C Hapter 1 - R Esear CH M Ethdolog Y: Objective of The Study

C H APTE R 1 - R ES E A R C H M E T H DO LO G Y
Objective of the Study

To study the perception of investors of commodity market
Sub Objectives:
1. To study the growth of commodity markets
2. To find out the investment pattern of investors in commodity market on the basis of
income ,age, occupation, etc
Research Design-Descriptive
Sample Design
In this study convenient random sampling method is used to select the
respondents. The sample size is 30 respondents.
Source of Data
The various sources of data are
1. Primary Sources, which includes questionnaire.
2. Secondary data which includes books internet etc.
Tools for Data Collection

The questionnaire is the tool used for data collection.
Analyses and Interpretation

The various tools for analysis used are graphs, charts, percentage growth, secondary
data.
Limitations and Constrains

Constraint of time.
Lack of resources
Cost Constraint.
Respondents are limited to Ahmedabad city.
- INVESTOR S PERC E PTION
C H APTE R 2 I N TODU CT ION TO IND I AN

FINAN C I A L SYSTE M
The Indian financial system consists of many institutions, instruments and
markets. Financial instruments range from the common coins, currency notes and
cheques, to the more exotic futures swaps of high finance.
The Indian financial system is broadly classified into 2 broad Groups:1. Organized Sector
2. Unorganized Sector
1. ORGANISED SECTOR
The organized sector consists of: -
i). Financial institutions

a) Regulatory
The regulatory institutions are the ones, which forms the regulations, and
control the Indian financial system. The Reserve Bank of India is the regulatory body,
which regulates, guides controls and promotes the IFS.
b) Financial intermediaries
They are the intermediaries who intermediate between the saver and investors.
They lend money as well mobilizes savings; their liabilities are towards ultimate
savers, while their assets are from the investors or borrowers.
They can be further classified into
Banking: All banking institutions are intermediaries.
Non-Banking: Some Non-Banking institutions also act as intermediaries, and when
they do so they are known as Non-Banking Financial Intermediaries.UTI, LIC,
GIC & NABARD are some of the NBFCs in India.
c) Non intermediaries:Non-intermediaries institutions do the loan business but their resources are not
directly obtained from the saver.
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ii. Financial Markets

Financial Markets are the centers or arrangements that provide facilities for
buying & selling of financial claims and services. Financial markets can be classified
into: -
Organized markets
These markets comprise of corporations, financial institutions,

individuals and governments who trade in these markets either directly or
indirectly through brokers on organized exchanges or offices.
Unorganized markets
The financial transactions, which take place outside the well-established

exchanges or without systematic and orderly structure or arrangements
constitutes the unorganized markets. They generally refer to the markets in the
villages.
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Chart showing the Indian Financial System

The Indian Financial
System
O rganized
sector
Financial
M arkets
Un-O rganized
S ector
Financial
S ervices
Financial
Institution
Financial
Instrument
M oney
Lenders
O thers
NonInterme
Interme
D iaries
Land Lords
R egulator
y
P awn
B rokers
Traders
Indigenous
Bankers
O rganized
Unorganized
P rimary
S econdary
C apital
M arket
M oney
M arket
P rimary
S hort -Term
S econdary
M edium-Term
LongTerm
iii. Financial instruments

Financial instruments constitute of securities, assets and claims. Financial
securities are classified as primary and secondary securities.
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The primary securities are issued by the companies directly to the ultimate
savers as ordinary shares and debentures.
While the secondary securities are issued by the financial intermediaries to the
ultimate savers as bank deposits, insurance policies so and on.
iv. Financial services

The term financial service in a broad sense means Mobilizing and allocating
savings. Thus, it can also be offered as a process by which funds are mobilized from
a large number of savers and make them available to all those who are in need of it,
particularly to the corporate customers.
2. THE UNORGANIZED SECTOR

The unorganized financial system comprises of relatively less controlled money
lenders, indigenous bankers, lending pawn brokers, land lords, traders etc. This part of
the financial system is not directly controlled by RBI.
.
Legislations passed by the RBI Relating to Foreign Investments

The Reserve Bank of India through its circular RBI/2004/39 A.P.Dir series
circular no 64/February 4 2004 has introduced a special scheme The Liberalized
Remittance scheme of USD 25,000 (per year) for Resident individuals.
The implications of this legislation:
Resident Indians can now freely invest in any overseas transaction; this opens
the entire gamut of the Indian Investment scenario to overseas instruments like forex
markets, forex derivatives, index futures, commodity future and options and all other
alternative investments. The legislation would eventually lead to complete
liberalization in the areas of overseas investments.
(2.1) - GUI DE LI NES B Y THE R BI PERTAI NING TO CO M M O D IT Y

FUTURE TR A DI NG
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The guidelines are: These guidelines cover the Indian entities that are exposed to commodity price
risk.
Name and address of the organization
I. A brief description of the hedging strategy proposed:
Description of business activity and nature of risk.
Instruments proposed to be used for hedging.
Exchanges and brokers through whom the risk is proposed to be hedged and
credit lines proposed to be available. The name and address of the
regulatory authority in the country concerned may also be given.
Size/average tenure of exposure/total turnover in a year expected.
II. Copy of the risk management policy approved by the Board of Directors
covering:
Risk identification
Risk measurements
Guidelines and procedures to be followed with respect to
revaluation/monitoring of positions.
Names and designations of the officials authorized to undertake transactions
and limits.
III. Any other relevant information
The authorized dealers will forward the application to Reserve Bank along with
copy of the Memorandum on the risk management policy placed before the
Board of Directors with specific reference to hedging of commodity price
exposure. .
i. All standard exchanges traded futures will be permitted.

ii. Tenure of exposure shall be limited to 6 months. Tenure beyond 6 months
would require Reserve Banks specific approval.
iii. Corporate who wish to hedge commodity price exposure shall have to
ensure that there are no restrictions on import/export of the commodity hedged
under the Exim policy in force.
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After grant of approval by Reserve Bank, the corporate concerned should

negotiate with off-shore exchange broker subject, inter alia, to the following:-
Brokers must be clearing members of the exchanges, with good financial track
record.
Trading will only be in standard exchange- traded futures contract/options .
(2.2) - SECURITIES A N D E X C H A NGE BO A R D OF IN DI A (SEBI)

SEBI was setup in April 12, 1988. To start with, SEBI was set up as a
non-statutory body.
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It took 4 years for the government to bring about a separate legislation in the
name of securities and exchange board of India Act, 1992, conferring statutory powers
over practically all aspects of capital market operations.
Objectives of SEBI
o To protect the interest of investors so that there is a steady flow of savings into
the capital market.
o To regulate the securities market and ensure fair practices by the issuers of
securities, so that they can raise resources at minimum cost.
o To provide efficient services by brokers, merchant bankers and the other
intermediaries, so that they become competitive and professional.
Functions of SEBI
Sec 11 of the SEBI act specifies the functions as follows:Regulation of the stock exchange and self-regulatory organizations.
o Registration and regulation of stock brokers, sub-brokers, registrar to all issue,
merchant bankers, underwriters, portfolio managers and such other
intermediaries who are associated with securities market.
o Regulation and registration of the working of collective investment schemes
including Mutual funds.
o Prohibition of fraudulent and unfair trade practices relating to security market.
o Prohibit insider trading in securities.
o Regulation substantial acquisitions of shares and take over of companies.
o
SEBI guidelines for COMMODITY FUTURES TRADING

There are many regulatory authorities, which are monitoring commodity
futures trading, one of them is SEBI. The following Report is one of the regulatory
frameworks for the commodity futures trading.
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Report of the committee appointed by the SEBI on participation by

