Commodity Derivatives and Price Risk Management

Commodity derivatives trading in India notwithstanding its long and tumultuous history, with globalisation and recent measures of liberalisation, has witnessed a massive resurgence turning it one of the most rapidly growing areas in the financial sector today. This project endeavours to test the efficacy and performance of commodity derivatives in steering the price risk management. The critical analytics of performance divulges that these markets although are yet to achieve minimum critical liquidity, almost all the commodities throw an evidence of co-integration in both spot and future prices, presaging that these markets are marching in the right direction of achieving improved operational efficiency, at a slower pace. In the case of some commodities, however, the volatility in the future price has been substantially lower than the spot price indicating an inefficient utilisation of information. Several commodities also appear to attract wide speculative trading. Hedging proves to be an effective proposition in respect of some commodities, while others entail moderate or considerably higher risk. As the markets develop, it remains to be seen whether the information content of future prices could be factored in the course of future monetary policy setting.

Introduction
In the wake of globalisation and surge in the global uncertainties, financial organisations around the world are devising methods and instruments to contain the price risk that these uncertainties bring. Commodity derivatives are such instruments that have been devised to achieve price risk management by basing the value of a security on the value of an underlying commodity. Commodity derivatives trading although has witnessed a long and chequered history, with the recent measures of liberalisation, the sector has witnessed a massive boom in the country. Commodity derivatives or futures markets hold a key in insulating the producers and the trade functionaries from the seasonal and cyclical oscillations in the prices of commodities, which are aggravated by the high income and low price elasticities of demand and the shifts in such elasticties overtime. Derivatives markets hold an immense potential for the economy as they stabilise the amplitude of price variations, facilitate lengthy, complex production decisions, bring
a balance between demand and supply, act as a price barometer to the farmers and the traders besides encouraging competition. These markets while enabling price discovery and better price risk management engender inter-temporal price equilibrium and horizontal and vertical price integration. While ensuring price risk mitigation and remunerative returns, these markets also contribute in scaling down the PGDM, IAMR Ghaziabad Page 1

downside risks associated with agricultural lending and thereby facilitate the flow of credit to agriculture. Besides, these markets through the use of warehouse receipts obviate the need for collaterals, the lack of which has currently impeded the flow of agricultural credit. They also hold a key role not only in reinvigorating the spot markets but also triggering the diversified growth of Indian agriculture in line with the consumption pattern. A strong, healthy, vibrant and well developed commodity exchanges can play a pivotal role in the globalisation of international trade by imparting a competitive pricing efficiency to exports. The promotion of derivatives trading has become imperative particularly, in the aftermath of WTO regime to face the challenges in terms of exposure to the vicissitudes of world commodity prices and heightened competition.

DERIVATIVES & COMMODITY AN OVERVIEW

DERIVATIVES DEFINED
A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues to have jurisdiction over commodity forward/ futures contracts. However, when derivatives trading in securities was introduced in 2001, the term 'security' in the Securities Contracts (Regulation) Act, 1956 (SC(R)A), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A. The Securities Contracts (Regulation) Act, 1956 defines 'derivative' to include

1. A security derived from a debt instrument, share, loan whether 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.

PGDM, IAMR Ghaziabad

Page 2

Derivatives Markets
Derivatives markets can broadly be classified as commodity derivatives market and financial derivatives markets. As the name suggest, commodity derivatives markets trade contracts are those for which the underlying asset is a commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade contracts have a financial asset or variable as the underlying. The more popular financial derivatives are those which have equity, interest rates and exchange rates as the underlying. The most commonly used derivatives contracts are forwards, futures and options which we shall discuss in detail later.

Products, Participants And Function

Derivative contracts are of different types. The most common ones are forwards, futures, options and swaps. Participants who trade in the derivatives market can be classified under the following three broad categories: hedgers, speculators, and arbitragers.

1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers face risk associated with the price of an asset. They use the futures or options markets to reduce or eliminate this risk.

2. Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Futures and options contracts can give them leverage; that is, by putting in small amounts of money upfront, they can take large positions on the market. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy between prices of the same product across different markets. If, for example, they see the futures price of
PGDM, IAMR Ghaziabad Page 3

an asset getting out of line with the cash price, they would take offsetting positions in the two markets to lock in the profit.

Whether the underlying asset is a commodity or a financial asset, derivatives market performs a number of economic functions.

Prices in an organised derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus, derivatives help in discovery of future as well as current prices.

