The document provides an overview of commodity derivative markets in India. It discusses the evolution and growth of commodity exchanges in India from the 19th century to present day. It describes how various commodity exchanges were established over time to trade different agricultural and industrial commodities. It also summarizes the roles of national and regional commodity exchanges in India and provides trade performance data for leading exchanges in January 2010.

1. CHAPTER -1
AN INTRODUCTION
Commodity market is an important constituent of the financial
markets of any country. It is the market where a wide range of
products, viz., precious metals, base metals, crude oil, energy and
soft commodities like palm oil, coffee etc. are traded. It is important
to develop a vibrant, active and liquid commodity market. This
would help investors hedge their commodity risk, take speculative
positions in commodities and exploit arbitrage opportunities in the
market.
Derivatives as a tool for managing risk first originated in the
commodities markets. They werethen found useful as a hedging
tool in financial markets as well. In India, trading in
commodityfutures has been in existence from the nineteenth
century with organised trading in cottonthrough the establishment
of Cotton Trade Association in 1875. Over a period of time,
othercommodities were permitted to be traded in futures
exchanges. Regulatory constraints in1960s resulted in virtual
dismantling of the commodity futures market. It is only in the
lastdecade that commodity futures exchanges have been actively
encouraged however, the markets have not grown to significant
levels.
A commodity derivatives market (or exchange) is, in simple terms,
nothing more or less than a publicmarketplace where commodities
1

2. are contracted for purchase or sale at an agreed price for delivery
at aspecified date. These purchases and sales, which must be
made through a broker who is a member of an organized
exchange, are made under the terms and conditions of a
standardized futures contract.Commodity prices do vibrate more
rapidly and provide profitable opportunities, accordinglyrecessions,
depressions and booms offer many opportunities to scoop up
profits. Exchange TradedDerivatives can be broadly classified
into Futures and Options.
Evolution of the commodity market in India
Although India has a long history of trade in commodity
derivatives, this segment remained underdeveloped due to
government intervention in many commodity markets to control
prices. 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.
While free trade in many commodity items is restricted under the
Essential Commodities Act (ECA), 1955, forward and futures
contracts are limited to certain commodity items under the Forward
Contracts (Regulation) Act (FCRA), 1952.
The first commodity exchange was set up in India by Bombay
Cotton Trade Association Ltd., and formal organized futures
trading started in cotton in 1875. Subsequently, many exchanges
came up in different parts of the country for futures trade in various
commodities. The GujratiVyapariMandali came into existence in
2

3. 1900 which has undertaken futures trade in oilseeds first time in
the country. The Calcutta Hessian Exchange Ltd and East India
Jute Association Ltd were set up in 1919 and 1927 respectively for
futures trade in raw jute. In 1921, futures in cotton were organized
in Mumbai under the auspices of East India Cotton Association
(EICA). Many exchanges were set up in major agricultural centres
in north India before world war broke out and they were mostly
engaged in wheat futures until it was prohibited. The existing
exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were
established during this period. The futures trade in spices was first
organized by India Pepper and Spices Trade Association (IPSTA)
in Cochin in 1957. Futures in gold and silver began in Mumbai in
1920 and continued until it was prohibited by the government by
mid-1950s. Options are though permitted now in stock market,
they are not allowed in commodities. The commodity options were
traded during the pre-independence period. Options on cotton
were traded until they along with futures were banned in 1939
(Ministry of Food and Consumer Affairs, 1999). However, the
government withdrew the ban on futures with passage of FCRA in
1952. The Act has provided for the establishment and constitution
of Forward Markets Commission (FMC) for the purpose of
exercising the regulatory powers assigned to it by the Act. Later,
futures trade was altogether banned by the government in 1966 in
order to have control on the movement of prices of many
agricultural and essential commodities.
After the ban of futures trade all the exchanges went out of
business and many traders started resorting to unofficial and
informal trade in futures. On recommendation of the Khusro
3

4. Committee in 1980 government reintroduced futures on some
selected commodities including cotton, jute, potatoes, etc. As part
of economic liberalization of 1990s an expert committee on
forward markets under the chairmanship of Prof. K.N. Kabra was
appointed by the government of India in 1993. Its report submitted
in 1994 recommended the reintroduction of futures which were
banned in 1966 and also to widen its coverage to many more
agricultural commodities and silver. In order to give more thrust on
agricultural sector, the National Agricultural Policy 2000 has
envisaged external and domestic market reforms and dismantling
of all controls and regulations in agricultural commodity markets. It
has also proposed to enlarge the coverage of futures markets to
minimize the wide fluctuations in commodity prices and for hedging
the risk arising from price fluctuations. In line with the proposal
many more agricultural commodities are being brought under
futures trading.
4

5. ABOUT THE REPORT
Title Of The Study:
The present study titled as “A project report on the COMMODITY
DERIVATIVE MARKETS”.
Objective of the study:
The following objectives of the present study are:
o To understand about the commodity derivative market.
o To know about the commodity derivative markets
instruments.
Limitations of the study:
The following limitations of the present study are:
o The period for the study is limited.
o The study deals only with the Indian market.
Data And Methodology:
For the purpose of the present study the secondary data was
used. The secondary data were collected from journals, internet ,
book and newspaper.
5

6. Presentation of the study:
Following are the Presentation of the study;
Chapter-1Gives an introduction to the study.
Chapter-2Deals with an overview of commodity exchanges
in India.
Chapter-3 Deals with profile of Commodity derivative market.
Chapter-4Recent news reports relating to commodity
derivatives.
Chapter-5 Conclusion
6

7. CHAPTER-2
COMMODITY EXCHANGES- AN OVERVIEW
Commodity exchanges are defined as centres where futures trade
is organized in a widersense; it is taken to include any organized
market place where trade is routed through onemechanism,
allowing effective competition among buyers and among sellers.
This would includeauction-type exchanges, but not wholesale
markets, where trade is localized, but effectivelytakes place
through many non-related individual transactions between different
permutationsof buyers and sellers.
Role of Commodity Exchanges
Commodity exchanges provide platforms to suit the
variedrequirements of customers. Firstly, they help in price
discovery as players get to set future prices which are also made
available toall participants. Hence, a farmer in the southern part of
India would be able to know the bestprice prevailing in the country
which would enable him to take informed decisions. For this
tohappen, the concept of commodity exchanges must percolate
down to the villages. Today thefarmers base their choice for next
year's crop on current year's price. Ideally this decisionought to be
based on next year's expected price. Futures prices on the
platforms of commodityexchanges will hopefully move farmers of
our country from the current 'cobweb' effect whereadditional
acreage comes under cultivation in the year subsequent to one
7

