Professional Documents
Culture Documents
A PROJECT REPORT ON
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CONTENTS
SL.NO PARTICULARS Executive Summary Research Methodology Company profile Introduction to the topic Analysis and interpretation Findings Suggestions Conclusion Bibliography
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2. 3. 4. 5. 6. 7. 8. 9.
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A project report containing the Awareness of commodity market with reference to Derivative investors a case study of Belgaum city At KARVY Finapolis Belgaum for fulfillment of requirement of MBA IVth semester in Institute of Management Education and research. It was an opportunity to learn the practical aspects of the firm Objectives of the study 1. To know the perception of derivative investors towards commodity future market 2. To find the awareness level of commodity market in Belgaum city 3. To understand the commodity market and its working mechanism. 4. To know which commodity they prefer to invest. 5. To find the potential customer for commodity market The project was undertaken at KARVY Finapolis Belgaum the first part of the study is done by collected information through net, journals, textbooks. And second part of the study is conducted through survey of the derivative investors. Scope of the study This study is limited to only Belgaum City the study is carried out to know the awareness level of derivative investors towards Commodity Futures market. This study also helps to know about trading mechanism of Commodity Market & the future trading level.
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RESEARCH METHODOLOGY
Title of the Project Awareness of commodity market with reference to Derivative investors Sample Size The sample size is consist of traders in derivative market of Belgaum city.100 random sample was taken to identify the awareness level of the derivative investors towards Commodity Future Market Sample Type Sample Area : : Simple random sampling was adopted to select respondents. Belgaum city
Duration of Project: Ist Phase - December IInd Phase - January to April (weekly two days) TOOLS USED FOR ANALYSIS: 1. Graphical Representation of Analysis through SPSS. : a. Pie charts DATA COLLECTION APPROACH: Primary data has been used to carry out the research successfully. The secondary data has been collected from NDEX and MCX. For the purpose of gathering primary data a structure and questionnaire was designed to collect data from the derivative investors.
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Secondary Data: Information is collected through internet From various text books Journals and magazines
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FINDINGS
More than 50% of the Traders in are aware about the commodity future Market Hardly 30% traders are invested in the commodity future market Most of the investors are not ready to invest in commodity future market they feel it involve high risk. Returns and the Risk of the commodity are the most critical factors, which Traders will consider while investing in any commodity Most of the investors are ready to invest in commodity future market if proper information is provided As commodity future market is new and emerging ,many investors and farmers are not fully aware of this market .as the market helps to trade transparently without middlemen and agents While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unanawareness & mythical perception about commodity market.
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SUGGESTION
There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc From survey it is found that most of the potential customers are concerned about the Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage it will help to attract more and more customers. More agents and marketing executives should be appointed to educate the customers because the customers having many myths in there mind And also create the awareness of electronic commodity trading Firm should approach people who are already into the business of commodities .special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation ,market trends etc . They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.
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COMPANY PROFILE
The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strengthto better our services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally totality in services.
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The Karvy Credo: Our Clients Our Focus Clients are the reason for our being. Personalized service, professional care; proactiveness are the values that help us nurture enduring relationships with our clients. Respect for the Individual Each and every individual is an essential building block of our organization. We are the kiln that hones individuals to perfection. Be they our employees, shareholders or investors. We do so by upholding their dignity & pride, inculcating trust and achieving a sensitive balance of their professional and personal lives.
Teamwork None of us is more important than all of us.Each team member is the face of Karvy. Together we offer diverse services with speed, accuracy and quality to deliver only one product: excellence. Transparency, co-operation, invaluable individual contributions for a collective goal, and respecting individual uniqueness within a corporate whole, is how we deliver again and again. Responsible Citizenship A social balance sheet is as rewarding as a business one. As a responsible corporate citizen, our duty is to foster a better environment in the society where we live and work. Abiding by its norms, and behaving responsibly towards the environment, is some of our growing initiatives towards realizing it. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 11
Integrity Everything else is secondary Professional and personal ethics are our bedrock. We take pride in an environment that encourages honesty and the opportunity to learn from failures than camouflage them. We insist on consistency between works and action
Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services for over 20 years. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 12
The first securities registry to receive ISO 9002 certification in India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being Most Admired Registrar is one among many of the acknowledgements we received for our customer friendly and competent services. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 13
The company, Member of National Stock Exchange (NSE), offers a comprehensive range of services in the stock market through the benefits of in-depth research on crucial market dynamics, done by qualified team of experts. Apart from stock broking activities, the company also provides Depository Participant Services to its corporate and retail customers.
