Professional Documents
Culture Documents
Submitted by:
Gautam V. Foria
I would like to sincerely thank my project guide Mr. Amit Mishra and
Mr. Mandeep Singh for their invaluable guidance, constructive suggestions,
keen and sustained interest, incessant and constant encouragement in the
development, planning and execution of the project and preparation of this
report.
I also thank the other employees of Karvy for their co-operation and
support.
Date:
Place:
Gautam V. Foria
(Summer Trainee)
2
Index
Content Page no.
Executive Summary 4
1. Introduction to Company 5
1.1. Karvy ltd. 5
1.2. Karvy Comtrade ltd. 6
1.2.1. Company Analysis 7
1.2.2. SWOT Analysis 7
1.2.3. Organization Structure 8
1.2.4. Financial Details 8
1.2.5. Competitors 8
3. Silver 39
3.1. Supply/Demand Scenario 40
3.2. Global Scenario for Silver 44
3.3. Indian Scenario for Silver 48
3.4. Outlook for Silver 61
4. Sugar 62
4.1. Introduction 62
4.2. Global Scenario for Sugar 64
4.3. Indian Scenario for Sugar 66
4.4. Outlook for Sugar 74
5. Bibliography 75
3
Executive Summery:
One may have their debt and equity funds in place, but investing in
commodities could just be the one element to improve their portfolio.
Commodity trading provides an ideal asset allocation, also helps one hedge
against inflation and also helps buy a piece of global demand growth.
The report also analyses Sugar and its price movements. It seeks to
analyze the fundamentals of Sugar and the involvement of the use of
sugarcane in production of gasoline so also the cultivation pattern and
demand and supply situation in India and the world and thereby gives an
insight about Sugar futures on NCDEX and how they are traded.
4
1. Introduction to Company:
5
1.2. Karvy Comtrade Ltd.:
Commodities market, contrary to the beliefs of many people, has been
in existence in India through the ages. However the recent attempt by the
Government to permit Multi-commodity National levels exchanges has
indeed given it, a shot in the arm. As a result two exchanges Multi
Commodity Exchange (MCX) and National Commodity and derivatives
Exchange (NCDEX) have come into being. These exchanges, by virtue of
their high profile promoters and stakeholders, bundle in themselves, online
trading facilities, robust surveillance measures and a hassle-free settlement
system. The futures contracts available on a wide spectrum of commodities
like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa
etc., provide excellent opportunities for hedging the risks of the farmers,
importers, exporters, traders and large scale consumers. They also make
open an avenue for quality investments in precious metals. The commodities
market, as it is not affected by the movements of the stock market or debt
market provides tremendous opportunities for better diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this
market.
Karvy Comtrade Limited is another venture of the prestigious Karvy
group. With well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services, it
is indeed a pleasure for them to make foray into the commodities derivatives
market which opens yet another door for Karvy to deliver its service to
customers and the investor public at large.
6
1.2.1. Company Analysis:
Trade from anywhere in India: Karvy, with its network of branches across
the length and breadth of the country, gives the facility to trade from
anywhere in India.
Strength Weakness
• No1. in commodities • Hampered reputation due to
• Trade anywhere in India bad news in market about
• Free Software for trading Karvy
• Personalized Service
Opportunity Threats
• Emerging Commodity Market • New Entrants
• Increase in customer base • New Adverse Regulations
7
from FMC
8
1.2.3. Organizational Structure:
Chairman
Board Of Directors
General Manager
Regional Manager
Branch Manager
Deputy PFEs
Deputy RMs
1.2.5. Competitors:
The main competitors to Karvy comtrade are:
• Religare
• India Infoline
• Kotak Commodities
• Manfinancial
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2. Introduction to Commodity Market
2.1. Commodity:
Definition 1: A physical substance, such as food, grains, and metals, which
is interchangeable with another product of the same type, and which
investors buy or sell, usually through futures contracts.
Defination3: Commodities, in simple words are any goods that are common
and unbranded. Eg: Gold, silver, rubber, pepper, jute, wheat, sugar, cotton
etc., are some of the common commodities.
Why commodity?
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If you are an importer or an exporter, commodities futures can help you in
the following ways…
• Hedge against price fluctuations – Wide fluctuations in the prices of
import or export products can directly affect your bottom-line as the
price at which you import/export is fixed before-hand. Commodity
futures help you to procure or sell the commodities at a price decided
months before the actual transaction, thereby ironing out any change
in prices that happen subsequently.
If you are a producer of a commodity, futures can help you as follows:
• Lock-in the price for your produce – If you are a farmer, there is every
chance that the price of your produce may come down drastically at
the time of harvest. By taking positions in commodity futures you can
effectively lock-in the price at which you wish to sell your produce
• Assured demand – Any glut in the market can make you wait
unendingly for a buyer. Selling commodity futures contract can give
you assured demand at the time of harvest.
If you are a large scale consumer of a product, here is how this market can
help you:
• Control your cost – If you are an industrialist, the raw material cost
dictates the final price of your output. Any sudden rise in the price of
raw materials can compel you to pass on the hike to your customers
and make your products unattractive in the market. By buying
commodity futures, you can fix the price of your raw material.
• Ensure continuous supply – Any shortfall in the supply of raw
materials can stall your production and make you default on your sale
obligations. You can avoid this risk by buying a commodity futures
contract by which you are assured of supply of a fixed quantity of
materials at a pre-decided price at the appointed time.
2.2. Derivatives:
Definition: A commodity derivative derives its value from an underlying
asset which is necessarily a commodity.
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2.3. Commodity Market:
Definition: Commodity markets represent the formal system for the
interplay of demand for and supply of commodities.
These markets can be broadly classified into spot market and futures
market. Commodities for immediate delivery are traded through the spot
market. The players in the spot market are the actual producers and the
consumers of the commodities.