8. when a commodityhad good prices; consequently the next year the
commodity price actually falls due to oversupply.
Secondly, these exchanges enable actual users (farmers, agro
processors, industry where thepredominant cost is commodity
input/output cost) to hedge their price risk given the uncertaintyof
the future - especially in agriculture where there is uncertainty
regarding the monsoon andhence prices. This holds good also for
non-agro products like metals or energy products aswell where
global forces could exert considerable influence. Purchasers are
also assured of afixed price which is determined in advance,
thereby avoiding surprises to them. It must beborne in mind that
commodity prices in India have always been woven firmly into
theinternational fabric. Today, price fluctuations in all major
commodities in the country mirrorboth national and international
factors and not merely national factors.
Thirdly, by involving the group of investors and speculators,
commodity exchanges provideliquidity and buoyancy to the
system.
Lastly, the arbitrageurs play an important role in balancing the
market as arbitrage conditions,where they exist, are ironed out as
arbitrageurs trade with opposite positions on differentplatforms and
hence generate opposing demand and supply forces which
ultimately narrowsdown the gaps in prices.
It must be pointed out that while the monsoon conditions affect the
prices of agro-basedcommodities, the phenomenon of
globalization has made prices of other products such asmetals,
energy products, etc., vulnerable to changes in global politics,
8

9. policies, growthparadigms, etc. This would be strengthened as the
world moves closer to the resolution of theWTO impasse, which
would become a reality shortly. Commodity exchanges would
provide avaluable hedge through the price discovery process while
catering to the different kind ofplayers in the market.
There are more than 20 recognised commodity futures exchanges
in India under the purviewof the Forward Markets Commission
(FMC). The country's commodity futures exchanges aredivided
majorly into two categories:
• National exchanges
• Regional exchanges
The four exchanges operating at the national level (as on 1st
January 2010) are:
i) National Commodity and Derivatives Exchange of India Ltd.
(NCDEX)
ii) National Multi Commodity Exchange of India Ltd. (NMCE)
iii) Multi Commodity Exchange of India Ltd. (MCX)
iv) Indian Commodity Exchange Ltd. (ICEX) which started trading
operations on November27, 2009
The leading regional exchange is the National Board of Trade
(NBOT) located at Indore. Thereare more than 15 regional
commodity exchanges in India.
9

10. Trade Performance of leading Indian Commodity Exchanges
for January 2010
INDIAN COMMODITY EXCHANGES
Some of the features of national and regional exchanges are listed
below:
National Exchanges
• Compulsory online trading
• Transparent trading
• Exchanges to be de-mutualised
• Exchange recognised on permanent basis
10

11. • Multi commodity exchange
• Large expanding volumes
Regional Exchanges
• Online trading not compulsory
• De-mutualisation not mandatory
• Recognition given for fixed period after which it could be
given for re-regulation
• Generally, these are single commodity exchanges.
Exchanges have to apply for tradingeach commodity.
• Low volumes in niche markets
Commodity Exchanges in India
NO. Exchanges Main Commodities
Gold, Silver, Copper, Crude Oil,
Zinc, Lead, Nickel, Natural gas,
Aluminium, Mentha Oil,
rude_Palm_Oil, RefinedSoya Oil,
Multi Commodity Cardamom, Guar Seeds, Kapas,
1. Exchange of India Ltd. Potato,ChanaGram, Melted
Mumbai* Menthol Flakes, Almond,
Wheat,Barley, Long Steel, Maize,
Soybean Seeds, Gasoline US,
Tin, Kapaskhali, Platinum,
Heating Oil
11

12. Guar Seed, Soy Bean, Soy Oil,
Chana,RM Seed, Jeera,
Turmeric, Guar Gum, Pepper,
National Commodity And Cotton Cake, Long Steel,
2. Derivative Exchange Gur, Kapas, Wheat, Red Chilli,
Mumbai* Crude Oil, Maize, Gold,
Copper, Castor Seeds, Potato,
Barley, KachhiGhani
Mustard Oil, Silver, Indian 28 Mm
Cotton, Platinum
Rape/Mustard Seed, Guar
Seeds, Nickel, Jute, Refined
Soya Oil, Zinc, Rubber,
National Multi
ChanaGram, Isabgul, Lead,
Commodity Exchange of
3. Gold, Aluminium, Copper,
India Limited
Turmeric, Copra, Silver, Raw
Ahmedabad*
Jute,Guar Gum, Pepper, Coffee
Robusta, Castor Seeds, Mentha
Oil
Indian Commodity
4. Exchange Limited, Gold, Crude Oil, Copper, Silver
Gurgaon *
National Board of Trade.
5. Soy bean, Soy Oil
Indore
Chamber Of
6. Gur, Mustard seed
Commerce,Hapur
12

13. Ahmedabad Commodity Castor seed
7.
Exchange Ltd.
Rajkot Commodity Castorseed
8.
Exchange Ltd, Rajkot
Surendranagar Cotton &
9. Oilseeds Association Ltd, Kapas
S.nagar
The Rajdhani Oil and
10. Oilseeds Exchange Ltd., Gur, Mustard Seed
Delhi
Haryana Commodities Mustard seed, Cotton seed Oil
11.
Ltd.,Sirsa Cake
India Pepper & Spice, Pepper Domestic-MG1,Pepper
12.
Trade Association. Kochi 550 G/L
Vijay Beopar Chamber
13. Gur
Ltd.,Muzaffarnagar
The Meerut Agro
14. Commodities Exchange Gur
Co. Ltd., Meerut
Bikaner Commodity
15. Guarseed,
Exchange Ltd.,Bikaner
First Commodity
16. Exchange of India Ltd, Coconut oil
Kochi
The Bombay Commodity Castorseed
17.
Exchange Ltd. Mumbai
13

14. The Central India
Mustard seed
18. Commercial Exchange
Ltd,Gwalior
Bhatinda Om & Oil
19. Gur
Exchange Ltd., Batinda.
The Spices and Oilseeds
20. Turmeric
Exchange Ltd., Sangli
The East India Jute &
21. Hessian Exchange Ltd, Raw Jute
Kolkatta
The East India Cotton
22. Cotton
Association Mumbai.
NCDEX
National Commodity & Derivatives Exchange Limited (NCDEX), a
national level online multi-commodityexchange, commenced
operations on December 15, 2003. The Exchange hasreceived a
permanent recognition from the Ministry of Consumer Affairs, Food
and PublicDistribution, Government of India as a national level
exchange. The Exchange, in just over twoyears of operations,
posted an average daily turnover (one-way volume) of around Rs
4500-5000 crore a day (over USD 1 billion). The major share of the
volumescomes from agriculturalcommodities and the balance from
bullion, metals, energy and other products. Trading isfacilitated
through over 850 Members located across around 700 centers
(having ~20000trading terminals) across the country. Most of these
14