Registered with SEBI as a Category I Merchant Banker and ranked among the top 10 merchant bankers in the country, the company has built a reputation as a professional advisor in structuring IPOs take over assignments and buy back exercises.
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The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.
The company is into distribution of Financial Products. It distributes a wide range of financial products and services from insurance to credit cards and loans. The company provides sound advisory services to suit the different investment needs of customers.
Stock Broking Services: It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by indepth knowledge of market functioning and changing trends, planning with foresight and BABASAB PATIL MBA FINANCE PROJECT REPORT Page 15
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Quality Policy: To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations. About Karvy Comodities Broking Limited: Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multicommodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system.
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KARVY Advantage: Trade from anywhere in India Karvy, with its network of branches across the length and breadth of the country, is always within your reach, no matter where you are. This gives you the facility to trade from anywhere in India. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 18
Reliable research Karvy has a dedicated team of research analysts who work round the clock to provide the best research newsletters and advices. We reach your desk daily, weekly and monthly. Personalized Services Karvy, with its wide array of personalized services from registry to stock broking takes the pleasure of adding one more service, commodities broking with the same personal touch . State of Infrastructure The strong IT backbone of Karvy helps us to provide customized direct services through our back office system, nation-wide connectivity and website. Round the clock operations in commodities trading Indian commodities market, unlike stock market keeps awake till 11 in the night and Karvy is all professionals. The account opening forms are available at our branch offices and with our business associates. You are requested to kindly contact a branch nearby your area and complete the account opening formalities for commodities trading at the branches. Also you can take a print out and fill out a simple account opening form from our website and complete the necessary documentation as per the checklist enclosed in the form. The form after duly filled up may be deposited at the nearest Karvy Branch or Associate along with a cheque/DD favouring Karvy Commodities Broking Private Limited payable at Hyderabad towards initial margin.Please remember the MemberClient agreement has to be executed on a non-judicial stamp paper, as per the applicable by the Stamp Duty Act of the relevant state. poised to offer round the clock services through its dedicated team of
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DepositInitialMargin: You need to deposit an initial upfront margin as specified by the exchange (usually between 5-10% of the contract value).The cheque/DD should be in favour of Karvy Commodities Broking Private Limited Mark to Market Margin: In addition to initial margin, you also need to keep a mark to market margin for taking care of the adverse price movements, if any.
Achievements Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the to top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operations
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Vice-President Karvy
Vice-President Karvy
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Deputy General Manager SeniorManager Deputy General Manager Deputy General Manager Senior Manager Deputy General Manager SenoirManager
Senior Manager
Branch Manager
Number of Team Leaders Number of Executives BABASAB PATIL MBA FINANCE PROJECT REPORT Page 21
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Introduction to derivatives The origin of derivatives can be traced back to the need of farmers to protect themselves against Fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be a futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the `to arrive contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. These were eventually standardized, and in 1925 the First futures clearing house came into BABASAB PATIL MBA FINANCE PROJECT REPORT Page 23
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The OTC derivatives markets have the following features compared to exchangetraded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative Contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the interbank foreign exchange market. Commodity derivatives the world over are typically exchange traded and not OTC in nature. Exchange traded versus OTC derivatives Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. These contracts were typically OTC kind of contracts. Over the BABASAB PATIL MBA FINANCE PROJECT REPORT Page 26
The OTC derivatives markets have the following features compared to exchangetraded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual Institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining. 3. There are no formal rules for risk and burden sharing. 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for Safeguarding the collective interests of market participants. 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative Contracts offer many benefits, the former have rigid structures compared to the latter. The largest OTC derivative market is the interbank
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The commodity market has evolved significantly from the days when farmers hauled bushels of wheat and corn to the local market. In the 1800s, demand for standardized contracts for trading agricultural products led to the development of commodity futures exchanges. Today, futures and options contracts on a huge array of agricultural products, metals, energy products and soft commodities can be traded on exchanges all over the world. Commodities have also evolved as an asset class with the development of commodity futures indexes and, more recently, the introduction of investment vehicles that track commodity indexes.