The 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, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives the underlying market witnesses higher trading volumes, because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.

Speculative traders shift to a more controlled environment of the derivatives market. In the absence of an organised derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets.

An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense.

PGDM, IAMR Ghaziabad

Page 4

 Derivatives markets help increase savings and investment in the long run. The transfer of risk enables market participants to expand their volume of activity.

Spot versus Forward Transaction

Every transaction has three components - trading, clearing and settlement. A buyer and seller come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the net outstanding, that is exactly how much of goods and money the two should exchange. In a spot transaction, the trading, clearing and settlement happens instantaneously. Forward contract is a contract by which two parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No money changes hands when the contract is signed. The exchange of money and the underlying goods only happens at the future date as specified in the contract. In a forward contract, the process of trading, clearing and settlement does not happen instantaneously. The trading happens today, but the clearing and settlement happens at the end of the specified period. A forward contract is the most basic derivative contract. We call it a derivative because it derives value from the price of the asset underlying the contract.

Some commonly used Derivatives

Here we define some of the more popularly used derivative contracts. Some of these, namely futures and options will be discussed in more details at a later stage. Forwards: A forward contract is an agreement between two entities to buy or sell the underlying asset at a future date, at today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell the underlying asset at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardised and exchange traded.

PGDM, IAMR Ghaziabad

Page 5

Options: There are two types of options - call and put. A Call option gives 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. A Put option gives 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. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a weighted 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 flows 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 interest 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 one direction being in a different currency than those in the opposite direction.

Difference Between Commodity And Financial Derivative

The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However, there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Since financial assets are not bulky, they do not need special facility for storage even in case of physical settlement. On the other hand, due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. However, in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed.

PGDM, IAMR Ghaziabad

Page 6

COMMODITY MARKET
In India, trading in commodity futures has been in existence from the nineteenth century with organised trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodity futures market. It is only in the last decade that commodity futures exchanges have been actively encouraged. In the commodity futures market, the quinquennium after the set up of national level exchanges witnessed exponential growth in trading with the turnover increasing from 1.29 trillion(one trillion equals 100,000 crore) in 2003-04 to 119 trillion in 2010-11. However, the markets have not grown to significant levels as compared to developed countries. Furthermore, in some of the major derivative exchanges in the world such as Chicago Board of Trade (CBOT), London International Futures and Options Exchange (LIFEE), etc, there is convergence between the commodities and securities derivatives markets. With the globalisation of financial markets, significant developments are taking place in the international arena in terms of electronic trading, internet based commodity exchanges and electronic communication networks (ECNs) using multiple products and combination of networks as competitors to exchanges. There are increasing alliances, often international, to compete effectively with exchanges and ECNs. An overview of futures trading and the volumes traded around the world divulges massive divergence across the different exchanges.

PGDM, IAMR Ghaziabad

Page 7

Commodity Exchange
Commodity exchanges are defined as centers where futures trade is organized in a wider sense; it is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition among buyers and among sellers. This would include auctiontype exchanges, but not wholesale markets, where trade is localized, but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.

Commodity Defined
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs Economic commodities comprise goods and services. The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there demand is, but which is supplied without qualitative differentiation across a market

FEATURE OF COMMODITIES ,NECESSARY FOR TRADING

Standardize Quality Available in bulk quantities Trader in the particular commodity should be many Basically primary sector product ready to be manufactured or product of less complicated manufacturing process

PGDM, IAMR Ghaziabad

Page 8

IMPORTANT TERMINOLOGIES USED IN FUTURE MARKET

Bear Bid : A market trending downward, or a person who expects prices to go lower. : A bid, subject to immediate acceptance, made on the floor of exchange to buy a definite number of futures contracts at a specified price. : A market trending upward; on a person who expects prices to go higher. : To buy at the end of the trading session at a price within the closing range. : To buy at the beginning of a trading session at a price within the opening range.

