Commodity derivative Trading

Module 4
 Rice Tickets
• In Japan, merchants 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
 Chicago Spot
• The concept of organized trading in commodities evolved in the
middle of 19th century, in Chicago, United states. Chicago had
emerged as a major commercial hub with railroad and telegraph-
lines connecting it with the rest of the world, thereby attracting
wheat producers from Mid-west to sell their produce to the dealers
and distributors. However, lack of organized storage facilities and
the absence of a uniform weighing/grading mechanism often
confined them to the mercy of dealer’s discretion.

• This led to inherent need to establish a common meeting place

both for farmers and dealers to transact in “spot” grain – to
deliver wheat and receive cash in return. This happened in 1848.
 Evolution Of Forwards
• Gradually the farmers (sellers) and dealers (buyers) started
to make commitment to exchange the produce for cash in
future.
• whereby the producer would agree to sell his produce
(wheat) to the buyer at a future delivery date at an agreed
upon price.
• This prompted the entry of traders in the future market
that had no intentions to buy or sell wheat but would
purely speculate on price movement in the market to earn
profit.
• during 1848, the Chicago board of trade was established
• In the 1870s and 1880s the New York coffee, cotton and
produce exchange were born.
• The largest commodity exchange in USA are the Chicago board
of trade, The Chicago mercantile exchange, The New York
mercantile exchange, the New York commodity exchange and
the New York coffee, sugar and Cocoa Exchange.
• Worldwide there are major future trading exchange in over
twenty countries including Canada, England, India, France,
Singapore, Japan, Australia, and New Zealand.
• Trading is regulated by an agency of the department of
agriculture called the “commodity future trading commission ”
 HISTORY OF THE COMMODITY MARKET IN INDIA

• Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized
futures market. Bombay Cotton Exchange Ltd. was established in 1893
following the widespread discontent amongst leading cotton mill owners
and merchants over functioning of Bombay Cotton Trade Association.
• 1900 with the establishment of the Gujarati Vyapari Mandali, which carried
on futures trading in groundnut, castor seed and cotton
• Futures trading in bullion began in Mumbai in 1920.
• Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in
raw jute and jute goods. But organized futures trading in raw jute began only
in 1927 with the establishment of East Indian Jute Association Ltd
• Forward Contracts (Regulation) Act was enacted in 1952
• Forwards Markets Commission (FMC) was established in 1953 under the
Ministry of Consumer Affairs and Public Distribution.
 Evolution Indian Commodity Market
A.D. Shroff Committee (1950) has contributed to the following:
I. Draft Bill for Forward Markets Regulation was made,
II. Inputs received from different commercial organizations,
III. Recommended for passage of the Forward Contract Regulation
IV. Recommended for establishment of Forward Market Commission (FMC)
dedicated to regulation of forward markets.
Dantwalla Committee (1966): The important recommendations of the
committee are:
– Review of previous 10 years of functioning of FMC,
– Suggest amendments to FCR(A), 1952,
– Recommended that FMC be made autonomous,
– Futures in export commodities to be allowed,
– Futures contracts are defined,
– Not to have option trading in commodities.
• Khusro Committee (1979): The important recommendations of the committee
are:
– Review role of FMC and analyze commodities markets
– Not all commodities were to be allowed for futures trading
– Laid down the possibilities for specific commodities such as Sugar and Silver
– Condition for trade: Homogeneity of commodity and large supply and demand
– Exporters to be allowed to hedge
• In order to monitor the price movements of several agricultural and essential
commodities, futures trade was completely banned by the government in 1966.
Subsequent to the ban of futures trade, many traders resorted to unofficial and
informal trade in futures.

