A

STUDY ONCOMMODITY MARKET

WITH

SPECIAL REFERENCE TO GOLD

IN
INTER- CONNECTED STOCK EXCHANGE OF INDIA LIMITED

A project report submitted to Osmania University, Hyderabad in partial

fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By

P.PAVAN PRAHALAD
(Regd.No.08808109)
Under the guidance of
Mr. B.SATISH
(Faculty Member)

VATHSALYA COLLEGE OF BUSINESS MANAGEMENT

(Affiliated to Osmania University)
 BANJARA HILLS, BHONGIRI, DIST: NALAGONDA

DECLARATION

I here by declare that this project report titled “COMMODITY MARKET

WITH SPECIAL REFERENCE TO GOLD in INTER- CONNECTED STOCK

EXCHANGE OF INDIA LIMITED, HYDERABAD, (NARAYANAGUDA)” has

been prepare by me during the academic year 2008-2010, and the report is the

result of my own efforts and it is not been submitted to any other university for the

award of any degree or diploma any time before.

Place: HYDERABAD

Date:
P.PAVAN PRAHALAD

2
 CERTIFICATE

This is to certify that the project report titled “COMMODITY MARKET

WITH SPECIAL REFERENCE TO GOLD” IN INTER- CONNECTED STOCK

EXCHANGE OF INDIA LIMITED, HYDERABAD, (NARAYANAGUDA)” is a

bonified work done by Mr.P.PAVAN PRAHALAD bearing Regd No. 08808109

under my guidance and supervision for a period of 8 weeks and this project report

is submitted to Osmania University in partial fulfillment for the award of degree

of Master Of Business Administration.

B.SATISH
RAMA SUBBA RAO (Head of the Department)
(Project Guide)

3
 ACKNOWLEDGEMENT
It is my privilege to express my deepest sense of gratitude
to the management of INTER- CONNECTED STOCK EXCHANGE
OF INDIA LIMITED and Mr. RAMA SUBBA RAO my company
guide in INTER- CONNECTED STOCK EXCHANGE OF INDIA
LIMITED without whose support, encouragement and guidance
this Executive Training would not have been possible.

I am also grateful to B. SATISH, Asst professor of The

Vathsalya college of business management , Master of
Business Administration whose guidance & teachings have
enabled me to understand the concept of FinanceI also thankful
to I.S.E senior manager for their constant support
Encouragement, cooperation and valuable suggestions
throughout the Progress of project.Above all I thank to my family
for their support andEncouragement, which has always been a
source of inspiration.

P.PAVAN
PRAHALAD

4
 INDEX

CHAPTER-I
INTRODUCTION

 Introduction to the study

 Need and importance of the study
 Scope of the study
 Objectives of the study
 Sources of data
 Limitations
CHAPTER- II
 Company profile
CHAPTER-III
 Theoretical review
CHAPTER IV
 Data analysis &Interpretations
CHAPTER -V
 Findings & suggestions
BIBLIOGRAPHY

5
ANNEXURES

CHAPTER - I

6
 INTRODUCTION

INTRODUCTION TO THE STUDY

Indian markets have recently thrown open a new avenue for retail investors and traders to
participate commodity derivatives. For those who want to diversify their portfolios beyond
shares, commodities bonds and real estate are the best options.

The retail investors could have done very little to actually invest in commodities such as gold
and silver or oilseeds in the futures market. This was nearly impossible in commodities except
for gold and silver as there was practically no retail avenue for pumping in commodities.

However, with the setting up of three multi-commodity exchanges in the country, retail investors
can now trade in commodity futures without having physical stock.

Commodities actually offer immense potential to become a separate asset class for market survey
investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity
markets, may find commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned. Retail investors should
understand the risks and advantages of trading in commodities futures before taking a leap.
Historically, pricing in commodities futures has been less volatile compared with equity and
bonds, thus providing an efficient portfolio diversification option.

7
NEED AND IMPORTANCE OF THE STUDY

The era of liberalization has revolutionized the commodity market. In such a scenario it is
necessary to make an assessment of commodity market .as more and more investors are seeking
commodity market as of the important investment avenues, it is neccesary to make a detailed
analysis.such an analysis will help any person who is to invest in commodity market.

SCOPE OF THE STUDY

 The analysis is based on commodity trading specifically

in gold futures market.

 The analysis is based on six (6) month prices on daily

basis to show the friend of the bullion market.

 The analysis is based on opening and closing price of

gold in commodity market.

 The study is conducted based on four types of gold

products i.e.

 Gold

 Gold hni

 Gold guinea and

 Gold mini only

8
 OBJECTIVES OF THE STUDY

• To study the commodity trading and its clearing&settelement.

• To study the commodity trading with reference to gold.

• To analyze the gold trend in commodity market.

SOURCES OF DATA

The data is collected from secondary sources mainly from financial websites.

Primary of data: The no primarily source of data used.

Secondary source of data: The secondary data is collected from Hyderabad inter
connected stock exchange and various internet sources

LIMITATIONS

 The analysis is based on moving average tool.

 A technical analysis is done using 3day moving averages.

 The present study takes in to consideration of 6 month data of gold prices.

9
 This analysis will be holding good for a limited time period i.e. based on present
scenario and study conducted, future movement of price may or may not be similar.

CHAPTER-II

10
COMPANY PROFILE
Inter-connected Stock Exchange of India Limited (ISE) is a national-level stock exchange,
providing trading, clearing, settlement, risk management and surveillance support to its Trading
Members. It has 841 Trading Members, who are located in 131 cities spread across 25 states.
These intermediaries are administratively supported through the regional offices at Delhi,
Kolkata, Patna, Ahmedabad, Coimbatore and Nagpur, besides Mumbai.

ISE has been promoted by 14 Regional stock exchanges to provide cost effective trading
linkage to all the members of the participating Exchanges. ISE aims to address the needs of small
companies and retail investors by harnessing the potential of regional markets, so as to transform
them into a liquid and vibrant market using state-of-the art technology and networking.

ISE has floated ISE Securities & Services Limited as a wholly owned subsidiary under
the policy formulated by the Securities and Exchange Board of India (SEBI) for “Revival of
Small Stock Exchanges”. The policy enunciated by SEBI permits a stock exchange to float a
subsidiary, which can take up membership of larger stock exchanges, such as the National Stock
Exchange of India Limited (NSE), and Bombay Stock Exchange Limited (BSE). ISS has been
registered by SEBI as a Trading-cum-Clearing Member in the Capital Market segment and
Futures & Options segment of NSE and Capital Market segment of BSE. Trading Members of
ISE can access NSE and BSE by registering themselves as Sub-brokers of ISS. Thus, the trading
intermediaries of ISS can access other markets in addition to the ISE market. ISS, thus provides
the investors in smaller cities, a one-stop solution for cost-effective and efficient trading and
settlement services in securities.

Complementing the stock trading function, ISE’s depository participant (DP) services reach out
to intermediaries and investors at industry-leading prices. The full suite of DP services are
offered using online software, accessible through multiple connectivity modes - leased lines,
VSATs and internet. Operation of the demat account by a client requires just a few mouse clicks.

The Research Cell has been established with the objective of carrying out quality
research on various facets of the Indian financial system in general and the capital market in
particular.

It brings out a monthly newsletter titled “NISE” and a fortnightly publication titled “V
share”. The Research Cell plans to expand its activities by publishing a host of value based
research publications, covering a number of areas, such as equities, derivatives, bonds, mutual

11
funds, risk management, pension funds, money markets and commodities. The ISE Training
Centre conducts class-room training programmes on different subjects related to the capital
market, such as equities trading and settlement, derivatives trading, day trading, arbitrage
operations, technical analysis, financial planning, compliance requirement, etc. Through these
courses, the training centre provides knowledge to stockbrokers, sub-brokers, professionals and
investors to also appear for the certificate courses conducted by the stock exchanges.

It also aims to make and build the professional careers of MBAs, post graduates and
graduates, with a view to enabling them to work effectively in securities trading, risk
management, financial management, corporate finance disciplines or function as intermediaries
(viz. stock brokers, sub-brokers, merchant bankers, clearing bankers, etc.)

MISSION OF ISE

ISE endeavors to consolidate the small, fragmented and less liquid markets into a
national-level, liquid market by using state-of-the-art infrastructure and support systems.

OBJECTIVES OF ISE

• Create a single integrated national level solution with access to multiple markets for providing
high cost-effective service to millions of investors across the country.

• Create a liquid and vibrant national level market for all listed companies in general and small
capital companies in particular.

• Optimally utilize the existing infrastructure and other resources of participating Stock
Exchanges, which are under-utilized now.

12
• Provide a level playing field to small Traders and Dealers by offering an opportunity to
participate in a national markets having investment-oriented business.

• Provide clearing and settlement facilities to the Traders and Dealers across the Country at
their doorstep in a decentralized mode.

• Spread demats tradin

• g across the country.

SAILENT FEATURES OF ISE

NETWORK OF INTERMEDIARIES
As at the beginning of the financial year 2003-04, 548 intermediaries (207 Traders and 341
Dealers) are registered on ISE. A broad of members forms the bedrock for any Exchange, and in this
respect, ISE has a large pool of registered intermediaries who can be tapped for any new line of
business.

ROBUST OPERATIONAL SYSTEMS

The trading, settlement and funds transfer operations of ISE and ISS are completely automated
and state-of-the-art systems have been deployed. The communication network of ISE, which has
connectivity with over 400 trading members and is spread across46 cities, is also used for supporting
the operations of ISS. The trading software and settlement software, as well as the electronic funds
transfer arrangement
established with HDFC Bank and ICICI Bank, gives ISE and ISS the required operational
efficiency and flexibility to not only handle the secondary market functions effectively, but
also by leveraging them for new ventures.

13
 SKILLED AND EXPERIENCED MANPOWER
ISE and ISS have experienced and professional staff, who have wide experience in
Stock Exchanges/ capital market institutions, with in some cases, the experience going up to
nearly twenty years in this industry. The staff has the skill-set required to perform a wide
range of functions, depending upon the requirements from time to time.

AGGRESSIVE PRICING POLICY

The philosophy of ISE is to have an aggressive pricing policy for the various products
and services offered by it. The aim is to penetrate the retail market and strengthen the
position, so that a wide variety of products and services having appeal for the retail market
can be offered using a common distribution channel. The aggressive pricing policy also
ensures that the intermediaries have sufficient financial incentives for offering these products
and services to the end-clients.

Trading, Risk Management and Settlement Software Systems

The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS (Automated
Exchange Integrated Settlement) software developed on the Microsoft NT platform, with
consultancy assistance from Microsoft, are the most contemporary of the trading and
settlement software introduced in the country. The applications have been built on a
technology platform, which offers low cost of ownership, facilitates simple maintenance and
supports easy up gradation and enhancement. The software’s are so designed that the
transaction processing capacity depends on the hardware used; capacity can be added by just
adding inexpensive hardware, without any additional software work.

VIBRANT SUBSIDIARY OPERATIONS

ISS, the wholly owned subsidiary of ISE, is one of the biggest Exchange subsidiaries in the
country. On any given day, more than 250 registered intermediaries of ISS traded from 46
cities across the length and breadth of the country.

14
INTER-CONNECTED STOCK EXCHANGE SECURITIES
SERVICES LIMITED (ISS)

Inter-connected stock exchange of India Ltd. (ISE) has floated ISE Securities &
Services Ltd (ISS) as a wholly owned subsidiary under the policy formulated by the Securities
and Exchange Board of India (SEBI) for “Revival of Small Stock Exchange”. The policy
enunciated by the SEBI permits a stock exchange to float a subsidiary, which can take up
membership of larger stock exchange, such as the National Stock Exchange of India Ltd.
(NSE) and Bombay Stock Exchange Ltd. (BSE).

ISS has been registered by SEBI as a Trading-cum-Clearing Member in the Capital

Market segment and Futures & Options segment of NSE and Capital Market segment of BSE.
Trading Members of ISE can access NSE and BSE by registering themselves with SEBI as
Sub-brokers of ISS. Thus, the trading intermediaries of ISS can access other markets in
addition to the ISE market and their local market. ISS thus provides the investors in small
cities, a one-stop solution for cost-effective and efficient trading and settlement services in
securities.

ISS has commenced operations in the NSE segment from May 3, 2000 and the BSE segment
from December 24, 2004 and is at present operating from 80 locations.

MISSION OF ISS

ISS shall endeavor to provide flexible and cost-effective access to multiple markets to its
intermediaries across the country using the latest technology.

15
MAJOR MILESTONES

July 6, 1996 a report on Inter-Connected Market System (ICMC)

Submitted to the Federation of Indian Stock Exchange
(FISE).

October 26, 1996 Steering Committee was constituted by FISE at

Hyderabad.

January 4, 1997 Price water House Coopers, the management consultancy Firm.

January 22, 1998 ISE incorporated as a company limited by guarantee.

November 18, 1998 SEBI grants recognition to ISE.

