Flow of Presentation • What do we mean by Commodity Market? • Global classification of commodities. • Commodities not traded in commodity market • How Commodities is an alternate asset class? • Scope of commodities market. • How to Trade in Commodities? • Various commodity Exchanges. • Commodity trading • Risk factors involved • Conclusion
Commodities • A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a markets. • Key Learning here was the difference between commodity and a brand.
Commodities not traded in commodity market Non-tradable commodities Rare Metals Agricultural Products Minerals and other materials
Rare metals - Germanium, Cadmium, Cobalt, Chromium, Magnesium, Manganese, Molybdenum, Silicon, Rhodium, Selenium, Titanium, Vanadium, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and Beryllium.
Agricultural products - Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Milk, Tomatoes, Grapes, Eggs, Potatoes, and Figs.
Asphalt, Aggregate, Arsenic, Borax, Boron, Gypsum, Asbestos, Chlorine, Fluoride, Cement, Sulfuric Acid, Carbon Dioxide, Fluorspar, Bromine, Titanium Dioxide.
Commodities – An Alternate Asset Class • Traditional choice of asset allocation includes stocks, bonds and real estate. • Now portfolio has shifted to alternative assets, like hedge funds, private equity, derivatives and commodities. • Traded on spot and forward markets. • Positively correlated with inflation. • Independent risk and return profile.
Portfolio Diversification • Low or negative co-relation allows commodities to reduce overall risk. • Hedge against inflation. • An improved risk/return profile in strategic asset allocation.
Let’s assume your total portfolio is $250,000 and you invest 80% in stocks and bonds ($200,000) and 20% in managed Commodities ($50,000). Let’s assume at the end of the year you realize a 5% return on your stocks and bonds and a 25% return on Commodities. The result would be as follows:
Now let’s assume you earn 10% on the 80% of your portfolio invested in stocks and bonds, but lose 25% in managed futures. The results would be as follows:
By investing only 20% of your portfolio in futures, if you were to earn 25%, it would outperform 80% of your portfolio invested in stocks and bonds if the stocks and bonds earned 5%. • You can also see that a 25% loss in futures would still leave you with a net profit of $7,500 if your stock and bond allocation returned 10%.
SCOPE OF COMMODITY MARKET • Allowing mutual funds and FII’s to participate in the commodity market • Widening the definition of commodities to include also commodity indices and weather derivatives • Changes in the Banking Regulation Act allowing banks to operate in the commodity exchanges • Allow set-offs on trading losses in the derivatives market.
FUTURE PLANS NCDEX constantly plans to widen the menu of products available for trading to include:- • Other agricultural products, • Base metals, • plastics, • energy products • indices (including weather)
WAY AHEAD • Commodity exchanges in India are expected to contribute significantly in strengthening Indian economy to face the challenges of globalization. • Indian markets are poised to witness further developments in the areas of electronic warehouse receipts (equivalent of dematerialized shares), which would facilitate seamless nationwide spot market for commodities.
Amendments to Essential Commodities Act and implementation of Value-Added-tax • Options contracts in commodities. • Their may see increased interest from the international players in the Indian commodity markets once national exchanges become operational.
Commodity derivatives as an industry is poised to take-off which may provide the numerous investors in this country with another opportunity to invest and diversify their portfolio. Finally their may be greater convergence of markets – equity, commodities, Forex and debt – which could enhance the business opportunities for those have specialized in the above markets.
COMMODITY MARKET • Commodity market is a place where trading in commodities takes place. These are the markets where raw and primary products are exchanged. • These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities.
HOW TO TRADE IN COMMODITIES COMMODITY FUTURE A standardized agreement to buy (or sell) an asset in the future, at a price agreed today
COMMODITY EXCHANGE TRADED FUNDS (ETFs) Commodity ETFs generally are index funds and track commodities indices.
COMMODITY STOCKS Stocks which belongs to commodity related sector like metals, energy, agriculture etc.
COMMODITY MUTUAL FUNDS Mutual funds which invest in stocks belonging to commodity sectors or fund of funds which invest in other commodity funds etc.
