The role of commodity markets in price risk

India has long history of trade good hereafters trading, widening over 125 old ages. As the state embarked on economic liberalisation policies and signed the GATT understanding in the early 1890ss, the authorities realized the demand for hereafters merchandising to beef up the fight of Indian agribusiness and the trade good trade and industry. Futures merchandising began to be permitted in several trade goods and the ushering in of the twenty-first century saw the outgrowth of new national trade good exchanges with nationwide range for trading in about all primary trade goods and their merchandises.

A trade good hereafters contract is basically a fiscal instrument. Following the absence of hereafters merchandising in trade goods for about four decennaries, the new coevals of trade good manufacturers, processors, market officials, fiscal organisations, broking bureaus and investors at big are, unluckily, unaware at nowadays of the economic public-service corporation, the operational techniques and the fiscal advantages of such trading.

9.2 Meaning of Commodity and Commodity exchange

Commodity includes all sorts of goods. FCRA defines “ goods ” as “ every sort of movable belongings other than actionable claims, money and securities ” . Futures ‘ trading is organized in such goods or trade goods as are permitted by the Cardinal Government. At present, all goods and merchandises of agricultural ( including plantation ) , mineral and fossil beginning are allowed for hereafters merchandising under the protections of the trade good exchanges recognized under the FCRA. The national trade good exchanges have been recognized by the Cardinal Government for forming trading in all allowable trade goods which include cherished ( gold & A ; silver ) and non-ferrous metals ; cereals and pulsations ; ginned and un-ginned cotton ; oil-rich seeds, oils and oilcakes ; raw jute and jute goods ; sugar and Gur ; murphies and onions ; java and tea ; gum elastic and spices, etc.

A trade good exchange is an association or a company or any other organic structure corporate organizing hereafters trading in trade goods. Soon four national degree trade good exchanges are operational which are:

i. Multi Commodity Exchange of India Ltd. ( MCX ) located at Mumbai

two. National Commodity and Derivatives Exchange Ltd ( NCDEX ) located at Mumbai

three. National Board of Trade ( NBOT ) located at Indore

four. National Multi Commodity Exchange ( NMCE ) located at Ahmedabad

9.3 Futures contract and Commodity hereafters contract

A hereafters contract is a type of “ forward contract ” . FCRA defines frontward contract as “ a contract for the bringing of goods and which is non a ready bringing contract ” . Under the Act, a ready bringing contract is one, which provides for the bringing of goods and the payment of monetary value therefore, either instantly or within such period non transcending 11 yearss after the day of the month of the contract, capable to such conditions as may be prescribed by the Cardinal Government. A ready bringing contract is required by jurisprudence to be fulfilled by giving and taking the physical bringing of goods. In market idiom, the ready bringing contracts are normally known as “ topographic point ” or “ hard currency ” contracts.

All contracts in trade goods supplying for bringing of goods and/or payment of monetary value after 11 yearss from the day of the month of the contract are “ forward ” contracts. Forward contracts are of two types – “ Specific Delivery Contracts ” and “ Futures Contracts ” . Specific bringing contracts provide for the existent bringing of specific measures and types of goods during a specified future period and in which the names of both the purchaser and the marketer are mentioned.

A trade good hereafters contract is a tradable standardized contract, the footings of which are set in progress by the trade good exchange forming trading in it. The hereafters contract is for a specified assortment of a trade good, known as the “ footing ” , though rather a few other similar assortments, both inferior and superior, are allowed to be deliverable or tenderable for bringing against the specified hereafters contract.

The quality parametric quantities of the “ footing ” and the allowable tenderable assortments ; the bringing months and agendas ; the topographic points of bringing ; the “ on ” and “ off ” allowances for the quality differences and the conveyance costs ; the tradable tonss ; the manners of monetary value quotation marks ; the processs for regular periodical ( largely daily ) glades ; the payment of prescribed glade and border monies ; the dealing, glade and other fees ; the arbitration, study and other difference righting methods ; the mode of colony of outstanding minutess after the last trading twenty-four hours, the punishments for non issue or non-acceptance of bringings, etc. are all predetermined by the regulations and ordinances of the trade good exchange.

Consequently, the parties to the contract are required to negociate merely the measure to be bought and sold and the monetary value. Everything else is prescribed by the Exchange. Because of the standardised nature of the hereafters contract, it can be traded with easiness at a minute ‘s notice.