February 26, 1999 Commencement of trading on ISE.

December 31, 1999 Induction of 450 Dealers commences.

January 18, 2000 Incorporation of ISS as a company limited by share

Capitals.

February 24, 2000 SEBI registers ISS for the Capital Market Segment of
NSE.

May 3, 2000 Commencement of trading by ISS in the Capital

Market Segment of NSE.

January 10, 2001 Turnover in the Capital Market Segment of NSE

Crosses Rs.1000 million per day.

16
February 28, 2001 Turnover of Rs.1508.80 million recorded by ISS in
The Capital Market Segment of NSE.

May 4, 2001 Internet trading for clients started by ISS for the
NSE segment through DotEx plaza.

May 19, 2001 ISE’s website, www.iseindia.com, launched.

February 13, 2002 SEBI registers ISS for the Futures & Options segment
Of NSE.

May 6, 2002 ISS commences trading in the Futures & Options segment
Of NSE.

March 12, 2003 ISS admitted as a member of the Equities segments of

BSE.

April 21, 2003 DP services through CSDL launched by ISE.

June 21, 2003 First Investor Education Program under the Securities
Market Awareness Campaign (SMAC) of SEBI conducted
At Vashi.

January 9, 2004 Peak turnover of Rs.3034.90 million recorded by ISS in the

Capital Market Segment of NSE.

May 17, 2004 First DP branch office opened at Coimbatore by ISE.

July 17, 2004 First Investor Point opened at the Vashi Railway Station
Complex by ISE.

July 24, 2004 Second DP branch opened at New Delhi by ISE.

17
Sept 3, 2004 Third DP branch opened at Kolkata by ISE.

Dec 27, 2004 Trading in the BSE equities started by ISS.

Sept 15, 2005 Approval of ISE’sCorporatisation & Demutualization

Scheme by SEBI.

October 20, 2005 Switchover to Direct Client Dealing commences in ISS.

November24, 2005 ISE re-registered as a “For Profit” company, limited by

Shares.

November 24, 2005 Board of ISE reconstituted in tune with the Corporatisation
And Demutualisation Provision.

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BOARD OF DIRECTORS

• Shri K. Rajendran Nair - Chairman, Public Interest Director

• Shri P. J. Mathew - Managing Director

• Shri S. Ravi - Public Interest Director

• Shri K. V. Thomas - Shareholder Director

• Shri K. D. Gupta - Shareholder Director

• Shri A.K. Chakrawal - Shareholder Director

• Shri Debrai Biswal - Shareholder Director

• Shri Dharmendra B. Mehta - Shareholder Director

• Shri P. Sivakumar - Shareholder Director

• Shri Surendra Holani - Trading Member Director

• Shri Rajeeb Ranjan kumar - Trading Member Director

19
CHAPTER - III

20
 THEORETICAL REVIEW

INTRODUCTION

Commodities Futures’ trading in India has a long history. The first commodity futures
market appeared in 1875. But the new standardized form of trading in the Indian capital
market is an attractive package for all the people who earn money through speculation by
trading into FUTURES. It is a well-known fact and should be remembered that the trading
in commodities through futures’ exchanges is merely, “old wine in a new bottle”.

The trading in commodities was started with the first transaction that took place between
two individuals. We can relate this to the ancient method of trading i.e., BARTER
SYSTEM. This method faced the initial hiccups due to the problems like: store of value,
medium of exchange, deferred payment, measure of wealth etc. This led to the invention of
MONEY. As the market started to expand, the problem of scarcity piled up.

The farmers / traders then felt the need to protect themselves against the fluctuations in the price
for their produce. In the ancient times, the commodities traded were – the Agricultural Produce,
which was exposed to higher risk i.e., the natural calamities and had to face the price uncertainty.
It was certain that during the scarcity, the farmer realized higher prices and during the
oversupply he had to loose his profitability. On the other hand, the trader had to pay higher price
during the scarcity and vice versa. It was at this time that both joined hands and entered into a
contract for the trade i.e., delivery of the produce after the harvest, for a price decided earlier. By
this both had reduced the future uncertainty.

One stone still remained unturned- ‘surety of honoring the contract on part from either of the
parties’. This problem was settled in the year 1848, when a group of traders in

CHICAGO came forward to standardize the trading. They initiated the concept of “to-arrive”
contract and permitted the farmers to lock in the price upfront and deliver the grain at a

21
contracted date later. This trading was carried on a platform called CHICAGO BOARD OF
TRADE, one of the most popular commodities trading exchanges’ today. It was this time that the
trading in commodity futures’ picked up and never looked back.

Although in the 19th century only agricultural produce was traded as a futures contract, but now,
the commodities of global or at least domestic importance are being traded over the commodity
futures’ exchanges. This form of trading has proved useful as a device for HEDGING and
SPECULATION. The commodities that are traded today are:

• Agro-Based Commodities…… Wheat, Corn, Cotton, Oils, Oilseeds etc..

• Soft Commodities…………….. Coffee, Cocoa, Sugar etc
• Livestock………………………. Live Cattle, Pork Bellies etc
• Energy………………………….. Crude Oil, Natural Gas, Gasoline etc
• Precious Metals……………….. Gold, Silver, Platinum etc
• Other Metals…………………… Nickel, Aluminum, Copper etc

22
STRUCTURE OF THE COMMODITY MARKET

23
 DEFINITION OF COMMODITIES

Any product that can be used for commerce or an article of commerce which is traded on

an authorized commodity exchange is known as commodity. The article should be movable of

value, something which is bought or sold and which is produced or used as the subject or barter

or sale. In short commodity includes all kinds of goods. Forward

Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property

other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and

fossil origin are allowed for commodity trading recognized under the FCRA. The national

commodity exchanges, recognized by the Central Government, permits commodities which

include precious (gold and silver) and non-ferrous metals: cereals and pulses; ginned and un-

ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and

onions.

NEED OF COMMODITY MARKET IN INDIA

Achieving hedging efficiency is the main reason to opt for futures contracts. For instance, in
February, 2007, India had to pay $ 52 per barrel more for importing oil than what they had to pay
a week ago. The utility of a futures contact for hedging or risk management purpose parallel or
near-parallel relationship between the spot and futures prices over time. In other words, the
efficiency of a futures contract for hedging essentially envisages that the prices in the physical
and futures markets move in close union not only in the same direction, but also by almost the
same magnitude, so that losses in one market are offset by gains in the other.

24
 Theoretically ( and ideally), in a perfectly competitive market with surplus supplies and
abundant stocks round the year, the futures price will exceed the spot price by the cost of storage
till the maturity of the futures contract. But such storage cost declines as the contract approaches
maturity, thereby reducing the premium or contango commanded by the futures contract over the
spot delivery over its life and eventually becomes zero during the delivery month when the spot
and futures prices virtually converge. The efficiency of a futures contract for hedging depends
on the prevalence of such an ideal price relationship between the spot and futures markets.

COMMODITIES EXCHANGES

A brief description of commodity exchanges are those which trade in particular

commodities, neglecting the trade of securities, stock index futures and options etc.,

In the middle of 19th century in the United States, businessmen began organizing market forums
to make the buying and selling of commodities easier. These central market places provided a
place for buyers and sellers to meet, set quality and quantity standards, and establish rules of
business.

The major commodity markets are in the United Kingdom and in the USA. In India there are 25
recognized future exchanges, of which there are three national level multi-commodity
exchanges. After a gap of almost three decades, Government of India has allowed forward
transactions in commodities through Online Commodity Exchanges, a modification of traditional
business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of
commodities.

25
 THE THREE EXCHANGES ARE

• National Commodity & Derivatives Exchange Limited ( NCDEX)

• Multi Commodity Exchange of India Limited ( MCX)
• National Multi-Commodity Exchange of India Limited ( NMCEIL)
All the exchanges have been set up under overall control of Forward Market Commission (FMC)
of Government of India.

NATIONAL COMMODITY & DERIVATIVES EXCHANGES

LIMITED (NCDEX)

National Commodity & Derivatives Exchanges Limited (NCDEX) located in Mumbai is

a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and
had commenced its operations on December 15, 2003. This is the only commodity exchange in
the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life
Insurance Corporation and National Bank for Agriculture and Rural Development (NABARD)
and National Stock Exchange of India Limited (NSE). It is a professionally managed online
multi commodity exchange. NCDEX is regulated by Forward Market Commission and is
subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act.,
Forward Commission ( Regulation) Act and * various other legislations.
Multi Commodity Exchange of India Limited (MCX)
Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an
independent and de-mutualised 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, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online
trading, clearing and settlement.

All the exchanges have been set up under overall control of Forward Market Commission (FMC)
of Government of India.

26
Commodity exchange in India plays an important role where the prices of any commodity are
not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market
judged upon the prices. Others never had a say. Today, commodity exchanges are purely
speculative in nature. Before discovering the price, they reach to the producers, end-users, and
even the retail investors, at a grassroots level. It brings a price transparency and risk
management in the vital market.

A big difference between a typical auction, where a single auctioneer announces the bids, and the
Exchange is that people are not only competing to buy but also to sell. By Exchange rules and
by law, no one can bid under a higher bid, and no one can offer to sell higher than some one
else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their
toes to make sure no one gets the purchase or sale before they do.

INTERNATIONAL COMMODITIES EXCHANGES

Chicago board of trade (CBOT) – 1848
Chicago mercantile exchanges (CME) – 1898
New York mercantile exchanges (NYMEX) –1872
London metal exchange (LME) – 1877
London international financial futures exchange (LIFFE) – 1979
Tokyo commodity exchange (TOCOM) – 1984
Shanghai metal exchange (SHME)
Dahlia commodity exchange (DCE) – 1993

27
 DERIVATIVES

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard themselves
against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial
markets are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices. However,
by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on
the profitability and cash flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their value from an underlying asset. The
underlying asset can be bullion, index, share, bonds, currency, interest, etc. Banks, Securities firms,
companies and investors to hedge risks, to gain access to cheaper money and to make profit, use
derivatives. Derivatives are likely to grow even at a faster rate in future.

DEFINITION

Derivative is a product whose value is derived from the value of an underlying asset in a contractual
manner. The underlying asset can be equity, forex, commodity or any other asset.
1) Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to
secured or unsecured, risk instrument or contract for differences or any other form of security.
2) A contract which derives its value from the prices, or index of prices, of
underlying securities.
3)

Emergence of financial derivative products

Derivative products initially emerged as hedging devices against fluctuations in commodity prices,
financial derivatives came into spotlight in the post-1970 period due to growing instability in the
financial markets. However, since their emergence, these products have become very popular and by

28
1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years,
the market for financial derivatives has grown tremendously in terms of variety of instruments
available, their complexity and also turnover. Even small investors find these useful due to high
correlation of the popular indexes with various portfolios and ease of use.

PARTICIPANTS

The following three broad categories of participants in the derivatives market.

HEDGERS

Hedgers face risk associated with the price of an asset. They use futures or options markets to
reduce or eliminate this risk.

SPECULATORS
Speculators wish to bet on future movements in the price of an asset. Futures and options
contracts can give them an extra leverage; that is, they can increase both the potential gains and
potential losses in a speculative venture.
ARBITRAGERS
Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if,
for, example, they see the futures price of an asset getting out of line with the cash price, they will take
offsetting position in the two markets to lock in a profit.

FUNCTION OF DERIVATIVES MARKETS

The following are the various functions that are performed by the derivatives markets. They are:

• Prices in an organized derivatives market reflect the perception of market participants about
the future and lead the price of underlying to the perceived future level.

29
• Derivatives market helps to transfer risks from those who have them but may not like them to
those who have an appetite for them.
• Derivatives trading acts as a catalyst for new entrepreneurial activity.
• Derivatives markets help increase saving and investment in long run.

TYPES OF DERIVATIVES

The following are the various types of derivatives. They are

FORWARDS
A forward contract is a customized contract between two entities, where settlement takes place on a
specific date in the future at today’s pre-agreed price.
FUTURES
A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a
certain price; they are standardized and traded on exchange.
OPTIONS
Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a
given quantity of the underlying asset, at a given price on or before a given future date. Puts give the
buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price
on or before a given date.
WARRANTS
Options generally have lives of up to one year; the majority of options traded on options exchanges
having a maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded over-the counter.
LEAPS
The acronym LEAPS means long-term Equity Anticipation securities. These are options having a
maturity of up to three years.
BASKETS

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Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving
average of a basket of assets. Equity index options are a form of basket options.