Securities Brokers in Commodity Futures Markets under the chairmanship of
Shri K.R. Ramamurthy (February 5, 2003)
The following were the recommendations:I)
Participation of Securities Brokers in Commodity Futures Market
o The committee was of the unanimous view that participation of intermediaries

like securities brokers in the commodity futures market is welcome as it could
inter-alia increase the number of quality players, infuse healthy competition,
boost trading volumes in commodities and in turn provide impetus to the
overall growth
of the commodity market.
o
Since the commodity market falls under the regulatory purview of a separate
regulatory authority viz., Forward Market Commission, to ensure effective
regulatory oversight by the Forward Market Commission, and to avoid any
possible regulatory overlap, the pre-condition for such entry by intending
participating securities brokers in the commodity futures market would be
through a separate legal entity, either subsidiary or otherwise. Such entity
should conform from time to time to the regulatory prescription of Forward
Market Commission, with reference to capital adequacy, net worth,
membership fee, margins, etc.
\
o The committee took note of the fact that the existing provisions of the
Securities Contracts (Regulation) Rules, 1957 forbid a person to be elected as a
member of a recognized stock exchange if he is engaged as principal or
employee in any business other than that of securities, except as a broker or
agent not involving any personal financial liability. The Committee
recommended that the above provisions in the Securities Contract
(Regulations) Rules be removed/amended suitably to facilitate securities
brokers participation/engagement in commodity futures.
o An important felt need was the necessity to improve market awareness of
trading and contracts in commodities. The committee therefore recommended
the forward market commission take appropriate initiatives in training the
market participants.
II) Risk containment measures
In the background of the Forward Market Commissions report on risk
containment measures currently obtaining in commodity markets and the
committees recommendation to permit security brokers participation in
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commodities markets only through a separate legal entity, the committee

considers that ensuring strict compliance of the regulatory prescriptions like net
worth, capital adequacy, margins, exposure norms, etc., by the respective
market regulators, and due oversight would be an adequate safeguard to ensure
that the risks are not transmitted from one market to the other.
III) Utilization of existing infrastructure of stock exchanges
On the issue of convergence/integration of the securities market and

commodities market, that is, of allowing stock exchanges to trade in
commodity derivatives and vice versa, the committee was of the view that in
the current statutory and regulatory framework and existence of two separate
and established regulators, the issue of integration of the two markets would
require detailed examination, particularly for the purpose of defining clearly the
scope of regulatory purview and responsibility.
Also, given the concerns raised by a section of members that such
integration may lead to further fragmentation of volumes and liquidity in the
nascent commodity markets, the committee was of the view that the issue of
markets could be taken up for consideration at a future date as the two markets
mature further.
SEBI SIGNS MOU WITH COMMODITY FUTURE TRADING

COMMISSION, UNITED STATES
Securities and exchange Board of India (SEBI) signed a
memorandum of understanding (MOU) with United States Commodity Futures
Trading Commission (CFTC) in Washington on April 28, 2004. The MOU was signed
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by Mr. G. N. Bajpal, Chairman, SEBI and Mr. James E.Newsome, Chairman, CFTC.
The MOU aims to strengthen communication channels and establish a framework for
assistance and mutual cooperation between the two organizations.
The MOU marks the beginning of greater collaboration between SEBI and
CFTC to effectively regulate and develop futures markets, in view of greater crossborder trade and cross-market linkages brought about by the globalization of financial
markets. The two authorities mintend to consult periodically about matters of mutual
interest in order to promote cooperation and market integrity, and to further the
protection of futures and options market participants. In furtherance of the objective of
promoting the development of sound futures and options regulatory mechanisms, the
CFTC would also provide technical assistance for development of futures markets in
India.
Regulatory framework in India

In India, the statutory, basis for regulating commodity futures trading is found
in the Forward Contracts (Regulation) Act, 1952, which (apart from being an enabling
enactment, laying down certain fundamental ground rules) created the permanent
regulatory body known as the mForwards Markets Commission. This commission
holds overall charge of the regulation of all forward contracts and carries out its
functions through recognized association.
C H APTE R 3 - L IT E R ATU R E R E V I E W
(3.1) - INTRODUCTION TO D E RI VATI VE S IN D U STRY

Derivatives
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A derivative is a security or contract designed in such a way that its price is

derived from the price of an underlying asset. For instance, the price of a gold futures
contract for October maturity is derived from the price of gold. Changes in the price of
the underlying asset affect the price of the derivative security in a predictable way.
Evolution of derivatives
In the 17th century, in Japan, the rice was been grown abundantly; later the
trade in rice grew and evolved to the stage where receipts for future delivery were
traded with a high degree of standardization. This led to forward trading.
In 1730, the market received official recognition from the Tokugawa
Shogunate (the ruling clan of shoguns or feudal lords). The Dojima rice market can
thus be regarded as the first futures market, in the sense of an organized exchange
withstandardized trading terms.
The first futures markets in the Western hemisphere were developed in the
United States in Chicago. These markets had started as spot markets and gradually
evolved into futures trading. This evolution occurred in stages. The first stage was the
starting of agreements to buy grain in the future at a pre-determined price with the
intension of actual delivery. Gradually these contracts became transferable and over a
period of time, particularly delivery of the physical produce. Traders found that the
agreements were easier to buy and sell if they were standardized in terms of quality of
grain, market lot and place of delivery. This is how modern futures contracts first
came into being. The Chicago Board of Trade (CBOT) which opened in 1848 is, to
this day the largest futures market in the world.
Kinds of financial derivatives

1) Forwards
2) Futures
3) Options
4) Swaps
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1) Forwards
A forward contract refers to an agreement between two parties, to exchange an
agreed quantity of an asset for cash at a certain date in future at a predetermined price
specified in that agreement. The promised asset may be currency, commodity,
instrument etc,
In a forward contract, a user (holder) who promises to buy the specified asset at
an agreed price at a future date is said to be in the long position. On the other hand,
the user who promises to sell at an agreed price at a future date is said to be in short
position.
2) Futures
A futures contract represents a contractual agreement to purchase or sell a
specified asset in the future for a specified price that is determined today. The
underlying asset could be foreign currency, a stock index, a treasury bill or any
commodity. The specified price is known as the future price. Each contract also
specifies the delivery month, which may be nearby or more deferred in time.
The undertaker in a future market can have two positions in the contract: a) Long position is when the buyer of a futures contract agrees to purchase the
underlying asset.
b) Short position is when the seller agrees to sell the asset.
Futures contract represents an institutionalized, standardized form of forward
contracts. They are traded on an organized exchange, which is a physical place of
trading floor where listed contract are traded face to face.
A futures trade will result in a futures contract between 2 sides- someone going
long at a negotiated price and someone going short at that same price. Thus, if there
were no transaction costs, futures trading would represent a Zero sum game what
one side wins, which exactly match what the other side loses.
Types of futures contracts

a) Agricultural futures contracts:
These contracts are traded in grains, oil, livestock, forest products, textiles and
foodstuff. Several different contracts and months for delivery are available for
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different grades or types of commodities in question. The contract months

depend on the seasonality and trading activity.
b) Metallurgical futures contract:
This category includes genuine metal and petroleum contracts. Among the
metals, contracts are traded in gold, silver, platinum and copper. Of the
petroleum products, only heating oil, crude oil and gasoline is traded.
c) Interest rate futures contract:
These contracts are traded on treasury bills, notes, bonds, and banks
certification of deposit, as well as Eurodollar.
d) Foreign exchange futures contract:
These contracts are trade in the British Pound, the Canadian Dollar, the
Japanese Yen, the Swiss Franc and the Deutsche Mark. Contracts are also listed
on French Francs, Dutch Guilders and the Mexican Peso, but these have met
with only limited success.
3) Options
An option contract is a contract where it confers the buyer, the right to either
buy or to sell an underlying asset (stock, bond, currency, and commodity) etc.
at a predetermined price, on or before a specified date in the future. The price
so predetermined is called the Strike price or Exercise price.
Depending on the contract terms, an option may be exercisable on any date
during a specified period or it may be exercisable only on the final or expiration
date of the period covered by the option contract.
Option Premium
In return for the guaranteeing the exercise of an option at its
strike price, the option seller or writer charges a premium, which
the buyer usually pays upfront. Under favorable circumstances
the buyer may choose to exercise it.
Alternatively, the buyer may be allowed to sell it. If the option
expires without being exercised, the buyer receives no
compensation for the premium paid.
Writer
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In an option contract, the seller is usually referred to as writer,

since he is said to write the contract.
If an option can be excised on any date during its lifetime it is
called an American Option. However, if it can be exercised only
on its expiration date, it is called an European Option.
Option instruments
a. Call Option
A Call Option is one, which gives the option holder the right to
buy an underlying asset at a pre-determined price.
b. Put Option
A put option is one, which gives the option holder the right to
sell an underlying asset at a pre-determined price on or before the
specified date in the future.
c. Double Option
A Double Option is one, which gives the Option holder both the
right to buy or sell underlying asset at a pre-determined price on or
before a specified date in the future.
4) SWAPS
A SWAP transaction is one where two or more parties exchange (swap) one
pre-determined payment for another.
There are three main types of swaps:a) Interest Rate swap
An Interest Rate swap is an agreement between 2 parties to exchange
interest obligations or receipts in the same currency on an agreed amount of
notional principal for an agreed period of time.
b) Currency swap
A currency swap is an agreement between two parties to exchange
payments or receipts in one currency for payment or receipts of another.
c) Commodity swap
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A commodity swap is an arrangement by which one party (a commodity

user/buyer) agrees to pay a fixed price for a designated quantity of a
commodity to the counter party (commodity producer/seller), who in turn pays
the first party a price based on the prevailing market price (or an accepted index
thereof) for the same quantity.
(3.2) - INTROD UCTION TO CO M M O D IT Y FUTURES
THE HISTORY OF TRADING
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Futures trading are a natural outgrowth of the problems of maintaining a yearround supply of seasonal products like agricultural crops. In Japan, merchant
stored rice in warehouses for future use. In order to raise cash, warehouse
holders sold receipts against the stored rice. These were known as rice
tickets. Eventually, such rice tickets became accepted as a kind of general
commercial currency. Rules came into being to standardize the trading in rice
tickets.
In the United States, futures trading started in the grain markets in the middle
of the 19th century.