Commodity prices have been driven higher by a number of factors, including increased demand from China, India and other emerging countries that need oil, steel and other commodities to support manufacturing and infrastructure development. The commodity supply chain has also suffered from a lack of investment, creating bottlenecks and adding an insurance premium and/or a convenience yield to the returns of many commodity futures. Over the long term, these economic factors are likely to support continued gains in commodity index returns. The potential for attractive returns is probably the most obvious reason for increased investor interest in commodities, but it isn't the only factor. Commodities may offer investors other significant benefits, including portfolio diversification and a hedge against inflation and risk. Commodities are real assets, unlike stocks and bonds, which are financial assets. Commodities, therefore, tend to react to changing economic conditions in different ways than traditional financial assets. For example, commodities are one of the few asset BABASAB PATIL MBA FINANCE PROJECT REPORT Page 29
The futures markets are so crucial to the well being of our nation, that the government established the Commodity Futures Trading Commission (CFTC) to oversee the industry. There is also a self-regulatory body, the National Futures Association (NFA), who monitor the activities of all futures market professionals to ensure the integrity of the futures markets. Commodities also give the investor the ability to participate in virtually all sectors of the world economy and have the potential to produce returns that tend to be independent of other markets. In fact portfolios that add commodity investments can actually lower the overall portfolio risk by diversification. What is the difference between hedging and speculating? Just about every product that you consume would likely cost dramatically more without the commodities futures markets. Because of the intrinsic risks associated to being in business, lacking the ability to shift risk, a manufacturer/producer of goods or services BABASAB PATIL MBA FINANCE PROJECT REPORT Page 30
The person willingly accepting a risk does so because of the opportunity to profit from price movements, this is known as speculating. The cotton in your shirt, the orange juice, cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home, the gas or ethanol that you put in your car all would be priced many times higher without the participation of speculators in the futures markets. Through supply and demand market forces, equilibrium prices are reached in an orderly and equitable manner within the exchanges, and world economies, and you, benefit tremendously from futures trading.
What commodity futures markets do? A well-developed and effective commodity futures market, unlike physical market, facilitates off setting the transactions without impacting on physical goods until the expiry of a contract. Futures market attracts
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In futures market, speculators play a role in providing liquidity to the markets and may sometimes benefit from price movements, but do not have a systematic causal influence on prices. An effective architecture for regulation of trading and for ensuring transparency as well as timely flow of information to the market participants would enhance the utility of commodity exchanges in efficient price discovery and minimize price shocks triggered by unanticipated supply demand mismatches. Participants of Commodity Market: The participants who trade in the commodity derivatives markets can be classified as follows; Hedgers: Hedgers are participants who use commodity derivative instruments to hedge / eliminate the price risk associated with the underlying commodity asset held them. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 32
Speculators: Speculators are participants who bet on future movements in the price of an asset i.e. I commodity to make short term gain from the price movements. Commodity future s gives theme the leverage so to take risks on nominal margin payments and thereby increasing for bigger gains or losses. Speculators are some what like a middle man. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms.
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Major Commodity Exchanges: The Government of India permitted establishment of National-level Multi- Commodity exchanges in the year 2002 and accordingly three exchanges have come into picture. Multi-Commodity Exchange of India Ltd, Mumbai.(MCX). National Commodity and Derivative Exchange of India, Mumbai (NCDEX). National Multi Commodity Exchange, Ahemdabad (NMCE). However there is regional commodity exchanges functioning all over the country. Karvy commodities Broking Pvt.Ltd has got membership of both the premier commodity exchanges i.e. MCX and NCDEX.