15. terminals are located in the semi-urbanand rural regions of the
country. Trading is facilitated through VSATs, leased lines and
theInternet.
Structure of NCDEX
NCDEX has been formed with the following objectives:
• To create a world class commodity exchange platform for the
market participants.
• To bring professionalism and transparency into commodity
trading.
• To inculcate best international practices like de-materialised
technology platforms, low cost solutions and information
dissemination into the trade.
• To provide nationwide reach and consistent offering.
• To bring together the entities that the market can trust.
Shareholders of NCDEX
NCDEX is promoted by a consortium of four institutions. These are
National Stock Exchange(NSE), ICICI Bank Limited, Life Insurance
Corporation of India (LIC) and National Board forAgriculture and
Rural Development (NABARD). Later on their shares were diluted
and moreinstitutions became shareholders of NCDEX. These are
Canara Bank, CRISIL Limited, Indian FarmersFertilisers
Cooperative Limited (IFFCO), Punjab National Bank (PNB),
Goldman Sachs, Intercontinental Exchange (ICE) and Shree
Renuka Sugars Ltd.All the ten shareholders (now ICICI is not a
shareholder of NCDEX) bring along with themexpertise in closely
15

16. related fields such as agriculture, rural banking, co-operative
expertise,risk management, intensive use of technology, derivative
trading besides institution buildingexpertise.
GOVERNANCE
The governance of NCDEX vests with the Board of Directors.
None of the Board of Directorshas any vested interest in
commodity futures trading. The Board comprises persons of
eminence,each an authority in their own right in the areas very
relevant to the Exchange.Board appoints an executive committee
and other committees for the purpose of managingactivities of the
Exchange. The executive committee consists of Managing Director
of theExchange who would be acting as the Chief Executive of the
Exchange, and also other membersappointed by the board. Apart
from the executive committee the board has
constitutedcommittees like Membership committee, Audit
Committee, Risk Committee, NominationCommittee,
Compensation Committee and Business Strategy Committee,
which help the Boardin policy formulation.
NCDEX Products
NCDEX currently offers an array of more than 50 different
commodities for futures trading.The commodity segments covered
include both agri and non-agri commodities [bullion, energy,metals
(ferrous and non-ferrous metals) etc]. Before identifying a
commodity for trading, theExchange conducts a thorough research
into the characteristics of the product, its market andpotential for
futures trading. The commodity is recommended for approval of
16

17. Forward MarketsCommission, the Regulator for commodity
exchanges in the country after approval by theProduct Committee
constituted for each of such product and Executive Committee of
theExchange.
Exchange Membership
Membership of NCDEX is open to any person, association of
persons, partnerships, co-operativesocieties, companies etc. that
fulfills the eligibility criteria set by the Exchange. FIs, NRIs,Banks,
MFs etc are not allowed to participate in commodity exchanges at
the moment. All themembers of the Exchange have to register
themselves with the competent authority beforecommencing their
operations. NCDEX invites applications for Members from persons
who fulfillthe specified eligibility criteria for trading commodities.
The members of NCDEX fall intofollowing categories:
1. Trading cum Clearing Member (TCM):
Members can carry out the transactions (Trading, clearing
and settlement) on their own account and also on their
clients' accounts. Applicants accepted for admission as TCM
are required to pay the requisite fees/ deposits and also
maintain net worth as explained in the following section.
2. Professional Clearing Members (PCM):
Members can carry out the settlement and clearing for their
clients who have traded through TCMs or traded as TMs.
Applicants accepted for admission as PCMs are required to
pay the requisite fee/ deposits and also maintain net worth.
17

18. 3. Trading Member (TM):
Memberwho can only trade through their account or on
account of their clients and will however have to clear their
trade through PCMs/STCMs.
4. Strategic Trading cum Clearing Member (STCM):
This is up gradation from the TCM to STCM. Such member
can trade on their own account, alsoon account of their
clients. They can clear and settle these trades and also clear
and settletrades of other trading members who are only
allowed to trade andare not allowed to settleand clear.
Capital requirements
NCDEX has specified capital requirements for its members.
On approval as a member ofNCDEX, the member has to
deposit the following capital:
Base Minimum Capital (BMC)
Base Minimum Capital comprises of the following:
• Interest Free Cash Security Deposit
• Collateral Security Deposit
Interest Free Cash Security Deposit
An amount of Rs. 15 Lacs by Trading cum Clearing Members
(TCM) and Rs. 25 LacsbyProfessional Clearing Members
(PCM) is to be provided in cash. The same is to be provided by
issuing a cheque / demand draft payable at Mumbai in favour of
National Commodity & Derivatives Exchange Limited.
18

19. Collateral Security Deposit
The minimum-security deposit requirement is Rs. 15 Lacs for
TCM and Rs. 25 Lacs for PCM. All Members have to comply
with the security deposit requirement before the activation of
their trading terminal. Members may opt to meet the security
deposit requirement by way of the following:
Cash
The same is to be provided by issuing a cheque / demand draft
payable at Mumbai in favour of'National Commodity &
Derivatives Exchange Limited'.
Bank Guarantee
Banks guarantee in favour of NCDEX as per the specified
format. The minimum term of thebank guarantee should be 12
months.
Fixed Deposit Receipt
Fixed Deposit Receipts (FDRs) issued by approved banks are
accepted. The FDR should beissued for a minimum period as
specified by the Exchange from time to time from any of
theapproved banks.
Government of India Securities
National Commodity Clearing Limited (NCCL) is the approved
custodian for acceptance ofGovernment of India Securities. The
securities are valued on a daily basis and a haircut asprescribed
the Exchange is levied.
Additional Base Capital (ABC)
19

20. In case the members desire to increase their limit, additional
capital may be submitted to
NCDEX in the following forms:
Cash
Cash Equivalents
Bank Guarantee (BG)
Fixed Deposit Receipt (FDR)
Government of India Securities
Bullion
Shares (notified list)
The haircut for Government of India securities shall be 25%
and 50% for the notified shares.
Fees structure for membership
20

21. Clearing and Settlement System
Clearing
National Commodity Clearing Limited (NCCL) undertakes clearing
of trades executed on theNCDEX. Only clearing members
including professional clearing members (PCMs) are entitledto
clear and settle contracts through the clearing house. At NCDEX,
after the trading hours onthe expiry date, based on the available
information, the matching for deliveries takes placefirstly, on the
basis of locations and then randomly, keeping in view the factors
such as availablecapacity of the vault/warehouse, commodities
already deposited and dematerialized and offeredfor delivery etc.
Matching done by this process is binding on the clearing members.
Aftercompletion of the matching process, clearing members are
21