The Chicago Board of Trade was established in1848. In the 1870s and 1880s
the New York coffee, cotton and produce exchanges were born. Today there
are ten commodity exchanges in the United States. The largest are the Chicago
Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile\
Exchange, New York Commodity Exchange and the New York Coffee, Sugar
and Cocoa Exchange.
Worldwide there are major futures trading exchanges in over 20 countries
including Canada, England, France, Singapore, Japan, Australia and New
Zealand. The products traded range form agricultural staples like Corn and
Wheat to Red Beans and Rubber.
What is a commodity?
Commodity includes all kinds of goods. FCRA defines goods as every kind
of moveable property other than actionable claims, money and securities.
Futures trading are organized in such goods or commodities as are permitted by
the central government. The national commodity exchanges have been recognized by
the central government for organizing trading in all permissible commodities which
include precious (gold & silver) and non-ferrous metals; cereals and pulses; oil seeds,
raw jute and jute goods; sugar; potatoes and onions; coffee and tea; rubber and spices,
etc.
Commodity Futures Trading

The commodity futures trading, consists of a futures contract, which is a legally
binding agreement providing for the delivery of the underlying asset or financial
entities at specific date in the future.
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Like all future contracts, commodity futures are agreements to buy or sell
something at a later date and at a price that has been fixed earlier by the buyer and
seller.
So, for example, a cotton farmer may agree to sell his output to a textiles company
many months before the crop is ready for actual harvesting.
This allows him to lock into a fixed price and protect his earnings from a steep
drop in cotton prices in the future. The textiles company, on the other hand, has
protected itself against a possible sharp rise in cotton prices.
The complicating factor is quality. Commodity futures contracts have to
specify the quality of goods being traded. The commodity exchanges guarantee that
the buyers and sellers will stick to the terms of the agreement.
When one buys or sells a futures contract, he is actually entering into a contractual
obligation which can be met in one of 2 ways.
First, is by making or taking delivery of the commodity. This is the exception,
not the rule however, as less than 2% of all the futures contracts are met by actual
delivery. The other way to meet ones obligation, the method which everyone most
likely will use, is by offset.
Very simply, offset is making the opposite or offsetting sale or purchase of the
same number of contracts sold, sometimes prior to the expiration of the date of the
contract. This can be easily done because futures contracts are standardized.
Investors choice
The futures market in commodities offers both cash and delivery- based
settlement. Investors can choose between the two. If the buyer chooses to take
delivery of the commodity, a transferable receipt from the warehouse where goods are
stored is issued in favour of the buyer. On producing this receipt, the buyer can claim
the commodity from the warehouse.
All open contracts not intended for delivery are cash settled. While speculators
and arbitrageurs generally prefer cash settlement, commodity stockist and wholesalers
go for delivery. The options to square of the deal or to take delivery can be changed
before the last date of contract expiry. In the case of delivery- based trades, the margin
rises to 20-25% of the contract value and the seller is required to pay sales tax on the
transaction.
What makes commodity trading attractive?
A good low-risk portfolio diversifier
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A highly liquid asset class, acting as a counterweight to stocks, bonds and

real estate
Less volatile, compared with, say, equities
Investors can leverage their investments and multiply potential earnings
Upfront margin requirement low
Better risk- adjusted returns
A good hedge against any downturn in equities or bonds as there is little
correlation with equity and bond markets
High correlation with changes in inflation
No securities transaction tax levied.
Why commodities preferred to stocks?
Prices predictable to their cyclical and seasonal patterns

Less risk
Small margin requirement
Lesser investment requirement
No insider trading
Entry and exit guaranteed at any point of time
Cash settlement according to Mark to Market Position
Relatively small commission charges
Higher returns
The commodity market is a market where forwards, futures and options
contracts are traded on commodities. Commodity markets have registered a
remarkable growth in recent years. The stage is now set for banks to trade in
commodity futures. This could help producers of agricultural products bankers and
other participants of the commodity markets. Banks have started acknowledging the
commodity derivatives market. In this context the Punjab National Bank and the
Corporation Bank have sanctioned loans worth Rs 50 crore to commodity futures
traders over the past six months. However, the loans are not given to pure speculators.
A precondition for the loans is that the futures contract must result in the delivery of
the commodity.
OPERATIONAL DEFINITIONS
Short selling
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Selling first is known better as shorting or short selling. In futures

trading, since one is taking a future delivery, its just as easy to sell first
and then buy later. To offset the obligation to deliver, all one needs to do
is to buy back the Contract prior to the expiration of the Contract.
Margin
A margin refers to a good faith deposit made by the person who wants to
buy or sell a Contract in a futures exchange. It is a small percentage of
the value of the underling commodity represented by the Contract,
generally in the neighborhood of 2 to 10%.
Leverage
Leverage is the ability to buy or sell $100,000 of a commodity with a
$5000 security deposit, so that small price changes can result in huge
profits or losses.
Maintenance margin
Maintenance margin is the amount which must be maintained in ones
account as long as the position is active.
Margin call
If the equity balance in the account falls bellow the maintenance margin
level, due to adverse market movement, the account holder will be
issued a margin call.
Tick
A tick refers to the minimum price fluctuation, is a function of how the
prices are quoted and set by the exchange.
Float
Float refers to the concept, when an investor who has taken a position,
but does not want to liquidate his position at close of the market.
Limit up/down
It refers to the maximum amount that the market can move above or
below the previous days close in a single trading session. If the price
moves up it is known as limit up, when the price moves down its is
known as limit down.
The Role of the exchange in futures Trading

1) Price discovery
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As sellers offer to sell and buyers offer to buy in the pit, they provide
immediate information regarding the price of the futures contract.
The price is usually given as Bid -Ask.
E.g.: - Price for corn might be $2.40 bid, $2.42 ask, meaning a buyer is willing
to pay $2.40 a bushel, but the seller wants $2.42 a bushel.
2) Risk Transfer
In a futures transaction, risk is inherent part of doing business. The
exchange provides a setting where risk can be transferred from the hedgers to
the speculators.
3) Liquidity
If risk is to be transferred efficiently, there must be a large group of
individuals ready to buy or sell. When a hedger wants to sell futures contracts
to protect his business position, he needs to know whether he can effect the
transaction quickly. The futures exchange brings together a large number of
speculators, thus making quick transaction possible.
4) Standardization
The exchange writes the specifications for each contract, setting
standards of grading, measurement methods of transfer, and times of delivery.
By standardizing the contracts in this manner, the exchange opens the futures
market to almost anyone willing to hedge risk. In the pits, then, the auction
process is facilitated because only the price must be negotiated.
Functions of futures markets

The futures market serves the needs of individuals and groups who may be
active traders or passive traders, risk averse or profit makers. The above broadly
classifies the functions of the futures markets: 1) Price Discovery
2) Speculation
3) Hedging
1) Price discovery
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Futures prices might be treated as a consensus forecast by the market

regarding trading future price for certain commodities. This classifies that
futures market help market watchers to discover prices for the future.
The price of certain commodity depends on the following factors:a) The need for information about future spot prices
Individuals and groups in society need information not only for
generating wealth but also for planning of future investment and consumption.
E.g.- A furniture manufacturer, making plywood furniture for printing
his catalogue for next years needs to estimate price in advance. This task is
different as the cost of plywood varies greatly, depending largely on the health
of the construction industry. But the problem can be solved by using prices
from the plywood futures market.
b) Accuracy
The accuracy of the futures market is not too good but it is certainly
better than the alternative.
2) Speculation
Speculation is a spill over of futures trading that can provide comparatively less
risk adverse investors with the ability to enhance their percentage returns.
Speculators are categorized by the length of time they plan to hold a position.
The traditional classification includes: o Scalpers
They have the shortest holding horizons, typically closing
a position within a few minutes of initiation. They attempt to
profit on short-term pressures to buy and sell by reading other
traders and transacting in the futures pits. Thus, scalpers have to
be exchange members. They offer a valuable market service
because their frequent trading enhances market liquidity.
o Day Traders:They hold a futures position for a few hours, but never
longer than one trading session. Thus, they open and close to
futures position within the same trading day.
3) Hedging
While engaging in a futures contract in order to reduce risk in the spot
position, hedging is undertaken. Therefore the future trader is said to establish a
hedge.
The 3 basic types of hedge are:
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a) Long hedge/ Anticipatory hedge

An investor protects against adverse price movements of an asset
that will be purchased in future, i.e. the spot asset is not currently owned,
but is scheduled to be purchased or otherwise held at a later date.
b) Short hedge
An investor already owns a spot asset and engages in a trade or
sell its associated futures contract.
c) Cross hedge
In actual hedging positions, the hedgers needs do not perfectly
match with the institutional futures. They may differ in
-Time span covered
-The amount of commodity
-The particular characteristics of the particular goods
Thus, when a trader writes a futures contract on another underlying
asset, he is said to establish a cross hedge.
The regulators and regulations