9.4 Difference between Commodity Physical and Futures market

The physical markets for trade goods deal in either hard currency or topographic point contract for ready bringing and payment within 11 yearss or forward ( non hereafters ) contracts for bringing of goods and/or payment of monetary value after 11 yearss. These contracts are basically party to party contracts and are fulfilled by the marketer giving bringing of goods of a specified assortment of a trade good as agreed to between the parties. Rarely are these contracts for the existent or physical bringing allowed to be settled otherwise than by publishing or giving bringings. Such state of affairss may originate when unanticipated and uncontrolled fortunes prevent the purchasers and Sellerss from having or taking bringings. The contracts may so be settled reciprocally.

Unlike the physical markets, hereafters markets trade in hereafters contracts which are chiefly used for hazard direction ( fudging ) on trade good stocks or forward ( physical market ) purchases and gross revenues.

Futures contracts are largely offset before their adulthood and hence, barely end in bringings.

Speculators besides use these hereafters contracts to profit from alterations in monetary values and are barely interested in either pickings or having bringings of goods.

9.5 Price Risk Management- Role of Commodity Futures

The two major economic maps of a trade good hereafters market are monetary value hazard direction and monetary value find. Among these, the monetary value hazard direction is by far the most of import function of a trade good hereafters market. The demand for monetary value hazard direction, through what is normally called “ hedge ” , arises from monetary value hazards in most trade goods. The larger, the more frequent and the more unanticipated is the monetary value variableness in a trade good, the greater is the monetary value hazard in it.

Whereas insurance companies offer suited policies to cover the hazards of physical trade good losingss due to fire, pilferage, conveyance bad lucks, etc. , they do non cover likewise the hazards of value losingss ensuing from inauspicious monetary value fluctuations. The ground for this is obvious. The value losingss emerging from monetary value hazards are much larger and the chance of the return is far more frequent than the physical losingss in both the measure and quality of goods caused by inadvertent fires and bad lucks or occasional larcenies.

Commodity manufacturers, merchandisers, stockists and importers face the hazards of big value losingss on their production, purchases, stocks and imports from the autumn in monetary values. Likewise, the processors, makers, exporters and other market officials, come ining into forward sale committednesss in either the domestic or export markets, are exposed to heavy hazards from inauspicious monetary value alterations.

True, monetary value variableness may besides take to windfalls, when monetary values move favourably. In the long tally, such additions may even countervail the losingss from inauspicious monetary value motions. But the losingss, when incurred, are, at times, so immense that these may frequently do insolvencies. The greater the exposure to trade good monetary value hazards, the greater is the portion of the trade good in the entire net incomes or production costs. Hence, the demand for monetary value hazard direction or fudging through the usage of hereafters contracts.

Hedging involves purchasing or merchandising of a standardised hereafters contract against the corresponding sale or purchase severally of the tantamount physical trade good

Role of trade good hereafters

Unlike the physical market, a hereafters market facilitates countervailing the trades without interchanging physical goods until the termination of a contract. As a consequence, hereafters market attracts equivocators for hazard direction and encourages considerable external competition from those who possess market information and monetary value judgement to merchandise as bargainers in these trade goods. While equivocators have long-run position of the market, the bargainers or arbitrageurs, prefer an immediate position of the market.

However, all these users participate in purchasing and merchandising of trade goods based on assorted domestic and planetary parametric quantities such as monetary value, demand and supply, climatic and market related information.

These factors, together, consequence in efficient monetary value find, leting big figure of purchasers and Sellerss to merchandise on the exchange. MCX is pass oning these monetary values all across the Earth to do the market more efficient and to heighten the public-service corporation of this monetary value find map.

Monetary value Risk Management: Hedge is the pattern of off-setting the monetary value hazard inherent in any hard currency market place by taking an equal but opposite place in the hereafters market. This technique is really utile in instance of any long-run demands for which the monetary values have to be firmed to cite a sale monetary value but to avoid purchasing the physical trade good instantly to forestall blocking of financess and incurring big keeping costs.

9.6 Market Timing at MCX

Dayss

Commodity

Timings

Monday to Friday

All agricultural trade goods

All non agricultural trade goods

10 am to 5 autopsy

10 am to 11.55 autopsy

Saturday

All type of trade goods

10 am to 2 autopsy

9.7 Trading in MCX

Merely exchange members and their authorised users are entitled to merchandise on MCX. Those who are non members of MCX can merchandise through MCX members or their authorised users.