SWAPS
Swaps are private agreements between two parties to exchange cash floes in the future according to a
prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly
used Swaps are
Interest rate Swaps
These entail swapping only the related cash flows between the parties in the same currency.
Currency Swaps
These entail swapping both principal and interest between the parties, with the cash flows in on
direction being in a different currency than those in the opposite direction.
SWAPTION
Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.
Thus a swaption is an option on a forward swap.
INTRODUCTION TO FUTURES AND OPTIONS
In recent years, derivatives have become increasingly important in the field of finance. While
futures and options are now actively traded on many exchanges, forward contracts are popular on
the OTC market. In this chapter we shall study in detail these three derivative contracts.
Forward contracts
A forward contract is an agreement to buy or sell an asset on a specified date for a specified
price. One of the parties to the contract assumes a long position and agrees to buy the underlying
asset on a certain specified future date for a certain specified price. The other party assumes a
short position and agrees to sell the asset on the same date for the same price. Other contract
details like delivery date, price and quantity are negotiated bilaterally by the parties to the
contract. The forward contracts are normally traded outside the exchanges. The salient features
of forward contracts are:
They are bilateral contracts and hence exposed to counter–party risk.
Each contract is custom designed, and hence is unique in terms of contract size, expiration date
and the asset type and quality.

31
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty,
which often results in high prices being charged.
However forward contracts in certain markets have become very standardized. This process of
standardization reaches its limit in the organized futures market.
Forward contracts are very useful in hedging and speculation. The classic hedging application
would be that of an exporter who expects to receive payment in dollars three months later. He is
exposed to the risk of exchange rate fluctuations. By using the currency forward market to sell
dollars forward, he can lock on to a rate today and reduce his uncertainty. Similarly an importer
who is required to make a payment in dollars two months hence can reduce his exposure to
exchange rate fluctuations by buying dollars forward
Limitations of forward markets
Forward markets world-wide are afflicted by several problems:
• Lack of centralization of trading,
• Liquidity, and
• Counter party risk

INTRODUCTION TO FUTURES
Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the future
at a certain price. But unlike forward contracts, the futures contracts are standardized and
exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain
standard features of the contract. A futures contract may be offset prior to maturity by entering
into an equal and opposite transaction. More than 99% of futures transactions are offset this way.

Distinction between futures and forwards

Futures Forwards
Trade on an organized exchange OTC in nature
Standardized contract terms customized contract terms
Hence more liquid hence less liquid

32
 Requires margin payments no margin payments
Follows daily settlement settlement happens at end of period

Forward contracts are often confused with futures contracts. The confusion is primarily because both
serve essentially the same economic functions of allocating risk in the presence of future price
uncertainty. However futures are a significant improvement over the forward contracts as they eliminate
counterparty risk and offer more liquidity. Table 3.1 lists the distinction between the two

DEFINITION
A Futures contract is an agreement between two parties to buy or sell an asset a certain time in the future
at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard
features of the contract.
Quantity and Quality of the underlying of the underlying.
• The date and the month of delivery
• The units of price quotations and minimum price change
• Location of settlement

FEATURES OF FUTURES
1. Futures are highly standardized.
2. The contracting parties need not pay any down payments.
3. Hedging of price risks.
4. They have secondary markets to.

TYPES OF FUTURES
On the basis of the underlying asset they derive, the futures are divided into two types:

33
 • Stock futures
• Index futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a future contract, the buyer and the seller. The buyer of the futures contract is
one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the
futures contract.

The pay off for the buyer and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

Profit

FP
F
0 S2 S1

FL
Loss

CASE 1 the buyer bought the futures contract at (F); if the future price goes to S1 then the buyer gets
the profit of (FP).
CASE 2 the buyer gets loss when the future price goes less then (F), if the future price goes to S2 then
the buyer gets the loss of (FL).

34
 PAY-OFF FOR A SELLER OF FUTURES
Profit

FL
S2 F S1

FP
Loss
F – FUTURES PRICE S1, S2 – SETTLEMENT PRICE

CASE 1 the seller sold the future contract at (F); if the future goes to S1 then the seller gets the
profit of (FP).
CASE 2 the seller gets loss when the future price goes greater than (F), if the future price goes to
S2 then the seller gets the loss of (FL).

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES

Holding portfolios of securities is associated with the risk of the possibility that the
investor may realize his returns, which would be much lesser than what he expected to get. There
are various factors, which affect the returns
1. Price or dividend (interest)
2. Some are internal to the firm like-

• Industrial policy
• Management capabilities
• Consumer’s preference
• Labour strike, etc.

35
 These forces are to a large extent controllable and are termed as non systematic risks. An
investor can easily manage such non-systematic by having a well-diversified portfolio spread
across the companies.
There are other of influence which are external to the firm which cannot be controlled
and affect large number of securities. They are termed as systematic risk. They are:
1. Economic
2. Political
3. Sociological changes are sources of systematic risk.
For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-
individual stocks to move together in the same manner. We therefore quite often find stock prices
falling from time to time in spite of company’s earning rising and vice versa.

In debt market, a large position of the total risk of securities is systematic. Debt
instruments are also finite life securities with limited marketability due to their small size relative
to many common stocks. Those factors favor for the purpose of both portfolio hedging and
speculation, the introduction of a derivatives securities that is on some broader market rather than
an individual security

EVOLUTION OF COMMODITY FUTURES EXCHANGES

Commodity markets have existed for centuries around the world because producers and buyers
of foodstuffs and other items have always needed a common place to trade. Cash transactions
were most common, but sometimes “forward” agreements were also made deals to deliver and
pay for something in the future at a price agreed upon in the present. There are records, for
example, of “forward” agreements related to the rice markets in Seventeenth century Japan: most
scholars agree that forward arrangements actually date back much farther in time.
The first organized grain futures trading in the U.S began in places such as New York City and
Buffalo, but the development of “modern” futures, which are a unique type of forward
agreement, began in Chicago in the 1840s. With the construction of the railroads, Chicago began
to emerge as a center for transportation between Midwestern producers and west coast
population centers. The city was a natural hub for trade, but the trading that took place there was

36
inefficient and unorganized until a group of Chicago-based business men formed the Board of
Trade of the City of Chicago in 1848. The Board was a member-owned organization that offered
a centralized location for cash trading of a variety of goods as well as trading of forward
contracts. Members served as brokers who facilitated trading in return for commissions.
As trading of forward contracts increased, the Board decided that standardizing those contracts
would streamline the trading and delivery processes. Instead of individualized contracts, which
took a great deal of time to negotiate and fulfill, people interested in the forward trading of corn
at the Board, for example, were asked to trade contracts that were identical in terms of quantity,
quality, delivery month and terms, all as established by the exchange. The only thing left for
traders to negotiate was price and the number of contracts.

These standardized forwards were essentially the first modern futures contracts.
They were unlike other forwards in that they could only be traded at the exchange that created
them, and only at certain designated times. They were also different from other forwards in that
the bids, offers and negotiated prices of the trades were made public by the exchange. This
practice established futures exchanges as venues for “price discovery” in U.S markets.

In contrast to customized contracts, standardized futures contracts were easy to trade, since all
traders were simply re-negotiations of price, and they usually changed hands many times before
expiration. People who wanted to make a profit based on a fortuitous price change, or
alternatively, who wished to cut mounting losses as quickly as possible, could “offset” a futures
contract before expiration by engaging in an opposite trade: buying a contract which they had
previously sold (or “gone short”), or selling a contract which they had previously bought (or
“gone long”).
CASH COMMODITY

A cash commodity must meet three basic conditions to be successfully traded in the futures
market:
1. It has to be standardized and, for agricultural and industrial commodities, must be in a basic,
raw, unprocessed state. There are futures contracts on wheat, but not on flour. Wheat is wheat
(although different types of wheat have different futures contracts). The miller who needs

37
 wheat futures to help him avoid losing money on his flour transactions with customers
wouldn’t need flour futures. A given amount of wheat yields a given amount of flour and the
cost of converting wheat to flour is fairly fixed hence predictable.
2. Perishable commodities must have an adequate shelf life, because delivery on a futures contract
is deferred.
3. The cash commodity’s price must fluctuate enough to create uncertainty, which means both rise
and potential profit.

Unlike a stock, which represents equity in a company and can be held for along time, if not
indefinitely, futures contracts have finite lives. They are primarily used for hedging commodity
price-fluctuation risks or for taking advantage of price movements, rather than for the buying or
selling of the actual cash commodity. The word “contract” is used because a futures contract
requires delivery of the commodity in a stated month in the future unless the contract is
liquidated before it expires.

The buyer of the futures contract (the party with a long position) agrees on a fixed purchase price
to buy the underlying commodity (wheat, gold or T-bills, for example) form the seller at the
expiration of the contract. The seller of the futures contract (the party with a short position)
agrees to sell the underlying commodity to the buyer at expiration at the fixed sales price. As
time passes, the contract’s price changes relative to the fixed price at which the trade was
initiated. This creates profits or losses for the trader.

In most cases, delivery never takes place. Instead, both the buyer and the seller, acting
independently of each other, usually liquidate their long and short positions before the contract
expire: the buyer sells futures and the seller buys futures.

THE ERA OF FINANCIAL FUTURES

In the 19th and early 20th centuries gold played a key role in international monetary transactions.
The gold standard was used to back currencies; the international value of currency was
determined by its fixed relationship to gold; gold was used to settle international accounts. The

38
gold standard maintained fixed exchange rates that were seen as desirable because they reduced
the risk of trading with other countries.
Imbalances in international trade were theoretically rectified automatically by the gold standard.

A country with a deficit would have depleted gold reserves and would thus have to reduce its

money supply. The resulting fall in demand would reduce imports and the lowering of prices

would boost exports; thus the deficit would be rectified. Any country experiencing inflation

would lose gold and therefore would have a decrease in the amount of money available to spend.

This decrease in the amount of money would act to reduce the inflationary pressure.

Supplementing the use of gold in this period was the British pound. Based on the dominant

British economy, the pound became a reserve, transaction, and intervention currency. But the

pound was not up to the challenge of serving as the primary world currency, given the weakness

of the British economy after the Second World War.

Preparing to rebuild the international economic system as World War II was still raging 730

delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Breton Woods,

New Hampshire for the United Nations Monetary and Financial Conference. The delegates

deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July

1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary

system, the planners at Bretton Woods established the International Bank for Reconstruction and

Development (IBRD) (now one of five institutions in the World Bank Group) and the

International Monetary Fund (IMF). These organizations became operational in 1946 after a

sufficient number of countries had ratified the agreement.

39
 THE BRETTON WOODS SYSTEM OF FIXED EXCHANGE RATES

The chief features of the Bretton Woods system were an obligation for each country to adopt a

monetary policy that maintained the exchange rate of its currency within a fixed value-plus or

minus one percent – in terms of gold; and the ability of the IMF to bridge temporary imbalances

of payments.

THE “PEGGED RATE” OR “PAR VALUE” CURRENCY REGIME

What emerged was the “pegged rate” currency regime. Members were required to establish a

parity of their national currencies in terms of gold (a “peg”) and to maintain exchange rates

within plus or minus 1% of parity (a “band”) by intervening in their foreign exchange markets

(that is, buying or selling foreign money)

THE “RESERVE CURRENCY”

In practice, however, since the principal “ Reserve currency” would be the U.S dollar, this meant

that other countries would pet their currencies to the U.S dollar, and – once convertibility was

restored – would buy and sell U.S dollars to keep market exchange rates within plus or minus 1%

of parity. Thus, the U.S dollar took over the role that gold had played under the gold standard in

the international financial system.

Meanwhile, in order to bolster faith in the dollar, the U.S agreed separately to link the dollar to

gold at the rate of $ 35 per ounce of gold. Member countries could only change their par value

40
with IMF approval, which was contingent on IMF determination that its balances of payments

was in a “fundamental disequilibrium”.

THE U.S BALANCES OF PAYMENTS CRISIS (1958-68)

After the end of World War H. the U.S held $26 billion in gold reserves, of an estimated total of

$40 billion (approx 65%). As world trade increased rapidly through the 1950s, the size of the

gold base increased by only a few percent. In 1958, the U.S balance of payments swung

negative. The first U.S response to the crisis was in the late 1950s when the Eisenhower

administration placed import quotas on oil and other restrictions on trade outflows. More drastic

measures were proposed, but not acted on. However, with a mounting recession that began in

1959, this response alone was not sustainable.

By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the

Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. By the

early 1970s as the Vietnam War accelerated inflation, the United States as a whole began

running a trade deficit (for the first time in the twentieth century). The crucial turning point was

1970, which saw U.S gold coverage deteriorate from 55% to 22%.

The Smithsonian Agreement

On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in

Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with

2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It

was criticized at the time, and was by design a “temporary” agreement. It failed to impose

discipline on the U.S government, and with no other credibility mechanism in place, the pressure

against the dollar in gold continued.

41
This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $

70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg

against the dollar, though it took a decade for all of the industrialized nations to do so. In

February 1973 the Bretton Woods currency exchange markets closed after a last-gasp

devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.

Throughout the first seven decades of the twentieth century, the futures industry remained

essentially as it has been – focused on the trading of futures on agricultural products. But a

remarkable change occurred in the industry in 1971, with the introduction of futures based on

financial products.