The first level of regulation is the exchange.
The exchange does not take positions in the market. Instead, it has the
responsibility to ensure that the market is fair and orderly.
It does this by setting and enforcing rules regarding margin deposits, trading
procedures, delivery procedures and membership qualifications.
Each exchange consists of a clearinghouse.
The clearinghouse ensures all trades are matched and recorded and all margins
are collected and maintained.
It also is in charge of ensuring deliveries take place in an orderly and fair
manner.
(3.2)(a)
THE CO M M O DIT Y FUTURES MO DU S OPER A N DI
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The modus operandi of commodity futures includes the method of working

which is being followed. It also includes the factors and concepts, which affect the
smooth functioning of the markets, are discussed.
M odus O perandi
The
E xchange
D ifferent
Types of
Future
P ositions
D ifferent
Types O f
O rders
C ommodit
y Future Is
a Two Way
M arket
B rokers and
C ommission
D elivery
M onth
P rice
D etermination
D ifferent
Types O f
P articipants In
M arket
M argin
Types of Futures Positions

The different types of futures contract position are: Open position
The trader exploits a view on the economic or technical factors affecting
a market by taking a position in a single contract, usually the most liquid
or front month contract.
Spreads
Spread is the term used when, a client buys one contract while
simultaneously sell another. They are: Intra market spreads
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The trader exploits a view on the relative pricing of 2 futures

contracts of the same contract type by buying one futures contract
for a specific expiry date and simultaneously selling another
contract with a different expiry date. .
E.g. buying silver and selling gold.
Inter market spreads
The trader exploits a view on the relative pricing of 2 futures
contracts of different contract types by buying a future contract in
one market and simultaneously selling a futures contract, usually
of the same maturity, in a different futures market.
Commodity futures is a 2 way market

Buying a contract at a lower price and selling at a higher price, and booking
profits, this concept is well understood and widely accepted. In commodity futures
trading, one can also sell first and buy later. This concept is known as short selling.
A buyer of a futures contract is obligated to take delivery of a particular
commodity or sell back the contract prior to the expiration of the contract. The latter is
done by everyone usually. The purpose of shorting is to profit from a fall in prices. If
one believes that the price of commodity is going down, due to oversupply and poor
demand, he should go short.
Brokers and commissions

Commission is the brokers fees for his services.
Commissions are of 2 types,
1 Discounter
Discounter type of commission is the commission where the broker
charges his fees only for trading activities.
2 Full service.
Full service commission is the commission charged to a broker, for
advising the client regarding when to buy/sell and also providing useful
analysis.
Participants
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Hedgers
In a commodity market, hedging is done by a miller, processor, stockiest
of goods, or the cultivator of the commodity. Sometimes exporters, who have
agreed to sell at a particular price, need to be a hedger in a futures and options
market. All these persons are exposed to unfavorable price movements and they
would like to hedge their cash positions.
Speculators
Speculator does not have any position on which they enter in futures
options market. They only have a particular view about the future price of a
particular commodity. They consider various fundamental factors like demand
and supply, market positions, open interests, economic fundamentals internal
events, rainfall, crop predictions, government policies etc. and also considering
the technical analysis, they are either bullish about the future process or have a
bearish outlook.
In the first scenario, they buy futures and wait for rise in price and sell or
unwind their position the moment they earn expected profit. If their view
changes after taking a long position after taking into consideration the latest
developments, they unwind the transaction by selling futures and limiting the
losses. Speculators are very essential in all markets. They provide market to the
much desired volume and liquidity; these in turn reduce the cost of
transactions. They provide hedgers an opportunity to manage their risk by
assuming their risk.
Arbitrageur
He is basically risk averse. He enters in to those contracts where he can
earn risk less profits. When markets are imperfect, buying in one market and
simultaneous selling in another market gives risk less profit. It may be possible
between two physical markets, same for 2 different periods or 2 different
contracts.
Intermediate Participants
Brokers
A broker is a member of any one of the futures exchange, one gets
commodity or financial futures exchange, one gets the right to transact with
other members of the same exchange. All persons hedging their transaction
exposures or speculation on price movement cannot be members of a futures
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exchange. Non-member has to deal in futures exchange, through a member

only. This provides the member the role of a broker.
Margin
Margin is money deposited in the brokerage account, which serves to guarantee
the performance of the clients side of the contract. This is generally in the
neighborhood of 2-10%
When the client enters a position, he would have deposited, the margin in his
account, but the brokerage house is required to post the margin with a central
exchange arm called the clearing house. The clearing house is a non-profit entity,
which in effect is in charge of debiting this money to the accounts of winners daily.
Exchange Information
There are many exchanges in the world but among them some are very big and old.
1) CHICAGO MERCANTILE EXCHANGE
Chicago Mercantile Exchange inc (CME) is the largest futures exchange in
the United States and is the largest futures clearing house in the world for the trading
of the future and options on futures contracts.
As a marketplace for global risk management, the exchange brings together
buyers and sellers of derivatives products, which trade on the trading floors, on the
GLOBEXELECTRONIC TRADING platform and through privately negotiated
transactions. It was founded as a non profit corporation in 1898, later CME became
the first publicily traded U.S. financial exchange in December 2002 when the Class A
shares of its parent company, Chicago Mercantile Exchange Holdings Inc., began
trading on the New York Stock Exchange under the ticker symbol CME.
2) CHICAGO BOARD OF TRADE

The Chicago Board of Trade (CBOT), established in 1848, is one of the leading
futures and options on futures exchange. More than 3,600 CBOT members trade 50
different futures and options products at the exchange through open auction and
electronically. In its early history, the CBOT traded only agricultural commodities
such as corn, wheat, oats and soybeans.
Futures contracts at the exchange evolved over the years to include nonstorable agricultural commodities and non-agricultural products like gold and silver.
For more than 150 years, the primary method of trading at the CBOT was open
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auction, which involved traders meeting face-to -face in trading pits to buy and sell
futures contracts. But to better meet the needs of a growing global economy, the
CBOT successfully launched its first electronic trading system in 1994.
3) THE NEW YORK MERCANTILE EXCHANGE
The NYMEX is the worlds largest physical commodity futures exchange and
the pre-eminent trading forum for energy and precious metals. Transactions executed
in the exchange avoid the risk of counter party default because the exchange clearing
house acts as the counter party to every trade.
The above mentioned exchanges are of foreign country.
Main Indian commodity exchanges are:
-
The National Commodity and Derivative Exchange (NCDEX).

The Multi Commodity Exchange of India (MCX)
The National Multi Commodity Exchange of India (NMCE)
The National Board of Trading in Derivatives (NBOT)
Different Types of Order

There are different types of orders that a client can give to his broker, they are: -
Types O f O rders
M arket O rder
Market order
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Limit O rder
S top O rder
S top Limit
O rder
This is an order to buy or sell at the prevailing price. By definition, when a

commodity is bought or sold at the market, the floor broker has an order to fill
immediately at the best price, but in reality it is the next price
Limit order
With a limit order, the floor broker is prevented from paying more than the
limit on a sell order.
Stop order
Stop order or stops are used in 2 ways. The most common is to cut loss on a
trade, which is not working in ones favour. A stop is an order, which becomes market
order to buy or sell at the prevailing price only if and after the market touches the stop
price. A sell stop is placed under the market and a buy stop above the market.
Stops can also be used to initiate positions. They are used by momentum traders who
want to enter market moving in a certain direction.
E.g. a trader believes that, if gold prices trade above the psychologically significant
$400 mark, it will move higher. He places a key stop at a $401. And also can place a
sell stop at $396.
Stop limit order
It is an order where a client can place a stop order at a particular level with a
limit beyond which the market would not be chased
Sell on stop @2637, limit 35
An order of this nature will not force the market away from the limit; but is in danger
of not getting filled at all.
Delivery months
Every futures contract has standardized months, which are authorized by the
exchange for trading. E.g. wheat is traded for delivery in March, May, July,
September, and December.
Price Determination
The price is determined by demand and supply, or in other words buyers and sellers. If
the buyers are more aggressive then the prices go up. If the sellers are larger the prices
go down.
The bid and the offer
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The only part of a contract that is negotiated in the pit is the price. Everything
else is standardized.
Therefore, the trader in the bid needs to communicate only 3 things
1. Whether he wishes to buy or sell
2. The number of contracts he wishes to buy or sell
3. The price
The exchange open outcry and the clearing house

