system are irrevocable and 'locked in'. The exchange specifies

from time to time the market types and the manner if any, in which trade cancellation can

be effected. Where a trade cancellation is permitted and trading member wishes to cancela trade, it can be done only with the approval of the exchange.

III.11 UNFAIR TRADE PRACTICES:

y No trading member should buy, sell, deal in derivatives contracts in a fraudulent

manner, or indulge in any unfair trade practices including market manipulation.

This includes the following:

y Effect; take part either directly or indirectly in transactions, which are likely to

have effect of artificially, raising or depressing the prices of spot/derivatives

contract.


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y Indulge in any act, which is calculated to create a false or misleading appearance

of trading, resulting in reflection of prices, which are not genuine.

y 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 or of

his company or director for the same contract.y Delay the transfer of the commodities in the name of transferee.

y Indulge in falsification of his books, account and records for the purpose of

market manipulations.

y When acting as an agent, execute a transaction with a constituent at a price other

than the price at which it was executed on the exchange.

III.12 CLEARING:

As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL)

undertakes clearing of trades executed on the NCDEX. All deals executed on the

Exchange are cleared and settled by the trading members on the settlement date by the

trading members themselves as clearing members or through other professional clearing

members in accordance with these regulations, byelaws and rules of the exchange.

III.13 LAST DAY OF TRADING:

Last trading day for a derivative contract in any commodity is the date as specified in

the respective commodity contract. If the last trading day as specified in the respective

commodity contract is a holiday, the last trading day is taken to be the previous working

day of the exchange.

On the expiry date of contracts, the trading members/ clearing members have to give

delivery information as prescribed by the exchange from time to time. If a tradingmember/ clearing member fail to submit such information during the trading hours on

the expiry date for the contract, the deals have to be settled as per the settlement calendar

applicable for such deals, in cash together with penalty as stipulated by the exchange.


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III.14 DELIVERY:

Delivery can be done either through the clearinghouse or outside the clearinghouse. On

the expiry date, during the trading hours, the exchange provides a window on the trading

system to submit delivery information to all the open positions.

After the trading hours on the expiry date, based on the available information, the

matching for deliveries takes place. Firstly, on the basis of locations and then randomly

keeping in view the factors such as available capacity of the vault/ warehouse,

commodities already deposited and dematerialized and offered for delivery and any other

factor as may be specified by the exchange from time to time. Matching done is binding on

the clearing members. After completion of the matching process, clearing members are

informed of the deliverable / receivable positions and the unmatched positions.

Unmatched positions have to be settled in cash.

The cash settlement is only for the incremental gain/ loss as determined on the basis of

the final settlement price. All matched and unmatched positions are settled in accordance

with the applicable settlement calendar.

The exchange may allow an alternate mode of settlement between the constituents

directly provided that both the constituents through their respective clearing members notify

the exchange before the closing of trading hours on the expiry date. They have to

mention their preferred identified counter-party and the deliverable quantity, along with

other details required by the exchange. The exchange however, is not being responsible

or liable for such settlements or any consequence of such alternate mode of settlement.

If the information provided by the buyer/ seller clearing members fails to match, then the

open position would be settled in cash together with penalty as may be stipulated by the

exchange.

III.15 PROCEDURE FOR PAYMENTS OF SALES TAX/VAT:

The exchange prescribes procedure for payment of sales tax/VAT or any other

state/local/central tax/fee applicable to the deals culminating into sale with physical

delivery of commodities.


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All members have to ensure that their respective constituents, who intend to take or give

delivery of commodity, are registered with sales tax authorities of all such states in

which the exchange has a delivery center for a particular commodity in which constituent

has or is expected to have open positions. Members have to maintain records/ details of

sales tax registration of each of such constituent and furnish the same to the exchange asand when required.

The seller is responsible for payment of sales tax/VAT, however the seller is entitled to

recover from the buyer, the sales tax and other taxes levied under the local state sales tax law

to the extent permitted by law. In no event the exchange / clearing house liable for

payment of sales tax/ VAT or any other local tax, fees, levies etc.

(A) Pena lties for defau lts:

In the event of a default by the seller or the buyer in delivery of commodities or payment

of the price, the exchange closes out the derivatives contracts and imposes penalties on

the defaulting buyer or seller, as the case may be. It can also use the margins deposited by

such clearing member to recover the loss. The settlement for the defaults in delivery is to

be done in cash within the period as prescribed by the exchange at the highest price from

the last trading date till the final settlement date with a markup thereon as may be decided

from time to time.

(B) Delivery through the depository c learing system:Delivery in respect of all deals for the clearing in commodities happens through the

depository clearing system the delivery through the depository clearing system into the

account of the buyer with the depository participant is deemed to be delivery,

notwithstanding that the commodities are located in the warehouse along with the

commodities of other constituents.

(C) Payments through the c learing bank:

Payment in respect of all deals for the clearing has to be made through the clearing

bank(s); provided however that the deals of sales and purchase executed between different

constituents of the same clearing member in the same settlement shall be offset by process

of netting to arrive at net obligations.


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III.16 CLEARING AND SETTLEMENT PROCESS:

The relevant authority from time to time fixes the various clearing days, the pay-in and

payout days and the scheduled time to be observed in connection with the clearing and

settlement operations of deals in commodities/futures contract.

1. Sett lement ob ligation statement for TMCS: The exchange generates and

provides to each trading clearing member , settlement obligations statements

showing the quantities of the different kinds of commodities for which delivery/

deliveries is/ are to be given and/ or taken and the funds payable or receivable by

him in his capacity as clearing member and by professional clearing member for

deals made by him for which the clearing Member has confirmed acceptance to

settle. The obligations statement is deemed to be confirmed by the trading

member for which deliveries are to be given and/ or taken and funds to be

debited and/ or credited to his account as specified in the obligations statements

and deemed instructions to the clearing banks/ institutions for the same.