Clearing and Colony

Uncluttering the Trades on MCX

All trades on MCX are supported by an initial border. At the End-of-day MCX does mark-to-market of all the unfastened places. This activity consequences into concluding place of all members in regard to booked losingss or losingss on unfastened places. Members make the deficits good by manner of pay-ins to MCX by following twenty-four hours and the members in net income on such places are given the necessary credits. These payments are processed electronically through a country-wide web of uncluttering Bankss, likeYES Bank, Development Credit Bank Ltd, Bank of India, Citi Bank N.A, Corporation Bank, Kotak Mahindra Bank Ltd. , State Bank of India, Union Bank of India, ICICI Bank Ltd, HDFC Bank, IndusInd Bank, Axis Bank, wherein members maintain their histories.

Settling trades on MCX

A contract has a life rhythm of one month or longer. At MCX, two hebdomads before the termination of a contract, the contract enters into a stamp period. At the start of the stamp period, both the parties must province their purposes to give or have bringing, based on which the parties are supposed to move or bear the penal charges for any failure in making so. Those who do non show their purpose to give or have bringing at the beginning of stamp period are required to square-up their unfastened places before the termination of the contract. In instance they do non their places are closed out at ‘due day of the month rate ‘ . The links to the physical market through the bringing procedure ensures care of uniformity between topographic point and hereafters monetary values.

9.7.2 Delivery in MCX

From Seller to Buyer

Sellers at MCX intimate the exchange at the beginning of the stamp period and acquire the bringing quality certified from empanelled quality enfranchisement bureaus. They besides submit the paperss to the Exchange with the inside informations of the warehouse within the metropolis, chosen as a bringing centre. Sellers are free to utilize any warehouse, as they are responsible for the goods until the purchaser picks up the bringing, which is a pattern followed in the trade goods market globally. Seller would have the money from the exchange against the goods delivered, which happens when the purchaser has confirmed its satisfaction over quality and picked up the bringings within stipulated clip.

MCX has tied up with State Level Warehousing Corporations of Kerala, Gujarat, Tamil Nadu and

Uttar Pradesh and is in the procedure of finalising the agreements with CWC and other State degree Warehousing Corporations.

Receiving Delivery

Buyers meaning to take bringing will have it, if there are Sellerss willing to give bringing. The Buyer will hold to do the payment within three yearss after the bringing is allotted. The purchaser will take existent bringing from the warehouse at the designated bringing centres on the designated bringing yearss. There are committee agents who help the agents with handling of the bringing, logistic support, associated quality enfranchisement through empanelled bureaus and associated Billingss due to revenue enhancement deductions. This support is required as the purchaser may be in a different metropolis than the topographic point where the bringing is being received.

9.7.3 Role of Warehouse in Delivery of goods

The client of a purchaser may utilize this bringing for his ingestion in the industry or for exports or he may sell in the topographic point market or may sell in hereafters market in the subsequent contract, if he is a regular bargainer. By and large the trade goods available in the physical signifier are consumed by the industry and seldom, trade goods, are stored in the warehouse for a longer period.

Percentage of bringing in the hereafters market

The per centum is reasonably low. By and large, the hereafters markets all over the universe are used for fudging where existent bringing per centum is about 1 % . Any user in the trade goods ecosystem unlike the physical topographic point or forward market does non utilize these markets for regular ingestion.

Quality of a trade good given by a marketer ensured

MCX has specified the deliverable classs in the contract specifications, which are notified before beginning of trading in a contract. The marketer is required to subject the quality enfranchisement issued by MCX ‘s empanelled quality enfranchisement bureaus, like, SGS, Geo Chem, Dr. Amins, among others.

Role of a Warehouse in Futures Market

In India, vivacious topographic point markets, in assorted trade goods, exists for 100s of old ages. In these markets, there are husbandmans, industrialists, warehouses, consumers, traders and bargainers, who buy and sell trade goods. There are warehouses, which shops trade goods and there are consumers, who consume them finally. MCX or, for that affair, any other Futures Exchange do non take to replace, retroflex or replace such topographic point markets, instead the lone value added service of MCX is to back up the topographic point market participants by developing their monetary value hazard efficiency through supplying hedge tools.

Therefore, a Futures Exchange has to establish its bringing procedure on the footing of bing physical market patterns and utilize existing warehouse substructure, which is capable of managing billion dollars deserving of physical market trades. So the same substructure can properly take attention of small letter bringing tendered in a hereafters market.