22. informed of the deliverable/receivable positions and the
unmatched positions. Unmatched positions have to be settled
incash. The cash settlement is only for the incremental gain/ loss
as determined on the basis offinal settlement price
Settlement
Futures contracts have two types of settlements, the Mark-to-
Market (MTM) settlement whichhappens on a continuous basis at
the end of the day, and the final settlement which happenson the
last trading day of the futures contract. On the NCDEX, daily MTM
settlement in respectof admitted deals in futures contracts are
cash settled by debiting/ crediting the clearingaccounts of clearing
members (CMs) with the respective clearing bank. All positions of
CM,brought forward, created during the day or closed out during
the day, are mark to market atthe daily settlement price or the final
settlement price on the contract expiry.
The responsibility of settlement is on a trading cum clearing
member for all trades done on hisown account and his client's
trades. A professional clearing member is responsible for
settlingall the participants’ trades which he has confirmed to the
Exchange. Few days before expirydate, as announced by
Exchange from time to time, members submit delivery
informationthrough delivery request window on the trader
workstation provided by NCDEX for all openposition for a
commodity for all constituents individually. NCDEX on receipt of
such informationmatches the information and arrives at a delivery
position for a member for a commodity. Theseller intending to
make delivery takes the commodities to the designated
22

23. warehouse. Thesecommodities have to be assayed by the
Exchange specified assayer. The commodities have tomeet the
contract specifications with allowed variances. If the commodities
meet thespecifications, the warehouse accepts them. Warehouse
then ensures that the receipts getupdated in the depository system
giving a credit in the depositor's electronic account. Theseller then
gives the invoice to his clearing member, who would courier the
same to the buyer'sclearing member. On an appointed date, the
buyer goes to the warehouse and takes physicalpossession of the
commodities.
Clearing Days and Scheduled Time
Daily Mark to Market settlement where 'T' is the trading day
Mark to Market Pay-in (Payment): T+1 working day.
Mark to Market Pay-out (Receipt): T+1 working day.
Final settlement for Futures Contracts
The settlement schedule for Final settlement for futures contracts
is given by the Exchange indetail for each commodity.
Timings for Funds settlement:
Pay-in: On Scheduled day as per settlement calendars.
Pay-out: On Scheduled day as per settlement calendars.
Commodities Traded on NCDEX
NCDEX gives priority to commodities that are most relevant to
India, and where the pricediscovery process takes place
domestically. The products chosen are based on certain
23

24. criteriasuch as price volatility, share in GDP, correlation with global
markets, share in external trade,warehousing facilities, traders
distribution, geographical spread, varieties etc.
Spices Oil and Oilseeds Precious Metals
Pepper Castor Seed Gold
Chilli Sesame Seeds Silver
Jeera Cotton Seed Oilcake Platinum
Turmeric Soy Bean Metals
Coriander Refined Soy Oil Steel
Cereals Soybean meal (local & export) Copper
Wheat Mustard Seed Zinc
Barley KachhiGhani Mustard Oil Aluminium
Maize Rapeseed - Mustard Seed Oil Nickel
Pulses
(Yellow/Red) Crude Palm Oil Energy
Chana RBD Cake
Palmolein Crude Oil
Masoor Groundnut in shell Furnace Oil
Yellow Peas Groundnut Expeller Oil Thermal Coal
Others Plantation Products Brent Crude Oil
Guar Seeds Rubber Natural Gas
Potato Coffee-Robusta Cherry AB Fibres
Mentha Oil Cashew Indian 28.5 mm
Guar Gum Polymers V -797 Kapas
Cotton
CER Polypropylene Medium Staple
Gur Linear Low density Kapas
Cotton
Almond Polyvinyl Chloride Raw Jute
Polyethylene
MCX
Multi Commodity Exchange of India Ltd (MCX) (BSE: 534091)
is an independent commodity exchange based in India. It was
established in 2003 and is based in Mumbai. The turnover of the
exchange for the fiscal year 2009 was US$ 1.24 trillion, and in
24

25. terms of contracts traded, it was in 2009 the world's sixth largest
commodity exchange. (MCX offers futures trading in bullion,
ferrous and non-ferrous metals, energy, and a number of
agricultural commodities (mentha oil, cardamom, potatoes, palmoil
and others).
In 2011, MCX has taken the fifth spot among the global commodity
bourses in terms of the number of futures contracts traded. Based
on the latest data from Futures Industry Association (FIA), during
the period between January and June this year, about 127.8
million futures contracts were traded on MCX.
MCX has also set up in joint venture the MCX Stock Exchange.
Earlier spin-offs from the company include the National Spot
Exchange, an electronic spot exchange for bullion and agricultural
commodities, and National Bulk Handling Corporation (NBHC)
India's largest collateral management company which provides
bulk storage and handling of agricultural products.
In February 2012, MCX has come out with a public issue of
6,427,378 Equity Shares of Rs. 10 face value in price band of 860
- 1032 Rs. per equity share to raise around $134 million. It is the
first ever IPO by an Indian exchange.
It is regulated by the Forward Markets Commission.
 MCX is India's No. 1 commodity exchange with 83% market
share in 2009
 The exchange's main competitor is National Commodity &
Derivatives Exchange Ltd
25

26.  Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no.
3 in crude oil and gold in futures trading (But actual volume is
far behind CME group volume as Silver is traded in 30 Kg
lots on MCX whereas CME traded in Approx 155 kg Lot size
same in Gold 1 kg : 3. Kg Approx and Crude 100 Barrels :
1000 Barrels on CME) and major volume in manipulated as
there in no strict regulation in Indian markets just to Excalate
the prices of Shares of company. Also the major volume
comes from Arbitration of CME and MCX which is also not
legal to do.
 The highest traded item is gold.
 MCX has several strategic alliances with leading exchanges
across the globe
 As of early 2010, the normal daily turnover of MCX was
about US$ 6 to 8 billion
 MCX now reaches out to about 800 cities and towns in India
with the help of about 126,000 trading terminals
COMMODITIES TRADED ON MCX
METAL BULLION
Aluminium, Copper, Lead,
Nickel, Steel Long Gold, Gold HNI, Gold M, i-gold,
(Bhavnagar), Steel Long Silver, Silver HNI, Silver M,, Silver
(Govindgarh), Steel Flat, Micro
Tin, Zinc
FIBER ENERGY
Cotton L Staple, Cotton M Brent Crude Oil, Crude Oil, Furnace
26

27. Staple, Cotton S Staple, Oil, Natural Gas, M. E. Sour Crude
Cotton Yarn, Kapas, Jute Oil, ATF, Electricity(Now delisted),
Carbon Credit
SPICES PLANTATIONS
Cardamom, Jeera, Pepper,
Arecanut, Cashew Kernel, Coffee
Red Chilli, Turmeric, Cumin
(Robusta), Rubber
Seed, Coriander
PULSES PETROCHEMICALS
Chana, Masur, Yellow Peas,
HDPE, Polypropylene(PP), PVC
Tur, Urad
OIL & OIL SEEDS
Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton
Seed, Crude Palm Oil, Groundnut Oil, KapasiaKhalli, Mustard Oil,
Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein,
Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice Bran
Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds
CEREALS OTHERS
Maize, Barley, Rice, Guargum, Guar Seed, Gurchaku,
Sharbati Rice, Basmati Mentha Oil, Potato (Agra), Potato
Rice, Wheat (Tarkeshwar)
NMCE
National Multi Commodity Exchange of India Ltd. (NMCE) was
promoted by Central Warehousing Corporation (CWC), National
Agricultural Cooperative Marketing Federation of India (NAFED),
Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat
27