Bull Buy on close Buy on opening Call

: An option that gives the buyer the right to a long position in the underlying futures at a specific price; the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call. : The price (or price range) recorded during the period designated by the exchange as the official close. : Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or "good-till-canceled" order. : An approach to market forecasting that emphasizes the analysis of factors affecting supply and demand (opposite of technical analysis). : A term used to designate any or all contracts covering the sale of commodities (including financial instruments and cash representing indexes) for future delivery made on an exchange and subject to its rules. : The maximum daily price change above or below the previous close in a specific futures market. Trading limits may be changed during periods of unusually high market activity. : An order given to a broker by a customer which has some restrictions upon its execution. such as price or time. : Cash or equivalent posted as guarantee of fulfillment of a futures contract (not

Closing price (or range) Day orders

Fundamental analysis Futures contract

Limit

Limit order

Margin

PGDM, IAMR Ghaziabad

Page 9

a downpayment). Margin call : Demand for additional funds or equivalent because of adverse price movements or some other contingency.

Mark-to-market : The practice of crediting or debiting a trader's account based on the daily closing prices of the futures contracts he is long or short. Market order Nearby Net position : An order for immediate execution at the best available price. : The futures contract closest to expiration. : The difference between the open contracts long and the open contracts short held in any one commodity by any individual or group. : The price at which the spot or cash commodity is selling on the cash or spot market.

Spot price

REGULATORY BODY

The Forward Markets Commission (FMC) is the chief regulator of forwards and futures
markets in India. As of March 2009, it regulated Rs 52 trillion worth of commodity trades in India. It is headquartered in Mumbai and unusually for a financial regulatory agency is overseen by the Ministry of Consumer Affairs, Food and Public Distribution (India). Mr. Ramesh Abhishek replaced Mr. B.C. Khatua as the chairman of the commission in 2011.

PGDM, IAMR Ghaziabad

Page 10

Responsibilities and functions

The functions of the Forward Markets Commission are as follows: To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act. To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; To make recommendations generally with a view to improving the organization and working of forward markets; To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considers it necessary.

Present system of regulation in commodity forward/future trading in India

At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges.

PGDM, IAMR Ghaziabad

Page 11

The FC(R) Act, 1952 prohibits options in commodities. For the purpose of forward contracts in certain commodities can be regulated by notifying those commodities u/s 15 of the Act; forward trading in certain other commodities can be prohibited by notifying these commodities u/s 17 of the Act.

Regulatory measures prescribed by Forward Markets Commission

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 & promote interest of customers /non-members. The Forward Markets Commission prescribes following regulatory measures: Limit on net open position as on the close of an individual operator and at Member level to prevent excessive speculation Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. Imposition of margins to prevent defaults by Members/clients Physical delivery of contracts and penalty for default/delivery obligations Daily mark to marketing of the contract

PGDM, IAMR Ghaziabad

Page 12

STRUCTURE OF FMC

Indian Commodity Exchanges

There are more than 20 recognised commodity futures exchanges in India under the purview of the Forward Markets Commission (FMC). The country's commodity futures exchanges are divided majorly into two categories:

PGDM, IAMR Ghaziabad

Page 13

 National exchanges Regional exchanges

List of the Exchanges

Name of the Exchanges

A. National Multi Commodity Exchanges

1 National Multi Commodity Exchange of India Ltd., Ahmedabad (NMCE) 2 Multi Commodity Exchange of India Ltd., Mumbai (MCX) 3 National Commodity & Derivatives Exchange Ltd., Mumbai (NCDEX) 4 Indian Commodity Exchange Ltd., Mumbai (ICEX)

PGDM, IAMR Ghaziabad

Page 14

B. Commodity Specific Regional Exchanges

5 Ahmedabad Commodity Exchange Ltd, Ahmedabad 6 Bikaner Commodity Exchange Ltd, Bikaner 7 Bombay Commodity Exchange Ltd, Mumbai 8 Central India Commercial Exchange Ltd, Gwalior 9 Cotton Association of India, Mumbai 10 The Chember of Commerce, Hapur 11 East India Jute & Hessian Exchange Ltd., Kolkata 12 First Commodity Exchange of India Ltd, Kochi 13 Haryana Commodities Ltd., Sirsa 14 India Pepper & Spice Trade Association, Kochi 15 The Meerut Agro Commodities Exchange Company Ltd, Meerut 16 National Board of Trade, Indore 17 Rajkot Commodity Exchange Ltd., Rajkot 18 Spices & Oilseeds Exchange Ltd, Sangli 19 Surendranagar Cotton Oil & Oilseeds Association Ltd, Surendranagar 20 The Rajdhani Oil & Oilseeds Exchange Ltd, Delhi 21 Vijai Beopar Chamber Ltd., Muzaffarnagar

Features of national and regional exchanges

National Exchanges
Compulsory online trading Transparent trading
PGDM, IAMR Ghaziabad Page 15