2. Sett lement ob ligation statements for PCMS: The exchange/ clearing house

generates and provides to each p rofessional clearing member , settlement

obligations statements showing the quantities of the different kinds of

commodities for which delivery/ deliveries is/ are to be given and/ or taken and the

funds payable or receivable by him. The settlement obligation statement is deemed

to have been confirmed by the said clearing member in respect of all obligations

enlisted therein.

III.17 DELIVERY OF COMMODITIES:

Based on the settlement obligations statements, the exchange generates delivery

statement and receipt statement which each clearing member. The delivery and receipt

statement contains details of commodities to be delivered to and received from other clearing members, the details of the corresponding buying/ selling constituent and such

other details. The delivery and receipt statements are deemed to be confirmed by

respective member to deliver and receive on account of his constituent, commodities as

specified in the delivery and receipt statements.


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On respective pay-in day, clearing members effect depository delivery in the

depository clearing system as per delivery statement in respect of depository deals.

Delivery has to be made in terms of the delivery units notified by the exchange.

Commodities, which are to be received by a clearing member, are delivered to him in the

depository clearing system in respect of depository deals on the respective pay-out day

as per instructions of the exchange/ clearing house.

(A) Delivery unit:

The exchange specifies from time to time the delivery units for all commodities

admitted dealing on the exchange. Electronic delivery is available for trading before

expiry of the validity date. The exchange also specifies from time to time the variations

permissible in delivery units per those stated in contract specifications.


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III.18 ABOUT MCX

(A)Overview:

MCX is an independent and de-mutualised multi commodity exchange. It was

inaugurated on November 10, 2003 by Mr. Mukesh Ambani, Chairman and ManagingDirector, Reliance Industries Ltd.; and has permanent recognition from the

Government of India for facilitating online trading, clearing and settlement operations

for commodities futures market across the country. Today, MCX features amongst the

world's top three bullion exchanges and top four energy exchanges.

MCX offers a wide spectrum of opportunities to a large cross section of participants

including producers/ processors, traders, corporate, regional trading centre, importers,

exporters, co-operatives and industry associations amongst others. Headquartered in

the financial capital of India, Mumbai, MCX is led by an expert management team

with deep domain knowledge of the commodities futures market. Presently, the

average daily turnover of MCX is around USD1.55 bn (Rs.7, 000 crore - April 2006),

with a record peak turnover of USD3.98 bn (Rs.17, 987 crore) on April 20, 2006. In

the first calendar quarter of 2006, MCX holds more than 55% market share of the

total trading volume of all the domestic commodity exchanges. The exchange has also

affected large deliveries in domestic commodities, signifying the efficiency of price

discovery.

Being a nation-wide commodity exchange having state-of-the-art infrastructure,

offering multiple commodities for trading with wide reach and penetration, MCX is

well placed to tap the vast potential poised by the commodities market.


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(B) Key shareho lders:

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank

for Agriculture and Rural Development (NABARD), National Stock Exchange of

India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International,Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda

, HDFC Bank and SBI Life Insurance Co. Ltd.

III.19 OPERATIONS:

(a) Trading:

MCX employs state-of-the-art, new generation integrated trading platform that

permits faster and efficient operations in a cost effective manner. The Exchange

Central System is located in Mumbai, and maintains the Central Order Book, which

matches the trades on a pre-defined matching algorithm, and confirms the execution

of trades to the members on an online real-time basis. It has an integrated Surveillance

and Settlement System. Exchange members located across the country are connected

to the central system through VSAT, Leased line, Internet or any other mode of

communication as permitted by the Exchange. The Exchange also has a Disaster

Recovery Site

(b) Risk Management:

The central objective of MCX's Risk Management System is to assess and manage the

risk of the market in an expeditious manner to ensure smooth and timely pay-in/ pay-

out process of the Exchange. Some of the basic functions of Risk Management are as

follows:

y Real-time Margining System at client level

y Monitoring of position limits (Quantity)y Capital adequacy norms

y Daily price limits

y Initial margins

y Special margins


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y Marked-to-market margin

y Delivery period margin

III.20 C learing and Sett lement :

The Clearing and Settlement System of the Exchange is system driven and rule based.

The Exchange has its own in-house clearing house, which undertakes to clear each

and every trade and is counter-party for all trades; thus offering novation (zero

counter-party risk) to each and every trade executed on the Exchange.

(A)C learing bank interface:

Exchange maintains electronic interface with its Clearing Banks. All members of the

exchange have their Settlement and Client Accounts for exchange operations with the

Clearing Bank. All debits and credits are affected electronically through Settlement

account only.

(B) De livery and Fina l Sett lement:

All contracts on maturity are for delivery. MCX specifies tender and delivery periods.

For example, such periods can be from the 8th working day till the 15th day of the

month, where 15th is the last trading day of the contract month, know as tender and/

or delivery period. A seller or a short open position holder in that contract may tender

documents to the exchange expressing his intention to deliver the underlyingcommodity. The exchange would then select the buyer from the long open position

holder for the tendered quantity. Once the buyer is identified, seller has to initiate the

delivery process and the buyer has to take delivery according to the delivery schedule

prescribed by the exchange


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III.21 STRUCTURE OF DERIVATIVE INSTRUMENTS:

Illustration III.2 Structure of Derivative Instruments

DERIVATIVES

OPTIONS FUTURES SWAPS FORWARDS

PUT

OPTION

CALL

OPTION

COMMODITY SECURITY INTEREST

RATE

CURRENCY

RATE


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III.22 DERIVATIVES (A)INTRODUCTION:

The term Derivative is a financial contract which indicates that it has no

independent value, i.e., its value is entirely derived from the price of the underlyingasset. The underlying asset can be securities, commodities, bullion, currency,

livestock or anything else. In other words, derivative means a forward. Future, option

or any other hybrid contract of pre-determined fixed duration, linked for the purpose

of contract fulfillment to the value of a specified real or financial asset or to an index

of securities.