28. State Agricultural Marketing Board (GSAMB), National Institute of
Agricultural Marketing (NIAM), and Neptune Overseas Limited
(NOL). While various integral aspects of commodity economy, viz.,
warehousing, cooperatives, private and public sector marketing of
agricultural commodities, research and training were adequately
addressed in structuring the Exchange, finance was still a vital
missing link. Punjab National Bank (PNB) took equity of the
Exchange to establish that linkage. Even today, NMCE is the only
Exchange in India to have such investment and technical support
from the commodity relevant institutions.
The Department of Consumer Affairs in the Ministry of Consumer
Affairs, Food and Public Distribution -Government of India, is the
apex regulatory body governing all commodity exchanges. Various
powers to provide regulatory supervision, besides the powers to
grant or withdraw recognition of any exchange rests with this
Department of the Government of India. The Forward Markets
Commission (FMC) was set up in 1953 to provide regulatory
advice to the Government and have closer regulatory interaction
with the commodity exchanges. Most of the regulatory powers of
the Central Government have been delegated to the FMC. For
example, FMC has powers to approve the Memorandum and
Articles of Associations as well as Byelaws of the Exchange. It has
also powers to conduct inspection of accounts of the
exchanges/their members, inquire into the affairs of the exchange.
In an emergency, it can even suspend trading. All contracts for
futures trade have to be approved by the FMC before they can be
launched on the exchange. As a self-regulatory organization,
NMCE also plays an important role by ensuring that the provisions
28

29. in the Articles of Association and Byelaws etc. are followed in letter
and spirit. The regulation by the Exchange is rule-based and
incorporated in the software itself. Regulation involving human
intervention and of discretionary nature is implemented through
various committees of professional and experts. Special care is
taken while constituting these committees to ensure that there is
no conflict of interest.
NMCE facilitates electronic derivatives trading through robust and
tested trading platform, Derivative Trading Settlement System
(DTSS), provided by CMC. It has robust delivery mechanism
making it the most suitable for the participants in the physical
commodity markets. It has also established fair and transparent
rule-based procedures and demonstrated total commitment
towards eliminating any conflicts of interest. It is the only
Commodity Exchange in the world to have received ISO
9001:2000 certification from British Standard Institutions (BSI).
NMCE was the first commodity exchange to provide trading facility
through internet, through Virtual Private Network (VPN).
NMCE follows best international risk management practices. The
contracts are marked to market on daily basis. The system of
upfront margining based on Value at Risk is followed to ensure
financial security of the market. In the event of high volatility in the
prices, special intra-day clearing and settlement is held. NMCE
was the first to initiate process of dematerialization and electronic
transfer of warehoused commodity stocks. The unique strength of
NMCE is its settlements via a Delivery Backed System, an
imperative in the commodity trading business. These deliveries are
29

30. executed through a sound and reliable Warehouse Receipt
System, leading to guaranteed clearing and settlement.
The NMCE is India's third-largest commodities exchange behind
the Multi-Commodity Exchange (MCX) and the National
Commodity & Derivatives Exchange (NCDEX) and has grown
significantly as commodity trading in India has rebounded from the
2008 financial crisis. NMCE is India's top listed
of coffee and rubber contracts and seeks to broaden into
the currency derivatives and spot markets.
30

31. CHAPTER- 3
COMMODITY DERIVATIVE MARKETS - A PROFILE
Commodity futures markets have a long history in India. Cotton
was the first commodity to attract futures trading in the country
leading to the setting up of the Bombay Cotton Trade Association
Ltd in 1875. The Bombay Cotton Exchange Ltd. was established in
1893 followingthe widespread discontent amongst leading cotton
mill owners and merchants over the functioning of Bombay Cotton
Trade Association.
Subsequently, many exchanges came up in different parts of the
country for futures trading in various commodities. Futures trading
in oilseeds started in 1900 with the establishment of the Gujarati
VyapariMandali, which carried on futures trade in groundnut,
castor seed and cotton.
Before the Second World War broke out in 1939, several futures
markets in oilseeds were functioning in Gujarat and Punjab.
Futures trading in wheat existed at several places in Punjab and
Uttar Pradesh, the most notable of which was the Chamber of
Commerce at Hapur, which began futures trading in wheat in 1913
and served as the price setter in that commodity till the outbreak of
the Second World War in 1939.
Futures trading in bullion began in Mumbai in 1920 and
subsequently markets came up in other centres like Rajkot, Jaipur,
Jamnagar, Kanpur, Delhi and Kolkata. Calcutta Hessian Exchange
Ltd. was established in 1919 for futures trading in raw jute and jute
31

32. goods. But organized futures trading in raw jute began only in
1927 with the establishment of East Indian Jute Association Ltd.
These two associations amalgamated in 1945 to form the East
India Jute & Hessian Ltd. to conduct organized trading in both raw
jute and jute goods. In due course several other exchanges were
also created in the country to trade in such diverse commodities as
pepper, turmeric, potato, sugar and gur (jaggery).
After independence, with the subject of `Stock Exchanges and
futures markets' being brought under the Union list, responsibility
for regulation of commodity futures markets devolved on Govt. of
India. A Bill on forward contracts was referred to an expert
committee headed by Prof. A. D. Shroff and select committees of
two successive Parliaments and finally in December 1952 Forward
Contracts (Regulation) Act, 1952, was enacted.
The Act provided for 3-tier regulatory system:
a) An association recognized by the Government of India on the
recommendation
b) The Forward Markets Commission (it was set up in
September 1953) and
c) The Central Government.
India was in an era of physical controls since independence and
the pursuance of a mixed economy set up with socialist proclivities
had ramifications on the operations of commodity markets and
commodity exchanges. Government intervention was in the form of
buffer stock operations, administered prices, regulation on trade
and input prices, restrictions on movement of goods, etc.
32

33. Agricultural commodities were associated with the poor and were
governed by polices such as Minimum Price Support and
Government Procurement. Further, as production levels were low
and had not stabilized, there was the constant fear of misuse of
these platforms which could be manipulated to fix prices by
creating artificial scarcities. This was also a period which was
associated with wars, natural calamites and disasters which
invariably led to shortages and price distortions. Hence, in an era
of uncertainty with potential volatility, the government banned
futures trading in commodities in the 1960s.
The Khusro Committee which was constituted in June 1980 had
recommended reintroduction of futures trading in most of the major
commodities, including cotton, kapas, raw jute and jute goods and
suggested that steps may be taken for introducing futures trading
in commodities, like potatoes, onions, etc. at appropriate time. The
government, accordingly initiated futures trading in Potato during
the latter half of 1980 in quite a few markets in Punjab and Uttar
Pradesh.
With the gradual trade and industry liberalization of the Indian
economy pursuant to the adoption of the economic reform
package in 1991, GOI constituted another committee on Forward
Markets under the chairmanship of Prof. K.N. Kabra. The
Committee which submitted its report in September 1994
recommended that futures trading be introduced in the following
commodities:
Basmati Rice
Cotton, Kapas, Raw Jute and Jute Goods
33