 Exchanges to be de-mutualised Exchange recognised on permanent basis Multi commodity exchange Large expanding volumes

Regional Exchanges

Online trading not compulsory De-mutualisation not mandatory Recognition given for fixed period after which it could be given for re regulation Generally, these are single commodity exchanges. Exchanges have to apply for trading each commodity Low volumes in niche markets

TRADE TIMING
Special Session: Monday to Saturday: 9:45 a.m. to 9:59 a.m. Special Session (order cancellation session) is held to cancel the pending orders prior to opening of market Normal Session: Monday through Friday: 10:00 a.m. to 11:30 p.m. (up to 11:55 p.m. on account of day light savings typically between every November and March of the following year) Saturdays: 10:00 a.m. to 2:00 p.m. Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-commodities (bullions, metals, energy products) are available up to 11:30 pm /11.50
PGDM, IAMR Ghaziabad Page 16

Major Commodities Traded

Bullion Base Metals Cereals Spices Energy & Gas Oil & Oil Seeds Pulses Others : : : : : : : : Gold, Silver, Platinum Nickle, Tin, Copper, Zinc, Aluminium, Lead Wheat, Maize, Barley, Pepper, Red Chilli, Jeera, Turmeric, Cardamom Crude oil, Natural Gas, Gasoline, Heating oil Castor seeds, Soya bean, Refined Soya oil Chana Guar Seeds, Gur, Sugar, Mentha oil, Potato

Performance of Commodity Derivatives Market in India

A decadal overview of growth pattern reveals that the commodities such as turmeric, pepper and castorseed witnessed a significant turnaround in their volumes as measured by their compound growth rates since the late 1990s compared to the first half of the decade, while the commodities such as gur and cotton displayed downtrend during the same period. In terms of the value of trading, while commodities such as castorseed, and pepper witnessed a sharp rebound, others such as cotton, gur and turmeric revealed a negative growth. There has, however, been a massive spurt in the business of commodity derivatives trading in the recent past. The size of volumes and value of commodities traded tripled during. During 20010-11, the volume of trading recorded at 6,685 lakh tonnes valued at over Rs. 21 crore was more than 2 times the level of preceding year.

PGDM, IAMR Ghaziabad

Page 17

In India, the primary commodities account for bulk of the value of trading on the existing commodities derivatives market. In the last three years, they accounted for 74 per cent of total value of derivatives trading. Although trading in other commodities such as gold silver, metals and oil recorded only in the recent period, there has been a boom, particularly in the bullion market (Chart 3).

PGDM, IAMR Ghaziabad

Page 18

Similarly, the value of trading of agricultural commodities as a proportion GDP emanating from agriculture witnessed a three-fold increase in 2004-05, recording a ratio over 70 per cent. However, the value of trading of agricultural commodities as a proportion overall GDP stood at around 37 per cent, followed by bullion (around 24 per cent), oils (6 per cent) and other metals (0.6 per cent) during 2005-06 (Table 2).

Important Developments in the Commodity Derivative Markets:

During 2010-11, forward trading was regulated in commodities at 21 recognized exchanges. The break up of the total value of commodities traded stood as under Bullion - ` 54.94 lakh crore (45.98%). Base metals - ` 26.88 lakh crore (22.50%). Energy products - ` 23.11 lakh crore (19.34%). Agricultural commodities- ` 14.56 lakh crore (12.19%).

PGDM, IAMR Ghaziabad

Page 19

Total value of commodities traded in 2010-11

60 50 54.94

in lackh crore

40 30 20 10 0 Bullion Base metals Energy products Agricultural commodities 26.88 23.11 14.56

Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi Commodities Exchange, (NMCE), Ahmedabad, Indian Commodity Exchange, Ltd., Gurgaon, ACE Derivatives and Commodity Exchange, Ahmedabad, National Board of Trade (NBOT), Indore, contributed 99.84% of the total value of the commodities traded during the year.

PGDM, IAMR Ghaziabad

Page 20

The share of various Exchanges in the total value of trade in 2010-11.

Value of the recognized Exchanges during 2010-11 Name of the Exchanges Value in ` Cr. % share to the total value of the commodities traded during 2010-11. 82.36 11.81 1.83 3.16 0.25 0.43 99.84 0.16 100

MCX NCDEX, Mumbai NMCE, Ahmedabad ICEX, Gurgaon ACE, Ahmedabad @ NBOT, Indore Total of six Exchanges Others Grand Total

98,41,502.90 14,10,602.21 2,18,410.90 3,77,729.88 30,059.63 51,662.06 1,19,29,967.58 18,974.77 1,19,48,942.35

@ Value is inclusive of the value of trade at Ahmedabad Commodity Exchange, Ahmedabad.