EMERGING TRENDS IN COMMODITY MARKET IN INDIA

Commodity markets have existed in India for a long time, below Table gives the list of registered

commodities exchanges in India. Above Table gives the total annualized volumes on various

exchanges.

While the implementations of the Kara committee recommendations were rather slow, today, the

commodity derivative market in India seems poised for a transformation. National level

commodity derivatives exchanges seem to be the new phenomenon. The Forward Markets

Commission accorded in principle approval for the following national level multi commodity

exchanges. The increasing volumes on these exchanges suggest that commodity markets in India

seem to be a promising game.

42
NATIONAL BOARD OF TRADE

Multi Commodity Exchange of India

National Commodity & Derivatives Exchanges of India Ltd.,

Commodity Exchange Products

National board of trade, Indore Soya, mustard
National multi commodity exchange, Ahmedabad Multiple
Ahmedabad commodity exchange Castor, cotton
Rajadhani Oil & Oil seeds Mustard
Vijai Beopar Chamber Ltd., Muzzaffarnagar Gur
Rajkot seeds, Oil & bullion exchange Castor, groundnut
IPSTA, Cochin Pepper
Chamber of commerce, Hapur Gur, mustard
Bhatinda Om and Oil Exchange Gur
Other ( mostly inactive)

COMMODITY EXCHANGES REGISTERED IN INDIA

Commodity Exchange Products Traded

Bhatinda Om & Oil Exchange Ltd.,
The Bombay commodity Exchange
Ltd
The Rajkot Seeds Oil & Bullion
Merchants Association Ltd.
The Kanpur Commodity Exchange
Ltd.,
Te Meeerut Agro commodities
Exchange Co., Ltd.
The Spices and Oilseeds exchange
Gur
Sunflower Oil
Cotton ( Seed and Oil)
Safflower ( Seed , Oil and Oil Cake)
Groundnut ( Nut and Oil)
Castor Oil, Castor seed
Sesamum ( Oil and Oilcake)
Rice bran, rice bran oil and oil cake
Crude palm oil
Groundnut Oil, Castro Seed
Rapeseed / Mustard seed oil and cake.
Gur
Turmeric

43
Ltd., Sangli
Ahmedabad Commodities Exchange
Ltd
Vijay Beopar Chamber Ltd.,
Muzaffarnagr
India Pepper & Spice Trade
Association, Kochi
Rajadhani Oils and Oil seeds
Exchange Ltd.,Delhi
National Board of Trade, Indore
The Chamber of Commerce, Hapur
The East India Cotton Association,
Mumbai
The central India Commercial
Exchange Ltd Gwaliar
The east India Jute & Hessain
Exchange Ltd., Kolkata
First Commodity Exchange of India
Ltd., Kochi
The Coffee Futures Exchange India
Ltd Bangalore
National Multi Commodity Exchange
of India Ltd., / Ahmedabad
Cottonseed, castor seed
Gur
Pepper
Gur, Rapeseed / Mustard Seed Sugar Grade – M
Rapeseed / Mustard Seed / Oil / Cake
Soyabean / Meal / Oil / Crude Palm Oil
Gur, Rapeseed / Mustard seed
Cotton
Gur
Hessain, Sacking
Copra, Coconut Oil & Copra Cake
Coffee
Gur RBD Pamolien
Crude Palm Oil, Copra
Rapeseed / Mustard Seed, Soy Bean
Cotton ( Seed, Oil, Oil Cake)
Safflower ( Seed, Oil, and Oil cake)
Ground nut ( Seed, Oil, and Oil cake)
Sugar, Sacking, Gram
Coconut ( Oil and Oilcake)
Castor ( Oil and Oilcake)
Sesamum ( Seed, Oil, and Oil cake)
Linseed ( Seed, Oil, and Oil cake)
Rice Bran Oil, Pepper, Guar seed Aluminium ingots,
Nickel, tin Vanaspati, Rubber, Copper, Zinc, Lead
44
National commodity & Derivatives Soy Bean, Refined Soy oil, Mustard Seed
Exchange Limited Expeller Mustard Oil
RBD Palmolein Crude Palm Oil
Medium staple cotton
Long Staple Cotton
Gold, Silver

COMMODITY TRADING

COMMODITY MARKET TRADING MCHANISM

Every market transaction consists of three components – trading, clearing and settlement.

TRADING
The trading system on the Commodities exchange 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. 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 quantity
fields are in units and price in rupees. The exchange specifies the unit of trading and the delivery
unit for futures contracts on various commodities. The exchange notifies the regular lot size and
tick size for each of the contracts traded from time to time. When any order enters the trading
system, it is an active order. It tries to find a match on the other side of the book. If it finds a
match, a trade is generated. If it does not find a match, the order becomes passive and gets
queued in the respective outstanding order book in the system; Time stamping is done for each
trade and provides the possibility for a complete audit trail if required.

45
COMMODITY FUTURES TRADING CYCLE
NCDEX trades commodity futures contracts having one-month, two-month and three-month
expiry cycles. All contracts expire on the 20th of the expiry month. Thus a January expiration
contract would expire on the 20th of January and a February expiry contract would cease trading
on the 20th February. If the 20th of the expiry month is a trading holiday, the contracts shall
expire on the previous trading day. New contracts will be introduced on the trading day
following the expiry of the near month contract. Following Figure shows the contract cycle for
futures contracts on NCDEX.

Jan Feb Mar Apr

Time
Jan 20 contract
Feb 20 contract
March 20 contract

April 20 contract
May 20 contract
June 20 contract
ORDER TYPES AND TRADING PARAMETERS

An electronic trading system allows the trading members to enter orders with various conditions
attached to them as per their requirement. These conditions are broadly divided into the
following categories:
• Time conditions
• Price conditions
• Other conditions
Several combinations of the above are possible thereby providing enormous flexibility to users.
The order types and conditions are summarized below. Of these, the order types available on the
NCDEX system are regular lot order, stop loss order, immediate or cancel order, good till day
order, good till cancelled order, good till order and spread order.

46
TIME CONDITIONS
1. Good till day order
A day order, as the name suggests is an order which is valid for the day on which it is entered. If
the order is not executed during the day, the system cancels the order automatically at the end of
the day Example: A trader wants to go long on March 1, 2004 in refined palm oil on the
commodity exchange. A day order is placed at Rs.340/- 10 kg. If the market does not reach this
price the order does not get filled even if the market touches Rs.341 and closes. In other words
day order is for a specific price and if the order does not get filled that day, one has to place the
order gain the next day.

2. Good till cancelled (GTC)

A GTC order remains in the system until the user cancels it. Consequently, it spans trading days,
if not traded on the day the order is entered. The maximum number of days an order can remain
in the system is notified by the exchange from time to time after which the order is automatically
cancelled by the system. Each day counted is a calendar day inclusive of holidays. The days
counted are inclusive of the day on which the order is placed and the order is cancelled from the
system at the end of the day of the expiry period. Example: A trader wants to go long on refined
palm oil when the market touches Rs.400/- 10 kg. Theoretically, the order exists until it is filled
up, even if it takes months for it to happen. The GTC order on the NCDEX is cancelled at the
end of a period of seven calendar days from the date of entering an order or when the contract
expires, whichever is earlier.

3. Good till date (GTD)

A GTD order allows the user to specify the date till which the order should remain in the system
if not executed. The maximum days allowed by the system are the same as in GTC order. At the
end this day / date, the order is cancelled from the system. Each day / date counted is inclusive
of the day / date on which the order is placed and the order is cancelled from the system at the
end of the day / date of the expiry period.

47
4. Immediate or Cancel (IOC)
An IOC order allows the user to buy or sell a contract as soon as the order is released into the
system, failing which the order is cancelled from the system. Partial match is possible for the
order, and the unmatched portions of the order are cancelled immediately.
5. All or none order
All or none order ( AON) is a limit order, which is to be executed in its entirety, or not at all.
Unlike a fill-or-kill order, an all-or-none order is not cancelled if it is not executed as soon as it is
represented in the exchange. An all-or-none order position can be closed out with another AON
order.

6. Fill or Kill order

This order is a limit order that is placed to be executed immediately and if the order is unable to
be filed immediately, it gets cancelled.

PRICE CONDITION

1. Limit Order
An order to buy or sell a stated amount of a commodity at a specified price, or at a better price, if
obtainable at the time of execution. The disadvantage is that the order may not get filled at all if
the price of that day does not reach specified price.

2. Stop-loss
A stop-loss order is an order, placed with the broker, to buy or sell a particular futures contract at
the market price if and when the price reaches a specified level. Futures traders often use stop
orders in an effort to limit the amount they might lose if the futures price moves against their
position Stop orders are not executed until the price reaches the specified point. When the price

48
reaches that point the stop order becomes a market order. Most of the time, stop orders are used
to exit a trade. But, stop orders can be executed for buying / selling positions too. A buy stop
order is initiated when one wants to buy a contract or go long and a sell stop order when one
wants to sell or go short . The order gets filled at the suggested stop order price or at a better
price. Example: A trader has purchased crude oil futures at Rs.750 per barrel. He wishes to
limit his loss to Rs.50 a barrel. A stop order would then be placed to sell an offsetting contract if
the price falls to Rs.700 per barrel. When the market touches this price, stop order gets executed
and the trader would exit the market. For the stop-loss sell order, the trigger price has to be
greater than the limit price.

OTHER CONDITIONS
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract. The margin
required for a futures contract. The margin required for a futures contract is better described as
performance bond or good faith money. The margin levels are set by the exchanges based on
volatility (market conditions) and can be changed at any time. The margin requirements for most
futures contracts range from 2% to 15% of the value of the contract.
In the futures market, there are different types of margins that a trader has to maintain. We will
discuss them in more details when we talk about risk management in the next chapter. At this
stage we look at the types of margins as they apply on most futures exchanges.
• Initial margin: The amount that must be deposited by a customer at the time of entering
into a contract is called initial margin. This margin is meant to cover the largest potential
loss in one day. The margin is a mandatory requirement of parties who are entering into
the contract.
• Maintenance margin: A trader is entitled to withdraw any balance in the margin account
in excess of the initial margin. To ensure that the balance in the margin account never
becomes negative, a maintenance margin, which is somewhat lower than the initial
margin, is set. If the balance in the margin account falls below the maintenance margin,
the trader receives a margin call and is requested to deposit extra funds to bring it to the
initial margin level within a very short period of time. The extra funds deposited are

49
 known as a variation margin. If the trader does not provide the variation margin, the
broker closes out the position by offsetting the contract.
• Additional margin: In case of sudden higher than expected volatility, the exchange calls
for an additional margin, this is a preemptive move to prevent breakdown. This is
imposed when the exchange fears that the markets have become too volatile and may
result in some payments crisis, etc.,
• Mark-to-Market margin (MTM): At the end of each trading day, the margin account is
adjusted to reflect the trader’s gain or loss. This is known as marking to market the
account of each trader. All futures contracts are settled daily reducing the credit exposure
to one day’s movement. Based on the settlement price, the value of all positions is
marked-to-market each day after the official close, i.e., the accounts are either debited or
credited based on how well the positions fared in that day’s trading session. If the
account falls below the maintenance margin level the trader needs to replenish the
account by giving additional funds. On the other hand, if the position generates a gain,
the funds can be withdrawn (those funds above the required initial margin) or can be used
to fund additional trades.
Just as a trader is required to maintain a margin account with a breaker, a clearing house member
is required to maintain a margin account with the clearing house. This is known as clearing
margin. In the case of clearing house member, there is only an original margin and no
maintenance margin. Clearing house and clearing house margins have been discussed further in
detail under the chapter on clearing and settlement.

CHARGES
Members are liable to pay transaction charges for the trade done through the exchange during the
previous month. The important provisions are listed below; the billing for the all trades done
during the previous month will be raised in the succeeding month.

50
 1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs. One Lakh
trade done. This rate is subject to change from time to time.
2. Due date: The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month.
3. Collection process: NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System.
4. Registration with BJPL and their services: Members have to fill up the mandate form and
submit the same to NCDEX. NCDEX then forwards the mandate form the BJPL. BJPL
sends the login ID and password to the mailing address a s mentioned in the registration
form. The members can then log on through the website of BJPL, and view the billing
amount and the due date. Advance email intimation is also sent to the members. Besides,
the billing details can be viewed on the website up to a maximum period of 12 months.
5. Adjustment against advances transaction charges: In terms of the regulations, members
are required to remit Rs.50, 000/- as advance transaction charges on registration. The
transaction charges due first will be adjusted against the advance transaction charges
already paid as advance and members need to pay transaction charges only after
exhausting the balance lying in advance transaction.
6. Penalty for delayed payments: If the transaction charges are not paid on or before the due
date, a penal interest is levied as specified by the exchange. Finally, the futures market is
a zero sum game i.e. the total number of long in any contract always equals the total
number of short in any in time is called the “Open interest”. This Open interest figure is a
good indicator of the liquidity in every contract. Based on studies carried out in
international exchanges, it is found that open interest is maximum in near month expiry
contracts.