The two exchanges (NCEDX&MCX) have seen tremendous growth in less than two years . the daily average on these two exchanges put together has now grown to a BABASAB PATIL MBA FINANCE PROJECT REPORT Page 35
At NCDEX the contracts expire on 20th day of each month .if 20th happens to be a holiday the expiry day will be the previous working day. At MCE the expiry day is 15th of every month .if 15th happens to be a holiday the expiry day will be the previous day. The expiry day differs for different commodities in both the exchanges. Generally commodity futures require an initial margin between 5-10% of the contract value. The exchanges levy higher additional margin in case of excess volatility. The margin amount varies between exchanges and commodities. Therefore they provide great benefits of leverage in comparison to the stock and index futures trade on the stock exchanges. The exchange also requires the daily profits and losses to be paid in/out on open positions (mark to Market or MTM) so that the buyers and sellers do not carry a risk of not more than one day. Functions of an Exchange Product Conceptualization and Design Price Discovery & Dissemination Robust Trading & Settlement systems Management of Counter party Credit Self Regulation to ensure Overview of Trading and Surveillance Audit and review of Members Enforcement of Exchange rules
Risk
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Awareness of commodity market with reference Derivative investors Commodities selected in Phase I
Bullion Gold Silver
Agri commodities Soya bean Soya oil Rapeseed/Mustard Seed Rapeseed/ Mustard Seed Oil Crude Palm oil RBD Palmolein 40 Commodities introduced in Phase II Rubber Jute Pepper Chana (Gram) Guar Wheat Commodities exchanges across the world Main commodity exchanges worldwide: Americas Exchange Brazilian Mercantile and Abbreviation BMF Location Brazil Product Types Agricultural, Biofuels, Precious Page 37
Futures Exchange
Metals Agricultural, Biofuels, Precious Metals Emissions Energy, industrial Metals Energy, Emissions Kansas City Agricultural Memphis Agricultural
CME Group
CME
Chicago
Chicago California
Kansas City Board of Trade KCBT Memphis Cotton Exchange Mercado a Termino de Buenos Aires Minneapolis Grain Exchange
MATba
Argentina
Agricultural
MGEX
Minneapolis Agricultural
New York Board of Trade NYBOT New York Mercantile Exchange U.S. Futures Exchange Winnipeg Commodity Exchange
New York
NYMEX
New York
USFE
Chicago
WCE
Winnipeg
Agricultural
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Asia Exchange Bursa Malaysia Central Japan Commodity Exchange Dalian Commodity Exchange Abbreviation Location MDEX Malaysia Biofuels Energy, Industrial Metals, Rubber Product Types
Nagoya
DCE
China
Agricultural, Plastics
Dubai Mercantile Exchange DME Dubai Gold & Commodities DGCX Exchange Kansai Commodities Exchange
Dubai
Energy
Dubai
Precious Metals
KANEX
Osaka
Agricultural
India
Karachi
NCDEX
Mumbai
All
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SICOM
Tokyo
Tokyo Grain Exchange Zhen Zhou Commodity Exchange Europe Exchange Climex NYSE Euro next
TGE
Tokyo
CZCE
China
Agricultural
Product Types
Amsterdam Emissions Europe Europe London Hanover Agricultural Emissions Industrial Metals, Plastics Agricultural
Indian Commodities Market In India commodity markets have been in existence for decades. However in 1975 the Government banned forward contracts on commodities. Later in 2003 the Government of India again allowed forward contracts in commodities. There have been over 20 exchanges existing for commodities all over the country. However these exchanges are commodity specific and have a strong regional focus. The Government, in order to make the commodities market more transparent and efficient, accorded approval for setting up of national level multi commodity exchanges. Accordingly three exchanges are there which deal in a wide variety of commodities and which allow nation-wide trading. They are Multi Commodity Exchange (MCX) National Commodities Derivatives Exchange (NCDEX) National Multi Commodity Exchange (NMCE) The MCX is Mumbai-based and is promoted by Financial Technologies Pvt Ltd. MCX allows trading on a host of commodities ranging from bullion to grains. Please check the Commodities traded menu. MCX has become the first exchange in the world to launch futures on steel. Recently on 11th August 2004, MCX crossed a peak daily turnover of Rs.950 Crores. NCDEX is promoted by an elite group of financial institutions including NSE, LIC, SBI, UBI etc., NCDEX also allows trading of futures on a host of commodities. National Commodities and Derivatives Exchange, NCDEX At Karvy Commodities, we are focused on taking commodities trading to new dimensions of reliability and
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Our technological and infrastructure strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group. Our wide national network, spanning the length and breadth of India, further supports these advantages. Regular trading workshops and seminars are conducted to hone trading strategies to perfection. Every move made is a calculated one, based on reliable research that is converted into valuable information through daily, weekly and monthly newsletters, calls and intraday alerts. Further, personalized service is provided here by a dedicated team committed to giving hassle-free service while the brokerage rates offered are extremely competitive. Our commitment to excel in this sector stems from the immense importance that commodities broking has to a cross-section of investors farmers, exporters, importers, manufacturers and the Government of India itself.
Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.