The international monetary fund defines derivatives as financial instruments that are

linked to a specific financial instrument or indicator or commodity and through which

specific financial risks can be traded in financial markets in their own right. The

value of a financial derivative derives from the price of an underlying asset, such as

an asset or index. Unlike debt securities, no principle is advanced to be repaid and no

investment income accrues.

The securities contracts (regulation) Act 1956 defines derivative as under

Derivative inc ludes:

1) A security derived from a debt instrument, share and loan whether secured or

unsecured, risk instrument or contract for differences or any other form of

security.

2) A contract which derives its value from the prices of underlying asset.


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(B) FUNCTIONS OF DERIVATIVES:

The derivatives perform a number of economic factors. They are as follows:

y The prices in an organized derivatives market reflect the perception of

market participants about the future and lead the prices of underlyingassets to the perceived future level. The prices of derivatives converge

with the prices of the underlying assets at the expiring of the derivative

contract.

y The derivatives market helps to transfer risks from those who have them

but may not like them to those who have an appetite for them.

y Derivatives, due to their inherent nature, are linked to the underlying

market witnesses higher trading volumes because of participation by

more players who would not otherwise participate for lack of anarrangement to transfer risk.

y Speculative trades shift to a more controlled environment of derivatives

market. In the absence of an organized derivatives market, speculators

trade in the underlying cash markets. Margining, monitoring and

surveillance activities of various participants become extremely difficult

in these kinds of mixed markets.

y An important incidental benefit that flows from derivatives trading is

that it acts as a catalyst for new entrepreneurial activity.y Derivatives markets help increase savings and investment in the long

run. Transfer of risk enables market participants to expand their volume

of activity.

(C)TYPES OF DERIVATIVES:

Derivative products initially emerged as hedging devices against fluctuations in

commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years.


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In this class of equity derivatives over the world, futures and options on stock indices

have gained more popularity than on individual stocks, especially among institutional

investors, who are major users of index-linked derivatives. Even small investors find

these useful due to high correlation of the popular indexes with various portfolios and

ease of use. The lower costs associated with index derivatives vis--vis derivative products based on individual securities is another reason for their growing use.

The most commonly used derivatives contracts are forwards, futures and options.

Take a brief look at various derivatives that come to be used.

y Forwards: A forward contract is a customized contract between two entities,

where settlement takes place on specific date in the future at todays pre-

agreed price.

y Futures: a futures contract is an agreement between two parties to buy or sell

an asset at a certain time in the future at a certain price. Futures contracts are

special types of forward contracts in the sense that the former is standardized

Exchange traded contracts.

y Options: options are of two types

Call option

Put option

Call option: It gives the buyer the right but not the obligation to buy a

given quantity of the underlying asset, at a given price on or before a given

future date.

Put option: It gives the buyer the right, but not the obligation to sell a

given quantity of the underlying asset at a given price on or before a given

date.

y Warrants: options generally have lives of up to one year; the majority of

options traded on options Exchanges having a maximum maturity of ninemonths. Longer-dated options are called warrants and are generally traded

over the year.


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y Baskets: basket option is on portfolio of underlying assets. The underlying

asset is usually a moving average or a basket of assets. Equity index options

are a form of basket options.

y Swaps: swaps are private agreements between two parties to Exchange cash

flows in the future according to a prearranged formula. They can be regardedas portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash

flows between the parties in the same currency

Currency swaps: These entail swapping both principle and interest

between the parties, with the cash flows in one direction being in a

different currency than those in the opposite direction.

y Swaptions: swaptions are options to buy or sell a swap that will become

operative at the expiry date of the options. Thus a swaptions is an option on a

forward swap. Rather than have calls and puts, the swaptions market has

receiver swaptions and payer swaptions. A receiver swaptions is an option to

pay fixed and receiver floating.

(D) CLASSIFICATION OF DERIVATIVES :

Forwards (currencies, stocks, swaps etc):

Forward contract is different from a spot transaction, where payment of price

and delivery of commodity take place immediately the transaction is settled. In a

forward contract the sale/purchase transaction of an asset is settled including the price

payable, not for delivery/settlement at spot, but at a specified future date. India has a

strong dollar-rupee forward market with contracts being traded for one, two, and six-

month expiration. Daily trading volume on this forward market is around$500

million a day. Indian users of hedging services are also allowed to buy derivativesinvolving other currencies on foreign markets.

Futures (currencies. Stocks, indexes, commodities):

A future contract has been defined as a standardized, exchange-traded agreement

specifying a quantity and price of a particular type of commodity (soybeans, gold, oil


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etc.,) to be purchased or sold at a pre-determined date in the future. On contract date,

delivery and physical possession take place unless the contract has been closed out.

Futures are also available on various financial products and indexes today. A future

contract is thus a forward contract, which trades on an exchange. S&P CNX Nifty

futures are traded on National Stock Exchange. This provides them transparency,liquidity, anonymity of trades and also eliminates the counter party risks.

(E) PARTICIPANTS IN THE DERIVATIVE MARKET:

There are three major participants in the derivatives market. They are:

1. Hedgers

2. Speculators3. Arbitragers

1. HEDGERS:

Hedger is the person who enters the derivatives market to lock-in their prices to avoid

exposure to adverse movements in the price of an asset. While such locking may not

be extremely profitable the extent of loss is known and can be minimized. They are in

the position where they face risk associated with the price of an asset. They use

derivatives to reduce or eliminate risk.