CLEARING & SETTLEMENT

Most futures contracts do not lead to the actual physical delivery of the underlying asset. The
settlement is done by closing out open positions, physical delivery or cash settlement. All these
settlement functions are taken care of by an entity called clearing house or clearing corporation.

51
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades
executed on the NCDEX. The settlement guarantee fund is maintained and managed by
NCDEX.

CLEARING
Clearing of trades that take place on an exchange happened through the exchange-clearing
house. A clearinghouse is a system by which exchanges guarantee the faithful compliance of all
trade commitments undertaken on the trading floor or electronically over the electronic trading
systems. The main task of the clearing house is to keep track of all the transactions that take
place during a day so that the net position of each of its members can be calculated. It
guarantees the performance of the parties to each transaction. Typically it is responsible for the
following:
1. Effecting timely settlement.
2. Trade registration and follow up.
3. Control of the evolution of open interest.
4. Financial clearing of the payment flow.
5. Physical settlement (by delivery) or financial settlement ( by price difference) of
contracts.
6. Administration of financial guarantees demanded by the participants.

The clearing house has a number of members, who re mostly financial institutions responsible
for the clearing and settlement of commodities traded on the exchange. The margin accounts for
the clearing house members are adjusted for gains and losses at the end of each day (in the same
way as the individual traders keep margin accounts with the broker). On the NCDEX, in the
case of clearing house members only the original margin is required (and not maintenance
margin). Everyday the account balance for each contract must be maintained at an amount equal
to the original margin times the number of contracts outstanding. Thus depending on a day’s
transactions and price movement, the members either need to add funds or can withdraw funds
from their margin accounts at the end of the day. The brokers who are not the clearing members
need to maintain a margin account with the clearing house member through whom they trade in
the clearing house.

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CLEARING MECHANISM
Only clearing members including professional clearing members (PCMs) are entitled to clear and
settle contracts through the clearinghouse.
The clearing mechanism essentially involves working out open positions and obligations of
clearing members. This position is considered for exposures and daily margin purposes. The
open positions of PCMs are arrived at by aggregating the open positions of all the TCMs clearing
through him, in contracts in which they have traded. A TCM’s open position is arrived at by the
summation of his clients’ open positions, in the contracts in which they have traded. Client
positions are netted at the level of individual client and grossed across all clients, at the member
level without any set-offs between clients. Proprietary positions are netted at member level
without any set-offs between client and proprietary positions.
At NCDEX, after the trading hours on the expiry date, based on the available information, the
matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping
in view the factors such as available capacity of the vault / warehouse, commodities already
deposited and dematerialized and offered for delivery etc., Matching done by this process is
binding on the clearing members. After completion of the matching process, clearing members
are informed of the deliverable / receivable positions and the unmatched positions. Unmatched
positions have to be settled in cash. The cash settlement is only for the incremental gain / loss as
determined on the basis of final settlement price.

CLEARING BANKS
NCDEX has designed clearing bank through who funds to be paid and/or to be received must be
settled. Every clearing member is required to maintain and operate a clearing account with any
one of the designated clearing bank branches. The clearing account is to be used exclusively for
clearing operations i.e., for settling funds and other obligations to NCDE including payments of
margins and penal charges. A clearing member can deposit funds into this account, but can
withdraw funds from this account only in his self-name. A clearing member having funds
obligation to pay is required to have clear balance in his clearing account on or before the
stipulated pay-in day and the stipulated time. Clearing members must authorize their clearing
bank to access their clearing account for debiting and crediting their accounts as per the

53
instructions of NCDEX from time to time. The clearing bank will debit/credit the clearing
account of clearing members as per instructions received from NCDEX. The following banks
have been designated as clearing banks ICICI Bank Limited, Canara Bank, UTI Bank Limited
and HDFC Bank Limited, National Securities Clearing Corporation (NSCCL) undertakes
clearing of trades executed on the NCDEX.

SETTLEMENT
Futures contracts have two types of settlements, the MTM settlement which happens on a
continuous basis at the end of each day, and the final settlement which happens on the last
trading day of the futures contract. On the NCDEX, daily MTM settlement and final MTM
settlement in respect of admitted deal in futures contracts are cash settled by debiting/crediting
the clearing accounts of CMs with the respective clearing bank. All positions of a CM, brought
forward, created during the day or closed out during the day, are marked to market at the daily
settlement price or the final settlement price at the close of trading hours on a day.
• Daily settlement price: Daily settlement price is the consensus closing price as arrived after
closing session of the relevant futures contract for the trading day. However, in the absence
of trading for a contract during closing sessions, daily settlement price is computed as per the
methods prescribed by the exchange from time to time.
• Final settlement price: Final settlement price is the closest price of the underlying
commodity on the last trading day of the futures contract. All open positions in a futures
contract cease to exist after its expiration day.

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 SETTLEMENT MECHANISM

Settlement of commodity futures contracts is a little different from settlement of financial

futures, which are mostly cash settled. The possibility of physical settlement makes the process
a little more complicated.

` Types of
Settlement

Daily Settlement Final Settlement

Daily Settlement Price Final Settlement Price

Handles daily price fluctuation Handles final settlement of all

For all trades (mark to market) Open oppositions

Daily process at end of day On contract expiry date

DAILY MARK TO MARKET SETTLEMENT:

Daily mark to market settlement is done till the date of the contract expiry. This is done to take
care of daily price fluctuations for all trades. All the open positions of the members are marked
to market at the end of the day and profit/loss is determined as below:
• On the day of entering into the contract, it is the difference between the entry value and daily
settlement price for that day.
• On any intervening days, when the member holds an open position, it is the different between
the daily settlement price for that day and the previous day’s settlement price.

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FINAL SETTLEMENT
On the date of expiry, the final settlement price is the spot price on the expiry day. The spot
prices are collected from members across the country through polling. The polled bid/ask prices
are bootstrapped and the mid of the two bootstrapped prices is taken as the final settlement price.
The responsibility of settlement is on a trading cum clearing member for all trades done on his
own account and his client’s trades. A professional clearing member is responsible for settling
all the participants’ trades, which he has confirmed to the exchange.

On the expiry date of a futures contract, members are required to submit delivery information
through delivery request window on the trader workstations provided by NCDEX for all open
positions for a commodity for all constituents individually. NCDEX on receipt of such
information matches the information and arrives at a delivery position for a member for a
commodity. A detailed report containing all matched and unmatched requests is provided to
members through the extranet.
Pursuant to regulations relating to submission of delivery information, failure to submit delivery
information for open positions attracts penal charges as stipulated by NCDEX from time to time.
NCDEX also adds all such open positions for a member, for which no delivery information is
submitted with final settlement obligations of the member concerned and settled in cash.

Non-fulfillment of either the whole or part of the settlement obligations is treated as a violation
of the rules, bye-laws and regulations of NCDEX, and attracts penal charges as stipulated by
NCDE from time to time. In addition NCDEX can withdraw any or all of the membership rights
of clearing member including the withdrawal of trading facilities of all trading members clearing
through such clearing members, without any notice. Further, the outstanding positions of such
clearing member and/or trading members and/or constituents, clearing and settling through such
clearing member, may be closed out forthwith or any thereafter by the exchange to the extent
possible, by placing at the exchange, counter orders in respect of the outstanding position of
clearing member without any notice to the clearing member and / or trading member and / or
constituent. NCDEX can also initiate such other risk containment measures, as it deems

56
appropriate with respect to the open positions of the clearing members. It can also take
additional measures like imposing penalties, collecting appropriate deposits, invoking bank
guarantees or fixed deposit receipts, realizing money by disposing off the securities and
exercising such other risk containment measures as it deems fit or take further disciplinary
action.

SETTLEMENT METHODS
Settlement of futures contracts on the NCDEX can be done in three ways –by physical delivery
of the underlying asset, by closing out open positions and by cash settlement. We shall look at
each of these in some detail. On the NCDEX all contracts settling in cash are settled on the
following day after the contract expiry date. All contracts materializing into deliveries are settled
in a period 2-7 days after expiry. The exact settlement day for each commodity is specified by
the exchange.

Physical delivery of the underlying asset

For open positions on the expiry day of the contract, the buyer and the seller can announce
intentions for delivery. Deliveries take place in the electronic form. All other positions are
settled in cash.
When a contract comes to settlement/the exchange provides alternatives like delivery place,
month and quality specifications. Trading period, delivery date etc. are all defined as per the
settlement calendar. A member is bound to provide delivery information. If he fails to give
information, it is closed out with penalty as decided by the exchange. A member can choose an
alternative mode of settlement by providing counter party clearing member and constituent. The
exchange is however not responsible for, nor guarantees settlement of such deals. The settlement
price is calculated and notified by the exchange. The delivery place is very important for
commodities with significant transportation costs. The exchange also specifies the precise
period (date and time) during which the delivery can be made. For many commodities, the
delivery period may be an entire month. The party in the short position (seller) gets the
opportunity to make choices from these alternatives. The exchange collects delivery
information. The price paid is normally the most recent settlement price (with a possible

57
adjustment for the quality of the asset and – the delivery location). Then the exchange selects a
party with an outstanding long position to accept delivery.

As mentioned above, after the trading hours on the expiry date, based on the available
information, the matching for deliveries is done, firstly, on the basis of locations and then
randomly keeping in view factors such as available capacity of the vault/warehouse,
commodities already deposited and dematerialized and offered for delivery and any other factor
as may be specified by the exchange from time to time. After completion of the matching
process, clearing members are informed of the deliverable/receivable positions and the
unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is
done only for the incremental gain/loss as determined on the basis of the final settlement price.
Any buyer intending to take physicals has to put a request to his depository participant. The DP
uploads such requests to the specified depository who in turn forwards the same to the registrar
and transfer agent (R&T agent) concerned. After due verification of the authenticity, the R&T
agent forwards delivery details to the warehouse which in turn arranges to release the
commodities after due verification of the identity of recipient. On a specified day, the buyer
would go to the warehouse and pick up the physicals.
The seller intending to make delivery has to take the commodities to the designated warehouse.
These commodities have to be assayed by the exchange specified assayer. The commodities have
to meet the contract specifications with allowed variances. If the commodities meet the
specifications, the warehouse accepts them. Warehouses then ensure that the receipts get updated
in the depository system giving a credit in the depositor’s electronic account. The seller then
gives the invoice to his clearing member, who would courier the same to the buyer’s clearing
member.

NCDEX contracts provide a standardized description for each commodity. The description is
provided in terms of quality parameters specific to the commodities. At the same time, it is
realized that with commodities, there could be some amount of variances in quality/weight etc.,
due to natural causes, which are beyond the control of any person. Hence/ NCDEX contracts
also provide tolerance limits for variances. A delivery is treated as good delivery and accepted if
the delivery lies within the tolerance limits. However, to allow for the difference, the concept of
premium and discount has been introduced. Goods that come to the authorized warehouse for

58
delivery are tested and graded as per the prescribed parameters. The premium and discount rates
apply depending on the level of variation. The price payable by the party taking delivery is then
adjusted as per the premium/discount rates fixed by the exchange. This ensures that some
amount of leeway is provided for delivery, but at the same time, the buyer taking delivery does
not face windfall loss/gain due to the quantity/quality variation at the time of taking delivery.
This, to some extent, mitigates the difficulty in delivering and receiving exact quality/quantity of
commodity.

CLOSING OUT BY OFFSETTING POSITIONS

Most of the contracts are settled by closing out open positions. In closing out, the opposite
transaction is effected to close out the original futures position. A buy contract is closed out by a
sale and a sale contract is closed out by a buy. For example, an investor who took a long
position in two gold futures contracts on the January 30, 2004 at 6090, can close his position by
selling two gold futures contracts on February 27, 2004 at Rs.5928. In this case, over the period
of holding the position he has suffered a loss of Rs.162 per unit. This loss would have been
debited from his margin account over the holding period by way of MTM at the end of each day,
and finally at the price that he closes his position, that is Rs. 5928 in this case.

CASH SETTLEMENT
Contracts held till the last day of trading can be cash settled. When a contract is settled in cash,
it is marked to the market at the end of the last trading day and all positions are declared closed.
The settlement prince on the last trading day is set equal to the closing spot price of the
underlying asset ensuring the convergence of future prices and the spot prices. For example an
investor took a short position in five long staple cotton futures contracts on December 15 at Rs.
6950. On 20th February, the last trading day of the contract, the spot price of long staple cotton is
Rs. 6725. This is the settlement price for his contract. As a holder of a short position on cotton,
he does not have to actual deliver the underlying cotton but simply takes away the profit of Rs.
225 per trading unit of cotton in the form of cash entities involved in physical settlement.

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ENTITLES INVOLVED IN PHYSICAL SETTLEMENT
Physical settlement of commodities involves the following three entities – an accredited
warehouse, registrar & transfer agent and an assayer. We will briefly look at the functions of
each accredited warehouse.