• However, in India‘s liberalization epoch as per the June 1980 Khusro committee‘s
recommendations, the government reintroduced futures on selected
commodities, including cotton, jute, potatoes, etc.
• Report of the Committee on Forward Markets (KABRA COMMITTEE), September-1994.
The Committee was appointed with the following references:
• 1) To assess :the working of the Commodity Exchanges and their trading practices in India and to
make suitable recommendations with a view to making them compatible with those of other
countries, and,
• To ) To assess the role of the Forward Markets Commission and to make suitable
recommendations with a view to making it compatible with similar regulatory agencies in other
countries so as to see how effectively these agencies can cope up with the reality of the fast
changing economic scenario;
• ii) To review the role that forward trading has played in the Indian commodity markets during the
last 10 years;
• iii) To examine the extent to which forward trading has special role to play in promoting exports;
• iv)To suggest amendments to the Forward Contracts (Regulation) Act, in the light of the
recommendations, particularly with a view to effective enforcement of the Act to check illegal
forward trading when such trading is prohibited under the Act;
• v) To suggest measures to ensure that forward trading in the commodities in which it is allowed
to be operative remains constructive and helps in maintaining prices within reasonable limits;
and
• vi) To assess the role that forward trading can play in marketing/distribution system in the
commodities in which forward trading is possible, particularly in commodities in which
resumption of forward trading is generally demanded.
• Summary of the recommendations of the
Kabra Committee (Chapter VIII of the report):
• The Forward Markets Commission (FMC) and
the Forward Contracts (Regulation) Act, 1952,
would need to be strengthened. The
committee felt that the grower’s participation
in the deliberations of commodity exchanges,
which seem to have minimal hitherto, needs to
be enhanced considerably.
 REGULATORY FRAME WORK

• The Act provides that the commission shall consist

of not less than two but not exceeding four
members appointed by the central govt. to be the
chairman thereof.
• Currently the commission comprises four members
Ramesh Abhishek, IAS
 The functions of the Forward Markets Commission
•(a) To advise the Central Government in respect of the recognition or the withdrawal of recognition from
any association or in respect of any other matter arising out of the administration of the Forward Contracts
(Regulation) Act 1952.

•(b) To keep forward markets under observation and to take such action in relation to them, as it may
consider necessary, in exercise of the powers assigned to it by or under the Act.

•(c) To collect and whenever the Commission thinks it necessary, to publish information regarding the
trading conditions in respect of goods to which any of the provisions of the Act is made applicable,
including information regarding supply, demand and prices, and to submit to the Central Government,
periodical reports on the working of forward markets relating to such goods;

•(d) To make recommendations generally with a view to improving the organization and working of forward
markets;

•(e) To undertake the inspection of the accounts and other documents of any recognized association or
registered association or any member of such association whenever it considers it necessary.

III. The Commission functions under the administrative control of the Ministry of Finance, Department of
Economic Affairs, Government of India.
 OTC vs. Exchanges

OTC Exchange traded

• Skill to Structure • Standard structure
• Counterparty risk • Exchange assume risk
• Terms of contract • Terms defined by Exchange
changeable • High liquidity
• Poor liquidity • Many Players
• Few Players • Margins
• No Margins • Price/Time Priority
• Relationship • Anonymity
• Identity disclosed
Major Commodity Futures & International Exchanges
Commodity Main Exchange Contract Size
Gold COMEX 100 troy ounce
Platinum COMEX 50 troy ounce
Silver COMEX/MCX INDIA 5000 troy ounce
WTI Crude Oil NYMEX, ICE 1000 bbl
Brent Crude ICE 1000 bbl
Natural gas NYMEX 10,000 mmbtu
Wheat CBOT 5000 bu
Milk CME 200,000 lbs
Copper London Metal Exchange 25 MT
Lead London Metal Exchange 25 MT
Zinc London Metal Exchange 25 MT
Tin London Metal Exchange 5 MT
Aluminium London Metal Exchange 25 MT
Nickel London Metal Exchange 6 MT
 The London Metal Exchange (LME) Since 1877

• The LME is the world centre for the trading of industrial $15.4 trillion notional
metals – more than 80% of all non-ferrous metal futures 3.5 billion tonnes
business is transacted on LME platforms. 146 million lots
Record OI of 3M lots.