It is understood that the exchange does not set the prices of the traded
commodities. The prices are determined in an open and continuous auction on the
exchange floor by the members who are either acting on behalf of the customers, the
companies, they work for or themselves. The process of the auction, which has been
around for over 100 years, is called an open outcry.
People are not only willing to buy, but also to sell, and they all can be doing
this simultaneously. Every floor trader has his own auctioneer, the democratic feature
of an open outcry is that only the best bid and offer are allowed to come forward at
any point in time, if a trader is willing to pay the highest price offered, he yells it out,
and by law all lower bids are silenced, by exchange rules, no one can bid under a
higher bid, and no one can offer to sell higher than someone elses lower offer.
Difference between a floor broker and the broker with whom one can place order
A floor broker is buying or selling futures on the floor either solely for himself or
filling orders for his customers who are the Brokerage Houses.
A broker off the floor is licensed by the future government to execute the orders on
behalf of the public.
The pit
A pit is the heart of the open outcry market system. It is the place where the
various bid and sell offers are made by floor brokers, and floor traders on behalf of
their clients.
How price reach the Quote Board?
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At the exchange, a pit observer, who is an employee of the exchange, stands in

the pit with a walkie-talkie. Each time the price changes; the observer radios the info
to the exchange operator, who enters the info to the exchange quote entry system.
The price immediately appears on the quote board and is simultaneously
broadcasted on the exchange ticker to the public.
On the quote board, the most recent price appears at the bottom of a column
process, with the next previous price above that and the 5 precious prices above that.
As a trade is made the other prices move up, with the bottom, and the other prices
move up, with the top price dropping off. The quote board also gives the previous
days settlement price and the high-low of the days trading. And the net difference
between the last price and the previous days settlement price.
Analysis
Commodity futures market is a 2 way market
There are various parameters that are standardized such as delivery months,
the exchange, margins, leverage, brokerage and commissions.
One could take any one of the future positions out of the available ones
There are many types of orders, which a client can give to his broker.
The price is determined in a standardized manner
Interpretation
From the above analysis, it can be seen that, the commodity futures modus
operandi or operating procedure is very well defined at every level, and also
standardized.
Thus there is very little scope for manipulation. Thus, it is an efficient derivative
modus operandi.
(3.2)(b) - Risk Associated With Commodity Futures Trading

There are various risks in commodity futures trading, they are:-
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Types of R isk
O perational
R isk
M arket R isk
Liquidity R isk
Operational risk
The risk that, errors (or fraud) may occur in carrying out operations, in placing
orders, making payments or accounting for them.
Market risk
It is the risk of adverse changes in the market price of a commodity future.
Liquidity risk
Although commodity futures markets are liquid mostly, in few adverse
situations, a person who has a position in the market, may not be able to liquidate his
position. For E.g.. a futures price has increased or decreased by the maximum
allowable daily limit and there is no one presently willing to buy the futures contract
you want to sell, or sell the futures contract you want to buy.
The Various Risk Management Techniques Used in Commodity Futures

Trading
Considering the risks discussed previously, various risk management
techniques are used in order to minimize the losses.
There are mainly 3 techniques, they are
1. Averaging
2. Switching
3. Locking
Averaging
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Averaging is a technique used when there is an existing position, and the price
moves adversely. And then at that particular price, enter into a similar new position.
Then take the average of these 2 prices. And when the price moves to that price
liquidate the position.
Example:
1. Silver bought 1 lot@ 580 cents, expecting price to go up, with cut loss @
577 cents
Price goes to 574 cents,
Buy another new lot @ 574 cents
Now, the average price is 577 cents.
When the price comes to 577 cents, then liquidate both the lots and thus
Profit = 3 cents
Loss = -3cents
----------Net profit 0
----------2 .Sold soybean 1 lot @780 cents
Sold soybean 1 lot @790 cents
Sold soybean 1 lot@800 cents
Now, average price is 790 cents, when price comes to 790 cents, liquidate all 3
lots, thus making no profit no loss.
Switching
Switching is yet another risk management technique, when, there is an existing
position, and the prices move adversely and gives all indication that it will go in the
same direction for still some while. Then we have to liquidate the first position and
enter a new and opposite position at the same price.
Example:
Bought silver 1 lot @580 cents
Cut loss@ 578 cents
Price reaches @800 cents
Then sold 2 lots of silver @ 577 cents, one lot will be liquidating the first lot,
and then the second one will
be a new position.
Now when price goes to 570 cents, liquidate the second lot, and book the
profits.
Profit = 7 cents
Loss = (-) 3 cents
----------Net profit (+) 4 cents
----------Locking
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Locking is yet another risk management technique, where, when there is an

existing position, and the prices move adversely and give an indication that it will
move in that direction, but it will come back to its original position. Here two
processes are involved locking and unlocking.
It is the process where there is an existing position, and the price moves
adversely, we lock by entering into a new opposite position. And then when the
second price reaches a point where it will bounce back, we unlock by liquidating the
second position and book profits, and then finally when the pr ice reaches somewhere
near the first position, liquidate the position, whereby we can minimize the loss.
Example:Bought silver 1 lot @ 600 cents----(1)
Price falls to 590 cents
Sold silver 1 lot @ 590 cents----(2)
Price goes to 580 cents; where it is expected to bounce back, liquidate the
second lot.
Bought silver 1 lot @ 580 cents, liquidation (2)
Price comes to 597 cents, then liquidate the (1) lot
Sold silver 1 lot @ 597 cents, liquidation (1)
Profit = 10 cents
Loss = (-) 3 cents
---------Net profit (+) 7 cents
----------
Analysis
There are different types of risks involved in commodity futures trading.
The most important one being, market risk.
But to counter these price risks, various types of risk management
techniques are used in order to minimize the risk.
Among the risk management techniques, locking is the most commonly
used one.
Manipulation of price of the commodity is not possible as, these are
global commodity prices, and in order to do so, he has to pump in huge
volumes of money, which is very unlikely.
Interpretation
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Although there exists various types of risks involved in trading the various risk
management technique can be effectively used in order to minimize the loss due to
adverse price movements.
Various analysis tools used to predict the price movements in commodity

futures trading
In order to predict the future price of a commodity, the various analyses, tools are
used. In order to make the daily or regular predictions, two important analyses made
are:
Technical Analysis
Fundamental Analysis
TECHNICAL ANALYSIS
Technical analysis refers to the process of analyzing the market with the help of
technical tools, which includes charts, and henceforth makes future predictions of the
prices. The only important factor for analyzing the market is price action.
Bar Chart
A Bar Chart is one of the most widely used charts. The market movement is
reduced on a daily basis as a vertical line between the high and low; the opening level
being indicated as a horizontal dash to the left, the closing level being indicated as a
horizontal dash to the right. As well as a daily record, similar charts can be drawn for
weekly or monthly price ranges. Although bar charts are the most popular for
technical analysts, their minor limitation is that they do not show how the market
acted during the trading day.
A line chart is the simplest chart, and generally drawn by the non technical
investor interested in getting quick visual impression of the general movement of the
market. Normally closing prices are used and joined to form a line chart. They are not
really adequate for market movement interpretation, but can give a very good
indication as to what the market has been doing over a longer time scale, up to 10 to
20 years.
Moving averages
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Moving averages are used to iron out some of the more volatile short-term
movements, and can give better buy and sell signals, than just by looking at a daily
high-low-close pattern. For instance, a 20-day moving average refers to the average
price, of the previous 20 days. In the above chart the red line is the 20-day average.
The green line is the 50-day average and the yellow line is the 100 day average.
Gaps
A Gap is formed when one days trading movement does not overlap the range
of the previous day. This may be caused by the market opening sharply highly or
lower than the previous days close, as a result of important overnight news. Strong
movements in overseas markets influencing our market or interest, or quite simply
because the market has started to develop a strong momentum of its own.
Break away gap
This usually occurs soon after a new trend has been established as large
numbers of new trend has been established, as large numbers of new investors
suddenly want to join the action. It is often regarded as a confirmation that a new trend
is well established.
FUNDAMENTAL ANALYSIS
Fundamental analysis is the study of supply and demand. The cause and effect of price
movement is explained by supply and demand. A good fundamentalist will be able to
forecast a major price move well in advance of the technician.
E.g. if there is a drought in Brazil during the flowering phase of soybean plant one can
rationally explain why bean prices are rising.
There are various factors affecting the fundamentals of different commodities.
They are
Fundamentals affecting Agriculture Commodities
a) Supply
The supply of a grain will depend on
i) Beginning stocks
This is what the government says, it will carryover from the previous year
ii) Production
This is the crop estimate for the current year.
iii) Imports
This includes the commodities imported from different countries.
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iv) Total supply