The other type of market called the ‘Futures market’ is for facilitating
contracts for future delivery. These markets make available for trading, the
various derivatives based on commodities. Usually traded ones are the
futures and options. However in India options on commodities are not
available and are expected to be introduced soon.
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2.3.2. International commodity market:
Agricultural products such as wheat, rice, cattle, pigs, corn, etc., were
the first commodities to be traded. As the trade increased, it started occurring
at a fixed place in the area. In due course of time, this place was called a
market. As the time passed, the market grew in time and space. It took the
global form. But the name, commodity market remained the same. In this
article let us scan through and find where and how the commodity market
started and how it grew through the ages.
Some of the most popular exchanges around the world are given
below along with the major commodities traded:
13
Malaysian Derivatives Exchange Rubber, Soy Oil, Palm Oil
14
2.4. Commodity Markets in India:
Evolution of the commodity market in India:
Although India has a long history of trade in commodity derivatives,
this segment remained underdeveloped due to government intervention in
many commodity markets to control prices. The production, supply and
distribution of many agricultural commodities are still governed by the state
and forwards and futures trading are selectively introduced with stringent
controls. While free trade in many commodity items is restricted under the
Essential Commodities Act (ECA), 1955, forward and futures contracts are
limited to certain commodity items under the Forward Contracts
(Regulation) Act (FCRA), 1952.
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trade was altogether banned by the government in 1966 in order to have
control on the movement of prices of many agricultural and essential
commodities.
After the ban of futures trade all the exchanges went out of business
and many traders started resorting to unofficial and informal trade in futures.
On recommendation of the Khusro Committee in 1980 government
reintroduced futures on some selected commodities including cotton, jute,
potatoes, etc. As part of economic liberalization of 1990s an expert
committee on forward markets under the chairmanship of Prof. K.N. Kabra
was appointed by the government of India in 1993. Its report submitted in
1994 recommended the reintroduction of futures which were banned in 1966
and also to widen its coverage to many more agricultural commodities and
silver. In order to give more thrust on agricultural sector, the National
Agricultural Policy 2000 has envisaged external and domestic market
reforms and dismantling of all controls and regulations in agricultural
commodity markets. It has also proposed to enlarge the coverage of futures
markets to minimize the wide fluctuations in commodity prices and for
hedging the risk arising from price fluctuations. In line with the proposal
many more agricultural commodities are being brought under futures
trading.
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seed
6. The Meerut Agro Commodities Gur
Exchange Ltd., Meerut
7. The Bombay Commodity Exchange Oilseed Complex, Castor oil
Ltd., Mumbai international contracts
8. Rajkot Seeds, Oil & Bullion Merchants Castor seed, Groundnut, its
Association, Rajkot oil & cake, cottonseed, its oil
& cake, cotton (kapas) and
RBD palmolein.
9. The Ahmedabad Commodity Castorseed, cottonseed, its oil
Exchange, Ahmedabad and oilcake
10. The East India Jute & Hessian Hessian & Sacking
Exchange Ltd., Calcutta
11. The East India Cotton Association Ltd., Cotton
Mumbai
12. The Spices & Oilseeds Exchange Ltd., Turmeric
Sangli.
13. National Board of Trade, Indore Soya seed, Soyaoil and Soya
meals, Rapeseed/Mustardseed
its oil and oilcake and RBD
Palmolien
14. The First Commodities Exchange of Copra/coconut, its oil &
India Ltd., Kochi oilcake
15. Central India Commercial Exchange Gur and Mustard seed
Ltd., Gwalior
16. E-sugar India Ltd., Mumbai Sugar
17. National Multi-Commodity Exchange Several Commodities
of India Ltd., Ahmedabad
18. Coffee Futures Exchange India Ltd., Coffee
Bangalore
19. Surendranagar Cotton Oil & Oilseeds, Cotton, Cottonseed, Kapas
Surendranagar
20. E-Commodities Ltd., New Delhi Sugar (trading yet to
commence)
21. National Commodity & Derivatives, Several Commodities
Exchange Ltd., Mumbai
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22. Multi Commodity Exchange Ltd., Several Commodities
Mumbai
23. Bikaner commodity Exchange Ltd., Mustard seeds its oil &
Bikaner oilcake, Gram. Guar seed.
Guar Gum
24. Haryana Commodities Ltd., Hissar Mustard seed complex
25. Bullion Association Ltd., Jaipur Mustard seed Complex
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chosen from among the members of the Association who have trading and
business interest in the exchange. The Board is assisted by the chief
executive officer and his team in day-to-day administration.
MCX
MCX (Multi Commodity Exchange of India Ltd.) an independent
and de-mutulised multi commodity exchange has permanent recognition
from Government of India for facilitating online trading, clearing and
settlement operations for commodity futures markets across the country. Key
shareholders of MCX are Financial Technologies (India) Ltd., State Bank of
India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State
Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank
Of India, Bank Of Baroda, Canara Bank, Corporation Bank.
19
MCX, having a permanent recognition from the Government of
India, is an independent and demutualised multi commodity Exchange.
MCX, a state-of-the-art nationwide, digital Exchange, facilitates online
trading, clearing and settlement operations for a commodities futures trading.
NMCE
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business. These deliveries are executed through a sound and reliable
Warehouse Receipt System, leading to guaranteed clearing and
settlement.
NCDEX
21
22
Terminology:
Physical settlement
Physical settlement involves the physical delivery of the underlying
commodity, typically at an accredited warehouse. The seller intending to
make delivery would have to take the commodities to the designated
warehouse and the buyer intending to take delivery would have to go to the
designated warehouse and pick up the commodity. This may sound simple,
but the physical settlement of commodities is a complex process. The issues
faced in physical settlement are enormous. They are:-
• Limits on storage facilities in different states.