For example, a farmer may use futures or options to establish the price for his crop

long before he harvests it. Various factors affect the supply and demand for that crop,

causing prices to rise and fall over the growing season. The farmer can watch the

prices discovered in trading at the CBOT and, when they reflect the price he wants,

will sell futures contracts to assure him of a fixed price for his crop.

A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis =

Spot price of asset to be hedged Futures price of the contract used. Basis risk arisesas a result of the following uncertainties:

The exact date when the asset will be bought or sold may not be known.

The hedge may require that the Futures contract be closed before expiration.


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Page 35

PRICE

FUTURES PRICE

BASIS

SPOT PRICE

EXPIRY DATE TIME

Illustration III.3 Hedger basic risk

2. SPECULATORS:

A speculator is a one who accepts the risk that hedgers wish to transfer. A speculator

takes positions on expectations of futures price movements and in order to make a

profit. In general a speculator buy futures contracts when he expect futures prices to

rise and sell futures contract when he expects futures prices to fall , but has no desire

to actually own the physical commodity.

Speculators wish to bet on the future movement in the price of an asset. They use

derivatives to get extra leverage. They take positions in the market and assume risk to

profit from fluctuations in the prices. Infact, the speculators consume the information,

make forecast about the prices and put their money in these forecast. By taking

positions, they are betting that the price would go up or they are betting it would godown. Depending on their perception, they may long or short positions on the futures

or /and options, or may hold spread positions.


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Page 36

3. ARBITRAGEURS:

Simultaneous purchase of securities in one market where the prices thereof are low

and sale thereof in another market, where the price thereof is comparatively higher.

These are done when the same securities are been quoted at different prices in the two

markets, with a view to make a profit and carried on with the conceived intention to

derive advantage from difference in prices of securities prevailing in the two

markets.

-As defined by The Institute of Chartered Accountants of India.

Arbitrageurs thrive on the market imperfections. They profit by trading on given

commodities, or items, that are in the business to take advantage of a discrepancy

between prices in two different markets. If, for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in

the two markets to lock in a profit.

Thus, the arbitrage involves making risk-less profit by simultaneously entering into

transactions in two or more markets. With the introduction of derivate trading the

scope of arbitrageurs activities extends to arbitrage over time i.e., he can buy

securities in an index today and sell the futures, maturing in the month or two.

(F) TRADING OF COMMODITY DERIVATIVES IN INDIA

Trading of all the derivatives in India is carried over:

Exchanges

Over the counter

EXCHANGE TRADING

An asset (commodity/stock), when is traded over an organized exchange is it is

termed, to be traded on the Exchange. This type of trading is the general trading

which we see on the major exchanges world over. The settlement in the exchange

trading is highly standardized.


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Page 37

OVER THE COUNTER TRADING (OTC)

An asset (commodity/stock) is traded over the counter usually because the company is

small and unable to meet listing requirements of the exchanges and facilitates the

trading in those areas where the exchanges are not located. Also known as unlisted the

assets are traded by brokers/dealers who negotiate directly with one another over

computer networks and by phone.

Instruments such as bonds do not trade on a formal exchange and are thus considered

over-the- counter securities. Investment banks making markets for specific issues

trade most debt instruments. If someone wants to buy or sell a bond, they call the

bank that makes the market in that asset.


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Page 38

IV.1 Mark to Market (MTM):

Daily Mark to Market (MTM) Settlement is done for each Client:

At the end of every trading day, for all the trades, this is done till the date of the

Contract expiry.

A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all

trades.

Final Settlement will be done for each Client:

This on expiry of the Contract will handle the FINAL obligation of the Member for

all trades in that contract.

How is Daily MTM done?

Calculating the daily profits and losses for the client/investor does the Daily

Settlement.

Profits and Losses are determined on the positions for client/investor, for each client

and for each contract

All trades are marked to the market at the Daily Settlement Price which is equal to

Closing price for the day.

A total Mark to Market Profit or Loss is calculated for the every client/investor.


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Page 39

Tab le.1 Examp le of Dai ly MTM

Branch 1 Branch 2

Client 1 Client 2 Client 3

Contract A Contract B Contract A Contract A Contract B

Buy

[email protected]

Sell

[email protected]

Sell

700units @Rs.48

Buy

[email protected]

Buy

[email protected]

Sell

[email protected]

Sell

[email protected]

Buy

500units @Rs.40----

Sell

[email protected]

Closing

rate

A 58

B 180

400 units X Rs.8

= Rs.3,200

200 units X Rs.3

=

(Rs.600)

200 units X Rs.30 =

(Rs.6,000)

150 units X Rs.10 =

Rs.1,500

700 units X Rs.10

=

(Rs.7,000)

500 units X

Rs.18=

Rs.9,000

200 units X Rs.5

=

(Rs.1,000)

150 units X Rs.20 =

Rs.3,000

150 units X Rs.10 =

(Rs.1,500)

PROFIT

/(LOSS)

in Rs.

PROFIT

2,600

LOSS

(4,500)

PROFIT

2,000

LOSS

(1,000)

PROFIT

1,500

TOTAL

MTM in

Rs.

LOSS (1,900) PROFIT 2,500


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Page 40

(A) PREOCEDURE OF MTM:

Banks credits the funds

into KCBPL bank a/c

KCBPL BANK

Makes arrangement for funds

With the Head Office Exchange

Clearing

House

(NCDEX/

MCX)

BRANCH 2

Client 1BRANCH 1

Client 1,2

*TWS T rading W o rk S t a t io n

I llustration IV.1 : Procedure for Daily MTM

Funds transaction flow


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Page 41

(B) SETTLEMENT PROCESS OF MTM:

I llustration IV.2 : Settlement process of MTM

Exchange Clearinghouse(NCDEX/ MCX)

Margins

T WS*

Daily MT M settlement

Daily Profit/Loss

for

Positionsclosed out

MT M of Openpositions

Settlements Procedure - Daily MT M Settlement

InitialMarginCall

AnyspecialMargin

KARVY CommoditiesBroking Pvt. Ltd.