This is the beginning stocks+production+imports
b) Demand
i) Crush
This is the domestic demand by the crushers who buy new soybeans.
And crush them into the products, meal and oil.
ii) Exports
This refers to the quantity of different commodities demanded by
foreign countries.
c) Ending carryover stocks
Total supply minus total demand= the carryover, ending stocks
d) Weather
Weather is the single most important factor, which affects the process of all
types of grains. If there is flood drought, it will shoot up the price, due to
increase in demand.
e) Seasonality
All other factors remaining equal, the grains and oil seeds do exhibit certain
seasonal tendencies.
Metals fundamentals
Metals include
Precious metals
Industrial metals
Precious metals
The precious metals include gold, silver, and platinum. Their fundamentals are
i) Silver
Since much of the new production of silver comes as a by-product of the
3 metals (copper, zinc, lead), if the price of the 3 is depressed and production is
curtailed, silver output will suffer as well. The reverse is also true.
ii) Platinum
The demand for platinum is somewhat dependent on the health of the
automotive, electrical, dental, medical, chemical, and petroleum industries
(where it is used as a catalyst.)
Industrial metals
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These include copper, palladium. Their fundamentals are

i) Economic activity
For any metal, industrialized demand is the key. If there is the threat of
an economic slow down, this will be reflected in lower prices.
ii) LME stocks
Everyday the London Metal Exchange releases its widely watched
stocks report, where, it lists the stocks in the exchange approved warehouses
for aluminum, copper, zinc, tin, lead.
iii) Mining strikes and production problems
iv) War
Copper in particular has been called the war metal. Demand
traditionally soars for all the industry al metals in times of increased defense
spending.
v) Inflation
The industrial metals have been at times been called the poor mans
gold and will heat up in an inflationary environment.
Analysis
Predictions in the commodity futures trading can be made through 2 tools i.e.
fundamental analysis and technical analysis. Fundamental analysis seeks to protect the
market by making use of the demand and supply factors. It helps to explain what the
general tendency in the market is. Technical analysis is the process of using all kinds
of tools and charts, in order to make predictions, it helps to explain exactly at which
point to enter a position or helps to explain at what point will be the trend reversal.
Interpretation
From the above analysis, it can be concluded that, by making use of both the
fundamental and technical analysis efficiently, and henceforth take a favorable
position in the market and thus benefit from the price movements.
(3.3)(c)Growth of the commodity futures trading in India
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Investment in India has traditionally meant property, gold and bank deposits.
The more risks taking investors choose equity trading. But commodity trading
never forms a part of conventional investment instruments. As a matter of fact,
future trading in commodities was banned in India in mid 1960s due to
excessive speculation.
Commodity trading is finding favor with Indian investors and is been seen as a
separate asset class with good growth opportunities. For diversification of
portfolio beyond shares, fixed deposits and mutual funds, commodity trading
offers a good option for long term investors and arbitrageurs and speculators,
and, now, with daily global volumes in commodity trading touching three times
that of equities, trading in commodities cannot be ignored by Indian investors.
The strong upward movement in commodities, such as gold, silver, copper,
cotton and oilseeds, presents the right opportunity to trade in commodities. Due
to heavy fall down in stock market people are finding the safe option to invest
and commodity future is providing them that direction.
India has three national level multi commodity exchanges with electronic
trading and settlement systems.
o The National Commodity and Derivative Exchange (NCDEX).
o The Multi Commodity Exchange of India (MCX)
o The National Multi Commodity Exchange of India (NMCE)
o The National Board of Trading in Derivatives (NBOT)
India, which allowed futures trading in commodities in 2003, has one of the
fastest-growing commodity futures markets with a combined trade turnover of
40.66 trillion rupees in 2007/08.
Indian commodity futures trade rose 29.74 percent to 43.93 trillion rupees
during the first ten and-a-half-months of financial year 2008/09, helped mainly
by the surging trade in bullion, official data showed.
Turnover at Indian commodity bourses rose 39 percent to 31.54 trillion rupees
from April 1 to Nov. 15 from the year-ago period, data from regulator Forward
Markets Commission (FMC) showed.
Turnover rose 3.5 percent to 2.33 trillion rupees in the fortnight ended Feb. 15,
2009, data from regulator Forward Markets Commission (FMC)
Trade was most active in gold, silver, crude oil, copper and zinc in energy and
metals pack during the period, data showed.
Futures trade in bullion jumped 75.89 percent to 24.45 trillion rupees,
accounting for more than half of the total trade from in April 1, 2008 - Feb. 15,
2009 period. It rose 17.79 percent to 1.42 trillion rupees in the fortnight to Feb.
15.
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Indias commodity futures trade is set to grow more than 40% to Rs57 trillion
in the year to March 2009, despite trading curbs on eight commodities,said the
chairman of the Forward Markets Commission.
India allowed futures trading in commodities in 2003 and the turnover at 22
Indian exchanges rose 10.58% from the year ago to Rs40.66 trillion in 2007-08.
Traders have switched from the banned items to other related commodities
and bourses have successfully launched a few new commodities to fill the
void, analysts said.
C H APTE R 4 - ANA LYS YS AND IN E RP R ETAT ION

QUESTIONERE ANALYSES
In this section the data obtained through the questionnaire from the investors in
commodity futures is analyzed
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SECTION A:
Sex profile
Sex
No of Respondents Percentage
Male
23
80%
Female
6
20%
Column Chart Showing Sex Profile Of

The Respondents
100%
80%
60%
g
ta
n
rc
e
P
40%
20%
0%
M ale
Female
M ale
Sex
Female
Findings
From the above table and chart, it can be seen that 80% of the respondents were male,
and 20% were female.
Interpretation
It can be concluded that mainly males invest in commodity futures.
Age Profile
Age Group
20-30 years
30-40 years
40-50 years
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No. of Respondents
13
9
5
Percentage
43%
30%
17%
50 years and above
10%
Findings
From the above table and chart, it can be seen that 43% of the respondents were
in the age group of 20-30 years, 30% were in the age group of 30-40 years, and 17%
were in the age group of 40-50 years and 10% in the age group of 50 years and above.
Interpretation
It can be concluded that mainly the young people have invested commodity
futures.
Education profile:
Educational
Qualification
No. of
Respondents
Percentage
Higher Secondary
10%
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Graduate
Post Graduate
15
12
50%
40%
Findings
graduates, 40% were post graduates and only 10 percent were studied up to higher
secondary.
Interpretation
It can be concluded that mainly the young graduates have invested commodity
futures. But in real market this doesnt stand true.
Occupation Profile
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Occupation
No. of Respondents
Percentage
Government Employee
3%
Private Sector
Employee
Self-Employee
30%
17%
Businessmen
10
33%
Commodity Futures
Advisor
17%
Others
0%
Findings
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government employees, 30% were private sector employee, 17% were Self-Employed
and 33% were businessmen, 17% were Commodity futures advisors.
Interpretation
It can be concluded that mainly businessmen and private sector employees
invest in commodities.
Income Profile
Income Group
No. of Respondents
Percentage
Below Rs. 4 Lakh

Rs. 4 10 Lakh
Rs. 10 25 Lakh
Above Rs. 25 Lakh
11
18
1
0
37%
60%
3%
0%
Findings
in the income group of below Rs. 4 lakh, 60% were in the income group of Rs. 4-10
lakh, and 3% were in the income group of Rs. 10-25 lakh.
Interpretation
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It can be concluded that most of the people who have invested commodity
futures are in the income group of Rs.4-10 lakh.
SECTION B
1) Have you invested in commodity futures?
Particulars
No. Of Respondents
Percentage
Yes
20
67%
No
10
33%
Column Chart Showing The Percentage of

Respondents who have Invested In Comodity Future
80%
70%
60%
50%
g
ta
n
rc
e
P
40%
30%
20%
10%
0%
Yes
No
Particular
Yes
No
Findings
From the above table and chart, it can be seen that 67% of the respondents have
invested in commodity futures, and 33% have not invested in commodity futures
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Interpretation
It can be concluded that most of the respondents have invested in commodity
futures.
2) Have you invested in any other securities?
Findings
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Particulars
No. Of Respondents
Percentage
Yes
21
70%
No
30%
From the above table and chart, it can be seen that 70% of the respondents have
invested in other securities, and 30% have not invested in any other security.
Interpretation
It can be concluded that most of the respondents have invested in other
securities also.
3) Which are the investments you have made (excluding commodity

futures)?
Particulars
No. of Respondents
Percentage
Shares
Mutual Funds
Bonds
Bank Deposits
Real Estate
Jewellery
Insurance
9
10
3
2
3
1
2
30%
33%
10%
7%
10%
3%
7%
Findings
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It can be seen that, out of the respondents who have invested in other securities,
30% of them have invested in shares, 33% Mutual funds, 10% in Bonds, 7% have
invested in bank deposits. 10% in real estate, 3% have invested in jewellery and the
rest 7% have invested in insurance.
Interpretation
It can be concluded that other than commodity futures, most of the respondents
have invested in shares and mutual funds.
4) What is your Experience in your previous Investment (excluding

commodity futures)?
Particulars
No. Of Respondents
Percentage
Good
15
50%
Bad
30%
Reasonable
20%
Findings
PRAKASH MBA
It can be seen that 50% of the respondents had a good experience in their
previous investment, 30% had a reasonable experience in their previous investment
and 20% had a bad experience in their previous investment.
Interpretation
It can be concluded that most of the respondents had a good experience in their
previous investment.
5) How often do you trade in Commodity futures?