34. Groundnut, rapeseed/mustard seed, cottonseed, sesame
seed, sunflower seed, safflowerseed, copra and soybean
and oils and oilcakes
Rice bran oil
Castor oil and its oilcake
Linseed
Silver
Onions
The committee also recommended that some of the existing
commodity exchanges particularly the ones in pepper and
castorseed, may be upgraded to the level of international futures
markets.
UNCTAD and World Bank joint Mission Report "India: Managing
Price Risk in India's Liberalized Agriculture: Can Futures Market
Help? (1996)" highlighted the role of futures markets as market
based instruments for managing risks and suggested the
strengthening of institutional capacity of the Regulator and the
exchanges for efficient performance of these markets. Another
major policy statement, the National Agricultural Policy, 2000, also
expressed support for commodity futures. The Expert Committee
on Strengthening and Developing Agricultural Marketing (Guru
Committee: 2001) emphasized the need for and role of futures
trading in price risk management and in marketing of agricultural
produce. This Committee's Group on Forward and Futures
Markets recommended that it should be left to interested
exchanges to decide the appropriateness/usefulness of
34

35. commencing futures trading in products (not necessarily of just
commodities) based on concrete studies of feasibility on a case-to-
case basis. It, however, noted that all the commodities are not
suited for futures trading. For a commodity to be suitable for
futures trading it must possess some specific characteristics. The
liberalized policy being followed by the Government of India and
the gradual withdrawal of the procurement and distribution channel
necessitated setting in place a market mechanism to perform the
economic functions of price discovery and risk management.
The National Agriculture Policy announced in July 2000 and the
announcements of Hon'ble Finance Minister in the Budget Speech
for 2002-2003 were indicative of the Governments resolve to put in
place a mechanism of futures trade/market. As a follow up, the
Governmentissued notifications on 1.4.2003 permitting futures
trading in the commodities, with the issue of these notifications
futures trading is not prohibited in any commodity. An option
trading in commodity is, however presently prohibited. The year
2003 is a landmark in the history of commodity futures market
witnessing the establishment and recognition of three new national
exchanges [National Commodity and Derivatives Exchange of
India Ltd. (NCDEX), Multi Commodity Exchange of India Ltd
(MCX) and National Multi Commodity Exchange of India Ltd.
(NMCE)] with on-line trading and professional management. Not
only was prohibition on forward trading completely withdrawn, the
new exchanges brought capital, technology and innovation to the
market.
These markets depicted phenomenal growth in terms of number of
products on offer, participants, spatial distribution and volume of
35

36. trade. Majority of the trade volume is contributed by the national
level exchanges whereas regional exchanges have a very less
share. With developments on way, the commodity futures
exchanges registered an impressive growth till it saw the first ban
of two pulses (Tur and Urad) towards the end of January 2007.
Subsequently the ban of two more commodities from cereals
group i.e. Wheat and Rice in the next month. The commodity
market regulator, Forward Markets Commission as a measure of
abundant caution, suspended futures trading in Chana, Soya oil,
Rubber and Potato w.e.f. May 7, 2008. However, with the easing
of inflationary pressure, the suspension was allowed to lapse on
November 30, 2008. Trading in these commodities resumed on
December 4, 2008.
Later on futures trading in wheat was re-introduced in May 2009.
These bans affected participants' confidence adversely. In May
2009, futures’ trading in sugar was suspended. Due to mistaken
apprehensions that futures trading contributes to inflation, futures
trading in rice, urad, tur and sugar has been temporarily
suspended.
Issues and Concerns of Commodity Derivative Markets in
India
Commodity derivative markets have traditionally been a
contentious issue at various policy forums across the world,
particularly with the imbroglio created by allegations from various
corners that they encourage excessive speculation and are
therefore responsible for the recent commodity price escalation.
While this suspicion of excessive speculation in the commodity
36

37. markets has always been there among policymakers in developing
nations like India, it has become more widespread since 2008 in
the wake of worldwide inflationary pressures on food and energy.
The sudden deflation in the value of various assets underlying
different derivatives, which includes commodity derivatives, in the
wake of the global meltdown has provoked greater apprehension
about the economic utility of futures markets. The suspicion has
reached such a high that even the U.S., the biggest proponent of
market forces with the most active commodity exchanges in the
world, is considering new modes of regulation, and is also
investigating the role of commodity derivative trading in the steep
rise in prices of wheat, rice, and crude oil.
On the other hand, ever since commodity derivative trading was
allowed in India in the new millennium, there has always been a
hue and cry against such markets, with the alleged notion of
excessive “speculation”, though there has rarely been any
evidence for it. Rather than recognizing the potential economic
utility of commodity derivative markets in price discovery and risk
management, the government has been more apprehensive about
its alleged ill-effects. As a result, over time, futures’ trading has
been subjected to strict regulations, and certain commodities have
been inflicted with occasional bans. Thus, while the “disutility” of
the market is yet to be proven, the overcautious behaviour of the
government has never really allowed the market to develop and
prove its utility.
Hence, in the midst of doubts and debates on the utility of
commodity futures markets and against the background of
conflicting views and vista, there is a need to list various issues
37

38. and concerns in the development of futures exchanges. This
presents the agenda for research on commodity futures markets in
India, from both theoretical and empirical perspectives. While at a
more general level, probably the most succinct statement on
presenting a research agenda for commodity markets exists in a
paper by Rutten1, an attempt to do so in the Indian context is
missing from the literature so far.
Strengthening the Scope of Commodity Derivative Trading
The issue of expanding the scope of commodity derivative trading
is apparently normative and value judgmental. This is primarily
because of a large group of people who feel that commodity
derivative trading should not be allowed at all and hence the
question of expanding its scope does not arise. However, there are
enough strong arguments in favour of strengthening commodity
derivatives markets and developing supportive market institutions
and awareness. The role of commodity futures markets becomes
even more compelling with India moving toward greater trade
liberalization, particularly in the context of agriculture, and getting
further exposed to the volatilities of international trade and finance.
Commodity futures is a market mechanism that is viable for risk
management and price discovery, and such institutions can help
“bail out” the economy from the vagaries of international trade.
Despite the realization of the need for commodity derivative trading
in India and the subsequent resumption of trade in the new
millennium, the statutes dictating derivative trading are old and
outmoded. Derivative markets have been functioning under the
Forward Contracts Regulation Act (FCRA), which dates back to
38