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COMMODITY MARKET IN INDIAN PERSPECTIVE. India, a commodity based economy where 75% of the one billion populations depend on agriculture, surprisingly has an underdeveloped commodity market. The history of commodity markets in India is more than a century old. The institution of formal commodity market in India is almost as old as the UK and the US. The first organized commodity market in India was established in the late 19th century, Bombay Cotton Association Ltd. was set up in 1875 by the Bombay Cotton Exchange ltd. In 1893, due to widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade Association. Commodities markets offer immense potential to become a separate asset class for market savvy investors, arbitrageurs and speculators. Commodities markets are easy to understand as far as the demand and supply fundamentals are concerned as these are two things that guide these markets. The investors will have to understand the risks and the advantages before jumping the band wagon. Commodities futures are less volatile as compared to equity and bonds. Some of the other advantages linked to commodity futures are better risk adjusted, good hedge against downfall in equities or bonds as there is no or very less correlation and also a very effective hedge against inflation.
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All contracts settling in cash will be settled on the following day after the contract expiry date. Commodity trading follows a T + 1 settlement system, where the settlement date is the next working day after expiry. However, in case of delivery-based traders, settlement takes place five to seven days after expiry
Commodities like chana, urad, soya bean oil, guar gum, sugar, pepper, wheat, jeera, gold, silver and crude oil have found fancy with Indian Investors. Expecting the turnover on the three online commodity exchanges to spurt to more than Rs.15000 crores per day, banks are keen to tap the commodity trade-financing front. Commercial banks are chasing the commodity industry with attractive lending rates between 8% and 8.5% as against the normal lending rate between 11% and 14%. Commodity exchanges in India will contribute significantly towards the development of Indian economy as a whole. Commodity market is undergoing some breakthrough changes like demat, trading of commodities like crude oil and plastics, also GOI is contemplating of implenting Options trading.
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Let us now take a look at what the present scenario of each of the above markets is like.
The traditional wholesale market in India dealt with whole sellers who bought goods from the farmers and manufacturers and then sold them to the retailers after making a profit in the process. It was the retailers who finally sold the goods to the consumers. With the passage of time the importance of whole sellers began to fade out for the following reasons:
The whole sellers in most situations, acted as mere parasites who did not add any value to the product but raised its price which was eventually faced by the consumers.
The improvement in transport facilities made the retailers directly interact with the producers and hence the need for whole sellers was not felt. In recent years, the extent of the retail market (both organized and unorganized)
has evolved in leaps and bounds. In fact, the success stories of the commodity market of India in recent years has mainly centered around the growth generated by the Retail Sector. Almost every commodity under the sun both agricultural and industrial is now being provided at well distributed retail outlets throughout the country. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 45
What can commodity market offer? If you are an investor, commodities futures represent a good form of investment because of the following reasons.. High Leverage The margins in the commodity futures market are less than the F&O section of the equity market. Less Manipulations - Commodities markets, as they are governed by international price movements are less prone to rigging or price manipulations. Diversification The returns from commodities market are free from the direct influence of the equity and debt market, which means that they are capable of being used as effective hedging instruments providing better diversification. If you are an importer or an exporter, commodities futures can help you in the following ways Hedge against price fluctuations Wide fluctuations in the prices of import or export products can directly affect your bottom-line as the price at which you import/export is fixed before-hand. Commodity futures help you to procure or sell the commodities at a BABASAB PATIL MBA FINANCE PROJECT REPORT Page 46