• Pricing -LME publishes a set of daily reference prices that

are based on the most liquid trading sessions of the day.
They are used the world over by industrial and financial
participants for purposes of referencing, hedging, physical
settlement, contract negotiations and margining and are
indicators of where the market is at any point in time.

• Delivery points of last resort

As a 'market of last resort', the physical non-ferrous metals
and steel industries can use the Exchange's delivery option
to sell excess stock in times of over supply and as a source
of material in times of extreme shortage.
Warehouse Stocks report. This report provides an overview of the quantity of material for each
contract currently held on warrant in LME approved warehouses. The report takes in to account
all movement of stock, on and off warrant, by 1600 (London Time) on the previous business day.
 LME Copper -Warehouse Inventory Report
Copper
   
Cancelled
Country Location Opening Stock Delivered In Delivered Out Closing Stock Open Tonnage
Tonnage

   
Belgium Antwerp 55,700 0 0 55,700 41,225 14,475
Germany Hamburg 0 0 0 0 0 0
Italy Leghorn 1,275 0 0 1,275 1,275 0
Italy Trieste 25 0 0 25 25 0
Korea (South) Busan 60,325 100 0 60,425 42,650 17,775
Korea (South) Gwangyang 22,500 500 1,200 21,800 17,375 4,425
Korea (South) Incheon 4,025 0 0 4,025 3,650 375
Malaysia Johor 24,550 0 0 24,550 24,550 0
Malaysia Port Klang 575 0 0 575 575 0
Netherlands Rotterdam 17,075 0 0 17,075 15,900 1,175
Netherlands Vlissingen 10,150 0 0 10,150 9,500 650
Singapore Singapore 13,700 0 0 13,700 13,325 375
Spain Barcelona 0 0 0 0 0 0
Spain Bilbao 25 0 0 25 25 0
Sweden Helsingborg 0 0 0 0 0 0
UAE Dubai 0 0 0 0 0 0
UK Hull 0 0 0 0 0 0
UK Liverpool 625 0 0 625 625 0
USA Baltimore 0 0 0 0 0 0
USA Chicago 6,125 0 75 6,050 5,975 75
USA Mobile 50 0 0 50 50 0
USA New Orleans 95,000 1,700 475 96,225 95,300 925
USA St Louis 33,650 0 400 33,250 22,500 10,750
   
Total 3,45,375 2,300 2,150 3,45,525 2,94,525 51,000
   
+/-   -550     150    
 The London International Financial Futures Exchange (LIFFE), since 1982
• In 2007 Euronext acquired Major stake in LIFFE Renamed it as NYSE LIFFE
• Total Commodity Derivatives annual volume record of 20,729,525
 NYMEX …………. A CME group

• Earlier in 1872 know as Butter and Cheese EX of NY

• CME group acquired major stake NYMEX in 2008
• 1.6 Million Energy contracts traded
• Futures and options are available for all commodities
• International bench mark for WTI Crude prices
• WTI Crude future contract is open for 4 yrs
• 6 types options are available for trading
• Delivery location Cushing Oklahoma connected International spot market Via
pipeline
 Bursa Malaysia
Biggest palm oil futures trading hub since 1980

Major commodity traded

• Crude palm kernel futures
• Crude palm oil (FCPO)-25mt

Key feature
• 8 Currency are accepted as initial margin
• e-Negotiable Storage Receipts (e-NSRs)
• Avg daily volume 32,000 contacts
• Tie up CME for palm oil future trading
• Shariat compliant futures contracts are also available
 Coffee Futures
• Traded since 1882 in NYBOT ( Currently ICE)
• Two types of coffee are traded on a worldwide basis, Arabica and Robusta.
Robusta is typically sold for 70% of the price of Arabica
• Arabica has better taste but demands high production condition
• Robusta taste is neutral to harsh but They yield more pounds of finished
goods per acre at a lower cost
• Arabica coffee is Mainly traded ICE & Robusta in LIFFE
• Over 90% of coffee production takes place in developing countries, while
consumption happens mainly in United States, Germany, and Italy