• Restrictions on interstate movement of commodities.
• State level octroi and duties have an impact on the cost of movement of
goods across locations.
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Assignment
Whenever delivery notices are given by the seller, the clearing house
of the exchange identifies the buyer to whom this notice may be assigned.
Exchanges follow different practices for the assignment process. One
approach is to display the delivery notice and allow buyers wishing to take
delivery to bid for taking delivery. Among the international exchanges,
BMF, CBOT and CME display delivery notices. Alternatively, the clearing
houses may assign deliveries to buyers on some basis. Exchanges such as
COMMEX and the Indian commodities exchanges have adopted this
method.
Any seller/ buyer who has given intention to deliver/ been assigned a
delivery has an option to square off positions till the market close of the day
of delivery notice. After the close of trading, exchanges assign the delivery
intentions to open long positions. Assignment is done typically either on
random basis or first-in-first out basis. In some exchanges, the buyer has the
option to give his preference for delivery location. The clearing house
decides on the daily delivery order rate at which delivery will be settled.
Delivery rate depends on the spot rate of the underlying adjusted for
discount/ premium for quality and freight costs. The discount/ premium for
quality and freight costs are published by the clearing house before
introduction of the contract. The most active spot market is normally taken
as the benchmark for deciding spot prices. Alternatively, the delivery rate is
determined based on the previous day closing rate for the contract or the
closing rate for the day.
Delivery
After the assignment process, clearing house/ exchange issues a
delivery order to the buyer. The exchange also informs the respective
warehouse about the identity of the buyer. The buyer is required to deposit a
certain percentage of the contract amount with the clearing house as margin
against the warehouse receipt. The period available for the buyer to take
physical delivery is stipulated by the exchange. Buyer or his authorised
representative in the presence of seller or his representative takes the
physical stocks against the delivery order. Proof of physical delivery having
been effected is forwarded by the seller to the clearing house and the invoice
amount is credited to the seller's account. In India if a seller does not give
notice of delivery then at the expiry of the contract the positions are cash
settled by price difference exactly as in cash settled equity futures contracts.
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Warehousing
One of the main differences between financial and commodity
derivatives are the need for warehousing. In case of most exchange-traded
financial derivatives, all the positions are cash settled. Cash settlement
involves paying up the difference in prices between the time the contract was
entered into and the time the contract was closed. In case of commodity
derivatives however, there is a possibility of physical settlement. Which
means that if the seller chooses to hand over the commodity instead of the
difference in cash, the buyer must take physical delivery of the underlying
asset. This requires the exchange to make an arrangement with warehouses
to handle the settlements. The efficacy of the commodities settlements
depends on the warehousing system available. Most international
commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements. Such CWH are required to provide storage
facilities for participants in the commodities markets and to certify the
quantity and quality of the underlying commodity. In India, the warehousing
system is not as efficient as it is in some of the other developed markets.
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2.4.2. The NCDEX Platform:
Structure of NCDEX:
Promoters:
A consortium of institutions promotes NCDEX. These include the
ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC), National Bank for Agriculture and Rural Development (NABARD)
and National Stock Exchange of India Limited (NSE). Punjab National Bank
(PNB), CRISIL Limited (formerly the Credit Rating Information Services of
India Limited), Indian Farmers Fertiliser Cooperative Limited
(IFFCO) and Canara Bank by subsciribing to the equity shares have
joined the initial promoters as shareholders of the Exchange. NCDEX is the
only commodity exchange in the country promoted by national level
institutions. This unique parentage enables it to offer a variety of benefits
which are currently in short supply in the commodity markets. The four
institutional promoters of NCDEX are prominent players in their respective
fields and bring with them institution building experience, trust, nationwide
reach, technology and risk management skills.
Governance:
NCDEX is run by an independent Board of Directors. Promoters do
not participate in the day-to-day activities of the exchange. The directors are
appointed in accordance with the provisions of the Articles of Association of
the company. The board is responsible for managing and regulating all the
operations of the exchange and commodities transactions. It formulates the
rules and regulations related to the operations of the exchange. Board
appoints an executive committee and other committees for the purpose of
managing activities of the exchange. The executive committee consists of
Managing Director of the exchange who would be acting as the Chief
Executive of the exchange, and also other members appointed by the board.
Apart from the executive committee the board has constitute committee like
Membership committee, Audit Committee, Risk Committee, Nomination
Committee, Compensation Committee and Business Strategy Committee,
which, help the Board in policy formulation.
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Exchange membership:
Membership of NCDEX is open to any person, association of
persons, partnerships, co-operative societies, companies etc. that fulfills the
eligibility criteria set by the exchange. All the members of the exchange
have to register themselves with the competent authority before commencing
their operations. The members of NCDEX fall into two categories.
NCDEX invites applications for (TCMs) from persons who fulfill the
specified eligibility criteria for trading in commodities. The TCM
membership entitles the members to trade and clear, both for themselves
and/ or on behalf of their clients. Applicants accepted for admission as TCM
are required to satisfy the following:
Particulars (Rupees in Lakh)
1) Interest free cash security deposit 15.00
2) Collateral Security deposit 15.00
3) Annual subscription charges 0.50
4) Advance minimum transaction charges 0.50
5) Net worth requirement 50.00
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Capital requirements
28
The System of NCDEX:
Trading
The trading system provides a fully automated screen-based trading
for futures on commodities on a nationwide basis as well as an online
monitoring and surveillance mechanism. It supports an order driven market
and provides complete transparency of trading operations. The trade timings
of the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been
proposed for implementation at a later stage. The system supports an order
driven market, where orders match automatically. Order matching is
essentially on the basis of commodity, its price, time and quantity. 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.