PGDM, IAMR Ghaziabad

Page 21

% share of the commodity exchanges to the total value of trade during the year 2010-11 (April-March) NBOT
NMCE 1.83% ICEX 3.16% ACE 0.25% 0.43% Others 0.16%

NCDEX 11.81%

MCX 82.36%

MCX

NCDEX

NMCE

ICEX

ACE

NBOT

Others

MULTI COMMODITY EXCHANGE OF INDIA, MUMBAI (MCX)

During 2010-11, MCX accounted for 82.36% of the total value of trade in the commodity market. In actual terms, the total value of trade in the MCX was ` 98.42 lakh crore. During the year, 39 commodities were traded at the MCX platform amongst which predominant commodities traded during the year were Silver, Gold, Crude Oil, Copper, Nickel, Zinc and Lead. The total value of trade and percentage share of each of these predominantly traded commodities at MCX, Mumbai in 2010-11 is given below:

TOTAL VOLUME & VALUE OF COMMODITIES TRADED AT MCX, MUMBAI 2010-11 S.NO COMMODITY VOLUME (IN LAKH TONNES) 6.97 0.13 6317.99 309.80 43.55 388.87 VALUE ( ` IN CRORES) 2700017.25 2469246.20 1764067.84 1145074.86 464577.93 389457.78 SHARE OF VALUE TO TOTAL 27.44 25.09 17.92 11.64 4.72 3.96 Page 22

1 2 3 4 5 6

SILVER GOLD CRUDEOIL COPPER NICKEL ZINC

PGDM, IAMR Ghaziabad

7 8

LEAD OTHER TOTAL

300.60 515.40 7839.71

306414.62 602646.43 9841502.91

3.11 6.12 100.00

@ Volume of trading of Natural Gas not included in the total as the Unit of trading is in mmBtu.

The graphical presentation of the percentage share of the prominently traded commodities at MCX Mumbai is given below.

% SHARE OF THE VALUE OF THE COMMODITIES TRADED AT MCX,MUMBAI DURING April'2010 TO March' 2011 LEAD 3.11% OTHER 6.12%

ZINC 3.96%

NICKEL 4.72%

SILVER 27.44%

COPPER 11.64%

CRUDEOIL 17.92%

GOLD 25.09%

SILVER

GOLD

CRUDEOIL

COPPER

NICKEL

ZINC

LEAD

OTHER

1. Silver The ready price of Silver, which was quoted at ` 26,875 per kg on 31.03.2010, rose to ` 55,900

on 31.03.2011, showing a rise of 108%. In the futures section, the price which was quoted at ` 26,935 per kg (May 2010 contract) on 31.03.2010 rose to ` 55,970 per kg (May 2011 contract) on 31.03.2011 showing a rise of 107.80%. PGDM, IAMR Ghaziabad Page 23

Spot & Futures prices of Silver at MCX

60000 57500 55000 52500 50000 47500

Rs. per Kg

45000 42500 40000 37500 35000 32500 30000 27500 25000

31-Mar-10 7-Jul-10 16-Mar-11 12-May-10 26-May-10 10-Nov-10 24-Nov-10 18-Aug-10 22-Dec-10 15-Sep-10 29-Sep-10 30-Mar-11 23-Jun-10 19-Jan-11 21-Jul-10 16-Feb-11 13-Oct-10 27-Oct-10 14-Apr-10 28-Apr-10 4-Aug-10 8-Dec-10 1-Sep-10 2-Mar-11 9-Jun-10 5-Jan-11 2-Feb-11

SPOT

5-May-10

5-Jul-10

4-Sep-10

4-Dec-10

5-Mar-11

5-May-11

5-Jul-11

5-Sep-11

5-Dec-11

The total quantity traded in all contracts of silver was 6.97462 Lakh tonnes valued at 2700017.249 crore.

2. Gold:

The ready price of Gold, which was quoted at ` 16300 per 10 gm on 31.03.2010 rose to ` 20760 on 31.03.2011, showing a rise of 27.36%. In the futures section, the price which was quoted at ` 16295 per 10 gm (April 2010 contract) on 31.03.2010, rose to ` 20693 (April 2011 contract) per 10 gm on 31.03.2011 showing a rise of 26.99%.