Factors impact coffee prices

 Weather
 Supply & Demand
 Arabica Vs Robusta
 Coffee Futures Prices 21.01.2013
Coffee Producing countries % of World Production LIFFE (London) -
Brazil 29% Robusta US $/tonne
Vietnam 15% and cents/lb in
ICE (New York) -
Colombia 11% brackets
Arabica US cents/lb
Indonesia 6% (1 kg = 2.20462 lb) (10 MT contract)
Ethiopia 5%
Kenya Month        Prev.Price   Month  Price
4%
India 4% Mar - 2013 156.3 Jan-13 2020 (91.63)
Mexico 4%
Guatemala
May - 2013 159.1 Mar-13 1970 (89.36)
3%
July - 2013 161.85 May-13 1985 (90.04)
Honduras 3%
Peru 3%
 Indian Commodities Markets
• No Commodity Transaction tax
• Allowing MF , FII & Banks to participate in COMEX
• Arbitrage Opportunities -Alternative source debt investment
• Decontrolling of OIL prices -
 Futures Contracts
• Available on a wide range of underlying assets
• Exchange traded
– Exchange takes over the counterparty risk
• Specifications need to be defined:
– What can be delivered- grade, quality etc
– Where it can be delivered,
– When it can be delivered
• Settled daily

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 Futures Terminology
• Long position- buy position
• Short position- sell position
• Open interest: the total number of contracts
outstanding
– equal to number of long positions or number of short
positions
• Settlement price:
– Daily settlement price: The price just before the final bell each
day
– Final Settlement Price: The spot price of basis center
(Nizamabad in maize) – final settlement of the contract
• Volume of trading: the number of contracts/ quantity
traded in 1 day

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 Margins
• A margin is cash or marketable securities
deposited by an investor with his or her
broker, who in turn places it with the
exchange
• The balance in the margin account is
adjusted to reflect daily settlement
• Margins minimize the possibility of a loss
through a default on a contract

26
 Closing out of open position
• Closing out a futures position involves
entering into an offsetting trade i.e. take
an opposite position to what you already
hold
– E.g. Sell if you have a long position
– E.g. Buy if you have a short position
• Most contracts are closed out before
maturity

27
 Final Settlement of contract
• If a contract is not closed out before maturity,
it can be settled by physically delivering the
underlying asset
– When there are alternatives about what is
delivered, where it is delivered, and when it is
delivered, the party with the short position
chooses.
• Contracts can also be settled in cash

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 Convergence of Futures to Spot
 Convergence happens because of better information as contract comes closer to
expiry

Futures
Price Spot Price

Spot Price Futures

Price

Time Time

(a) (b)

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 Examples of Futures Contract
Ticker MAIZE
Basis Ex-warehouse Nizamabad inclusive of all taxes and
fees
Unit of Trading 10 MT
Delivery Unit 10 MT
Maximum order size 500 MT
Quotation / base value Rs. Per quintal
Tick Size Re.1.00
Delivery Center Nizamabad (within 50 km radius from the municipal
limits)
Additional Delivery Davangere, Karimnagar, Sangli, and Delhi (within 50
Centers km radius from the municipal limits) with location
premium/discount as notified by the Exchange from
time to time

30
 Examples of Futures Contract
Quality Specification Maize with the following specifications:
Count Up to 400 grains per 100 grams basis
Foreign matter 2% max
Broken, 5% max. Out of this, fungus affected grains not more
Damaged/slightly than 1%
damaged and
Immature kernels
Weevilled grains 1% max
Moisture 12% basis
Maize shall be free from any colouring agent, moulds,
fungus, live pests and obnoxious smell
Quantity Variation +/- 5%

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 Examples of Futures Contract
Price band (+/-) 3% followed by (+/-) 1%
Position limits Member-wise: 1,00,000 MT or 15% of market-wide open
position, whichever is higher
Client-wise: 20,000 MT

Near month limits

Member-wise: 25,000 MT or 15% of market-wide near

month open position, whichever is higher
Client-wise: 5,000 MT

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Ring and PIT
Commodity futures contract & its functions

A commodity futures /forward contract is a binding agreement

between a seller and a buyer to give (by the seller) and to take (by
the buyer) delivery of the underlying commodity at a specified
future date with agreed upon payment terms.