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Contract cycle
The figure shows the contract cycle for futures contracts. As can be seen, at
any given point of time, three contracts are available for trading - a near-
month, a middle-month and a far-month. As the January contract expires on
the 20th of the month, a new three-month contract starts trading from the
following day, once more making available three index futures contracts for
trading.
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Types of Order:
An electronic trading system allows the trading members to enter
orders with various conditions attached to them as per their requirements.
These conditions are broadly divided into the following categories:
Time conditions
Price conditions
Other conditions
Time conditions:
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.
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. The GTC order on the exchange 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.
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 of this
day/ date, the order is cancelled from the system.
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 portion of the order is cancelled immediately.
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.
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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 filled immediately, it gets
cancelled.
Price conditions:
Other conditions:
Market price: Market orders are orders for which no price is specified at the
time the order is entered (i.e. price is market price). For such orders, the
system determines the price. Only the position to be taken long/ short is
stated.
Market on open: The order will be executed on the market open within the
opening range. This trade is used to enter a new trade, or exit an open trade.
Market on close: The order will be executed on the market close. The fill
price will be within the closing range, which may, in some markets, be
substantially different from the settlement price. This trade is also used to
enter a new trade, or exit an open trade.
Trigger price: Price at which an order gets triggered from the stop-loss
book.
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Limit price: Price of the orders after triggering from stop-loss book.
Spread order: A simple spread order involves two positions, one long and
one short. They are taken in the same commodity with different months or in
closely related commodities. Prices of the two futures contract therefore tend
to go up and down together, and gains on one side of the spread are offset by
losses on the other. The spreaders goal is to profit from a change in the
difference between the two futures prices.
Trading parameters:
Tick size for contracts
The tick size is the smallest price change that can occur for the trades
on the exchange. The tick size in respect of all futures contracts admitted to
dealings on the NCDEX is 5 paise.
Quantity freeze
Orders placed have to be within the quantity specified by the exchange
regard. Any order exceeding this specified quantity will not be executed but
will lie pending with the exchange as a quantity freeze. In respect of orders
which have come under quantity freeze, the member is required to confirm
to the exchange that there is no inadvertent error in the order entry and that
the order is genuine. On such confirmation, the exchange can approve such
order. However, in exceptional cases, the exchange may, at its discretion, not
allow the orders that have come under quantity freeze for execution.
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Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each
contract. 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.
Charges
Members are liable to pay transaction charges for the trade done
through the exchange during the previous month. 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. 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.
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determines the best estimate of today and tomorrow's prices and it is
considered to be the accurate reflection of the supply and demand for the
underlying commodity. The cost-of-carry model explains the dynamics of
pricing that constitute the estimation of fair value of futures.
F= S + C eq(1)
Where: F = Futures price
S = Spot price
C = Holding costs or carry costs
The fair value of a futures contract can also be expressed as:
F = S(1 + r)T eq(2)
Where: r = Percent cost of financing
T = Time till expiration
Whenever the futures price moves away from the fair value, there
would be opportunities for arbitrage. If F < (1 + r)T or F > (1 + r)T , arbitrage
would exist. In the case of commodity futures, the holding cost is the cost of
financing plus cost of storage and insurance purchased. In the case of equity
futures, the holding cost is the cost of financing minus the dividends returns.
Equation 2 uses the concept of discrete compounding, where interest rates
are compounded at discrete intervals, for example, annually or semiannually.
Pricing of continuously compounded interest rates is expressed as:
F = SerT eq (3)
Where: r = Cost of financing (using continuously compounded interest rate)
T = Time till expiration
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e = 2.71828
The above equations provides for pricing futures in general.
Investment assets
An investment asset is an asset that is held for investment purposes
by most investors. Stocks and bonds are examples of investment assets. Gold
and silver are also examples of investment assets. Note however that
investment assets do not always have to be held exclusively for investment.
However, to classify as investment assets, these assets do have to satisfy the
requirement that they are held by a large number of investors solely for
investment. we can use arbitrage arguments to determine the futures prices
of an investment asset from its spot price and other observable market
variables.
Consumption assets
A consumption asset is an asset that is held primarily for
consumption. It is not usually held for investment. Examples of consumption
assets are commodities such as copper, oil, and pork bellies. For pricing
consumption assets, we need to review the arbitrage arguments a little
differently. We consider the cost-of-carry model and the pricing of futures
contracts on investment assets to determine the price of consumption assets.
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Pricing futures contracts on consumption commodities:
The arbitrage argument is used to price futures on investment
commodities. For commodities that are consumption commodities rather
than investment assets, the arbitrage arguments used to determine futures
prices need to be reviewed carefully. Suppose we have
F > (S + U)erT eq(5)
To take advantage of this opportunity, an arbitrager can implement the
following strategy:
1. Borrow an amount S + U at the risk-free interest rate and use it to
purchase one unit of the commodity and pay storage costs.
2. Short a forward contract on one unit of the commodity.
If we regard the futures contract as a forward contract, this strategy leads to a
profit of F- (S + U)erT at the expiration of the futures contract. As
arbitragers exploit this opportunity, the spot price will increase and the
futures price will decrease until Equation 5 does not hold good.
Suppose next that
F < (S + U)erT eq(6)
In case of investment assets such as gold and silver, many investors
hold the commodity purely for investment. When they observe the inequality
in equation 6, they will find it profitable to trade in the following manner:
1. Sell the commodity, save the storage costs, and invest the proceeds at the
risk-free interest rate.
2. Take a long position in a forward contract.
This would result in a profit at maturity of (S + U)erT - F relative to the
position that the investors would have been in had they held the underlying
commodity. As arbitragers exploit this opportunity, the spot price will
decrease and the futures price will increase until equation 6 does not hold
good. This means that for investment assets, equation 4 holds good.