PGDM, IAMR Ghaziabad

Page 24

Spot & Futures prices of Gold at MCX

22000 21500 21000 20500 20000

Rs. per 10 Gm

19500 19000 18500 18000 17500 17000 16500 16000

31-Mar-10

7-Jul-10

16-Mar-11
4-Jun-11

12-May-10

26-May-10

10-Nov-10

24-Nov-10

SPOT 5-Aug-11

5-Apr-10 5-Oct-11

5-Jun-10

18-Aug-10

5-Aug-10

5-Oct-10

4-Dec-10

5-Feb-11

22-Dec-10

15-Sep-10

29-Sep-10

5-Apr-11

The total quantity traded in for all contracts of Gold traded was 0.12890 Lakh tonnes valued at ` 2469246.201crore.

3. Crude Oil

The ready price of Crude Oil which was quoted at ` 3702 per Barrel on 31.03.2010 rose to ` 4668 on 31.03.2011, showing a rise of 26.09%. In the futures section, the price which was quoted at ` 3751 per Barrel (April 2010 contract) on 31.03.2010 rose to ` 4744 (April 2011 contract) per Barrel on 31.03.2011 showing a rise of 26.47%.

PGDM, IAMR Ghaziabad

30-Mar-11

23-Jun-10

19-Jan-11

21-Jul-10

16-Feb-11

13-Oct-10

27-Oct-10

14-Apr-10

28-Apr-10

4-Aug-10

8-Dec-10

1-Sep-10

2-Mar-11

9-Jun-10

5-Jan-11

2-Feb-11

Page 25

Spot & Futures prices of Crude Oil at MCX

5000 4750 4500 4250 4000 3750 3500 3250 3000

Rs. per Barrel

21-Jul-10

31-Mar-10

8-Dec-10

2-Mar-11

9-Jun-10

5-Jan-11

7-Jul-10

2-Feb-11

16-Mar-11

12-May-10

26-May-10

10-Nov-10

24-Nov-10

SPOT 20-Oct-10 19-May-11

19-Apr-10 18-Nov-10 20-Jun-11

19-May-10 17-Dec-10 19-Jul-11

18-Aug-10

21-Jun-10 19-Jan-11 19-Aug-11

19-Jul-10 21-Feb-11 19-Sep-11

22-Dec-10

15-Sep-10

29-Sep-10

19-Aug-10 21-Mar-11

20-Sep-10 18-Apr-11

30-Mar-11

23-Jun-10

19-Jan-11

16-Feb-11

13-Oct-10

14-Apr-10

28-Apr-10

27-Oct-10

4-Aug-10

1-Sep-10

The total quantity traded in Crude Oil was 6317.99250 lakh tonnes valued at 1764067.835 crore.

SPOT & FUTURES PRICES OF SILVER AT MCX

`. PER KG
FUTURES CLOSING PRICES FOR CONTRACT EXPIRING ON Date SPOT 5-May-10 31-Mar10 15-Apr-10 30-Apr-10 15-May10 31-May10 15-Jun10 30-Jun10 15-Jul-10 31-Jul-10 5-Jul-10 4-Sep-10 4-Dec-10 5-Mar-11 5-May-11 5-Jul-11 5-Sep-11 5-Dec-11

26875.00

26935.00

27141.00

27346.00

27506.00

27775.00 28235.00

27855.00 28304.00

28041.00 28297.00

28246.00 28418.00

28410.00 28577.00

29520.00

29658.00

29758.00

29931.00

30183.00

29263.00

29292.00

29385.00

29484.00

29215.00

29210.00

29366.00

29445.00

29551.00

29645.00

29575.00

29604.00

29607.00

29708.00

29832.00

29150.00 28644.00

29170.00 28636.00

29272.00 28750.00

29356.00 28862.00

29559.00 28950.00

PGDM, IAMR Ghaziabad

Page 26

14-Aug10 31-Aug10 15-Sep10 30-Sep10 15-Oct-10 30-Oct-10 15-Nov10 30-Nov10 15-Dec10 31-Dec10 15-Jan11 31-Jan11 15-Feb11 28-Feb11 15-Mar11 31-Mar11

28993.00 30140.00 32050.00 33350.00 36450.00 37075.00 39575.00 41805.00 44250.00 46065.00