39. 1952. The world has undergone a significant change since then,
and so have the dynamics of international trade and finance, and
the domestic economies of the developing world. In the process,
there has been a transformation in trading patterns, methods and
practices in physical and derivative markets, warehousing, and
transport norms. Newer risks and risk management instruments
are being innovated and operationalized worldwide in various
exchanges. There are non-trade–related market participants who
have helped provide liquidity to markets worldwide. Information
and communication technology has brought about changes in the
institutional processes. International trade and financial linkages
with the domestic economy are also different from what they were
sixty years ago in an economy that was insulated from external
forces and stimuli. Hence, there is an utmost need to strengthen
and expand the scope of commodity derivative trading. However,
merely expanding the scope of trading might even lead unbridled
market forces to play havoc with the functioning of the market,
thereby creating a negative dent on economic wellbeing. For
markets to operate effectively and efficiently there is a need for
appropriate regulation as well. Hence, there is a clear case for
strengthening the FMC by providing it with more autonomy.
With this objective, the Union Government had moved a Bill in the
last Lok Sabha to amend the FCRA. The Bill was scrutinized over
a long period by a specially appointed Standing Committee of the
Parliament. But the Ordinance lapsed before its provisions could
be implemented, and the Amendment Bill also lapsed following the
dissolution of that Lok Sabha. However, with the constitution of the
new Lok Sabha, there is renewed hope for an amendment.
39

40. FCRA is essentially an enabling Act, and the FMC, set up under
the provisions of the Act, is more an advisory and monitoring body
than one with regulatory powers. As per the statute, the real
regulatory powers remain in the hands of the Central Government,
while the FMC’s role is supposed to be that of being one of offering
recommendation and advises to the Ministry. Over time, the FMC
has acquired a few regulatory powers circuitously under the by-
laws of the associations recognized by the Act.
An amendment to the FCRA will usher in a new era in commodity
derivative trading by expanding the scope and instruments of
trading, and by strengthening the regulatory powers of the FMC.
Among the changes proposed in the Bill, an important intervention
is to bring about a change in the definition of “commodities” to
facilitate trading in derivative contracts for intangibles like
commodity indices, weather derivatives, etc. From the perspective
of new instruments for trading, the amendment will increase that
scope by legalizing options trading in commodity derivatives. On
the transaction and settlement side, it will set aside the outmoded
and archaic norm of physical delivery for contract settlement, and
will allow for cash settlement of futures contracts. The amendment
will also allow institutional investors like banks and mutual funds,
foreign institutional investors, financial institutions, and foreign
individuals to trade in commodity futures. This will help increase
liquidity in the market, and thereby augment price risk
management and price discovery. However, it is not that the
amendment is only in favour of unrelenting and unbridled market
forces; it is also about regulation. It releases the FMC from the
clangs of being traditionally described as an advisory body to the
40

41. Ministry of Consumer Affairs, and renders it the distinction of being
an “autonomous” regulatory body, in a process of its up-gradation
and expansion with more regulatory and judicial authority.
On the other hand, contrary to the clause under the FCRA
amendment of rendering more teeth to the FMC, there have also
been talks regarding the convergence of the Securities and
Exchange Board of India (SEBI), the regulator of the equity
markets, and the FMC. While government machineries have often
been arguing in favour of a merger on grounds that a common
regulator is in a better position to regulate and develop the various
markets synergically and in sync with each other, there are also
compelling arguments against the merger4. In my previous
article4, as has also been acknowledged in the literature5, 6, there
have been arguments that commodity exchanges are not stock
exchanges. Commodity exchanges are essentially institutions that
are adjunct to the physical market, and are supposed to perform
complementary functions in order to improve commodity
transactions in the various nodes of the value chain. While stock
prices are determined at centralised locations – in the
headquarters of stock exchanges, commodity prices vary across
locations, quality characteristics, end-usage patterns, and
seasons. Moreover, the stock market players are primarily those
who earn regular income from dividend or interest, or profit from
speculation – they are not hedgers like commodity players. Hence,
the various microstructure as well as the macro-level institutional
issues are different for the two forms of markets, and each
requires specialised treatments in terms of regulation, rather than
a common treatment.
41

42. The possible conflict of ideas has also brought to the fore the issue
of a super regulator above all the market regulators – something
that the USA has been contemplating ever since the outbreak of
the financial crisis. The feasibility of such an idea deserves a
critical examination before it receives acceptance or outright
rejection in the Indian context.
Another important issue is the relationship of spot and futures
markets and how the efficiency of physical markets can help
players in the futures markets. One critical element that emerged
from the paper was the need for development of nationwide,
information-technology enabled spot markets for futures
exchanges to perform their price discovery and price risk
management functions efficiently. This, definitely, has to attract the
attention of researchers and policymakers. There is a critical need
for development of such cases for buttressing these contentions
further.
Rules Governing Commodity Derivatives Exchanges
/Participants
The trading of commodity derivatives on the NCDEX is regulated
by Forward Markets Commission (FMC). In terms of Section 15 of
the Forward Contracts (Regulation) Act, 1952 (the Act),forward
contracts in commodities notified under section 15 of the Act can
be entered into onlyby or through a member of a recognized
association, i.e, commodity exchange as popularlyknown. The
recognized associations/commodity exchanges are granted
recognition underthe Act by the central government (Department of
Consumer Affairs, Ministry of ConsumerAffairs, Food and Public
42

43. Distribution). All the Exchanges, which permit forward contracts
fortrading, are required to obtain certificate of registration from the
Central Government. Theother legislations which have relevance
to commodity trading are the Companies Act, StampAct, Contracts
Act, Essential Commodities Act 1955, Prevention of Food
Adulteration Act, 1954and various other legislations, which
impinge on their working.
Forward Markets Commission provides regulatory oversight in
order (to ensure financial integrityto prevent systematic risk of
default by one major operator or group of operators), market
integrity (to ensure that futures prices are truly aligned with the
prospective demand andsupply conditions) and to protect and
promote interest of customers/ non-members. Some ofthe
regulatory measures by Forward Markets Commission include:
1. Limit on net open position as on the close of the trading
hours. Sometimes limit is also imposed on intra-day net open
position. The limits are imposed member- wise and client
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
43

44. is sobered down. This measure is imposed by the Exchange
(FMC may also issue directive).
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. This measure is also imposed on the
request of the exchanges (FMC may also issue directive).
5. Stopping trading in certain derivatives of the contract, closing
the market for a specified period and even closing out the
contract. These extreme measures are taken only in
emergency situations.
Besides these regulatory measures, a client's position cannot
be appropriated by the memberof the Exchange. No member
of an Exchange can enter into a forward contract on his
ownaccount with a non-member unless such member has
secured the consent of the non-memberin writing to the
effect that the sale or purchase is on his own account. The
FMC is persuadingincreasing number of exchanges to switch
over to electronic trading, clearing and settlement,which is
more safe and customer-friendly. The FMC has also
prescribed simultaneous reportingsystem for the exchanges
following open out-cry system. These steps facilitate audit
trail andmake 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 outcry
system to display at aprominent place in exchange premises,
the name, address, telephone number of the officer ofthe
commission who can be contacted for any grievance. The
44