Clearing

Bank A/c

Download of Marginand MT M files atEOD (End of the

Day)

((Collection/Refund ) on T+1)&


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Page 42

IV.2 MOVING AVERAGE:

An indicator frequently used in technical analysis showing the average value of a

security's price over a set period. Moving averages are generally used to measure

momentum and define areas of possible support and resistance.

Moving averages are used to emphasize the direction of a trend and to smooth out

price and volume fluctuations, or "noise", that can confuse interpretation. Typically,

upward momentum is confirmed when a short-term average (e.g.15-day) crosses

above a longer-term average (e.g. 50-day). Downward momentum is confirmed whena short-term average crosses below a long-term average.


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Page 43

IV.3 INDEX NUMBERS:

Index numbers are used when one is trying to compare series of numbers of vastly

different size. It is a way to standardize the measurement of numbers so that they are

directly comparable.

An index number is formed by:

The current value is simply the number for the current period. The base period is

some arbitrary period of time, chosen by the party creating the index number series,against which all other observations of the series will be measured. The index number

is multiplied by 100 in order to move more digits to the left of the decimal point.

Relatives or Price Relatives: A price relative us the ratio of the price of a certain

commodity at the current year to its price at the base year, expressed as a percentage.

If we let p0 be the price in the base period and let p1 be the price in the later period,

then the price relative for the price change between these periods is given by. The

Index of Retail Prices is probably the most generally known of all index numbers. Its

aim is to measure the change in price over time of a whole range of widely bought

goods and services and so give a measurement of the cost of living.


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Page 44

IV.4 Exponentia l Smoothing:

We discussed Exponential Smoothing as method for describing a time series that

involved removing the irregular fluctuations. In terms of the time series components

Discussed in the previous section, Exponential Smoothing tends to de-emphasize

most of the residual effects.

Recall that the Formula for Exponential Smoothing is

Et=wYt+(1-w)E t-1

Where w is the Exponential Smoothing constant, is a number between 0 and 1.

The exponentially smoothed forecast for Yt+1 is simply the smoothed value at time t;

Ft+1 =Et

Where Ft+1 is the forecast of Yt+1. To help interpret this forecast formula, substitute

the smoothing formula for Et;

y Ft+1=Et=wYt+(1-w)Et-1

=wYt+(1-w)Ft

=Ft+w(Yt-Ft)


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(A)Ca lcu lation of Exponentia l Smoothed Methods:

1. Given the observed time series y1,y2,..yt, first calculate the exponentially

smoothed values E1,E2,.,Et, using

y E1=Y1

y E2=WY2+(1-W)E1

Et=wYt+(1-w)Et-1

2. Use the last smoothed value to forecast the next time series value:

1. Ft+1=Et

Assuming that Yt is relatively free of trend and seasonal components, use the same

forecast for all future values of Yt:

Ft+2=Ft+1

Ft+3=Ft+1


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Page 46

IV.5 Tab le 1:-

Moving average price of gold for the year 2005

SL.NO MONT HLY AVERAGE(RS)

4yrs moving

averages

Dec-03 5,628.08

1 Dec-04 6,529.98 6,411.05

2 Jan-05 6,622.17 6,477.20

3 Feb-05 6,455.70 6,377.69

4 Mar-05 6,444.59 6,293.85

5 Apr-05 6,242.72 6,275.51

6 May-05 6,113.36 6,314.71

7 Jun-05 6,293.78 6,410.60

8 Jul-05 6,459.79 6,530.34

9 Aug-05 6,541.07 6,656.88

10 Sep-05 6,582.13 6,760.79

11 Oct-05 6,782.98 6,793.28

12 Nov-05 6,982.87 6,754.26


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Page 47

Chart 1:-

Interpretation:

The above graph shows the moving average prices of gold for the period DEC -03 to

NOV-05, it reveals that there is a steady rise in the price after June, the demand for

Gold in next six months increased to almost 600 rupees, the reasons might be demand

for gold and festivals seasons .

Graphical representation of moving averageFrom Dec-03 to Nov-05

6000.00

6200.00

6400.00

6600.00

6800.00

7000.00

1 3 5 7 9 11 13

M onths

Price

In Rs. Movinga ver a ges


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Page 48

IV.6 Tab le 2:-



4 yrs Moving

averages

1 Dec-05 6,849.29 6,684.31

2 Jan-06 6,533.82 6,618.39

3 Feb-06 6,519.15 6,581.42

4 Mar-06 6,687.13 6,585.59

5 Apr-06 6,617.66 6,575.85

6 May-06 6,469.66 6,568.24

7 Jun-06 6,616.66 6,656.18

8 Jul-06 6,511.74 6,830.87

9 Aug-06 6,732.15 7,077.81

10 Sep-06 7,058.73 7,409.46

11 Oct-06 7,425.05 7,785.37

12 Nov-06 7,678.90 5,929.11


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Page 49

Chart 2:-

Interpretation:

The above graph shows the moving average prices of gold for the period DEC -05 to

NOV-06, it reveals that there is a constant rise in the price right from the beginning

Of the year, the demand for gold increased only in September to November period,

basically this period is festival seasons.