29039.00 30915.00

29194.00 30887.00 32108.00 32962.00 36106.00 37105.00 39610.00 43009.00

29270.00 30956.00 32220.00 33097.00 36230.00 37378.00 39869.00 43198.00 44442.00 46217.00

29416.00 30991.00 32282.00 33185.00 36344.00 37518.00 40144.00 43320.00 44631.00 46433.00 32330.00 33310.00 36574.00 37625.00 40329.00 43428.00 44750.00 46593.00 44832.00 46712.00

44600.00

43842.00

44157.00

44306.00

44452.00

42950.00

43640.00

43936.00

44033.00

44178.00

46050.00

46390.00

47107.00

47317.00

47469.00

49600.00

49850.00

51113.00

51553.00

51919.00

52450.00

52084.00

52850.00

53481.00

54913.00

55900.00

55970.00

56609.00

57261.00

58157.00

PGDM, IAMR Ghaziabad

Page 27

SPOT & FUTURES PRICES OF GOLD AT MCX `. PER 10 GRAMS FUTURES CLOSING PRICES FOR CONTRACT EXPIRING ON Date SPOT 5-Apr10 16295.0 0 5-Jun10 16436.0 0 16838.0 0 17125.0 0 18164.0 0 18385.0 0 5-Aug10 16527.0 0 16920.0 0 17208.0 0 18248.0 0 18398.0 0 18664.0 0 18852.0 0 18400.0 0 17770.0 0 4-Dec10 5-Feb11 5-Apr11 4-Jun11 5-Aug11

5-Oct-10

5-Oct-11

31-Mar10 15-Apr10 30-Apr10 15-May10 31-May10 15-Jun10 30-Jun10 15-Jul10 31-Jul10 14-Aug10 31-Aug10 15-Sep10 30-Sep10 15-Oct10 30-Oct10 15-Nov10 30-Nov10

16300.0 0 16750.0 0 17015.0 0 18177.0 0 18377.0 0 18565.0 0 18805.0 0 18428.0 0 17799.0 0 18509.0 0 18920.0 0 19185.0 0 19165.0 0 19810.0 0 19680.0 0 20130.0 0 20500.0 0

16592.0 0 17012.0 0 17291.0 0 18345.0 0 18466.0 0 18747.0 0 18926.0 0 18488.0 0 17937.0 0 18565.0 0 19134.0 0 19139.0 0 19035.0 0 17049.0 0 17339.0 0 18327.0 0 18525.0 0 18780.0 0 19001.0 0 18565.0 0 18025.0 0 18662.0 0 19236.0 0 19232.0 0 19239.0 0 19835.0 0 19807.0 0 20223.0 0 20538.0 0 18831.0 0 19047.0 0 18653.0 0 18090.0 0 18727.0 0 19339.0 0 19325.0 0 19345.0 0 20006.0 0 20000.0 0 20415.0 0 20807.0 0 18799.0 0 19410.0 0 19440.0 0 19427.0 0 20148.0 0 20153.0 0 20600.0 0 20969.0 0 20250.0 0 20285.0 0 20676.0 0 21067.0 0

15-Dec-

20533.0

20631.0

20827.0

20969.0

21152.0

PGDM, IAMR Ghaziabad

Page 28

10 31-Dec10 15-Jan11 31-Jan11 15-Feb11 28-Feb11 15-Mar11 31-Mar11

0 20575.0 0 20325.0 0 19920.0 0 20325.0 0 20800.0 0 20730.0 0 20760.0 0

0 20728.0 0 20261.0 0 19922.0 0

0 20921.0 0 20487.0 0 20170.0 0 20500.0 0 20923.0 0 20605.0 0 20693.0 0

0 21073.0 0 20673.0 0 20386.0 0 20734.0 0 21227.0 0 20907.0 0 21058.0 0

0 21193.0 0 20837.0 0 20567.0 0 20924.0 0 21551.0 0 21246.0 0 21375.0 0 21124.0 0 21828.0 0 21588.0 0 21686.0 0

SPOT & FUTURES PRICES OF CRUDE OIL AT MCX

`
Date Spot 3702.0 0 3830.0 0 3796.0 0 3230.0 0 3443.0 0 3498.0 0 3533.0 0 19-Apr10 3751.00 19-May10 3769.00 21-Jun10 3787.00 19-Jul10 3814.0 0 3925.0 0 3964.0 0 3558.0 0 3526.0 0 3615.0 0 3523.0 0 19-Aug10 3822.00 20-Sep10 3829.00 20-Oct10