45. website of the commission alsohas a provision for the
customers to make complaint and send comments and
suggestions tothe FMC. Officers of the FMC meet the
members and clients on a random basis, visit exchanges,to
ascertain the situation on the ground to bring in development
in any area of operation of themarket.
Participants in commodity Derivative Market
Hedgers
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 any
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.
There are basically two kinds of hedges that can be taken. A
company that wants to sell an asset at a particular time in the
45

46. future can hedge by taking short futures position. This is
called a 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
some time in the future.
Similarly, a company that knows that it is due to buy an asset
in the future can hedge by taking long futures position. This
is known as long hedge. 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.
Speculators
If hedgers are the people who wish to avoid price risk,
speculators are those who are willing to take such risk.
These are the person who takes positions in the market &
assume risks to profit from price fluctuations in fact the
speculators consume market information make forecasts
about the prices & put money in these forecasts. 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,
speculating 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
46

47. 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 (the expiration date of the
contract).
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.
The buying cheap and selling expensive continues till prices
in the two markets reach equilibrium. Hence, arbitrage helps
to equalise prices and restore market efficiency.
F = (S + U)erT
Where: r = Cost of financing (annualised)
T = Time till expiration
47

48. U = Present value of all storage costs
The cost-of-carry ensures that futures prices stay in tune with the
spot prices of the underlying assets. The above equation gives the
fair value of a futures contract on an investment commodity.
Whenever the futures price deviates substantially from its fair
value, arbitrage opportunities arise. To capture mispricing that
result in overpriced futures, the arbitrager must sell futures and
buy spot, whereas to capture mispricing that result in underpriced
futures, the arbitrager must sell spot and buy futures. In the case
of investment commodities, mispricing would result in both, buying
the spot and holding it or selling the spot and investing the
proceeds. However, in the case of consumption assets which are
held primarily for reasons of usage, even if there exists a
mispricing, a person who holds the underlying may not want to sell
it to profit from the arbitrage
48

49. CHAPTER-4
NEWS REPORTS
1. A total of 120 varieties of different pulse crops comprising
chickpea (27), pigeonpea (16), urdbean (17), mungbean
(19), field pea (10), lentil (11), rajmash (2), cowpea (7), guar
(5), horse gram (3), mothbean (2) and lathyrus (1) have been
released during 2007-2012.
NEW DELHI: In India about 120 pulses varieties have been
developed and released during 2007-2012 by the State
Agricultural Universities and KrishiVigyanKendras.
The information was given by Harish Rawat, Minister of State
for Agriculture and Food Processing Industries in a written
reply to a question in the upper house of Indian Parliament.
At present, Indian Council of Agricultural Research (ICAR) is
busy with various research programmes on different pulse
crops at Indian Institute of Pulse Research (IIPR), Kanpur.
The research programmes include basic and strategic
research related to crop improvement, production and
protection technologies in different pulse crops.
Improved varieties and recommended agronomic practices
developed as a result of the research efforts of National
Agricultural Research System have increased yield potential
of different pulses crops.
49

50. 2. Mainland China’s gold imports from Hong Kong rose sharply
by 98.84% year-on-year to 75.84 metric tons in July this year,
according to the latest export data released by Census and
Statistics Department of the Hong Kong government. Country
imported 38.14 metric tons of gold from Hong Kong a year earlier.
BEIJING: It was the first rise in China's gold imports after
three months of slightly lower imports. Shipments were a
record 103.64 metric tons in April. China doesn’t publish
such data.
According to the government data, China's gold imports from
Hong Kong advanced sharply by 344.87% year-on-year to
458.628 metric tons in the first seven months of this year
compare to 103.09 metric tons a year earlier.
China’s gold imports advanced due to people renewed their
buying of gold to hedge against financial market’s turmoil and
weaker currencies with increasing concerns about the
Chinese economy and stock and property markets.
Exports of gold to Hong Kong from China were 30.03metric
tons in July, up from 27.50 metric tons in June.
China is the world’s second-biggest consumer of gold, after
India, but is expected to take the top spot soon. This year
China’s imports via Hong Kong during the first 10 months of
the year are more than three times higher than the same
period last year.
50

51. CHAPTER-5
CONCLUSION
The trade in global commodity market is worth US $600 billion;
India should put in place world standard trading exchanges to tap
this huge global commodities market while protecting the interests
of the domestic farmers from sharp price fluctuations. For
achieving this goal, we have to equip ourselves with the
appropriate markets instruments and institutions by building a
commodity trading exchange of global standards. Amidst the
turmoil of a risky market, stiff competition and many introduction
failures, the commodity derivatives industry needs a conceptual
model that incorporates all aspects relevant to the success and
failure of commodity derivatives. In order to meet this need, a new
and integrative approach towards commodity derivatives
management is needed, which makes it easier to gain insight into
the viability of new commodity derivatives before introduction, to
assess and improve the viability of existing commodity derivatives
At a time when India is fast catching up with the world’s leading
manufacturing centres and being home to back office work of the
leading global companies, new multi commodity exchanges, using
latest technologies, can help accelerate the process and also help
financial markets to allocate finance to right sectors. It’s a right
step in the direction of integration with the global commodity
markets. India being a developing country where majority of
population is still dependent on the agriculture, modern
commodities exchanges can be used as tool to improve the life of
such people, by making commodities market more efficient.
51

52. Instability of commodity prices has always been a major concern of
the producers, processors, traders as well as the consumers in
agriculture -dominated country like India. Commodity exchanges
provide a mechanism to lock-in prices, thus insulating the
participants from the adverse price risk. Commodity market helps
the farmer by signalling him the price that is expected to prevail in
future; so he can decide which crop to grow, thus making his
expectations aligned with the market. Farmers can also cover their
risk by locking in the price by selling their crop in futures market
(selling futures).Farmers’ direct exposure to price fluctuations, for
instance, makes it too risky for many farmers to invest in otherwise
profitable activities. There are various ways to cope with this
problem. Apart from increasing the stability of the market, various
actors in the farm sector can better manage their activities in an
environment of unstable prices through commodity exchanges. It
must be ensured that this system (futures) actually benefits the
farmers, and not just traders. For this, central and state
government agencies have to take necessary steps, including
rapid expansion of rural warehousing facilities.
52

53. BIBLIOGRAPHY
BOOKS:-
 COMMODITY MARKET (NCFM module)
 DERIVATIVES MARKET(NCFM module)
 COMMODITY DERIVATIVE MARKET AND
APPLICATION
- NEIL C. SCHOFIELD
NEWSPAPER
 ECONOIMICS TIMES
WEBLIOGRAPHY:-
 www.nseindia.com
 www.mcxindia.com
 www.commodityonline.com
53