Commodity Markets defined • Commodity: Any tangible item that can be bought and sold.
• SPOT MARKET-Mandis
• FUTURES MARKET-Exchanges
Inflation adjusted returns in the developed markets •
Returns greater than bonds and almost equivalent to stocks
•
Risk is lower than investing in stocks U.S.
U.S.
U.K.
Major International Exchanges Goldman Sachs Commodity Index Fertilizer.Dairy,etc Agricultural: corn, soybean, oats, wheat etc Metals :gold,silver
COMMEX
Gold,Silver
Precious Metals and Energy
Base Metals,Plastics
Indian Scenario • More than 100 years old market • Regional exchanges - Bombay Cottons Exchange - India Pepper and Spice Trade Association - National Board of Trade etc. • Year 2003 - Landmark year - Organized Trading at National Level
Premier Exchanges
• Organized National level exchanges • Professionally managed • Demutualised setup
T h e C o m m o d it ie s P r e c io u s M e ta ls
B a s e M e ta ls
A g r ic u ltu r e
E n e rg y
O ils a n d O il S e e d s
S o fts
G o ld S ilv e r
S te e l C opper N ic k e l T in
C e r e a ls P u ls e s S p ic e s e tc
C r u d e O il
S o y a O il C a s to r S e e d s M u s ta r d O il
C o tto n Sugar
ďƒ˜ More than 70 commodities listed in a short span of 2 years ďƒ˜ Record Volume seen in many commodities
NCDEX
Promoters
Expiry
Actively traded commodities
MCX
Financial Technologies ICICI Bank,LIC, (India) Ltd., SBI, HDFC NABARD,NSE,PNB,CRISIL, Bank, Union Bank of India, B O I, BOB, Canara Bank, Canara Bank,IFFCO Corp. Bank and more. 20th of contract month for most of the commodities or as specified
15th or 5th of the contract month,as specified for the particular commodity
Agro- commodities,Mild Steel ingots
Gold,Silver,Crude Oil
Average volumes of commodities traded Commodity
Exchange
Avg.volume per day
Gold
MCX
5,42,800 kgs
Silver
MCX
10,55,730 kgs
Crude
MCX
5,03,700 bbl
Refined Soya Oil
NCDEX
21,000 MT
Soybean, Guar seed
NCDEX
12,000 MT
Mild Steel Ingots
NCDEX
6,100 MT
Spices(jeera,turmeric,chilly,pepper)
NCDEX
1,800 MT
Chana,Urad,Wheat
NCDEX
30,000 MT
Sugar M
NCDEX
10,500 MT
Guar gum
NCDEX
1,37,000 MT
Medium staple cotton
NCDEX
1,500 bales
R e g u la t io n M in is t r y O f C o n s u m e r A f f a ir s F o r w a r d s M a r k e t C o m m is io n E x c h a n g e s B ro k e rs /T ra d e rs
The Potential-AGRO ECONOMY •
Constitutes 22% of GDP
•
Provides food to 1Billion people
•
Sustains 65% of the population : helps alleviate poverty
•
Produces 51 major Crops
•
Provides Raw Material to Industries
•
Contributes to 1/6th of the export earnings.
Participants Participants
Hedgers Hedgers
Producer Producer
User User
Importer Importer
Exporter Exporter
Arbitragers Arbitragers
Investors Investors
Gain from price Gain from price differentials differentials
Individuals Individuals Actively ActivelyManaged ManagedFunds Funds
The Commodity Hedger • Risks faced by Commodity Users and Producers • Price Volatility • Types of Hedges • Corporates currently benefitting from the market
Risks faced by Commodity Users and Producers Commodity enterprises faces two types of Risks • PRICE RISK • QUANTITY RISK(eg from weather) HEDGING REDUCES PRICE RISK
Price Volatility - Prices of commodities volatile due to
850 830
Price / Qtl
- Demand Supply mismatch
Wheat
870
810
12% Rise
13% Fall
790 770 750
- Erratic Monsoon
6/ 7/ 20 04 9/ 7/ 2 07 00 4 /1 3/ 2 07 004 /1 6/ 2 07 004 /2 0/ 2 07 004 /2 3/ 2 07 004 /2 7/ 2 07 004 /3 0/ 20 04 3/ 8/ 20 04 6/ 8/ 20 10 0 4 /8 /2 08 004 /1 3/ 2 08 004 /1 7/ 2 08 004 /2 0/ 2 08 004 /2 4/ 2 08 004 /2 7/ 20 08 04 /3 1/ 20 04 3/ 9/ 20 04 7/ 9/ 20 10 0 4 /9 /2 09 004 /1 4/ 2 09 004 /1 7/ 20 04
730
Date
Sugar M-30 (NCDEX)
- Import – Export restrictions
2000 1950 1900
- Spoilage during storage
Price / Qtl
1850 1800
23.66 % Rise
1750 1700 1650 1600
- Substitute demand etc.