Graphical representation of moving average fromDec-05 to Nov-06

0.00 2000.00

4000.00

6000.00

8000.00

10000.00

1 3 5 7 9 11 13

M onths

Price

In Rs. Moving a ver a ges


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Page 50

IV.7 Tab le 3:-


SL.NO MONT HLY AVERAGE(RS) 4 yrs Moving averages

1 Dec-06 8,218.14 8,417.03

2 Jan-07 8,580.06 8,729.91

3 Feb-07 8,665.26 9,188.89

4 Mar-07 8,730.39 9,592.97

5 Apr-07 9,669.68 9,926.62

6 May-07 10,800.36 10,222.42

7 Jun-07 9,677.63 10,177.02

8 Jul-07 10,387.25 10,007.31

9 Aug-07 10,379.20 9,914.38

10 Sep-07 9,727.61 9,798.69

11 Oct-07 9,392.75 9,757.53

12 Nov-07 9,928.63 9,894.50


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Page 51

Chart 3:-

Interpretation:

The above graph shows the moving average prices of for the period DEC -06 to

NOV-07, it reveals that there is a steady rise in the price right from the beginning of

The year and the price even touched 10K mark, the only reason might be the huge

demand for gold in this particular period.

Graphical representation of moving averagefrom Dec-06 to Nov-07

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

1 3 5 7 9 11 13

M onths

PriceIn Rs.

Moving a ver a ges


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Page 52

IV.8 Tab le 4:-


SL.NO MONT HLY AVERAGE(RS) 4yrs Moving averages

1 Dec-07 9,912.31 9,888.79

2 Jan-08 9,865.27 10,108.05

3 Feb-08 10,350.83 10,265.15

4 Mar-08 10,179.46 10,204.60

5 Apr-08 10,229.75 9,918.99

6 May-08 9,608.23 9,519.48

7 Jun-08 9,430.73 9,457.95

8 Jul-08 9,485.16 9,533.09

9 Aug-08 9,581.02 9,858.09

10 Sep-08 10,136.23 10,328.41

11 Oct-08 10,520.59 10,871.03

12 Nov-08 11,221.47 11,221.47


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Page 53

Chart 4:-

Interpretation:

During the year 2008 there was a continuous decline in gold price for the first six

months, then there after the market stabilized the prices moved regularly. There may

be many reasons for fluctuation in gold price in this particular period like lack of

market or demand for gold in first half of the year. Then the shoot in price might be

due to seasonal factors like festivals, marriages etc.

Graphical representation of moving averageFrom Dec-07 to Nov-08

8500.00

9000.00

9500.00

10000.00

10500.00

11000.00

11500.00

1 3 5 7 9 11 13

M onths

Price

In Rs Moving

a ver a ges


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Page 54

IV.9 Tab le 5:-

Simple index price of gold for the year 2005=P1/P0*100

SL.NO MONT HLY AVERAGE(RS) Simple index

Base Price Dec-03 5,628.08 100.00

1 Dec-04 6,529.98 116.02

2 Jan-05 6,622.17 117.66

3 Feb-05 6,455.70 114.71

4 Mar-05 6,444.59 114.51

5 Apr-05 6,242.72 110.92

6 May-05 6,113.36 108.62

7 Jun-05 6,293.78 111.83

8 Jul-05 6,459.79 114.78

9 Aug-05 6,541.07 116.22

10 Sep-05 6,582.13 116.95

11 Oct-05 6,782.98 120.52

12 Nov-05 6,982.87 124.07


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Page 55

Chart 5:-

Interpretation:

The above graph shows the simple index price for the period December-03 to

November-05, it reveals the increase in average price in this particular period, if we

see the table the maximum increase in price is 124 rupees, but if we see the prices it

has increased in every month. It reveals that market was always increasing in this

period.

0.00 20.00 40.00 60.00

80.00 100.00 120.00 140.00

Price

In Rs

1 3 5 7 9 11 13

M onths

Graphical representation of simplex index fromDec-03 to Nov-05

S imple index


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Page 56

IV.10 Tab le 6:-


SL.NO MONT HLY AVERAGE(RS) simple index

1 Dec-05 6,849.29 121.70

2 Jan-06 6,533.82 116.09

3 Feb-06 6,519.15 115.83

4 Mar-06 6,687.13 118.82

5 Apr-06 6,617.66 117.58

6 May-06 6,469.66 114.95

7 Jun-06 6,616.66 117.57

8 Jul-06 6,511.74 115.70

9 Aug-06 6,732.15 119.62

10 Sep-06 7,058.73 125.42

11 Oct-06 7,425.05 131.93

12 Nov-06 7,678.90 136.44


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Page 57

Chart 6:-

Interpretation:




has continuously decreased in every month. It reveals that market was always falling

and only stabilized in Sep, Oct, and Nov.

100.00 105.00 110.00 115.00

120.00 125.00 130.00 135.00 140.00

Price

In Rs

1 3 5 7 9 11 13

M onths


S imple index


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Page 58

IV.11 Tab le 7:-



1 Dec-06 8,218.14 146.02

2 Jan-07 8,580.06 152.45

3 Feb-07 8,665.26 153.96

4 Mar-07 8,730.39 155.12

5 Apr-07 9,669.68 171.81

6 May-07 10,800.36 191.90

7 Jun-07 9,677.63 171.95

8 Jul-07 10,387.25 184.56

9 Aug-07 10,379.20 184.42

10 Sep-07 9,727.61 172.84

11 Oct-07 9,392.75 166.89

12 Nov-07 9,928.63 176.41


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Page 59

Chart 7:-

Interpretation:




has continuously increased in every month. It reveals that there was a huge demand

for gold in this particular period as price of gold also 10000 marks.

0.00

50.00

100.00

150.00

200.00

Price

In Rs

1 3 5 7 9 11 13

M onths


S imple index


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Page 60

IV.12 Tab le 8:-



1 Dec-07 9,912.31 176.12

2 Jan-08 9,865.27 175.29

3 Feb-08 10,350.83 183.91

4 Mar-08 10,179.46 180.87

5 Apr-08 10,229.75 181.76

6 May-08 9,608.23 170.72

7 Jun-08 9,430.73 167.57

8 Jul-08 9,485.16 168.53

9 Aug-08 9,581.02 170.24

10 Sep-08 10,136.23 180.10

11 Oct-08 10,520.59 186.93

12 Nov-08 10,520.59 186.93


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Page 61

Chart 8:-

Interpretation:




has increased only in marriage and festival season. It reveals that there was a huge

demand for gold in that particular period where gold prices crossed 10000 marks.