However, for commodities like cotton or wheat that are held for
consumption purpose, this argument cannot be used. Individuals and
companies, who keep such a commodity in inventory, do so, because of its
consumption value - not because of its value as an investment. They are
reluctant to sell these commodities and buy forward or futures contracts
because these contracts cannot be consumed. Therefore there is unlikely to
be arbitrage when equation 6 holds good. In short, for a consumption
commodity therefore,
F <= (S + U)erT eq(7)
That is the futures price is less than or equal to the spot price plus the cost of
carry.
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Convergence of Future and Spot Price:
The figure shows how basis changes over time. As the time to expiration of a
contract reduces, the basis reduces. Towards the close of trading on the day
of settlement, the futures price and the spot price converge. The closing price
for the April gold futures contract is the closing value of gold in the spot
market on that day.
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2.5. Exchanges: International and Domestic
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3. Silver
Silver is a soft white precious univalent metallic element that is highly
ductile and malleable having the highest electrical and thermal conductivity
of any metal. It is found in the metallic state and also in a large amount of
minerals mainly in argentite and in a free form. That is why it is called
argentum in Latin.
Silver is one of the oldest found metals on earth and it had been used
since 4th millennium B.C. Old books indicate that at that time it was
extracted from lead. First attempt to mine silver is said to be have been made
around 3000 BC in the areas of Anatolia. A process, ”culpellation” was
found out in order to extract silver from silver ores around 2500BC. This led
to the discovery of more silver mines around the world.Used in coins and
jewelry and tableware and photography. It was used as currency in many
civilizations. Silver coin as a currency was first introduced in the eastern
Mediterranean in 550 B.C. It started gaining popularity as a medium of
exchange since then. The discovery of the American countries marked an
important twist in the history of silver as the major silver mines in Mexico,
Peru and Bolivia were found.
Silver is a metal that is associated with metals like gold, lead, zinc and
copper, though it’s unusual properties makes it very different from them. It
is used in making various kinds of jewelry, as it is considered as a precious
metal second to gold but its contribution in the various industrial sectors as a
raw material makes it unmatchable. No other metal can replace silver as it
has an endless number of uses.
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Basic Information:
Symbol: Ag
Mass: 107.868
Density @ 293 K: 10.5 g/cm3
Melting Point: 961.93 C (1235.1 K)
Boiling Point: 2212 C (2428 K)
Classification: Transition Metal
Crystal Structure: Face-centered Cubic
Color: silver
Characteristics: soft, ductile, tarnishes
41
Mine production of silver is the largest component of silver supply. It
can be seen that mine production accounts for nearly 72 % of silver supply.
Other sources of silver being scrap and sales by government bodies also play
their role in meeting the ever-increasing demand of silver. Government sales
are most done to stabilize the price of silver or in crisis situations like war or
natural disasters. The detailed trend analysis of the various source of silver
will facilitate in predicting the future movement of silver production and its
repercussions.
42
Supply from above the ground constitute of Scrap and Government
sales. Together they constitute of around 25% of silver supply. Scrap is
recovered from industrial waste or existing goods such as photographic
chemicals, jewellery, discarded electronic goods such as computers etc.
43
Most of the industrial applications of silver, the demand is price
inelastic as there it is required in minute quantities where as the demand of
silver in jewellery is highly price sensitive.
44
3.2. Global scenario for Silver:
Silver producing countries:
45
The Silver is mainly consumed for the
industrial uses. The main uses of silver are Batteries,
Electroplating, Bearings, Jewellery and Silverware,
Brazing and Soldering, Medical Applications,
Catalysts Mirrors and Coatings, Coins Photography,
Electrical Solar Energy, Electronics Water
Purification.
46
The countries that are the major consumers of silver
are: -
• United states
• Canada
• Mexico
• United Kingdom
• France
• Germany
• Italy
• Japan
• India
Grading of Silver:
Silver that is found with some percentage of other
elements in it is called impure silver. That is why it
is graded upon its fineness. According to the Indian
standards, silver is graded into six categories
World Markets:
• London Bullion Market is the global hub of
OTC (Over-The-Counter) trading in silver.
• Comex futures in New York is where most
fund activity is focused
47
Trading Symbol: SI
48
Trading Hours (All times are New York time):
Open outcry trading is conducted from 8:25 AM
until 1:25 PM.
Trading Months:
Trading is conducted for delivery during the current
calendar month; the next two calendar months; any
January, March, May, and September falling within
a 23-month period; and any July and December
falling within a 60-month period beginning with the
current month.
Delivery:
Silver delivered against the futures contract must
bear a serial number and identifying stamp of a
refiner's officially listed brand. Delivery must be
must be made from a warehouse or vault licensed or
designated by the Exchange specifically for the
storage of silver.
Delivery Period:
49
The first delivery day is the first business day of the
delivery month; the last delivery day is the last
business day of the delivery month.
50
Grade and Quality Specifications:
In fulfillment of each contract, the seller must
deliver 5,000 troy ounces (±6%) of refined silver,
assaying not less than .999 fineness, in cast bars
weighing 1,000 or 1,100 troy ounces each and
bearing a serial number and identifying stamp of a
refiner approved and listed by the Exchange. A list
of approved refiners and assayers is available from
the Exchange upon request.
Trading Symbol: QI
Trading Hours:
The contracts are available for trading on the CME
Globex® trading platform from 6:00 PM Sundays
through 5:15 PM Fridays, Eastern Time, with a 45-
minute break each day between 5:15 PM and 6:00
PM.
Trading Months:
51
Trading is conducted during the same months as the
full-sized silver futures contract (SI), except the
current month.
Settlement: Financial.