COMMODITY EXCHANGE • An entity, usually an incorporated non-profit association, that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures. • Commodities exchange also refers to the physical center where trading takes place
CONT……. • 18 existing commodity exchanges in India offering domestic contracts in8commodities and 2 exchanges that have permission to conduct trading in international (USD denominated) contracts.
CONT…. The two most important commodity exchanges in India are; 1)Multi-Commodity Exchange of India Limited (MCX), 2)National Multi-Commodity & Derivatives Exchange of India Limited (NCDEX)
Structure of Indian Commodity Futures Exchanges FMC CommodityExchanges Nationalexchanges Regionalexchanges NCDEX NMCE MCX NBOT 20 Other Regional Exchanges
NCDEX • National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity exchange. It has commenced its operations on December 15, 2003. • LIC, NABARD & NSE are Promoter Shareholder. • NCDEX is regulated by Forward Markets Commission.
NCDEX currently facilitates trading of 57, commodities including : • Agri-based commodities • Bullion • Energy • Ferrous metals • Non-ferrous metals • Plastics
MCX • Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutulised exchange with a permanent recognition from Government of India. • Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Bank of India and Canara Bank. • MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana.
NMCE • National Multi Commodity Exchange of India Limited (NMCE) is the first de-mutualized, Electronic Multi-Commodity Exchange in India. • On 25th July, 2001, it was granted approval by the Government to organize trading in the edible oil complex. • It has operationalized from November 26, 2002. • It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited.
SPOT TRADING Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.
FORWARD CONTRACT A forward contract or simply a forward is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed. It costs nothing to enter a forward contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward pricing at the time the contract is entered into.
Futures contract, in refers to a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price). • The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.
FeaturesofFuture …….. • Futures are used for hedging, particularly in a bear market. • Futures are exchange-traded derivatives. • The particular asset as well as the quantity are specified in the futures contract. • The currency in which the contract is to be executed is also specified in future contracts.
Futureshavelowertransactioncoststhanotherdebtinstruments. • Futurecontracts have high liquidity, since buyers and sellers of futures contracts can be found easily. • Futures are highly standardized. • Settlement - The delivery month and the last trading date are also mentioned in the contract.
Forward Vs. Futures • While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in different respects: • Futures are margined, while forwards are not. • Forward contracts are private agreements. Futures contracts have clearing houses. • For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to market daily, which means that daily changes are settled day by day until the end of the contract.
Futures contracts are quite frequently employed by speculators. On the other hand, forward contracts are mostly used by hedgers. • Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty.
KEY PLAYERS IN THE COMMODITY MARKET The Major Actors in commodity market • SPECULATOR • HEDGER • BROKER
FORWARD MARKETS COMMISSION • Forward Markets Commission (FMC) is headquartered at Mumbai. • It is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. • It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952. • The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government.
OBJECTIVES OF FMC • To create competitive conditions so that no unscrupulous participants could use these leveraged contracts for manipulating prices. • To ensure that the market has appropriate risk management system. • To ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders.
FUNCTIONS OF THE FMC • FMC advises the central government to either grant recognition or to withdraw the recognition of any association. • It keeps the forward market under strong observation and takes action wherever necessary. • To make recommendations generally with respect to improving the organization and working of forward markets.
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 considerers it necessary. • To collect and publish the information relating to trading conditions in respect of goods including information relating to demand, supply and prices.
Risk factors involved • Changing demand–supply dynamics. • Climatic factors. • Industry related factors. • Geopolitical consideration.
Conclusion • Commodities are the distinct class of assets that are largely independent of equity and bond returns. • Long term fundamentals of commodity companies appears bright given the supply demand mismatch , emphasis on infrastructure development in many developing economies
SUBMITTED BY • Abhinav Kansal • Deepak Jain • Arpit Khandelwal • Apeksha Khandelwal • Saumyadeep Dalal • Aastha Mittal • Ankit Mehta • Divya Jolly • Amit Goel