Ensure continuous supply Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time. The effective mechanism of settlement and delivery procedures adopted and employed by MCX has once again undergone rigorous tests and have come out extremely successful. This is signified with the surging trading volume in bullion contracts and high open interest entering the settlement period resulting in healthy quantities getting physically delivered. This whole process underscores the efficacy & transparency of the complete trading, settlement and delivery process employed by MCX. The complete delivery procedure right from getting the possession of the precious metal from the sellers, necessary quality certifications, consignment movement, handing over the precious metal to the buyers, etc was completed in flat 5 days period. The
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Problems Facing by Commodity Future market 1. The spot/physical markets are fragmented. This may be because of the restrictions on the free movement of commodities in the physical form under the Essential Commodities Act, APMC Act, Licensing restrictions, etc. Hence, the creation of an integrated and vibrant domestic market for physical trading in commodities with adequate infrastructure and transparent trading system is a pre-requisite for broad based commodity derivatives markets. 2. Lack of mechanism for standardization of warehousing receipts. The absence of the regulatory authority for accreditation of warehouses and for setting standards for scientific grading, packaging, storage and preservation. As a result, though Banks grant credit against warehouse receipts now, they are largely restricted to the ones issued by the Central Warehousing Corporation and those promoted by the State Governments. However, this problem is being sorted out by the Food Ministry, which is in the process of drafting a Warehouse Development and Regulation Act to promote warehouse receipts-based lending and commodity derivative transactions. 3. Dematerialized settlement system for commodities which has the standardization of warehouse receipts as a pre-requisite. A system of physical delivery of commodities backed by warehouse receipt system can help eliminate the quality risk and price risk. It will facilitate seamless nation wide spot market for commodities. 4. Creation of depository system for electronically facilitating transfer and delivery of commodities in dematerialized form. 5. Need to make warehouse receipts transferable. We understand that a bill to amend the Forward Contracts (Regulation) Act, 1952 is slated to be taken up during the current budget session of the Parliament, which proposes to permit the transferability of warehouse receipts by scrapping Section 18(2) of the Act. This will also easy
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Why are Commodity Derivatives Required? India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It BABASAB PATIL MBA FINANCE PROJECT REPORT Page 51
Two important derivatives are futures and options. (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a Commodity for a predetermined delivery price at a specific future time. Futures are standardize contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of BABASAB PATIL MBA FINANCE PROJECT REPORT Page 52
Modern Commodity Exchanges To make up for the loss of growth and development during the four decades of restrictive government policies, FMC and the Government encouraged setting up of the BABASAB PATIL MBA FINANCE PROJECT REPORT Page 53
b. The Warehousing and Standardization: For commodity derivatives market to work efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 54
f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods from one state BABASAB PATIL MBA FINANCE PROJECT REPORT Page 56
Super Markets
Large retailers
Sub Wholesaler
Wholesaler
Market Yard
Village level Consolidation Small & Marginal Farmers The emergence of organized sector retail chain stores and a rise in competition is likely to BABASAB PATIL MBA FINANCE PROJECT REPORT Page 57
The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The trade timings of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for implementation at a later stage.
The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All BABASAB PATIL MBA FINANCE PROJECT REPORT Page 58
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INTRODUCTION TO PULSE MARKET India is the world's largest pulse producer, consumer and importer accounting for 27% of the global pulse production. However, stagnant production has led to declining per capita consumption over the past 20 years. The per capita availability has progressively declined from 60 g in 1950-51 to 32 g at present. The burgeoning demand-supply gap has led the Government of India to ease the norms related to importing of pulses. In India, pulses are grown on 22-23 million hectares area with an annual production of 13-15 million tons and per hectare of yield of 600-650 kg. Pulses account for around 19% of the gross cropped area and less than 8% of the total food grain production of the country. The major pulses grown in India are - Pigeon peas (Arhar) and Tyson chick peas (Gram or Desi Chana). Their share in the total pulses production is about 20% and 33% respectively. Important Pulse Markets in India are Mumbai, Delhi, Chennai, Indore, Kanpur, Bikaner, Hapur, Hyderabad, Jaipur, Jalandhar, Ludiana, and Sangrur.