• London
• Zurich
• New York (COMEX)
• Chicago (CBOT)
• Hong Kong
• Tokyo Commodity Exchange (TOCOM)
52
sharp decline could not affect India’s reputation of
being one of the largest consumer countries of silver
in the world. India stands third after United States
and Japan among the leading consumers of silver in
the world. By contrast with United States and Japan,
Indian industrial off take for fabrication in hardcore
industrial applications like electronics and brazing
alloys accounts for only 15 % and the rest being for
foils for use in the decorative covering of food,
plating of jewelry and silverware and jari.
• China
• United Kingdom
• European Union
• Australia
• Dubai
• Rajasthan
• Gujarat
• Jharkhand
53
tons. Gujarat follows on the second place with a
production of around 20 thousand tons.
• Delhi
• Indore
• Rajasthan
• Madhya Pradesh
• Mathura (Uttar Pradesh)
• Rajkot (Gujarat)
54
Silver at MCX:
Though the silver futures are traded on
NCDEX and MCX, bigger volumes are traded on
MCX. So we will have a look on silver specification
on MCX. There are three different types of silver
contracts traded on MCX; they are Silver future,
Silver HNI Futures and Silver Mini Futures.
Symbol: SILVER
Description: SILVERMMMYY
Trading session:
Mondays to Friday: 10.00 a.m. to 11.30 p.m.
Saturday: 10.00 a.m. to 2.00 p.m.
Trading unit: 30 kg
Quotation/Base Value: 1 kg
Price Quote:
Ex-Ahmedabad (inclusive of all taxes and levies
relating to import duty, customs , if applicable but
55
excluding Sales Tax / VAT, any other additional tax
or surcharge on sales tax, local taxes and octroi.
Initial margin: 5%
Special Margin:
In case of additional volatility, a special margin at
such percentage, as deemed fit, will be imposed
immediately on both buy and sale side in respect of
all outstanding position, which will remain in force
for next 2 days, after which the special margin will
be relaxed.
Delivery unit: 30 kg
Quality specifications:
Grade: 999 and Fineness: 999 (as per IS 2112: 1981)
• No negative tolerance on the minimum fineness
shall be permitted.
56
• If it is below 999 purity it is rejected.
It should be serially numbered silver bars supplied
by LBMA approved suppliers or other suppliers as
may be approved by MCX.
57
month and seller submits all the documentary
evidence.
58
Delivery Logic:
Compulsory Delivery. Any seller having open
position on the expiry date fails to deliver on the
next day then a penalty of 5% shall be imposed out
of which 90% will be passed on to the buyer.
Delivery Pay-in:
On any tender days by 6.00 p.m.
Funds Pay-in
T+1 working day by 11.00 a.m. (T stands for tender
day).
Funds Pay-out
T+1 working day by 05.00 p.m.
Delivery Pay-out:
T+1 working day after completion of pay-in funds.
Buyer’s obligation:
The buyer shall not refuse taking delivery and such
refusal will entertain 5% penalty out of which 90%
of the penalty amount shall be passed on to the
seller.10% will be retained by the Exchange.
59
At the time of taking delivery, the buyer can open
the sealed packets in front of Group 4 personnel. If
he is satisfied with the quantity, weight and quality
of material, then he will issue receipt of the metals
instantly. If he is not satisfied with the metal, he can
insist for assaying by any of the approved assayers
available at that center.
60
Legal obligation:
The members will provide appropriate tax forms
wherever required as per law and as customary and
neither of the parties will unreasonably refuse to do
so.
Validation Process:
On receipt of delivery, the Group 4 personnel will
do the following validations:
a. whether the person carrying Silver is the
designated clearing agent of the member;
b. whether the selling member is listed in the
statement forwarded by the Exchange as a delivering
member
c. whether the quantity being delivered by the seller
is exactly the same quantity as communicated by the
Exchange;
d. whether the serial no of all the bars is mentioned
in the seller’s bill;
e. whether the original certificates are accompanied
with the Silver Bars
61
f. whether the serial nos listed in the certificate tally
with the nos written inscribed on the bars
g. whether the seller has issued individual bills of
relevant quantity in favour of each of the buyer
Any other validation checks, as they may desire.
Delivery Process:
In case any of the above validation fails, the Group 4
Securitas will contact the Exchange office and take
any further action, only as per instructions received
from the Exchange in writing. If all validations are
through, then the Group 4 personnel will put the
Silver in bag/s and seal the same in front of the
customer with unique tamper-proof seal/s. Then the
custodian of Group 4 will cut a serially numbered
Group 4 receipt (in triplicate consisting of White,
Pink and Yellow slips), get the signature of the
seller’s clearing agent and signing the same for
authorization, hand over the Pink slip to seller’s
clearing agent, send by courier the third copy
(Yellow Colour slip) while retaining the White for
the records of Group 4 Securitas. The receipt details
in full are then entered into the package supplied by
MCX and is uploaded to MCX server for
authorization and further processing. Group 4 in
front of the selling member’s clearing agent deposit
the said metal into a bag and seal it with a tamper-
proof unique numbered Group 4 seal and give a
copy of the same to the customer, send the second
one to MCX for its records and third copy of the
receipt for its record. The sealed bag will be vaulted
in the same condition with Group 4 Securitas until
further delivery to MCX customer. Even in case if
the metal has to be sent to various destinations, it
shall be done in same bag only. Each bag shall not
contain not more than 30 kg of Silver and where the
depository is more than 30 kg, the same will be
stored in multiple bags with each having individual
seals with unique number. If the metal delivered by
a seller has to go to 10 different buyers, 10
62
individual packets will be made for each buyer and
unique numbers will be assigned to each packet.
Quality adjustment:
The price of Silver is on the basis of 999 purity.
If the quality is less than 999, it is rejected.
Quantity adjustment:
The tolerance limit will be +/- 3 kg. The weight of
Silver bar must be between 27 kg to 33 kg.