In contrast to the forward cash market, futures exchanges provide:

● Rules of conduct
● An organized marketplace
● Standardized trading
● A focal point for collection and dissemination of information
● A mechanism for settling disputes among traders without
resorting to costly and often slow legal systems
● Guaranteed settlement of contractual and financial obligations

02/11/2022 34
 Commodity futures market - what & why?

Commodity Futures Exchange?

It is a central marketplace with established rules and regulations where
buyers and sellers meet to trade futures and options on futures contracts.

Why futures markets?

● Improve economic infrastructure
● Encourage ecosystem for efficient price discovery
● Assign right economic value to ecosystem
● Participants’ contribution
● Transfer risk among heterogeneous market participants

02/11/2022 35
 Key features of a modern exchange
• Well regulated;
• Automated screen-based trading;
• National/global reach;
• Order-driven trading system;
• Transparent, objective and fair system of order matching;
• Identity of the trader undisclosed;
• Daily turnover limits for ‘buy’ and ‘sell’ for each user linked to deposit;
• Flexibility in placing orders;
• Complete online, real-time market information;
• Square-off facility.

02/11/2022 36
02/11/2022 36
 Futures trading vs. traditional marketing

Traditional Agri Futures Trading Benefits from futures

Marketing market
Futures contracts
Emergence of
Trading on Commodities (underlying
Reference Price
commodities)
Open outcry auction Electronic matching of Prevents collusion
Trading Mode
system Trade among traders
Discovery of price on
Buyers and Sellers Local or nearby areas National level
national level
Price for the day Price discovery
Efficient decision by
Price Discovery depending on local depends on national
value chain players
fundamentals fundamentals

Producer/consumers/
Producer and sellers Participative price
Participation investors/arbitrageurs
are price takers discovery
together discover price

Payment mode is on Assured payments to Ensures payment

Counter Party Risk
buyers discretion sellers made to sellers

02/11/2022 37
Commodity market participants

Commercial participants
Non-commercial
Corporates
participants
Farmers
Speculators
Producers Transfer of Arbitragers
Intermediaries Risk
Investors
Merchandisers
Jobbers
Importers
Exporters
 Major participants of derivatives markets

• Hedgers;
– Transfer of undesired risk;
– Prime motive of derivatives;

• Speculators/Investors;
– To gain from the preconceived desirous price movement;
– Accepts hedger’s risk
– Adds much needed liquidity;

• Arbitrageurs;
– Exploit the imbalances between spot and futures or between two futures
market;
– Bring the spot market and futures market or two futures market to
equilibrium.

02/11/2022 39
 Two major functions of commodity futures
markets

• Price Risk Management or Hedging

• Price Discovery

40
 Role of Futures Market

•Transparent, real-time, pan-Indian

Price Discovery
•Benchmark reference prices
•Liquidity to participants
•Neutrality and Anonymity

Price Risk •Risk transfer platform from hedgers/actual users to speculators/traders