ACCREDITED WAREHOUSE
NCDEX specified accredited warehouses through which delivery of a specific commodity can be
affected and which will facilitate for storage of commodities. For the services provided by them,
warehouses charge a fee that constitutes storage and other charges such as insurance, assaying
and handling charges or any other incidental charges following are the functions of an accredited
warehouse.

FOLLOWING ARE THE FUNCTIONS OF AN ACCREDITED

WAREHOUSE
1. Earmark separate storage area as specified for the purpose of storing commodities to be
delivered against deals made on the exchange. The warehouses are required to meet the
specifications prescribed by the exchange for storage of commodities.
2. Ensure and coordinate the grading of the commodities received at the warehouse
before they are stored.
3. Store commodities in line with their grade specifications and validity period and
facilitate maintenance of identity. On expiry of such validity period of the grade for
such commodities, the warehouse has to segregate such commodities and store them
in a separate area so that the same are not mixed with commodities which are within
the validity period as per the grade certificate issued by the approved assayers.
4.
Approved registrar and transfer agents (R&T agents)
The exchange specifies approved R&T agents through whom commodities can be dematerialized
and who facilitate for dematerialization/re-materialization of commodities in the manner
prescribed by the exchange from time to time. The R&T agent performs the following functions.

60
1. Establishes connectivity with approved warehouses and supports them with
physical infrastructure.
2. Verifies the information regarding the commodities accepted by the accredited
warehouse and assigns the identification number (ISIN) allotted by the depository
in line with the grade/validity period.
3. Further processes the information, and ensures the credit of commodity holding to
the Demat account of the constituent.
4. Ensures that the credit of commodities - £oes only to the demat account of c5 the
constituents held with the exchange empanelled DPs.
5. On receiving a request for re-materialization (physical delivery) through the
depository, arranges for issuance of authorization to the relevant warehouse for
the delivery of commodities.

R&T agents also maintain proper records of beneficiary position of constituents holding
dematerialized commodities in warehouses and in the depository for a period and also as
on a particular date. They are required to furnish the same to the exchange as and when
demanded by the exchange, R&T agents also do the job of co-ordinating with DPs and
warehouses for billing of charges for services rendered on periodic intervals. They also
reconcile dematerialized commodities in the depository and physical commodities at the
warehouses on periodic basis and co-ordinate with all parties concerned for the same
settlement – entity interaction approved assayer.

Client Broker Exchange

BANK Clearing Corporation

Depository NSDL
Participant

Ware R&T
House Agent

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 APPROVED ASSAYER
The exchange specifies approved assayers through whom grading of commodities (received at
approved warehouses for delivery against deals made on the exchange), can, be availed by the
constituents of clearing members. Assayers perform the following functions.
Inspect the warehouses identified by the exchange on periodic basis to verify the compliance of
technical/safety parameters detailed in the warehousing accreditation norms of the exchange.
Make available grading facilities to the constituents in respect of the specific commodities traded
on the exchange at specified warehouse. The assayer ensures that the grading to be done (in a
certificate format prescribed by the exchange) in respect of specific commodity is as per the
norms specified by the exchange in the respective contract specifications.
Grading certificate so issued by the assayer specifies the grade as well as the validity period up
to which the commodities would retain the original grade, and the time up to which the
commodities are fit for trading subject to environment changes at the warehouses.

PRICING COMMODITY FUTURES

The process of arriving at a figure at which a person buys and another sells a futures contract for
a specific expiration date is called price discovery. In an active futures market, the process of
price discovery continues from the market’s opening until its close. The prices are freely and
competitively derived. Future prices are therefore considered to be superior to be administered
prices or the prices that are determined privately. Further, the low transaction costs and frequent
trading encourages wide participation in futures markets lessening the opportunity for control by
a few buyers and sellers.

We try to understand the pricing of commodity futures contracts and look at how the
futures price is related to the spot price of the underlying asset. We study the cost-of-carry
model to understand the dynamics of pricing that constitute the estimation of fair value of futures
the cost of carry model.

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REGULATORY FRAMEWORK FOR COMMODITY TRADING IN INDIA

At present there are three tiers of regulations of forward/futures trading system in India, namely,
government of India, Forward Markets Commission (FMC) and commodity exchanges. The
need for regulation arises on account of the fact that the benefits of futures markets accrue in
competitive conditions.
Proper regulation is needed to create competitive conditions. In the absence of regulation,
unscrupulous participants could use these leveraged contracts for manipulating prices. This
could have undesirable influence on the spot prices, thereby affecting interests of society at large.
Regulation is also needed to ensure that the market has appropriate risk management system. In
the absence of such a system, a major default could create a chain reaction.
The resultant financial crisis in a futures market could create systematic risk. Regulation is also
needed 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, particularly non-
member users of the market.

RULES GOVERNING COMMODITY DERIVATIVES EXCHANGES

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets

Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges, which
are granted recognition by the central government (Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution). All the exchanges, which deal with forward
contracts, are required to obtain certificate of registration from the FMC Besides, they are
subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward
Commission (Regulation) Act and various other legislations, which impinge on their working.
Forward Markets Commission provides regulatory oversight in order to ensure financial integrity
(i.e. to prevent systematic risk of default by one major operator or group of operators), market
integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and
supply conditions) and to protect and promote interest of customers/ nonmembers. It prescribes
the following regulatory measures:

63
 1. Limit on net open position as on close of the trading houses. Some times limit is
also imposed on intra-day net open position. The limit is imposed operator-wise/
and in some cases, also member wise.
2. Circuit filters or limit on price fluctuations to allow cooling of market in the event
of abrupt upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when
price moves up or down sharply above or below the previous day closing price.
By making further purchases/sales relatively costly, the price rise or fall is
sobered down. This measure is imposed only on the request of the exchange.
4. Circuit breakers or minimum/maximum prices. These are prescribed to prevent
futures prices from failing below as rising above not warranted by prospective
supply and demand factors. This measure is also imposed on the request of the
exchange.
5. Skipping trading in certain derivatives of the contract closing the market for a
specified period and even closing out the contract. These extreme are taken only
in emergency situations.

Besides these regulatory measures, the F.C) R) Act provides that a client’s position cannot be
appropriated by the member of the exchange, except when a written consent is taken within three
days time. The FMC is persuading increasing number of exchanges to switch over to electronic
trading, clearing and settlement which is more customer/friendly. The FMC has also prescribed
simultaneous reporting system for the exchanges following open out cry system.

These steps facilitate audit trail and make it difficult for the members to indulge in malpractice
like trading ahead of clients, etc. The FMC has also mandated all the exchanges following open
outcry system to display at a prominent place in exchange premises, the name, address,
telephone number of the officer of the commission who can be contacted for any grievance. The
website of the commission also has a provision for the customers to make complaint and send
comments and suggestions to the FMC. Officers of the FMC have been instructed to meet the
members and clients on a random basis, whenever they visit exchanges, to ascertain the situation

64
on the ground, instead of merely attending meetings of the board of directors and holding
discussions with the office bearers.

RULES GOVERNING INTERMEDIARIES

In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules framed
there under, exchanges are governed by its own rules and bye laws (approved by the FMC). In
this section we have brief look at the important regulations that govern NCDEX. For the sake of
convenience/these have been divided into two main divisions pertaining to trading and clearing.
The NCDEX provides an automated trading facility in all the commodities admitted for dealings
on the spot market and derivative market. Trading on the exchange is allowed only through
approved workstation(s) located at locations for the office(s) of a trading member as approved by
the exchange. If LAN or any other way to other workstations at any place connects an approved
workstation of a trading Member it shall require an approval of the exchange.

Each trading member is required to have a unique identification number which is provided by the
exchange and which will be used to log on (sign on) to the trading system. A trading member
has a non-exclusive permission to use the trading system as provided by the exchange in the
ordinary course of business as trading member. He does not have any title rights or interest
whatsoever with respect to trading system/its facilities/ software and the information provided by
the trading system.

For the purpose of accessing the trading system/the member will install and use equipment and
software as specified by the exchange at his own cost. The exchange has the right to inspect
equipment and software used for the purposes of accessing the trading system at any time. The
cost of the equipment and software supplied by the exchange/installation and maintenance of the
equipment is borne by the trading member and users Trading members are entitled to appoint,
(subject to such terms and conditions/as may be specified by the relevant authority) from time to
time Authorized persons and Approved users.

Trading members have to pass a petrifaction program/which has been prescribed by the
exchange. In case of trading members/other than individuals or sole proprietorships/such

65
certification program has to be passed by at least one of their
directors/employees/partners/members of governing body.

Each trading member is permitted to appoint a certain number of approved users as notified from
time to time by the exchange. The appointment of approved users is subject to the terms and
conditions prescribed by the exchange. Each approved user is given a unique identification
number through which he will have access to the trading system. An approved user can access
the trading system through a password and can change the password from time to time.
The trading member or its approved users are required to maintain complete secrecy of its
password. Any trade or transaction done by use of password of any approved user of the trading
member, will be binding on such trading member. Approved user shall be required to change his
password at the end of the password expiry period.

TRADING DAYS
The exchange operates on all days except Saturday and Sunday and on holidays that it declares
from time to time. Other than the regular trading hours, trading members are provided a facility
to place orders offline i.e. outside trading hours. These are stored by the system but get traded
only once the market opens for trading on the following working day.
The types of order books, trade books, price a limit, matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time. Members can place orders on the trading system
during these sessions, within the regulations prescribed by the exchange as per these bye laws,
rules and regulations, from time to time.

TRADING HOURS AND TRADING CYCLE

The exchange announces the normal trading hours/open period in advance from time to time. In
case necessary, the exchange can extend or reduce the trading hours by notifying the members.
Trading cycle for each commodity/derivative contract has a standard period, during which it will
be available for trading.

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CONTRACT EXPIRATION
Derivatives contracts expire on a pre-determined date and time up to which the contract is
available for trading. This is notified by the exchange in advance. The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time.

TRADING PARAMETERS
The exchange from time to time specifies various trading parameters relating to the trading
system. Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts. The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on the
order that will make it eligible to place it in those books.
The exchange specifies the minimum disclosed quantity for orders that will be allowed for each
commodity/derivatives contract. It also prescribed the number of days after which Good Till
Cancelled orders will be cancelled by the system. It specifies parameters like lot size in which
orders can be placed, price steps in which shall be entered on the trading system, position limits
in respect of each commodity etc.

FAILURE OF TRADING MEMBER TERMINAL

In the event of failure of trading member’s workstation and/ or the loss of access to the trading
system, the exchange can at its discretion undertake to carry out on behalf of the trading member
the necessary functions which the trading member is eligible for. Only requests made in writing
in a clear and precise manner by the trading member would be considered. The trading member
is accountable for the functions executed by the exchange on its behalf and has to indemnity the
exchange against any losses or costs incurred by the exchange.

TRADE OPERATIONS
Trading members have to ensure that appropriate confirmed order instructions are obtained from
the constituents before placement of an order on the system. They have to keep relevant records
or documents concerning the order and trading system order number and copies of the order
confirmation slip/modification slip must be made available to the constituents.

67
The trading member has to disclose to the exchange at the time of order entry whether the order
is on his own account or on behalf of constituents and also specify orders for buy or sell as open
or close orders. Trading members are solely responsible for the accuracy of details of orders
entered into the trading system including orders entered on behalf of their constituents. Traders
generated on the system are irrevocable and blocked in 1. The exchange specifies from time to
time the market types and the manner if any, in which trade cancellation can be effected.
Where a trade cancellation is permitted and trading member wishes to cancel a trade, it can be
done only with the approval of the exchange.

MARGIN REQUIREMENTS
Subject to the provisions as contained in the exchange bye-laws and such other regulations as
may be in force, every clearing member/in respect of the trades in which he is party to, has to
deposit a margin with exchange authorities.
The exchange prescribes from time to time the commodities/derivatives contracts, the settlement
periods and trade types for which margin would be attracted.
The exchange levies initial margin on derivatives contracts using the concept of Value at Risk
(VaR) or any other concept as the exchange may decide from time to time. The margin is
charged so as to cover one-day loss that can be countered on the position on 99% of the days.
Additional margins may be levied for deliverable positions, on the basis of VaR from the expiry
of the contract till the actual settlement date plus a mark-up for default.
The margin has to be deposited with the exchange within the time notified by the exchange. The
exchange also prescribes categories of securities that would be eligible for a margin deposit, as
well as the method of valuation and amount of securities that would be required to be deposited
against the margin amount.

The procedure for refund/adjustment of margins is also specified by the exchange from time to
time. The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement. On failure to deposit margin/s as required
under this clause, the exchange/clearing house can withdraw the trading facility of the trading
member. After the pay-out, the clearing house releases all margins.

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CLEARING
As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX, All deals executed on the Exchange are cleared and
settled by the trading members on the settlement date by the trading members themselves as
clearing members or through other professional clearing members in accordance with these
regulations/bye laws and rules of the exchange.