63
The buying member can endorse delivery order to a
client or any third party with full disclosure given to
MCX. Responsibility for contractual liability would
be with the original assignee.
64
Specification of Silver HNI Futures Contract:
Symbol:SILVER
Description:SILVERHNIMMMYY
Trading unit: 50 kg
Quotation/Base Value: 1 kg
Initial margin: 5 %
65
Pay-in of funds: E+2 working day by 11.00 a.m.
Symbol: SILVERM
Trading unit: 5 kg
Quotation/Base Value: 1 kg
Initial margin: 5%
66
Delivery unit: 30 kg
Delivery allocation:
- Date
- Rate
On expiry date of the Contract
At due date rate (DDR)
67
Factors influencing the price of Silver:
• Demand – Supply
• Price movements of other metals
• Income level of the rural sector of the
economy
• Fluctuation in deficits and interest rates
• Inflation
• Monsoon, Agricultural output
• Currency fluctuation
68
3.4. Outlook on Silver:
The price of silver has shown a downward
trend in last few weeks. The various reasons for the
same are:
• The decisions of interest rates in US and its
focus on inflation rate due to which investors
began to move away from the precious metals
segment into treasuries
• Lower industrial demand in the India
• Price fluctuation of gold
• The sliding demand of photography industry due
to the growing demand of digital world.
69
• The tiniest bit of investment demand will drive
prices sky high
4. Sugar
4.1. Introduction:
Sugar is a sweet white (or brownish yellow)
crystalline substance, of a sandy or granular
consistency, obtained by crystallizing the evaporated
juice of certain plants, as the sugar cane, sorghum,
beet root, sugar maple, etc. It is used for seasoning
and preserving many kinds of food and drink.
Ordinary sugar is essentially sucrose. Sugar or
sucrose is a carbohydrate that is derived as an end
product of the process called photosynthesis, a
process from which plants convert sun’s energy to
produce their food. Sugar is used by the plant cells
as a source of energy. That is why it naturally occurs
in all the fruits and vegetables. The word is taken
from the Sanskrit word 'sharkara' which means a
sweetener only.
70
For a long time, the rest of the world did not
know the process of cane sugar production because
it was kept as a secret as it earned them a good
amount of profits. Finally Arabs broke this secret
and started growing sugarcane in Spain and other
parts of Europe and Africa around 7th century AD. It
started gaining popularity in the European continent
and it was considered a luxurious product at that
time. A large amount of sugar was imported from
the East as it started giving competition to honey as
a sweetening agent. Christopher Columbus was the
person who took sugarcane to the new world. This is
how the concept of sugar production spread in
Europe and with the European invasions in the rest
of the world; sugarcane was especially cultivated to
extract sugar from it.
71
refined sugar produced. Sugarcane and sugarbeet
contribute in production of sugar in the ratio 3:1
respectively. In fact this ratio is further moving into
the direction of dominance of sugarcane in the
production process as producing sugar from
sugarbeet is relatively expensive. Generally sugar is
consumed to add sweet taste to many cuisines and
recipes and also for preserving them.
Cultivation pattern:
72
4.2. Global scenario of Sugar:
Over the past fifty years, especially, the
international trade in sugar has changed
dramatically. Since it is either imported or exported
by every country on earth, sugar has become an
integral component of the economic relationships
among nations. Because of that unique position, the
trade in sugar has both reflected-and been affected
by-a wide range of divergent forces, including
global politics, health consciousness, the emergence
of developing nations as suppliers and consumers,
and many others.
73
As most of the sugar producing countries are
indulged in self consumption of sugar, the exports of
sugar are concentrated among a very few countries.
Major sugar exporting countries are: -
• Brazil • Australia
• European Union • Cuba
• India • United states
• Thailand • China
74
60% of world’s sugar production is
concentrated in seven countries, with the top four
producers – Brazil, India, China and the EU,
accounting for almost 50% of the total world
production. However, two of the top four producers
– India and China – are not among the top exporters
due to large domestic demand. 70% of sugar exports
are accounted by Brazil, Thailand, Australia and the
EU.
75
import and production policies practiced by different
nations to protect their domestic produce from
competition. A voluntary body named International
Sugar Organization looks upon the trade of world
sugar.
• BrazilL • Philippines
• Australia • China
• U.S. • Bangladesh
• Cuba
• Iran
76
4.3. Indian scenario:
As history foretells, India had been connected
to sugar for a long time. In fact, it is known as the
place of origin of sugar. India maintains this
reputation of sugar connection by producing the
second largest quantity of sugar in the world and
also being the largest consumer of sugar. Indian
sugar industry is the largest processing industry for
agricultural products constituting of both organized
and unorganized sectors.
77
1.5 million tons. The Indian sugar industry has
successfully satisfied the domestic demand till now.
That is why India no imports of sugar were done
during the past few years.
78
Production of sugar in India:
79
• Muzzafarnagar • Kolkata
• Mumbai • Hyderabad
• Delhi • Chennai
• Ludhiana
80
Ethanol:
81
khandsari to consumption of sugar, the use of
cultivable land for growing sugarcane may increase
with simultaneous reduction in diversion of
sugarcane for production of alternate sweeteners.
Such a trend may lead to an unabated increase in
sugar production
As there is concern about the rate of increase in the
global warming India through its large sugarcane
industry can play a pro-active role in mitigating the
same. The advantages of using green fuel for
generation of power and use of gasohol to reduce
automobile emissions have led sugar mills and the
Government of India is taking steps to encourage
manufacture of Ethanol for the purpose of doping
motor fuel to reduce air pollution. The Indian sugar
industry is taking various steps to make use of this
opportunity for its sustainable growth.
Sugar on NCDEX:
There are two types of sugar traded on
NCDEX, S-30 and M-30. The volume of sugar
traded is more in NCDEX then MCX.