Particulars
No. Of Respondents
Percentage
Everyday
20%
Once a Week
20%
Only when there is a

good Price
18
60%
PRAKASH MBA
Findings
It can be seen that out of the investors in commodity futures, 20% of them trade
everyday, 20% of them traded once a week and 60% traded only when there is good
price.
Interpretation
It can be concluded that most of the investors trade in commodity futures only
when there is a good price.
6) What is your objective for trading in commodity futures?

Particulars
Less Risky
Investment
Diversification of
Portfolio
Very Good Returns
Others
PRAKASH MBA
No. Of Respondents
Percentage
10
33%
12
40%
20%
7%
Findings
It can be seen that out of the investors in commodity futures, 33% of them have
invested with the objective a less risky investment, 40% of them invested with the
objective of diversifying hid portfolio and 20% of them due to the expectation of very
good returns and 7% have invested due to other reasons.
Interpretation
It can be concluded that most of the investors in commodity futures, have
invested with the objective of diversifying their portfolio and to reduce risk .
7) What is the amount you have invested in commodity futures?
PRAKASH MBA
Amount(Rupees)
No. Of Respondents
Percentage
Rs. 2 lakh
27%
Rs. 2-3 lakh
15
50%
Rs. 3-5 lakh
20%
Above Rs.5lakh
3%
Findings
It can be seen that out of the investors, 27% of them had invested Rs. 2 lakhs,
50% of them had invested between Rs. 2-3 lakhs, 20% had invested between Rs. 3-5
lakhs and 3% had invested above Rs. 5 lakhs.
Interpretation
PRAKASH MBA
It can be concluded that most of the investors had invested between Rs. 2-3
lakhs in ,commodity futures.
8) What type of trade do you prefer the most?

Particulars
No. Of Respondents
Percentage
Short Term Positions
15
50%
Medium term
30%
Long term positions
20%
PRAKASH MBA
Findings
It can be seen that out of the investors in commodity futures, 50% of them
prefer short-term positions, 30% of them preferred medium term positions and 20%
preferred long-term positions.
Interpretation
It can be concluded that most of the investors trading in commodity futures
prefer short-term positions.
9) Which commodities have you traded in, the most?

Commodity
PRAKASH MBA
Percentage
Coffee
No. Of
Respondents
9
Cotton
17%
Wheat
Soybean
Silver
Copper
6
4
3
3
20%
13%
10%
10%
30%
Findings
It can be seen that out of the investors in commodity futures, 30% of them have
traded mostly in coffee, 17% of them traded in cotton, 20% in wheat, 13% in soybean
and 10% each in copper and silver, .
Interpretation
It can be concluded that the mostly traded commodity is coffee, followed by
wheat and cotton. Copper is the least traded commodity.
10) Do you, as a client use Fundamental/Technical Analysis while

giving an order?
Findings
PRAKASH MBA
Particulars
No. Of Respondents
Percentage
Yes
20
67%
No
10
33%
From the above table and chart, it can be seen that 76% of the investors use
Fundamental/technical Analysis while giving an order to trade in commodity futures,
and 24% do not any analysis tools.
Interpretation
It can be concluded that most of the investors use Fundamental/ Technical
Analysis when giving an order while trading in commodity futures.
11) Which commodity do you think is the most volatile?

Commodity
No. Of Respondents
Percentage
Coffee
20%
Silver
30%
Soybean
14
47%
Copper
3%
PRAKASH MBA
Findings
It can be seen that 47% of the investors feel that soybean is the most volatile
commodity, 30% feel silver is the most volatile, 20% feel Coffee is the most volatile
while 3% feel that copper is the most volatile commodity.
Interpretation
It can be concluded that soybean is the most volatile commodity.
12) What percentage of savings have you invested in commodity futures?

Particulars
No. Of Respondents
Percentage
0-10%
10%
10-20%
30%
20-30%
12
40%
30-50%
10%
50% and above
10%
PRAKASH MBA
Findings
It can be seen that, 40% of the investors have invested between 20-30% of their
savings in commodity futures, 30% of them have invested between 10-20% of their
savings and total 20% of them have invested above 30% of their saving in commodity
futures.
Interpretation
It can be concluded that most of the investors have invested between 20-30% of
their savings in commodity futures.
13) How did you get to know about commodity futures trading?
PRAKASH MBA
Particulars
No. Of Respondents
Percentage
Friends
30%
Media
15
50%
Self-Research
20%
Others
0%
Column chart showing the means through

which the investors got to know about
commodity futures
60%
50%
40%
30%
20%
10%
0%
Friends
Friends
M edia
M edia
Self-Research
Self-Research
Others
Others
Findings
It can be seen that, 50% of the investors got to know about commodity futures
through different media, 30% got to know through their friends and family and 20% of
the investors got to know through self-research.
Interpretations
PRAKASH MBA
It can be concluded that most of the investors got to know about commodity
futures through Media.
14) What do think about the felicitation fee charged by your company?
Particulars
No. Of Respondents
Percentage
Very High
13%
High
11
37%
Reasonable
15
50%
Low
0%
PRAKASH MBA
Findings
It can be seen that, 50% of the investors feel that the facility fee charged by
their company is reasonable, 37% of them feel that the facility fee charged by their
company is high and 13% of the investors feel that it is very high.
Interpretations
It can be concluded that most of the investors feel that the facility fee charged by their
company is reasonable. But there are people who are not satisfied with fees also.
15) Do you think there is future in commodity future trading, in the present
economy?
PRAKASH MBA
Particulars
No. Of Respondents
Percentage
Yes
22
73%
No
17%
Cant say
10%
Findings
It can be seen that, 73% of the investors feel that there is future in commodity
futures trading in the present economy, 17% of them feel that there is no future in
commodity futures, 10% of the investors were unable to come to a conclusion.
Interpretations
It can be concluded that most of the investors feel that there is future in
commodity future trading in the present economy.
16) What do you think of the return derived from commodity futures?
Particulars
No. Of Respondents
Percentage
Good
18
60%
Reasonable
27%
Bad
13%
PRAKASH MBA
Findings
It can be seen that, 60% of the investors feel that they got good returns from
commodity futures trading, 27% of them feel that they got reasonable returns
commodity futures, 13% of the investors felt they got bad returns from commodity
futures.
Interpretations
It can be concluded that most of the investors got good returns from commodity
futures.
17) Have you invested in any other derivative instrument?
PRAKASH MBA
Particulars
No. Of Respondents
Percentage
Yes
14
47%
No
16
53%
Column Chart showing whether the investors

have invested in any other derivative
instrument
54%
52%
50%
48%
46%
44%
Yes
No
Yes
No
Findings
It can be seen that 53% of the investors have not invested in any other
derivative instrument and 47% of the investors have invested in any other derivative
instrument.
Interpretation
It can be concluded that most of the investors have not invested in any other
derivative instrument but people also invest in other derivatives to diversify their
portfolio.
18) Do you think commodity future is a good investment opportunity?
PRAKASH MBA
Particulars
No. Of Respondents
Percentage
Yes
21
70%
No
30%
Findings
From the above table and chart, it can be seen that 70% of the investors feel
that commodity futures is a good investment opportunity, and 30% investors feel that
commodity futures is not a good investment opportunity
Interpretation
It can be concluded that most of the investors feel that commodity futures is a
good investment opportunity
19) Which type of trader you are?

Particulars
No. Of Respondents
Percentage
Hedgers
13
43%
Speculator
20%
PRAKASH MBA
Arbitrager
11
37%
Findings
From the above table and chart, it can be seen that most of respondents are
hedger and arbitrager
Interpretation
It can be concluded that most of the respondents are hedgers
20) In which commodities you would like to invest in future and why?
Particulars
No. Of Respondents
Percentage
Wheat
15
50%
Cotton
30%
PRAKASH MBA
Gold
20%
Findings
From the above table and chart, it can be seen that 50% of the respondents want
to invest in wheat and 30% want to invest in cotton commodity futures
Interpretation
It can be concluded that most of the respondents want to invest in wheat
commodity futures.
21) factors you take into consider while invest in commodities?

Particulars
No. Of Respondents
Percentage
Global economy
10
33%
Availability
14
47%
PRAKASH MBA
others
06
20%
Findings
From the above table and chart, it can be seen that 33% of the respondents
consider global economy as a factor before investing commodity future 20% consider
in
Other factors in commodity futures.
Interpretation
It can be concluded that most of the respondents consider availability of
commodities in commodity futures
22) factors to be taken care while investing commodity market comparing

to equity market factors you take into consider while invest in
commodities?
Particulars
No. Of Respondents
Percentage
market
16
54%
liquidity
10
33%
PRAKASH MBA
Lot size
04
13%
Findings
consider market as a factor 10% consider lot size
Interpretation
It can be concluded that most of the respondents consider market comparing
others.
23) Which kind of settlement you do ?