LAST DAY OF TRADING

Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract. If the last trading day as specified in the respective commodity
contract is a holiday, the last trading day is taken to be the previous working day of exchange.
On the expiry date of contracts, the trading members/ clearing members have to give delivery
information as prescribed by the exchange from time to time. If a trading member/clearing
member fails to submit such information during the trading hours on the expiry date for the
contract/the deals have to be settled as per the settlement calendar applicable for such deals, in
cash-together with penalty as stipulated by the exchange deals entered into through the exchange.
The clearing member cannot operate the clearing account for any other purpose.

INTRODUCTION TO THE GOLD

A very ductile and malleable, brilliant yellow precious metal that is resistant to air and water
corrosion. It is a precious metal that is very soft when pure (24 Kt). Gold is the most malleable
(hammerable) and ductile (able to be made into wire) metal. Gold is alloyed (mixed with other
metals, usually silver and copper) to make it less expressive and harder. The purity of gold
jewelry is measured in karats. Some countries hallmark gold with a three-digit number that
indicates the parts per thousand of gold. In this system. “750” means 750/1000gold (equal to
18K); “500” means 500/1000 gold (equal to 12K). Alloyed gold comes in many colors.

69
WORLD GOLD MARKETS
• London as the great clearing house
• New York as the home of futures trading
• Zurich as a physical tumtable
• Istanbul, Dubai, Singapore and Hong Kong as doorways to important consuming regions.
• Tokyo where TOCOM sets the mood of Japan
• Mumbai under India’s liberalized gold regime.

24 HOURS ROUND THE CLOCK MARKET

Hong Kong Gold Market

• Zurich Gold Market
• London Gold Market
• New York Market

INDIA GOLD MARKET

• Gold is valued in India as a savings and investment vehicle and is the second preferred
investment after bank deposits
• India is the world’s largest consumer of gold to jewellery as investment.
• In July “1997 the RBI authorized the commercial banks to import gold for sale or loan to
jewelers and exporters. At present, 13 banks are active in the import of gold.
• This reduced the disparity between international and domestic prices of gold from 57
percent during 1986 to 1991 to 8.5 percent in 2001.
• The gold hoarding tendency is well ingrained in Indian society.
• Domestic consumption is dictated by monsoon/harvest and marriage season. Indian
jewelry off take is sensitive to price increase and even more so to volatility.
• In the cities gold is facing competition from the stock market and a wide range of
consumer goods.

70
 • Facilities for refining, assaying, making them into standard bars in India, as compared to
the rest of the world, are insignificant, both qualitatively and quantitatively.
Major gold production countries
• South Africa, United States, Australia, China, Canada, Russia, Indonesia, Peru,
Uzbekistan, Papua New Guinea, China, Brazil, Chile, Philippines, Mali, Mexico,
Argentina, Zimbabwe& Colombia.

Market Moving Factors

• Aboveground supply from sales by central bank, reclaimed scrap and official gold loans
• Producer/miner hedging interest
• World macro-economic factors – US Dollar, interest rate
• Comparative returns on stock markets
• Domestic demand based on monsoon and agricultural output, Fine gold content.

THE PURITY OF GOLD ARTICLES IS GENERALLY DESCRIBED IN

THREE WAYS.

Percent % (Parts of gold per Fineness (Parts of gold per Karats (parts of gold per 24)
100) 1000)
100% 999 Fine 24 Karats
91.60% 916 Fine 22 Karats
75.00% 750 Fine 18 Karats
58.50% 583 Fine 14 Karats
41.60% 416 Fine 10 Karats

FINE GOLD CONTENT

71
The minimum fineness is 995 parts per 1000 fine gold and gold said to be 100 fine is marked
down to 999.9 fine. The following fine gold contents of other bar weights are accepted by the
London Bullion Market Association (LBMA). These bars are available at the spot Loco-London
price plus a premium which varies dependent on prevailing market conditions in different
locations

TECHNICAL VS. FUNDAMENTAL ANALYSIS

Technical analysis and fundamental analysis are the two main schools of thought in the financial
market. As we’ve mentioned, technical analysis looks at the price movement of a security and
uses this data to predict its Future price movements. Fundamental analysis, on the other hand,
looks at economic factor, know as fundamentals. Let’s get into the details of how this two
approaches differ, the criticism against technical analysis and how technical and fundamental
analysis can be used together to analyze securities.

FUNDAMENTAL ANALYSIS
At the most basic level, by looking at the balance sheet, cash flow statement and income
statement, a fundamental analyst tries to determine a company’s value. In financial terms, an
analyst attempts to measure a company’s intrinsic value. In this approach, investment decisions
are fairly easy to make –if the price of a stock trades below its intrinsic value, it’s a good
investment. Although this is an oversimplification (fundamental analysis goes beyond just the
financial statements) for the purpose of this tutorial, this simple tenet holds true.

TECHNICAL ANALYSIS
Technical traders, on the other hand, believe there is no reason to analyze a company’s
fundamental because these are all accounted for in the stock’s price. Technicians believe that all
the information they need about a stock can be found in its chart. While a fundamental analyst
starts with the financial statements.

TYPES OF MOVING AVERAGES

72
There are a number of different types of moving averages that vary in the way they are calculate,
but how each average is interpreted remains the same. The calculations only differ in regards to
the weighting that they place on the price data, shifting from equal weighting of each price point
to more weight being placed on recent data .The three most common types of moving averages
are

SIMPLE MOVING AVERAGE (SMA)

This is the most common method used to calculate the moving average of price. It simply takes
the sum of all of the past closing prices over the time period and divides the result by the number
of price used in the calculation. For example, in a 10-day moving average, the last 10 closing are
added together and then divided by 10.

LINEAR WEIGHTED AVERAGE

This moving average indicator is the least common out of the three and is used to address the
problem of the equal weighting. Taking the sum of all the closing prices over a certain time
period and multiplying them by the position of the data point and then dividing by the sum of the
number of periods calculate the linear weighted moving average. For example ,in a five –day
linear weighted average ,five multiplies today’s closing price ,yesterday’s by four and so on until
the first day in the period range is reached .These numbers are hen added together and divided by
the sum of the multipliers.

EXPONENTIAL MOVING AVERAGE (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent data
point and is regarded as much more efficient than the linear weighted average. Having an
understanding of the calculation is not generally required for most trades because most charting
packages do the calculation for you. The most important thing to remember about the
exponential moving average is that it is more responsive to new information relative to the
simple moving average. This responsiveness is one of the key factors of why this is the moving
average of choice among many technical traders.

73
GOLD CONTRACTS

In India we have 4 types of gold contracts available in mcx.

• Gold-1000 grams
• Goldmini- 100 grams
• Goldhni-1000 grams
• Goldguinea-8 grams

Gold -1000 grams

It is a 1000 grams lot available in mcx and big investor can invest in this gold lots.

Gold hni-1000 grams

It is a1000 grams lot available in mcx so, here who has registered as a HNI in mcx he will
take the gold HNI contracts at a time .number of contracts like it called as bulk deals.

Goldmini-100 grams

the medium investor can invest in goldmine and the lot size is 100 grams.

Goldguinea-8 grams

It is especially for small investors the lot size is 8 grams.

74
CHAPTER - IV

75
DATA ANALYSIS &INTERPRETATIONS
Gold-1000 grams

The below table shows 3 days moving averages.

3 DAYS
Close(Rs MOVING
Date ) AVERAGE
1-Jan-10 16747 0
2-Jan-10 16794 0
4-Jan-10 16889 16810
5-Jan-10 16897 16860
6-Jan-10 16923 16903
7-Jan-10 16888 16902.66667
8-Jan-10 16906 16905.66667
9-Jan-10 16957 16917
11-Jan-10 17092 16985
12-Jan-10 16929 16992.66667
13-Jan-10 16858 16959.66667
14-Jan-10 16957 16914.66667
15-Jan-10 16899 16904.66667
16-Jan-10 16912 16922.66667
18-Jan-10 16892 16901
19-Jan-10 16994 16932.66667
20-Jan-10 16756 16880.66667
21-Jan-10 16598 16782.66667
22-Jan-10 16519 16624.33333
23-Jan-10 16551 16556
25-Jan-10 16518 16529.33333
27-Jan-10 16503 16524
28-Jan-10 16353 16458
29-Jan-10 16317 16391
30-Jan-10 16317 16329
1-Feb-10 16620 16418
2-Feb-10 16754 16563.66667
3-Feb-10 16647 16673.66667
4-Feb-10 16152 16517.66667
5-Feb-10 16106 16301.66667
6-Feb-10 16286 16181.33333
8-Feb-10 16276 16222.66667
9-Feb-10 16319 16293.66667
10-Feb-10 16277 16290.66667
11-Feb-10 16474 16356.66667
12-Feb-10 16452 16401
13-Feb-10 16503 16476.33333
15-Feb-10 16605 16520

76
16-Feb-10 16731 16613
17-Feb-10 16756 16697.33333
18-Feb-10 16775 16754
19-Feb-10 16857 16796
20-Feb-10 16816 16816
22-Feb-10 16692 16788.33333
23-Feb-10 16591 16699.66667
24-Feb-10 16488 16590.33333
25-Feb-10 16694 16591
26-Feb-10 16772 16651.33333
27-Feb-10 16789 16751.66667
1-Mar-10 16796 16785.66667
2-Mar-10 17020 16868.33333
3-Mar-10 17028 16948
4-Mar-10 16956 17001.33333
5-Mar-10 16901 16961.66667
6-Mar-10 16907 16921.33333
8-Mar-10 16739 16849
9-Mar-10 16727 16791
10-Mar-10 16484 16650
11-Mar-10 16526 16579
12-Mar-10 16447 16485.66667
13-Mar-10 16452 16475
15-Mar-10 16538 16479
16-Mar-10 16718 16569.33333
17-Mar-10 16687 16647.66667
18-Mar-10 16768 16724.33333
19-Mar-10 16509 16654.66667
20-Mar-10 16506 16594.33333
22-Mar-10 16416 16477
23-Mar-10 16445 16455.66667
24-Mar-10 16295 16385.33333
25-Mar-10 16261 16333.66667
26-Mar-10 16349 16301.66667
27-Mar-10 16390 16333.33333
29-Mar-10 16319 16352.66667
30-Mar-10 16291 16333.33333
31-Mar-10 16295 16301.66667
1-Apr-10 16391 16325.66667
3-Apr-10 16424 16370
5-Apr-10 16377 16397.33333

77
GOLD 3 DAYS MOVING AVERAGES

The below graph shows daily prices like closing prices of the gold in the form of the
technical tool indicator simple moving averages.

GOL D 3 D AYS MOV IN G AV G

40000
35000
30000
25000
VALUES

3 DA Y S M OV ING A V E RA G E
20000
Close(Rs)
15000
10000
5000
0
1/1/2010

1/15/2010

1/29/2010

2/12/2010

2/26/2010

3/12/2010

3/26/2010

M ONTHS

INTERPRETATION

As above data we are taken GOLD Price moving from January 1st to April 5th , on 1st
January it is closed on 16747 in between the period on Jan 11th it is closed to 17092 , latterly on
29th Jan it came down to 16317, on 2nd Feb. it is increased to 16754 , on 5th Feb. again it is come
down to 16106 , end of the contract on 5th April it is closed to 16377.
If you see total data the gold is highly fluctuated because the gold leads the economy.

78
GOLDGUINEA 8 GRAMS

The below table shows 3 days moving averages.

Close(Rs 3 days moving

Date ) average
1-Feb-10 13183 0
2-Feb-10 13324 0
3-Feb-10 13258 13255
4-Feb-10 12896 13159.33333
5-Feb-10 12846 13000
6-Feb-10 12998 12913.33333
8-Feb-10 12976 12940
9-Feb-10 12991 12988.33333
10-Feb-10 12966 12977.66667
11-Feb-10 13081 13012.66667
12-Feb-10 13079 13042
13-Feb-10 13118 13092.66667
15-Feb-10 13146 13114.33333
16-Feb-10 13298 13187.33333
17-Feb-10 13298 13247.33333
18-Feb-10 13296 13297.33333
19-Feb-10 13364 13319.33333
20-Feb-10 13354 13338
22-Feb-10 13286 13334.66667
23-Feb-10 13210 13283.33333
24-Feb-10 13111 13202.33333
25-Feb-10 13224 13181.66667
26-Feb-10 13288 13207.66667
27-Feb-10 13294 13268.66667
1-Mar-10 13299 13293.66667
2-Mar-10 13436 13343
3-Mar-10 13439 13391.33333
4-Mar-10 13404 13426.33333
5-Mar-10 13377 13406.66667
6-Mar-10 13383 13388
8-Mar-10 13268 13342.66667
9-Mar-10 13251 13300.66667
10-Mar-10 13128 13215.66667
11-Mar-10 13146 13175
12-Mar-10 13097 13123.66667
13-Mar-10 13091 13111.33333
15-Mar-10 13131 13106.33333
16-Mar-10 13230 13150.66667
17-Mar-10 13223 13194.66667
18-Mar-10 13260 13237.66667
19-Mar-10 13125 13202.66667
20-Mar-10 13110 13165
22-Mar-10 13042 13092.33333
23-Mar-10 13056 13069.33333

79
 24-Mar-10 12956 13018
25-Mar-10 12924 12978.66667
26-Mar-10 12975 12951.66667
27-Mar-10 12986 12961.66667
29-Mar-10 12951 12970.66667
30-Mar-10 12931 12956
31-Mar-10 12952 12944.66667
1-Apr-10 13005 12962.66667
3-Apr-10 13019 12992
5-Apr-10 12992 13005.33333

GOLD GUINEA 3 DAYS MOVING AVERAGE

The below graph shows daily prices like closing prices of the gold guinea in the form
of the technical tool indicator simple moving averages.