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occupation Frequency business 24 profession 13 govt service 37 private service 25 others 1 Total 100 Percent 24.0 13.0 37.0 25.0 1.0 100.0 Valid Percent 24.0 13.0 37.0 25.0 1.0 100.0 Cumulative Percent 24.0 37.0 74.0 99.0 100.0
Valid
occupation
others 1.0% private service 25.0% business 24.0%
profession 13.0%
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Valid
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50000-100000 37.0%
10001-200000 38.0%
Interpretation: above graph depicts that most of the investors income lies between 10001-200000 followed by 38%,37% investors income lies between 50000-100000,14% of the investors lies between 20001-400000,6% of the investors lies below 50000 & 5% of the investors lies more than 400000
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Inv e stme nt cre te ria the y pre fe r ot inv e st Frequency Bank deposit 10 Real estate 4 stocks 32 commodity future market 7 mutual fund 5 life insurance 8 derivitive market 32 bonds 2 Total 100 Percent 10.0 4.0 32.0 7.0 5.0 8.0 32.0 2.0 100.0
Valid
stocks 32.0% life insurance 8.0% m utual fund 5.0% com odity future m m ar 7.0%
Interpretation: From this chart it is known that 32% of the respondents prefer to invest in derivative and stocks, 10% of the respondents in bank deposit, 8% & 7% in life insurance & commodity market ,5% in mutual fund ,4% in real estate & 2% in bonds
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Aware ne ss of de riv itiv e marke t Frequency 100 Percent 100.0 Valid Percent 100.0 Cumulative Percent 100.0
Valid
yes
yes 100.0%
Interpretation: as my targeted customer is derivative investors the above diagram depicts about the awareness level of the derivative investors is 100%
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Hav e you inv e ste d in future & options Frequency 100 Percent 100.0 Valid Percent 100.0 Cumulative Percent 100.0
Valid
yes
yes 100.0%
Interpretation: as my targeted customer is derivative investors the above diagram depicts about the investment level of the derivative investors is 100% that is respondents are purely from derivative market BABASAB PATIL MBA FINANCE PROJECT REPORT Page 68
factors conside re d while inv e sting in de riv itiv e marke t Frequency price 9 risk 39 return 45 demand & supply 7 Total 100 Percent 9.0 39.0 45.0 7.0 100.0 Valid Percent 9.0 39.0 45.0 7.0 100.0 Cumulative Percent 9.0 48.0 93.0 100.0
Valid
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return 45.0%
risk 39.0%
Interpretation: Most of the investors consider 45% of return,39% of risk,9% price& 7% demand and supply .while investing in derivatives mainly they considered returns & risk
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Valid
yes no Total
yes 64.0%
Interpretation: The above pie chart depicts that 64% of the trader aware about the Commodity Future market and 36% of them are not aware about Commodity Future Market. So there is a need to create awareness about the commodity future market and its benefits. There is a lot of potential is there to create customer and influence them to invest in Commodity Future market
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Valid
yes no Total
yes 39.0%
no 61.0%
Interpretation: From the above diagram we can say that out of 100 traders only 39% have invested in commodity market 61% have not invested in commodity market so even though the most of the traders are aware about Commodity Future market they are not trading in Future market traders feel there is a high risk involved in the future market.
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how do you came to know about commodity marke t Frequency not attempted 61 frnds/colleauges 12 bill boards/advt/brochure 9 agents 18 Total 100 Percent 61.0 12.0 9.0 18.0 100.0 Valid Percent 61.0 12.0 9.0 18.0 100.0 Cumulative Percent 61.0 73.0 82.0 100.0
Valid
Interpretation: most of the investors came to know about the commodity by agents the respondents who have invested in commodity market from them 18% of the people came to know by agents ,9% from the bill boards /advertisement/brochure &12% people came to know by there friends and colleagues. Here not attempted indicates the people who have not invested in commodity market have not attempted this question. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 73
commodity you prefer for trading Frequency not attempted 64 Agro products 10 Base metals 5 Precious metals 16 Energy products 5 Total 100 Percent 64.0 10.0 5.0 16.0 5.0 100.0 Valid Percent 64.0 10.0 5.0 16.0 5.0 100.0 Cumulative Percent 64.0 74.0 79.0 95.0 100.0
Valid
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Base m etals 5.0% Agro products 10.0% not attem pted 64.0%
Interpretation: among the persons who have invested in commodity in them 10% prefer to trade in agro products, 5% in base metals, 16% in precious metals & 5 % in energy products .here not attempted indicates the people who have not invested in commodity market have not attempted this question.
Factors conside red while trading in commodity market Frequency not attempted 65 price 3 season 8 risk 13 return 11 Total 100 Percent 65.0 3.0 8.0 13.0 11.0 100.0 Valid Percent 65.0 3.0 8.0 13.0 11.0 100.0 Cumulative Percent 65.0 68.0 76.0 89.0 100.0
Valid
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Interpretation: Most of the investors consider 11% of return,13% of risk,3% price& 8% of season. While investing in commodities mainly they considered returns & risk while investing in commodity market they mainly consider returns & risk. here not attempted indicates the people who have not invested in commodity market have not attempted this question.