PER 10 GRAMS 17-Dec10

18-Nov10

31-Mar-10

15-Apr-10

3800.00

3852.00

3907.00

3961.00

3959.00

30-Apr-10

3814.00

3908.00

3995.00

4024.00

4034.00

15-May-10

3264.00

3440.00

3638.00

3689.00

3740.00

31-May-10

3464.00

3577.00

3625.00

3664.00

3695.00

15-Jun-10

3556.00

3659.00

3698.00

3744.00

3764.00

30-Jun-10

3563.00

3603.00

3647.00

3692.00

3714.00

PGDM, IAMR Ghaziabad

Page 29

15-Jul-10

3592.0 0

3558.0 0

3590.00

3622.00

3659.00

3689.00

3736.00

31-Jul-10

3668.0 0

3654.00

3686.00

3716.00

3743.00

3780.00

14-Aug-10

3512.0 0 3499.0 0 3561.0 0 3497.0 0 3653.0 0 3627.0 0 3789.0 0 3927.0 0 3973.0 0 4034.0 0 4147.0 0 4086.0 0 3859.0 0 4441.0 0 4569.0 0

3537.00

3580.00

3624.00

3661.00

3696.00

31-Aug-10

3449.00

3526.00

3609.00

3657.00

15-Sep-10

3514.00

3585.00

3659.00

3713.00

30-Sep-10

3591.00

3650.00

3703.00

15-Oct-10

3599.00

3653.00

3704.00

30-Oct-10

3630.00

3689.00

15-Nov-10

3854.00

3906.00

30-Nov-10

3923.00

15-Dec-10

4020.00

31-Dec-10

15-Jan-11

31-Jan-11

15-Feb-11

28-Feb-11

15-Mar-11

PGDM, IAMR Ghaziabad

Page 30

31-Mar-11

4668.0 0

SPOT & FUTURES PRICES OF CRUDE OIL AT MCX

`. PER 10 GRAMS
Date 31-Mar-10 15-Apr-10 30-Apr-10 15-May-10 31-May-10 15-Jun-10 30-Jun-10 15-Jul-10 31-Jul-10 14-Aug-10 31-Aug-10 15-Sep-10 30-Sep-10 15-Oct-10 30-Oct-10 15-Nov-10 Spot 3702.00 3830.00 3796.00 3230.00 3443.00 3498.00 3533.00 3592.00 3668.00 3512.00 3499.00 3561.00 3497.00 3653.00 3627.00 3789.00 3798.00 3730.00 3695.00 3759.00 3743.00 3754.00 3737.00 3950.00 3735.00 3792.00 3781.00 3798.00 3781.00 3995.00 3818.00 3850.00 3814.00 4025.00 3853.00 4056.00 19-Jan11 21-Feb11 21-Mar11 18-Apr11 19-May11 20-Jun11 19-Jul11 19-Aug11 19-Sep11

PGDM, IAMR Ghaziabad

Page 31

30-Nov-10 15-Dec-10 31-Dec-10 15-Jan-11 31-Jan-11 15-Feb-11 28-Feb-11 15-Mar-11 31-Mar-11

3927.00 3973.00 4034.00 4147.00 4086.00 3859.00 4441.00 4569.00 4668.00

3970.00 4074.00 4088.00 4163.00

4008.00 4124.00 4146.00 4230.00 4229.00 3831.00

4056.00 4168.00 4198.00 4293.00 4345.00 4009.00 4444.00 4465.00

4085.00 4171.00 4217.00 4357.00 4432.00 4178.00 4536.00 4532.00 4744.00

4134.00 4224.00 4277.00 4395.00 4447.00 4308.00 4588.00 4588.00 4794.00 4312.00 4477.00 4569.00 4419.00 4636.00 4636.00 4840.00 4592.00 4484.00 4674.00 4672.00 4892.00 4715.00 4727.00 4942.00 4991.00

PGDM, IAMR Ghaziabad

Page 32

Price Risk Management

Price Risk
Price Risk is defined as the standard deviation of returns generated by any asset. This indicates how much individual outcomes deviate from the mean. For example, an asset with possible returns of 5%, 10% and 15% is more risky than one with possible returns of 10%, 1% and 25%. It simply means higher the standard deviation more will be the risk.

PGDM, IAMR Ghaziabad

Page 33