1550 11/01/2004
11/16/2004
11/30/2004
12/14/2004 Date
12/30/2004
01/13/2005
01/28/2005
Types of Hedges Long hedge Hedge against increase in cotton prices(e.g. Textile companies)
Short hedge Hedge against decrease in prices(e.g.Steel ,Rubber,Oil producers)
Commodity – Tool of Hedging Wheat Physical Stock 200 Tons @ 750/qtl
200 tons sold in Futures @ 800/qtl
Price down to 680/qtl
Settlement at 680qtl
Loss of Rs. 70/qtl
Profit of Rs. 120qtl
Profit of Rs 50 qtl
Corporates currently benefitting from the market
Portfolio Diversification Correlation Coefficient in the Indian Markets
• Diversification reduces risk • Downside risk is limited -Residual Value
GOLD SILVER
STOCKS BONDS
GOLD
SILVER
STOCKS
BONDS
1
0.89
0.206
0.741
1
-0.099
0.146
1
0.112 1
Types of Arbitrage • Calendar Spread Arbitrage • Inter exchange Spread Arbitrage • International Spread Arbitrage • Spot Future Arbitrage
Calendar Spread Arbitrage • Exploiting the convergence of price between two contract. • Example Chana 20 Dec05
1900
1901
Chana 20 Jan05 1954 1955 Spread between the two contract months is 53 On expiry Chana 20 Dec05
1910
1911
Chana 20 Jan05
1912
1913
Spread between the two contract months is 2
International Spread Arbitrage • Prices in India are derived from International prices. • Exploiting the mismatch in parity
NYMEX Crude
60.35
INR
46.23
Fair Value (Rs.)
2790
MCX Crude (Rs.)
2820
Difference
30
Spot – Future arbitrage • Steps in Arbitrage Process •1)
Spot Purchase and spontaneous future sale
•2)
Goods warehoused within 4 to 5 days and payment to
•
Supplier towards spot purchase
•3)
Goods certified in next 5 days
•4)
Goods dematerlization in next 2 days
•5)
Delivery on the expiry of Future Contract
•6)
Release of Client fund along with his profit.
Obligation of Client No taxation obligation (Sales Tax etc.) is being done on part of client. We have our sales tax registration at every state in name of Navratan Comdex Pvt Ltd. So whatever are the taxation formalities, we will complete on behalf of client. Risk Parameter No risk is involved in spot future arbitrage since profit in the arbitrage sauda is locked at its initiation itself. There might be a slight diversion of Annualized Approximate Return due to uncontrolled upward move of commodity prices since we have to call MTM Loss Money for the time prices come down again. But the absolute amount of profit will not be changed anyhow.
Formalities If a client wants to do arbitrage, client has to open a Trading Account and a Demat Account with us. Trading Account is required to initiate futures sauda and Demat Account is necessary to get demat goods in client account. Except this no other obligation is due on client part.
Investment Client has to pay his purchase cost of goods along with all expenses (warehousing charges, spot commission, our commission, we will incur on his behalf. The client will pay further, specified margin for the future sale sauda.
Milestones achieved • NCDEX unveils India's first agriculture index. • NCDEX peak daily turnover of 4271cr. • MCX clocks record volume in Crude Oil contracts. Peak Daily Volume of 9,26,500 Barrels • MCX registered 602kgs of physical deliveries of GOLD february contract
Sample Contract Specification Specifications
GOLD
SUGAR
Trading unit
1 kg
10MT
Quotation/Base Value Market Price
Rs/10gms
Rs/100kg
Rs 7760
Rs 1800
Lot Value
Rs 776000
Rs 180000
Total Margin *
5%
10%
Delivery unit
1 kg
10 MT
* Margin is changed from time to time depending upon volatility ,time to expiry etc.
Client Registration Form (CRF) • Individual / HUF
• Non –Individual --Company/ Firms/ Trust
Documents Required • Photo with signature across. • Name , Address, Tel. No. • Birth Date & Occupation. • Bank A/c details • IT PAN No. or 49A / Form 60 • Introducer’s Name & Signature • Signature of Client • Manager (Person in charge) Signature
Documents Required • Certified true copy of Board Resolution • Certified true copy of Audited Final A/cs for the latest year. • Copy of IT Return, if possible • Certified true copy of MOA/ AOA / Partnership Deed / Trust Deed • Details of 2 key persons * Photo with signature across * Name, Address, Tel. No. * Birth Date & Designation * Copy of any one of the specified documents * Signature of key person.
The Edge • Early movers in the commodities business • Integrated wealth management solutions across global financial markets • Propriety Global economic and investment strategy research • Sophisticated asset allocation and risk modeling processes • Seasoned team of professionals • Local strength –Underpinned by network of national offices • Multiple dealing terminals for better Client servicing