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Valid
Interpretation: most of the investors say it is in neutral position & some who are benefited lot they will go for factors like agree & strongly agree & percentage of disagree is very less among invested people
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Re asons why the y hav e not inv e ste d in commodity mkt Frequency those who hv invested 39 Not intersted 5 Info non availability 10 high investment 7 complex understanding 33 high risk 6 Total 100 Percent 39.0 5.0 10.0 7.0 33.0 6.0 100.0 Valid Percent 39.0 5.0 10.0 7.0 33.0 6.0 100.0 Cumulative Percent 39.0 44.0 54.0 61.0 94.0 100.0
Valid
Interpretation: The above pie chart shows that most of the traders are not interested to invest in Commodity Future Market due to complex understanding involved in it around 33% of the traders are given this reason and 5% of them are not interested in investing in BABASAB PATIL MBA FINANCE PROJECT REPORT Page 78
planning for trading in commodity mkt in future Frequency 67 33 100 Percent 67.0 33.0 100.0 Valid Percent 67.0 33.0 100.0 Cumulative Percent 67.0 100.0
Valid
yes no Total
yes 67.0%
Interpretation: From the above graph we conclude that most of the traders are interested to invest in Commodity Future Market if proper awareness is created among them and BABASAB PATIL MBA FINANCE PROJECT REPORT Page 79
Findings
More than 50% of the Traders in are aware about the commodity future Market Hardly 30% traders are invested in the commodity future market Most of the investors are not ready to invest in commodity future market they feel it involve high risk. Returns and the Risk of the commodity are the most critical factors, which Traders will consider while investing in any commodity Most of the investors are ready to invest in commodity future market if proper information is provided As commodity future market is new and emerging ,many investors and farmers are not fully aware of this market .as the market helps to trade transparently without middlemen and agents While finding the reasons why most of the people are not trading in commodity market I found that many respondents are not interested at all in this trade this is because of unawareness & mythical perception about commodity market. BABASAB PATIL MBA FINANCE PROJECT REPORT Page 80
Most of the respondents are were from government service & business men
Suggestion
There is need to create awareness about commodity Future Market. Awareness program has to be conducted by Karvy consultants, because since this was new to the market .so it can be done through by giving advertisements in local channels, Newspapers, by sending E-mail to present customers etc From survey it is found that most of the potential customers are concerned about the Brokerage charges so Karvy can look upon this. If it can charge moderate brokerage it will help to attract more and more customers. More agents and marketing executives should be appointed to educate the customers because the customers having many myths in there mind And also create the awareness of electronic commodity trading Firm should approach people who are already into the business of commodities .special campaigns / investors meets should be conducted for these people since they are aware of rate fluctuation ,market trends etc . They have got market idea that benefits them in price prediction. They will be in high spirits when price risk of them will be managed.
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CONCLUSION
Commodity futures markets are new and emerging market. The awareness of the market is very less among the investors who can use this trade to sell there products without the middlemen or agents it also help the actual buyers too. Here trader also can transfer his risk to some other who can handle it or can appetite the risk through hedging techniques Compared to capital market commodity market is less risky in volatility context here the prices do not change within a fraction of second .significantly, minimum margin ready physical possession, no manipulation & fraud, maximum profitability is available over here since the commodity market helps all such as farmers, industries and individuals investors it is growing at a faster rate in global outlook.
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BIBLOGRAPHY
News Papers;
Business Line Economic times Times of India
Web site
www.moneycontrol.com www.google.com www.MCX.com www.NCDEX.com BABASAB PATIL MBA FINANCE PROJECT REPORT Page 83
Text books Futures & Options second addition by Vohra & Bagri
QUESTIONNAIRE
NAME : __________________________________ AGE : __________________________________ ADDRESS : __________________________________ CONTACT NO: __________________________________ 1) Which of the following will best describe your occupation (Note: please tick below the option you want to choose) Business Profession Govt.services Private service Others specify
2) What is your annual income? Below 50000 50000-100000 100001-200000 200001-400000 More than 400001
3) Which among these investment criteria you usually prefer? Bank deposits Real estate Mutual fund Life insurance Page 84
6) Which factors would you consider while investing in derivative market? Price Risk Return Demand & supply
8) If yes have you invested in commodity market? (If no directly go to question 13) Yes No
9) How do you come to know about commodity future trading? Friends/colleagues Billboards /advt/brochure Agents/ brokers Other specify
11) Which factor do you normally consider while trading in commodity market? Price Season Risk Return Demand & supply
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Disagree
13) What made you not to invest in commodity future trading? Not interested Info non availability High investment Complex understanding High risk
14) Are you planning for investing &trading in commodity future market in future? Yes No
Respondent signature
Thank you
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