•Robust clearing and settlement process

Management •Rigorous surveillance

Futures are the most efficient market mechanisms for price discovery

41
Structure of Indian Commodity Futures Exchanges

SEBI FMC

Commodity Exchanges

National Regional
Exchanges Exchanges

NCDEX NMCE MCX ICEX ACE 21 Regional Exchanges

42
 Regional Commodity Exchange
• 2-Ahmedabad Commodity Exchange Ltd.
• 3-Rajkot Commodity Exchange Ltd, Rajkot
• 4- Surendranagar Cotton& Oilseeds Association Ltd, S.Nagar
• 5- The Rajdhani Oil and Oilseeds Exchange Ltd., Delhi
• 6- Haryana Commodities Ltd.,Sirsa
• 7- India Pepper & Spice Trade Association. Kochi
• 8- Vijay Beopar Chamber Ltd.,Muzaffarnagar
• 9- The Meerut Agro Commodities Exchange Co. Ltd., Meerut
• 10- Bikaner Commodity Exchange Ltd.,Bikaner
• 11- First Commodity Exchange of India Ltd, Kochi
• 12- The Bombay Commodity Exchange Ltd. Mumbai 13- The Central India Commerial Exchange Ltd,
Gwaliar14- Bhatinda Om & Oil Exchange Ltd., Batinda.
• 15- The Spices and Oilseeds Exchange Ltd., Sangli
• 16- The East India Jute & Hessian Exchange Ltd, Kolkatta
• 17- The East India Cotton Association Mumbai
• 18- Chamber of Commerce.Hapur
• 19-Coffee Board
 Commodity Futures Trade Volume in India

Rs. Crore 2009-10 2010-11 Growth (%)

Total Value of Trade 77,64,754.05 119,48,942.35 53.89

Trade in Agri Commodities 12,17,949.04 14,56,389.62 19.58

Trade in Bullion 31,64,152.24 54,93,892.12 73.63

Trade in Metals other than

18,01,636.31 26,87,672.99 49.18
Bullion

Trade in Energy 15,77,882.06 23,10,958.58 46.46

Trade in other commodities 3,134.40 29.04 -99.07

 About NCDEX
• Established in the year 2003 by reputed institutions like
ICICI Bank, LIC, NABARD, NSE etc.
• Trading commenced in 2004
• Largest exchange in India for agricultural commodities
• Legacy of institution building and robust business
policies inherited from promoters
• Professional management, qualified and competent
manpower at all levels
• More than 1000 members, 1.3 million MT warehouse
capacity, 50,000 MT deliveries every month

45
02/11/2022
46
Business Function of MCX
Online monitoring at exchange level

• Price Volatility

• Daily Price Range ( DPR )

• Circuit filters

• Max. order size

• Trading pattern of Futures Market as compared to Spot Market

• Margin Utilization by Members

• Mark-to-Market of Members

• Commodity wise - Maximum Allowable Open Position

 Trading Mechanism: Basics
• Contracts are launched with a duration of 4-6 months to expiry
• During the life of futures contracts, participants can sell or buy futures
contracts depending on their price view and requirements
• Participants can exit, during life of contract, by entering an opposite
position
– Long (buy) contract, then short (sell) contract
– Short (sell) contract, then long (buy) contract
• A trade between buyer and seller happens when order price of buyer &
seller matches
• Trade happens on Price Time Priority basis
– Highest buy price is best buyer price
– Lowest sell price is the best seller price
• If opened positions are not closed till expiry, then they enter into
exchange delivery mechanism

02/11/2022 49
National Multi Commodities Exchange (NMCE)

• National Multi Commodity Exchange of India

Limited (NMCEIL) is the first de- mutualized
Electronic Multi Commodity Exchange in India. On
25th July 2001 it was granted approval by
Government to organize trading in edible oil
complex. It is being supported by Central
warehousing Corporation Limited, Gujarat State
Agricultural Marketing Board and Neptune Overseas
Limited. It got reorganization in Oct 2002. NMCEIL
Head Quarter is at Ahmedabad.
 To qualify as a commodity for futures trading, an article or product has to meet some basic characteristics :

