Chapter 4 commodity market

Chapter - 4Commodity MarketsBY

SUKU THOMAS SAMUELDEPARTMENT OF MANAGEMENTKRISTU JAYANTI COLLEGE, BANGALORE - 560077

DerivativesFinancial instruments that derives its value from the underlying asset: Forwards – agreement to buy or sell an assets at a predetermined rate at a

future date. Futures – agreement to buy or sell an assets at a predetermined rate at a future

date regulated by an exchange. Options – the right but not the obligation to buy or sell an asset

What is a commodity?

Economic resourceProduct or article of commerceTradeablePrice - a function of forces of demand & supply

Commodity MarketsA commodity market is a physical or virtual marketplace for buying, selling and tradingParticipants of Commodity Market:Hedgers SpeculatorsArbitragers

Commodity DerivativesFinancial instruments that derives its value from the underlying commodityHelps the users of commodity to hedge their risk

Commodity Markets

Spot Market

Forward Market

Futures Market

Spot Forward FutureReal time transaction Future oriented transaction Future oriented transactionPhysical delivery mandatory Physical delivery is mandatory Physical delivery is optionalComplete cash payment Based on terms & conditions Marginal amount for contractsOrganized and unorganized market

Unorganized Organized

Terms and conditions based on participants

Terms and conditions based on participants

Terms and conditions based on commodity exchange

- Unstandardized contracts Standardized contracts

Spot Vs. Forward Vs. Future

Commodity ExchangesExchange for commodities and

derivativesRegulated market for dealing in

commoditiesMay have specific commodities or

various commoditiesWas regulated by FMCPresently regulated by SEBI

Spot Transactions

Derivatives Transactions

Functions of Commodity Exchanges

Arrangement for carrying out transaction

Provide a platform for price discovery

Evaluate demand and supply

Protection for market participants

Guarantee for transactions

Understand influencing factors

Role of Commodity Exchange

Designs a contractProvides a trading platformConverges the bids and offers emanating from

geographically dispersed locationsProvides facilities for

– Clearing– Settlement– Arbitration

Provide financially secure environment

History of Commodity Exchanges

• 1848 – Chicago Board of Trade to supervise wheat contracts• 1870 – New York Coffee Exchange• First commodity derivatives in India for cotton• 1900 – Oilseed in Bombay• 1912 – Jute in Calcutta• 1913 – Wheat in Hapur• 1920 – Bullion in Bombay

Types of Commodities

Trades

Spot Trading

Derivative Trading

Classification of Commodity Exchange

Commodity Exchanges

National Exchange Regional Exchange

National Commodity Exchange

Best international systems and practicesMust have well defined process for trading, clearing,

settlement, and governanceGranted recognition in all permitted commodities

National Commodity Exchange

1. Multi Commodity Exchange of India2. National Commodity & Derivatives Exchange3. National Multi Commodity Exchange of India4. Indian Commodity Exchange5. Ace Derivatives and Commodity Exchange6. Universal Commodity Exchange

Regional Commodity Exchange

Have to approach the Government for grant of recognition for each futures contract separately

1. Bikaner Commodity Exchange2. Bombay Commodity Exchange3. Cotton Association of India4. India Pepper & Spice Trade Association5. National Board of Trade

National Commodity & Derivatives Exchange Limited (NCDEX)

Promoter shareholders: – ICICI Bank Limited– Life Insurance Corporation of India (LIC)– National Bank for Agriculture and Rural Development (NABARD)– National Stock Exchange of India Limited (NSE)

National Commodity & Derivatives Exchange Limited (NCDEX)

Incorporated on April 23, 2003Commencement of Business on May 9, 2003Headquarters are located in MumbaiOffices in Mumbai, Delhi, Ahmedabad, Indore, Hyderabad,

Jaipur, and KolkataDeliveries of commodities through a network of over 594

accredited warehouses

National Commodity & Derivatives Exchange Limited (NCDEX)

Offers trading in 26 commodities– 21 agricultural commodities– 2 bullion commodities– 2 metals– 1 commodity in energy & polymer sector.

Agricultural commodity index - DHAANYA 

Multi Commodity Exchange

Promoter shareholders: – Kotak Mahindra Bank– State Bank of India and its associates– National Bank for Agriculture and Rural Development (NABARD)– National Stock Exchange of India Ltd. (NSE)

Multi Commodity Exchange

Established in 2003Based in MumbaiBecame India’s first listed exchange on March 9, 2012World’s 3rd largest commodity futures exchange in terms of the numbers

of contracts traded in CY2012Highest daily turnover of INR 1,19,941 crore achieved on April 15, 2013MCX COMDEX - India's first and only composite commodity futures

price index

Multi Commodity Exchange

National Multi Commodity Exchange of India

Promoter shareholders: – Central warehousing corporation– Punjab National Bank– Gujarat Agro Industries Corp

National Multi Commodity Exchange of India

Established on 26th November, 2002 First to initiate process of dematerialization and electronic

transfer of commodity