9.7.4 Demat Electronic Warehouse reception

Demat Electronic Warehouse Receipts are expected to be electronic records created by an sanctioned bureau after dematerialization of the physical reception issued by a Warehouse. In securities market the physical portions of the company are dematerialized by their Registrar and Transfer Agents utilizing a Depository empowered under the Depositories Act. Besides, the entire portions of a company are monitored by the Registrar of Companies and the Stock Exchanges. In trade goods market, there is no standardisation of monitoring of warehouse grosss issued by a warehouse by any regulative organic structure. Similarly, the transportation of ownership besides gets affected under a common understanding and non as per any Statutory Act. It remains to be seen whether such transportation will be considered good transportation under Negotiable Instruments Act and whether electronic records will be good rubric sing the above defects. And besides the fact that trade good is perishable and may non be a good bringing if the purchaser finds out that it has deteriorated beyond the specifications mentioned in the contract.

9.8 Investment chances provided by trade good derived functions

Futures contract in the trade goods market, similar to equity derived functions section, will ease the activities of guess, fudging and arbitrage to all category of investors.

Guess:

It facilitates guess by supplying chance to people, although non involved with the trade good, to merchandise on the positions in the motion of trade good monetary values. The bad place is taken with a little border sum that is paid to the exchange, and the contract can be squared-off anytime during the trading hours.

Hedge:

For the people associated with the trade goods the hereafters market can supply an effectual hedge mechanism against monetary value motions.

For illustration an oil-seed husbandman may travel short in oil-seed hereafters, therefore ‘locking ‘ his sale monetary value and in the procedure fudging against any inauspicious monetary value motions. On the other manus a processor of oil seeds may purchase oil-seed hereafters and therefore guarantee him a supply of oil-seeds at a pre-determined monetary value. Similarly the oil-seed processor may travel short in oil hereafters, which may be bought by a jobber of oil.

Besides, there is a stating that ‘Gold radiances when everything fails ‘ . Thus, gold can be used as a fudging tool against other investings.

Arbitrage:

Traders may work arbitrage chances that arise on history of different monetary values between the two exchanges or between different adulthoods in the same underlying.

Drumhead

Commodity includes all sorts of goods. FCRA defines “ goods ” as “ every sort of movable belongings other than actionable claims, money and securities ” .

A trade good exchange is an association or a company or any other organic structure corporate organizing hereafters trading in trade goods.

A hereafters contract is a type of “ forward contract ” . FCRA defines frontward contract as “ a contract for the bringing of goods and which is non a ready bringing contract ” .

A trade good hereafters contract is a tradable standardized contract, the footings of which are set in progress by the trade good exchange forming trading in it.

In India four national trade good exchanges are operational – out of which MCX and NCDEX are the prima trade good exchanges

Merely exchange members and their authorised users are entitled to merchandise on MCX. Those who are non members of MCX can merchandise through MCX members or their authorised users.

Appraisal

Due to the ________ nature of the implicit in assets, physical colony in trade good derived functions creates the demand for warehousing.

Volatile

Bulky

Valuable

Variable

Who identifies the purchaser to whom the bringing notice is assigned in instance of trade good trading

The glade corporation

The purchaser

The marketer

The warehouse

Physical colony in a trade good hereafters market involves the physical bringing of

the hereafters contract

the net incomes

the implicit in trade good

None of the above

A trade good hereafters contract is nil but a forward contract that is

Sold by common financess

Sold by Bankss

Traded across the counter

Traded in an exchange

In a trade good hereafters contract concluding colony happens on the

Last trading twenty-four hours of the month

Last trading twenty-four hours of the hebdomad

Last trading twenty-four hours of the hereafters contract

None of the above

Which of the following can non organize the underlying for a trade good derivative contract

Cotton

Gold

Chana

Nifty

The sum that must be deposited in the border history at the clip a hereafters contract is foremost entered into is known as

Initial border

Mark to market border

Collateral border

Security sedimentation

In instance of trade good merchandising the marketer intending to do bringing takes the trade goods to

The glade house

The warehouse

The purchaser ‘s house

The exchange office

Which of the undermentioned characteristic differentiates a trade good hereafters contract from a fiscal hereafters contract

Standardised contract size

MTM colony

Changing quality of implicit in plus

Exchange traded merchandise

The timings for trading in instance of non agricultural trade goods in MCX is

9 am to 3.30 autopsy

9.55 am to 3.30 autopsy

10 am to 7 autopsy

10 am to 11.55 autopsy

A A A