GOLD GUINEA 8 grams

30000
25000
VALUES

20000 3 days moving average

15000
10000 Close(Rs)
5000
0
0

10

10

10

10
01

01

01

01

01
01

20

20
20

20
2

/2

/2

/2
/2

/2
1/

8/

8/
1/

5/
15

22

15

22

29
2/

2/

3/

3/

4/
2/

2/

3/

3/

3/

MONTHS

INTERPRETATION

As above data we are taken GOLD GUINEA Price moving from February 1 st to April 5th,
on 1st February it is closed on 13183 in between the period on Feb. 19 th it is closed to 13364 ,
latterly on 26th Feb. it came down to 13288, on 3rd march it is increased to 13439 , on 30th march
again it is come down to 12931 , end of the contract on 5th April it is closed to 12992.
If you see total data the gold is highly fluctuated because the gold leads the economy.

80
GOLDMINI-100 GRAMS

The below table shows 3 days moving averages of goldmini.

3 DAYS
Close(Rs MOVING
Date ) AVERAGE
6-Jan-10 16942 0
7-Jan-10 16914 0
8-Jan-10 16912 16922.66667
9-Jan-10 16980 16935.33333
11-Jan-10 17103 16998.33333
12-Jan-10 16971 17018
13-Jan-10 16888 16987.33333
14-Jan-10 16973 16944
15-Jan-10 16930 16930.33333
16-Jan-10 16943 16948.66667
18-Jan-10 16927 16933.33333
19-Jan-10 17024 16964.66667
20-Jan-10 16801 16917.33333
21-Jan-10 16626 16817
22-Jan-10 16555 16660.66667
23-Jan-10 16571 16584
25-Jan-10 16548 16558
27-Jan-10 16526 16548.33333
28-Jan-10 16372 16482
29-Jan-10 16329 16409
30-Jan-10 16343 16348
1-Feb-10 16647 16439.66667
2-Feb-10 16766 16585.33333
3-Feb-10 16659 16690.66667
4-Feb-10 16165 16530
5-Feb-10 16106 16310
6-Feb-10 16294 16188.33333
8-Feb-10 16279 16226.33333
9-Feb-10 16328 16300.33333
10-Feb-10 16287 16298
11-Feb-10 16471 16362
12-Feb-10 16450 16402.66667
13-Feb-10 16500 16473.66667
15-Feb-10 16598 16516
16-Feb-10 16732 16610
17-Feb-10 16757 16695.66667
18-Feb-10 16779 16756
19-Feb-10 16860 16798.66667
20-Feb-10 16822 16820.33333
22-Feb-10 16703 16795
23-Feb-10 16599 16708
24-Feb-10 16494 16598.66667
25-Feb-10 16696 16596.33333

81
 26-Feb-10 16773 16654.33333
27-Feb-10 16790 16753
1-Mar-10 16799 16787.33333
2-Mar-10 17017 16868.66667
3-Mar-10 17023 16946.33333
4-Mar-10 16955 16998.33333
5-Mar-10 16905 16961
6-Mar-10 16913 16924.33333
8-Mar-10 16748 16855.33333
9-Mar-10 16736 16799
10-Mar-10 16499 16661
11-Mar-10 16540 16591.66667
12-Mar-10 16458 16499
13-Mar-10 16463 16487
15-Mar-10 16541 16487.33333
16-Mar-10 16710 16571.33333
17-Mar-10 16680 16643.66667
18-Mar-10 16750 16713.33333
19-Mar-10 16502 16644
20-Mar-10 16498 16583.33333
22-Mar-10 16415 16471.66667
23-Mar-10 16439 16450.66667
24-Mar-10 16295 16383
25-Mar-10 16254 16329.33333
26-Mar-10 16324 16291
27-Mar-10 16356 16311.33333
29-Mar-10 16261 16313.66667
30-Mar-10 16242 16286.33333
31-Mar-10 16232 16245
1-Apr-10 16377 16283.66667
3-Apr-10 16427 16345.33333
5-Apr-10 16377 16393.66667

GOLDMINI 3 DAYS MOVING AVERAGE

82
 The below graph shows daily prices like closing prices of the goldmine in the form of the
technical tool indicator simple moving averages.

GOLD MINI 100 grams

40000
35000
30000
VALUES

25000 3 DAYS MONING AVERAGE

20000
15000 Close(Rs)
10000
5000
0
0

10

10

0
1

01

01

01
01

20
20

20
/2

/2

/2

/2
3/
/

3/
6

17

17
20

31
1/

2/

3/
1/

2/

3/

3/

MONTHS

INTERPRETATION
As above data we are taken GOLD MINI Price moving from January 6th to April 5th, on
6th January it is closed on 16942, in between the period on 11th Jan it is closed to 17103 ,
latterly on 5th Feb. it came down to 16106, on 3rd march it is increased to 17023 , on 25th march
again it is come down to 16254 , end of the contract on 5th April it is closed to 16377.
If you see total data the gold is highly fluctuated because the gold leads the economy.

83
GOLD HNI –(1000 ) 3 DAYS MOVING AVERAGES

The below table shows 3 days moving averages of gold hni.

3 DAYS
MOVING
Date Close(Rs) AVERAGE
1-Jan-10 16835 0
2-Jan-10 16835 0
4-Jan-10 16667 16779
5-Jan-10 16667 16723
6-Jan-10 16667 16667
7-Jan-10 16834 16722.66667
8-Jan-10 16834 16778.33333
9-Jan-10 16834 16834
11-Jan-10 16834 16834
12-Jan-10 16834 16834
13-Jan-10 16834 16834
14-Jan-10 16834 16834
15-Jan-10 16834 16834
16-Jan-10 16834 16834
18-Jan-10 16834 16834
19-Jan-10 16834 16834
20-Jan-10 16834 16834
21-Jan-10 16666 16778
22-Jan-10 16499 16666.33333
23-Jan-10 16499 16554.66667
25-Jan-10 16499 16499
27-Jan-10 16499 16499
28-Jan-10 16499 16499
29-Jan-10 16334 16444
30-Jan-10 16334 16389
1-Feb-10 16334 16334
2-Feb-10 16334 16334
3-Feb-10 16497 16388.33333
4-Feb-10 16497 16442.66667
5-Feb-10 16332 16442
6-Feb-10 16332 16387
8-Feb-10 16332 16332
9-Feb-10 16332 16332
10-Feb-10 16332 16332
11-Feb-10 16332 16332
12-Feb-10 16332 16332
13-Feb-10 16332 16332
15-Feb-10 16332 16332
16-Feb-10 16332 16332
17-Feb-10 16495 16386.33333
18-Feb-10 16495 16440.66667
19-Feb-10 16495 16495

84
 20-Feb-10 16495 16495
22-Feb-10 16495 16495
23-Feb-10 16495 16495
24-Feb-10 16495 16495
25-Feb-10 16495 16495
26-Feb-10 16660 16550
27-Feb-10 16660 16605
1-Mar-10 16660 16660
2-Mar-10 16660 16660
3-Mar-10 16827 16715.66667
4-Mar-10 16827 16771.33333
5-Mar-10 16827 16827
6-Mar-10 16827 16827
8-Mar-10 16827 16827
9-Mar-10 16827 16827
10-Mar-10 16827 16827
11-Mar-10 16659 16771
12-Mar-10 16492 16659.33333
13-Mar-10 16492 16547.66667
15-Mar-10 16327 16437
16-Mar-10 16327 16382
17-Mar-10 16490 16381.33333
18-Mar-10 16490 16435.66667
19-Mar-10 16490 16490
20-Mar-10 16490 16490
22-Mar-10 16490 16490
23-Mar-10 16490 16490
24-Mar-10 16325 16435
25-Mar-10 16325 16380
26-Mar-10 16325 16325
27-Mar-10 16325 16325
29-Mar-10 16162 16270.66667
30-Mar-10 16162 16216.33333
31-Mar-10 16000 16108
1-Apr-10 16000 16054
3-Apr-10 16000 16000
5-Apr-10 16160 16053.33333

GOLDHNI 3 DAYS MOVING AVERAGES

85
 The below graph shows daily prices like closing prices of the gold hni in the form of the
technical tool indicator simple moving averages.

GOLD HNI 1000 grams

40000
35000
30000
VALUES

25000 3 DAYS MOVING AVERAGE

20000
15000 Close(Rs)
10000
5000
0
1/15/2010

3/26/2010
1/1/2010

1/29/2010

2/12/2010

2/26/2010

3/12/2010

MONTHS

INTERPRETATION

As above data we are taken GOLD HNI Price moving from January 1st to April 5th , on
1st January it is closed on 16835 in between the period on Jan 26th it is closed to 16666 , latterly
on 6 Feb. it came down to 16332, on 10 march it is increased to 16827 , on 27th march again it
is come down to 16325 , end of the contract on 5th April it is closed to 16160.
If you see total data the gold is highly fluctuated because the gold leads the economy.

ANALYSIS AND INTERPRITATIONS OF THE GRAPH

86
The above graphs shows daily prices like closing prices of the precious metal commodity (gold)
in the form of the technical tour indicator “simple moving avarage”

The moving avarage is the graph shows the moving trends of the index of gold futures for the six
months period data are tekan in to consideration of defferant gold contracts.

Moving avarage is used in-order to analyse the past trends of the particular commodity (gold)
and helping interpretations for the analyst and investors whether to buy, hold or sell particular
commodity in the near future.

In this particular graphs we have taken three days moving avarages on daily basis for period of
six months. Three days moving avarage is generally consider for interpreting the short term
trends are intraday trading on a daily terms.

In commodity market most of the investors are trading in intra-day points, they generally make
both buy and sell signals in a day. The buyers and sellers mainly follow three days moving
avarages.

Here volumes are not taken in to concideration for analysis porpos. Even they effect the high-low
in the market. This analysis is based only on each day trading closing prices.

ANALYSIS FOR GOLD

In this starting contract the closing prices of three days moving averages which indicate a step
increasing in the commodity future and it happens in the january as there was no fluctuation in
commodity market and from the january onwards there were high incresing of gold prices. The
moving average shows a incresing trend in the commodity market which shows a very bullish
trend,because of high incresing trend and also the closing prices of the contract period.

CONCLUSSION OF GOLD ANALYSIS

87
 In the lost six months the market was showing more of buying signals than sellings.this
shows a good trend for gold in near future for long term investors and prices might rise and
mostly investor are earning profit if analyse the market proporly.

88
CHAPTER - V

89
 FINDINGS & SUGGESTIONS

FINDINGS

• The investment made in this is for short period of time and most of the trading is intra-
day in nature i.e. buy and sell on same day to make profit. Here daily volumes and
trends are consider.

• The prices of gold had shown significant raise in the six months.

• Dollor prices are one of the important factor, which need to track constently.

• Future and options derivatives contract avaliable in theworld commodity market .In
india options contracts have not been permitted by the government.

• There is scope for better and huge profit especially in commodities market for
investors.

Ex: openning price of contract is Rs.11400 and closing price of contract is

Rs.12650, at the end of the contract the investor can get Rs.1250 as profit.

90
SUGGESTIONS

• Innvestors should try to understand the technical part of analyzing the prices of bullion
commodities so tat they can earn huge profits,as fundamental analysis doesn’t give sharp
trends of future when compared to technical analysis.
• The investor should always try to go for long positions right from the beginning of the
contract,as it is exhibites a large scale.
• In commodity market though there is a possibility of physical delivery of the
contracts,there arise the requirement of warehouse facility that is not required in case of
eqity market.
• The farmers and traders are not fully aware of the existence of the commodity exchange
in india,which has to be advertised regularly.

91
 BIBLIOGRAPHY

Journals &Articles
(1) Jangaih Paladi and c.Anitha raman,commodity market_ A
relook ,in icfai reader.

Books
(1) Financial claims &derivatives -by David N King.
(2) Futures & options -by Franklin R Edward.

Websites
(1) Market data is available from the URL
http://www.mcxindia.com/market/date wise

(2) Company data available from the URL

http://www.ise.com/webform/view page

92