155.00 160.00

165.00 170.00 175.00 180.00 185.00 190.00

Price

In Rs

1 3 5 7 9 11 13

M onths


S imple index


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Page 62

IV.13 Tab le 9:-

Exponential smoothing price of gold for the year 2005, Et=W Yt + (1-W)*E1

SL.NO MONT HLY AVERAGE(RS) Exponential smoothing

0.3 0.6

Dec-03 5,628.08 5,628.08 5,628.08

1 Dec-04 6,529.98 5,898.65 6,169.22

2 Jan-05 6,622.17 6,115.71 6,440.99

3 Feb-05 6,455.70 6,217.70 6,449.82

4 Mar-05 6,444.59 6,285.77 6,446.68

5 Apr-05 6,242.72 6,272.86 6,324.31

6 May-05 6,113.36 6,225.01 6,197.74

7 June-05 6,293.78 6,245.64 6,255.36

8 Jul-05 6,459.79 6,309.88 6,378.02

9 Aug-05 6,541.07 6,379.24 6,475.85

10 Sep-05 6,582.13 6,440.11 6,539.62

11 Oct-05 6,782.98 6,542.97 6,685.63

12 Nov-05 6,982.87 6,674.94 6,863.97


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Page 63

Chart 9:-

Interpretation:

The above graph shows the movement of gold price by using forecasting tool

(Exponential Smoothing) with 0.3 & 0.6 weights respectively. But if we see the

weights and monthly average price there is decrease in gold price when 0.3 & 0.6 are

taken as weights. Thus if we predict the gold price according to weights there is

certain possibility that price of gold will come down.

0.00 1000.00 2000.00 3000.00 4000.00 5000.00 6000.00 7000.00

Price

In Rs

1 3 5 7 9 11 13 15

M onths

Graphical representation of exponential smoothing fromDec-03 to Nov-05

E xponenti a l 1

E xponenti a l 2


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Page 64

IV.14 Tab le 10:-



0.30 0.6

1 Dec-05 6,849.29 5,994.44 6,360.80

2 Jan-06 6,533.82 6,089.20 6,387.98

3 Feb-06 6,519.15 6,236.74 6,487.89

4 Mar-06 6,687.13 6,358.53 6,592.20

5 Apr-06 6,617.66 6,385.34 6,549.27

6 May-06 6,469.66 6,331.90 6,411.52

7 June-06 6,616.66 6,342.50 6,449.09

8 Jul-06 6,511.74 6,325.47 6,409.19

9 Aug-06 6,732.15 6,436.56 6,590.49

10 Sep-06 7,058.73 6,583.09 6,825.58

11 Oct-06 7,425.05 6,735.59 7,070.88

12 Nov-06 7,678.90 6,883.75 7,281.59


65/79

Page 65

Chart 10:-

Interpretation:






0.00

2000.00

4000.00

6000.00

8000.00

Price

In Rs

1 3 5 7 9 11 13

M onths


Exponenti

al

1

E xponenti a l 21


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Page 66

IV.15 Tab le 11:-



0.30 0.6

1 Dec-06 8,218.14 6,405.10 7,182.12

2 Jan-07 8,580.06 6,703.07 7,615.73

3 Feb-07 8,665.26 6,880.57 7,775.55

4 Mar-07 8,730.39 6,971.51 7,818.16

5 Apr-07 9,669.68 7,300.94 8,380.48

6 May-07 10,800.36 7,631.11 9,009.94

7 June-07 9,677.63 7,260.79 8,285.67

8 Jul-07 10,387.25 7,488.12 8,734.49

9 Aug-07 10,379.20 7,530.68 8,778.73

10 Sep-07 9,727.61 7,383.75 8,426.91

11 Oct-07 9,392.75 7,325.90 8,251.50

12 Nov-07 9,928.63 7,558.67 8,631.43

,


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Page 67

Chart 11:-

Interpretation:




taken as eights. Thus if we predict the gold price according to weights there is certain

possibility that price of gold will come down.

0.00

3000.00

6000.00

9000.00

12000.00

13500.00

Price

In Rs

1 3 5 7 9 11 13

M onths


E xponenti a l 1

E xponenti a l 2


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Page 68

IV.16 Tab le 12:-



0.30 0.6

1 Dec-07 9,912.31 6,913.35 8,198.62

2 Jan-08 9,865.27 7,088.64 8,386.85

3 Feb-08 10,350.83 7,386.24 8,786.90

4 Mar-08 10,179.46 7,406.23 8,687.60

5 Apr-08 10,229.75 7,468.96 8,716.52

6 May-08 9,608.23 7,273.47 8,294.66

7 June-08 9,430.73 7,186.72 8,137.53

8 Jul-08 9,485.16 7,217.50 8,193.24

9 Aug-08 9,581.02 7,291.22 8,299.82

10 Sep-08 10,136.23 7,506.34 8,672.08

11 Oct-08 10,520.59 7,664.25 8,928.20

12 Nov-08 10,520.59 7,736.26 8,986.61


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Page 69

Chart 12:-

Interpretation :






1000.00

6000.00

8000.00

10000.00

12500.00

14500.00

PriceIn Rs

1 3 5 7 9 11 13

M onths


E xponenti a l1

E xponenti a l2


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Page 70

IV.17 Tab le 13:-

Monthly average price of gold per Tula in the 2005


Dec-03 5,628.08

1 Dec-04 6,529.98

2 Jan-05 6,622.17

3 Feb-05 6,455.70

4 Mar-05 6,444.59

5 Apr-05 6,242.72

6 May-05 6,113.36

7 Jun-05 6,293.78

8 Jul-05 6,459.79

9 Aug-05 6,541.07

10 Sep-05 6,582.13

11 Oct-05 6,782.98

12 Nov-05 6,982.87


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Page 71

Chart 13:-

Interpretation:

The above chart represents the monthly average price per tulle during the period

December-03 to November-05; the graph shows that there is a continuous rise in gold

price. Thus it can be said that there was average demand for gold in this particular

period.