Symbol: SUGARMMZR
Unit of trading: 10 MT
Delivery unit:
10 MT net basis packed in 50 kgs new A Twill
Bags/PP bags Also deliverable in 100 kgs new A
Twill jute bags.
82
Tick Size: Re. 1
Quality Specification:
Sugar in crystal form manufactured by vacuum pan
method with:
Moisture: 0.08% Max
Polarization: 99.80% Min
ICUMSA > or = 150 ICUMSA and < 200 ICUMSA
as determined by GS9/1/2/3-8 prescribed in Sugar
Analysis ICUMSA Method Book
Grade: M
Grain Size: Medium as determined by the methods
prescribed in IS: 498-2003
Hours of Trading:
Mondays through Fridays: 10:00 AM to 5:00 PM
Saturdays: 10.00 AM to 2.00 PM
Delivery specification:
Compulsory delivery: Upon expiry of the contracts,
all open positions will be settled by taking or giving
delivery as the case may be.
83
Closing of contract:
Upon expiry of the contract all the outstanding open
position would result in compulsory delivery.
Opening of contracts:
Trading in new contract will open on the 10th day of
the month in which near month contract is due to
expire. If the 10thday happens to be a non-trading
day, contracts would open on the next trading day
Price Band:
Daily price fluctuation limit is (+/-) 4%. If the trade
hits the prescribed daily price limit there will be a
cooling off period for 15 minutes. Trade will be
allowed during this cooling off period within the
price band. Thereafter the price band would be
raised by another 50% of the existing limit i.e. (+/-)
2% and trade will be resumed. If the price hits the
revised price band (6%) again during the day, trade
will only be allowed within the revised price band.
No trade/order shall be permitted during the day.
Position limits:
Member-wise: 30,000 MT for all contracts or 15%
of market - wide open interest whichever is higher
Client-wise: 10,000 MT
This limit will not apply to bonafide hedge limit if
granted by the Exchange)
Special margins:
84
Special margin of 10% of the value of the contract,
whenever the rise and fall in price exceeds 20%
from the first day's closing price, depending upon
whether price rise or fall respectively. The margin
shall stay in force so long as price stays beyond 20%
limit and will be withdrawn as soon as the price is
within 20% band.
Premium/Discount:
M grade sugar with ICUMSA 100 - 150 could be
accepted as good delivery but with no premium.
Sugar with ICUMSA more than 200 shall be
rejected.
Unit of trading: 10 MT
Delivery unit:
10 MT net basis packed in 50 kgs new A Twill Bags
/PP bags. Also deliverable in 100 kgs new A Twill
jute bags.
85
Quality Specification:
Sugar in crystal form manufactured by vaccum pan
method with:
Moisture: 0.08% Max
Polarization: 99.80% Min
ICUMSA > or = 100 ICUMSA and < 150 ICUMSA
as determined by GS9/1/2/3-8 prescribed in Sugar
Analysis ICUMSA Method Book
Grade: S
Grain Size: Small as determined by the methods
prescribed in IS:498-2003
Hours of Trading:
Mondays through Fridays: Trading Hours - 10:00
AM to 05:00 PM
Saturdays: Trading Hours - 10.00 AM to 2.00 PM
Delivery specification:
Compulsory delivery: Upon expiry of the contracts,
all open positions will be settled by taking or giving
delivery as the case may be.
86
No. of active contracts:
Minimum 2 contracts and maximum 12 contracts
running concurrently
Position limits:
Member-wise: 30,000 MT for all contracts or 15%
of market - wide open interest whichever is higher
Client-wise: 10,000 MT
(This limit will not apply to bonafide hedge limit if
granted by the Exchange)
Near Month Limits
The following limits would be applicable for one
month prior to the expiry of a contract
Member-wise: 7,500 MT
Client-wise: 2,500 MT
Special margins:
Special margin of 10% of the value of the contract,
whenever the rise and fall in price exceeds 20%
from the first day's closing price, depending upon
whether price rise or fall respectively. The margin
shall stay in force so long as price stays beyond 20%
limit and will be withdrawn as soon as the price is
within 20% band.
Discount:
S grade sugar with ICUMSA more than 150 shall be
rejected. S grade sugar with ICUMSA less than 100
is also accepted as good delivery but with no
premium.
87
• Candy and confectionery sales
• Sugars use in new technologies, such as
ethanol production for automobile fuel.
• Factors pertaining to the climatic conditions
and rainfall
• Production of sugarcane in the country
• Political factors
88
3.4. Outlook on Sugar:
The current volatility in sugar prices has led
the market to believe that sugar is not being guided
by its own fundamentals but by the world energy
prices and policy developments.
The key dynamic governing the sugar market
currently is ethanol Brazil’s decision on how much
cane to be diverted for ethanol production.
The new market structure in the EU reforms also
plays an important role in the price movement of
sugar.
Global prices have declined 30% from their
peak as global supply has expanded in response to
spikes in sugar prices.
India has enters a phase of domestic surplus
and the ability of producers to export the surplus
remains uncertain as low global prices make exports
unattractive and catalysts for higher global prices are
not obvious.
Also various factors like a ban on sugar
exports, anticipation of excess production, and price
decline with the onset of the crushing season showed
the decline in sugar prices.
But various policies by Indian government
like increase in buffer stocks and relief in export
policies have eased the pressure on sugar prices.
89
Thus the declining trend of sugar price will remain
to be range bound depending in various factors as
below:
• The surplus production of sugar has prompted
the country to export.
• More stock to release.
• Upcoming monsoon.
• World energy prices and policy developments.
5. Bibliography:
www.karvycomtrade.com
www.mcxindia.com
www.ncdex.com
www.nymex.com
www.kitco.com
www.crnindia.com
www.bloomberg.com
www.google.com
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