1. The product must not have gone through any complicated manufacturing activity, except for
certain basic processing such as mining, cropping, etc. In other words, the product must be in a
basic, raw, unprocessed state. There are of course some exceptions to this rule. For example,
metals, which are refined from metal ores, and sugar, which is processed from sugarcane.
2. The product has to be fairly standardized, which means that there cannot be much
differentiation in a product based on its quality. For example, there are different varieties of
crude oil. Though these different varieties of crude oil can be treated as different commodities
and traded as separate contracts, there can be a standardization of the commodities for futures
contract based on the largest traded variety of crude oil. This would ensure a fair representation
of the commodity for futures trading. This would also ensure adequate liquidity for the
commodity futures being traded, thus ensuring price discovery mechanism.
3. A major consideration while buying the product is its price. Fundamental forces of market
demand and supply for the commodity determine the commodity prices.
4. Usually, many competing sellers of the product will be there in the market. Their presence is
required to ensure widespread trading activity in the physical commodity market.
5. The product should have adequate shelf life since the delivery of a commodity through a
futures contract is usually deferred to a later date (also known as expiry of the futures contract).
Market timing
 Daily Turnover
SEGMENTS MCX
Turnover (In Crs) % of Total Turnover Trades % of Total Trades
BULLION 18,994.59 46.09 267787 40.21
ENERGY 12,088.54 29.33 150812 22.65
METAL 9,634.50 23.38 234175 35.17
ARGI COMM 468.75 1.14 12021 1.81
GUAR 29.94 0.07 1118 0.17
TOTAL 41,216.32 100.00 665913 100.00
Price Volatility of MCX Benchmark
Commodity Futures

Daily Price Volatility of MCX Benchmark Commodity Futures

Years Gold Silver Crude Oil Copper

2006 1.34% 2.71% 1.48% 2.17%

2007 0.78% 1.31% 1.36% 1.59%

2008 1.54% 2.10% 2.60% 2.33%

2009 1.11% 1.60% 2.99% 1.93%

2010 0.74% 1.33% 1.37% 1.32%

2011 1.13% 2.39% 1.84% 1.51%

2012* 0.60% 0.95% 1.86% 2.8%

* Till Aug, 2012

 Commexes role in price discovery

• Price awareness

Enabling
Price informed
Price Better price
Discovery Price Signals Disseminatio sowing/sellin realisation
n g decision
making

• Better cropping decision – Better Marketing Decision – Surplus for saving –

Access to credit through commodity collaterals - Credit to growers against
warehouse receipts at competitive T&C

02/11/2022 56
Commexes role in financial inclusion - serving all in the pyramid chain

Price Discovery Empowerment for farmers

Risk Management Platform to hedge their risks

Warehouse based Lower haircut margins, lower

funding interest rates for farmers

Integration of rural, Increasing the farmers share

urban and global markets in consumers rupee

02/11/2022 57
Commodities derivatives trading across global
exchanges (in million contracts traded)

Segment Jan-June 2010 Jan-June 2011

Futures
Agricultural sector 446.9 348.6
Energy sector 144.4 180.8
Precious metals 48.3 82.4
Non-precious metals 295.9 180.3
Total 935.6 792.1
Options
Agricultural sector 1.4 2.4
Energy sector 0.7 1.9
Precious metals 0.3 0.6
Non-precious metals 4.1 4.1
Total 6.4 8.9
Total Futures and Options 942.0 801.0
Source: Futures Industry Association

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Global exchanges in developed and emerging economies
TDX, Turkey (74)
Gold, Wheat, Cotton

LME, UK
(146)
Aluminium, Copper,
TOCOM, Japan
Zinc (31)
Gold, Platinum, Rubber

CME, US SHFE, China

(1804) (308)
Gold, Crude Oil, Steel, Zinc, Copper
Corn

MCX, India (345)

Crude oil, Silver, Gold

BMD, Malaysia (8)

Crude Palm Oil

Figures in brackets refer to annual volume in million lots in 2011

Source: Futures and Options Intelligence, MCX
Top commodity futures exchanges in the world in
2011 (in no. of contracts)*

*Source: Data published for the period between January 1 and June 30 on the websites of the exchanges
and FIA Report.
Note: Volume is expressed in terms of number of contracts traded. This data is for a single-sided trade.