M onthly average price per tula from Dec-03 to Nov-05

0.00

1000.00

2000.00 3000.00

4000.00

5000.00

6000.00

7000.00

8000.00

1 3 5 7 9 11 13

M onths

Price

In Rs AVERAGE


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Page 72

IV.18 Tab le 14:-


SLNO MONT HLY AVERAGE(RS)

1 Dec-05 6,849.29

2 Jan-06 6,533.82

3 Feb-06 6,519.15

4 Mar-06 6,687.13

5 Apr-06 6,617.66

6 May-06 6,469.66

7 Jun-06 6,616.66

8 Jul-06 6,511.74

9 Aug-06 6,732.15

10 Sep-06 7,058.73

11 Oct-06 7,425.05

12 Nov-06 7,678.90


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Page 73

Chart 14:-

Interpretation:


December-05 to November-06; the graph shows that there is a continuous rise and all

in old price, but suddenly the price shoots up. Thus it can be said that there was good

demand for gold in second half of the year in this particular period.

M onthly average price per tula from Dec-05 to Nov-06

5500.00

6000.00

6500.00

7000.00

7500.00

8000.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14

M onths

Price

In Rs

AVERAGE


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Page 74

IV.19 Tab le 15:-


SLNO MONT HLY AVERAGE(RS)

1 Dec-06 10,500.14

2 Jan-07 10,611.06

3 Feb-07 10,699.26

4 Mar-07 10,729.39

5 Apr-07 11,899.68

6 May-07 12,850.36

7 Jun-07 11,898.63

8 Jul-07 12,587.25

9 Aug-07 12,589.20

10 Sep-07 11,727.61

11 Oct-07 11,392.75

12 Nov-07 12,500.63


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Page 75

Chart 15:-

Interpretation:



price and the price even touched 10000 marks. Thus it can be said that there was

demand for gold, but fell after it reached 10000 marks.

M onthly average tula price from Dec-06 TO Nov-07

6500.00

7500.00

8500.00

9500.00

10500.00

12500.00

13500.00

1 2 3 4 5 6 7 8 9 10 11 12 13

M onths

Price

in Rs AVERAGE


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Page 76

IV.20 Tab le 16:-



1 Dec-07 9,912.31

2 Jan-08 9,865.27

3 Feb-08 10,150.83

4 Mar-08 10,379.46

5 Apr-08 10,599.75

6 May-08 11,136.23

7 June-08 11,579.73

8 Jul-08 11,999.16

9 Aug-08 12,181.02

10 Sep-08 12,536.23

11 Oct-08 13,500.59

12 Nov-08 13,520.59


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Page 77

Chart 16:-

Interpretation:



price as the price soared to 10000 marks twice in the year. Thus it can be said that

there was huge demand for gold, because of festival season in this particular period.

M onthly average tula price from Dec -07 TO Nov-08

8500.00

9000.00

9500.00

10500.00

13500.00

14500.00

1 2 3 4 5 6 7 8 9 10 11 12 13

M onths

AVERAGE Pricein Rs


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Page 78

V.1 CONCLUSIONS:

Commodity markets are markets where raw materials (or) primary products

are exchanged and traded on regulated commodities exchanges.

Commodity trading means trading in commodity spot & derivatives (Futures).

National Commodity Derivatives Exchange Limited (NCDEX) is a

professionally managed on-line multi commodity exchange. It was

incorporated on April 23, 2003.

Commodity market is regulated by the Forward Markets Commission (FMC)

and government of India.

Derivatives A contract which derives its value from the prices of underl ying

asset.

V.2 FINDINGS:

By critically examine price movement of world during period of the study one

can find that price is high in quarter of October, November, and December due

to the festival season.

By a clearly observing average monthly price movement of gold huge

fluctuation in the year 2008 due to the global recession.

Prices of gold touching bottom in the month of July, august usually during the period of the study due to the sentiment and less demand.

V.3 SUGGESTIONS:

Buyers or investors are advised to investing in gold in the month of July-

august where prices of the gold touch low during the period of the study.

As prices of gold are higher in the quarter of October, November, and

December because of festival season in this particular period. So investors and

buyer conscious while investing in the quarter.

Price of gold gradually increasing during the period of the study that 2005-

2008. So long term investors who aim at long term returns can stock for

investment in gold. Irrespective of the monthly averages price movement.


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I. BIBLOGRAPHY

(A) BOOKS:

y Donald E. Fisher, Ronald J. Jordan, Securities Analysis and

Portfolio Management,, 1999, sixth edition, futures and options

Prentice hall of India.

y Sharpe W.F. Alexander J. Bailey, investments, 1998, 5th edition, Derivatives,

Prentice Hall of India.

y C.Shapiro International financial management, 6th edition.

y Karvy finapolies, Monthly editions, Broachers of karvy com trade.

(B) JOURNALS: y Business India, January 2009.

y Capital Market, January 2009.

y Economics Times, January 2008.

y ICFAI Journal, January 2009.

(C)WEBSITES:

KARVY LEARNING CENTRE

y www.karvy.com

y www.karvycommodities.com

y www.ncdex.com

y www.mcx.com

Final Project of Commodity

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