Particulars
No. Of Respondents
Percentage
Physical
18
60%
Cash
12
40%
PRAKASH MBA
Findings
settle transaction through physical and others through cash.
Interpretation
It can be concluded that most of the respondents settle transaction through
physical settlement .
C H APTE R 5 - FIND IN GS
From the analysis made in the previous chapter the following findings can be derived:
There is awareness of commodity market in the eyes of investors.
PRAKASH MBA
Investors consider factor like global economy, availability of commodity and

others things during investing in commodity and earn money by doing
technical and fundamental analysis from their brokers.
Person between age of 20-40 years are more active player in the commodity
trading and 10-30 % of their income are invested in market. Most of them
believe that return derived from commodity are good and reasonable.
There has been seen that most of private sector employees and business person
invests in commodity market. Media and friends are powerful communicating

networks for expansion.
It has been that, respondents are investing their income in diversified portfolio
and less risky assets and 50% of respondent takes short position in the market.
It has been seen that about 67% investor are doing fundamental technical
analyses.
There has been seen that coffee, wheat and cotton are more dealing commodity
and investor believe that commodity market have good opportunist market in
future and most of investor invest when there is favorable price in market.
Respondent also invest in share and mutual fund etc. other then commodity
market to diversified their investment risk and most of investor have mix
experience (good and bad) in commodity market and respondent view that
coffee, silver and soybean are most volatile commodity.
The commodity futures markets are experiencing a good growth in the recent
past.
This can be emphasized by the fact that the trading volume of most
commodities is increasing.
C H APTE R 6 - C ON C LUS ION

Now a days investor become more careful in investment with considering the factor
like global economy, availability of commodity etc..
PRAKASH MBA
In the trading system people consider above factor for investment so we can conclude
that investor are more moving towards the exchange traded market
The trading system also includes trading and intermediary participants, who ensure
the correct price discovery. Thus, the trading system is one of the factors, which
reduce the risk in commodity futures.
In the commodity market various risk are involved but here with the help of the
fundamental and technical analysis they are reducing their risk.
It can be concluded that one can use commodity futures for the hedging purposes
rather than for the speculative
This can be emphasized by the fact that there has been an increasing trend in the
volume traded in most of the commodities. Thus, commodity futures are a growing
market.
from all the above conclusions of it can be concluded, commodity futures can be
used as a risk reduction and a sound investment instrument
C H APTE R 7 R E C O M EN D ATAT I ONS

Since commodity futures are a new concept, more awareness must be created
by marketing this investment instrument appropriately.
PRAKASH MBA
If the minimum investment is reduced, this might induce more people to invest
in
commodity future.
As commodity market are growing so one should trade in exchange traded

market rather than the OTC market
As commodity market growing so all groups of people must be asked to invest
in commodity futures.
one should take better position with the help of fundamental and technical
analysis
It is not a necessity that one must be very educated to invest in commodity
futures. So, it is recommended that those who are not so well educated also can
invest in commodity futures.
It is recommended that now a days investor should invest in agriculture
commodity because within the few days few of agriculture commodity are
coming up with huge quantity.
C H APTE R 8 B IB L I O G R APH Y
PRAKASH MBA
Books
Future, option and other derivatives

Author
-John C Hull 4th
Futures & Option
Author
-N.D. Vohra
-Bagri B.R. 2nd
Websites
www.rbi.org
www.sebi.com
www.mcx.com
C H APTE R 9 APPEND I C ES/ANNE XU R ES

Questionnaire to know the views of investors
PRAKASH MBA
NOTE: This is the clarification that the information, which is provided by you, is used
only for researchs perspective and not for any other purpose. In addition, it is assured
that your identity would not be disclosed to any one at any cost
PART A
1) Name:
2) Sex:
Male
Female
3) Age:
20-30 Years
30-40 years
40-50 years
Above 50 years
4) Education:
Higher secondary
Graduation
Post-graduation
5) Occupation:
Government employee
Self-employee
Commodity futures analyst
Private sector employee
Businessman
Others ____________
6) Income:
Below 4 lakh
4,00,001 10,00,000
10,00,001 25,00,000
Above 25,00,000
PART B
1) Have you invested in commodity futures?
Yes
PRAKASH MBA
No
2) Have you invested in any other security?

Yes
No
3) Which are the investments you have made (excluding commodity futures)?
Shares
Bonds
Mutual funds
Bank deposits
Real estate
Jewelry
Others ___________
4) What is your experience in your previous investment (excluding commodity
futures)?
Good
Reasonable
Bad
5) How often do you trade in commodity futures?

Everyday
Once a week
Trade only when there is a good price

6) What is your objective when trading in commodity futures?
Less risky investment
Diversification of portfolio
Very good returns
Others ______________
7) What is the amount you have invested in commodity futures?

2,00,000
2,00,001-3,00,000
3,00,001-5,00,000
5,00,000 and above
PRAKASH MBA
8) What type of trade do you prefer the most?

Short Term Position
Medium Term Position
Long Term Position

9) Which commodities have you traded in the most?
a. _________________
b. _________________
c. __________________
10) Do you, as a client use fundamental/technical analysis when giving an order?
Yes
No
11) Which commodity do you think is the most volatile?

_________________________
12) What percentage of savings have you invested in commodity futures?

0-10%
20-30%
10-20%
30-50%
50% and above
13) How did you get to know about commodity futures trading?
Friends/family
Self-research
Media
Others ______________
PRAKASH MBA
14) What do think about the felicitation fee charged by your company?
Very high
High
Reasonable
Low
15) What do you think about the margin requirement charged by your company?
Very high
High
Reasonable
Low
16) Do you think there is future in commodity future trading, in the present economy?
Yes
No
Cant say
17) What do you think of the return derived from commodity futures?
Good
Reasonable
Bad
18) Do you think commodity future is a good investment opportunity?

Yes
No
19) which type of trader you are?

Hedger
speculator
arbitrager
20) In which commodities you would like to invest in future and why?
__________________________________________
21)factors you take into consider while invest in commodities?
__________________________________________
PRAKASH MBA
22)factors to be taken care while investing commodity market comparing to equity

market?
_______________________________________
23) Which kind of settlement you do ?

Physical
PRAKASH MBA
cash

C Hapter 1 - R Esear CH M Ethdolog Y: Objective of The Study

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C H APTE R 1 - R ES E A R C H M E T H DO LO G Y

Objective of the Study

Tools for Data Collection

Analyses and Interpretation

Limitations and Constrains

- INVESTOR S PERC E PTION

C H APTE R 2 I N TODU CT ION TO IND I AN

i). Financial institutions

- INVESTOR S PERC E PTION

ii. Financial Markets

These markets comprise of corporations, financial institutions,

The financial transactions, which take place outside the well-established

- INVESTOR S PERC E PTION

Chart showing the Indian Financial System

iii. Financial instruments

- INVESTOR S PERC E PTION

iv. Financial services

2. THE UNORGANIZED SECTOR

Legislations passed by the RBI Relating to Foreign Investments

(2.1) - GUI DE LI NES B Y THE R BI PERTAI NING TO CO M M O D IT Y

- INVESTOR S PERC E PTION

i. All standard exchanges traded futures will be permitted.

- INVESTOR S PERC E PTION

After grant of approval by Reserve Bank, the corporate concerned should

(2.2) - SECURITIES A N D E X C H A NGE BO A R D OF IN DI A (SEBI)

- INVESTOR S PERC E PTION

SEBI guidelines for COMMODITY FUTURES TRADING

- INVESTOR S PERC E PTION

Report of the committee appointed by the SEBI on participation by

Participation of Securities Brokers in Commodity Futures Market

o The committee was of the unanimous view that participation of intermediaries

- INVESTOR S PERC E PTION

commodities markets only through a separate legal entity, the committee

III) Utilization of existing infrastructure of stock exchanges

On the issue of convergence/integration of the securities market and

SEBI SIGNS MOU WITH COMMODITY FUTURE TRADING

- INVESTOR S PERC E PTION

Regulatory framework in India

(3.1) - INTRODUCTION TO D E RI VATI VE S IN D U STRY

- INVESTOR S PERC E PTION

A derivative is a security or contract designed in such a way that its price is

Kinds of financial derivatives

- INVESTOR S PERC E PTION

Types of futures contracts

- INVESTOR S PERC E PTION

different grades or types of commodities in question. The contract months

- INVESTOR S PERC E PTION

In an option contract, the seller is usually referred to as writer,

- INVESTOR S PERC E PTION

A commodity swap is an arrangement by which one party (a commodity

(3.2) - INTROD UCTION TO CO M M O D IT Y FUTURES

THE HISTORY OF TRADING

- INVESTOR S PERC E PTION

of the 19th century.

Commodity Futures Trading

- INVESTOR S PERC E PTION

A good low-risk portfolio diversifier

- INVESTOR S PERC E PTION