02/11/2022 60
 Trading Mechanism: Basics
• Contracts are launched with a duration of 4-6 months to expiry
• During the life of futures contracts, participants can sell or buy futures
contracts depending on their price view and requirements
• Participants can exit, during life of contract, by entering an opposite
position
– Long (buy) contract, then short (sell) contract
– Short (sell) contract, then long (buy) contract
• A trade between buyer and seller happens when order price of buyer &
seller matches
• Trade happens on Price Time Priority basis
– Highest buy price is best buyer price
– Lowest sell price is the best seller price
• If opened positions are not closed till expiry, then they enter into
exchange delivery mechanism

02/11/2022 61
 Types of Delivery Logics
• Types of delivery logics on national commodity exchanges
– Both option (intention matching) contracts
• Examples: Crude oil, Silver 1 KG, Copper & other base metals
– Sellers’ option contracts
• Examples: Kapas (Raw cotton)
– Compulsory delivery contract
• Most of all agricultural commodities & Gold contracts (Gold 1 KG,
Gold 100 grams, Gold Guinea (8 grams) and Gold Petal (1 gram)

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 Delivery Allocation

• Delivery marking
– Staggered delivery mechanism
• Example: Potato 1st to 15th of delivery month
• Gold 1 KG between 1st to 5th of delivery month
• Seller’s option till 15th calendar day of delivery month
• Marked to buyers
– Priority to those who shown interest
– Residual on a proportional basis

• All outstanding position s on the last day of expiry in a compulsory delivery

contract are marked for delivery – both sellers & buyers have to perform the
obligation
• Penalty for non performance on the sellers
– Example: Cardamom 6% of deliver price on sellers
– Buyer will be compensated for a loss on account of sellers
• No option to default for buyers
– Auction mechanism

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 Deliverable/Non Last Day Contract Expiry
Commodity Delivery Intention Major Delivery center time
Crude Non delivery Both Mumbai 11.30 PM

Gold Deliverable Compulsory Ahmedabad ,Mumbai 11.30 PM

Silver Deliverable Compulsory Ahmedabad ,Mumbai 11.30 PM

Copper Non delivery Both Mumbai 6.00 PM
Zinc Non delivery Both Mumbai 6.00 PM
Nickel Non delivery Both Mumbai 6.00 PM

Steel Deliverable Compulsory Raipur 5.30 PM

Lead Non delivery Both Mumbai 6.00 PM
Aluminium Non delivery Both Mumbai 6.00 PM

potato Deliverable Compulsory Agra 5.00 PM

almond Deliverable Compulsory Delhi,Mumbai 5.00 PM

mentha oil Deliverable Compulsory Chandausi 5.00 PM

 Hedging
• Hedging is a strategy used in futures markets to protect
one’s asset from adverse price changes and minimize risks
• Hedging is a loss minimizing strategy or a way of fixing
your cost for the time till which you take position in
futures exchange
• At any given point there are a number of contracts which
are simultaneously running (e.g. currently contracts
expiring from August till October 2009 are available for
trading and soon contracts expiring in Nov and Dec 2009
will be launched)
 What about hedging
• Hedging is for managing your price risk
• Hedging is not just about futures market and trading in
futures contract
• Its about integration of spot transaction with futures
transactions to fix the cost of feed inputs
• By hedging for all months of the year, you are ascertaining
your cost of maize for full year
• After you start hedging for maize you have to take care of
only the output – poultry, eggs etc. and not worry about
maize prices
• How does it work…

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 Risks faced by an Enterprise

Foreign exchange risk

•Commodity price risk includes:

Interest rate risk
• Increase in input cost vis-à-vis
commitment on sales price
Commodity price risk • Change in value of inventory
• Counterparty risk translating into
commodity price risk
Credit risk

Operational risk

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Specific Risks Faced by Poultry Industry

Prices of feed inputs (maize, soya meal)

keep fluctuating throughout the year

Prices of egg and broiler determined by their

demand-supply conditions

Increase/decrease in feed prices cannot

always be passed on to consumers

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What options does a poultry farmer
have?
Option 1
Buy entire •High storage cost
•Capital blocked
year’s •Cost of obsolescence (quality
requirement at deterioration)

one time

Option 2
Buy at regular •No control over input costs
•Losses due to fluctuation in prices
intervals and •High price risk for end produce

store

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