study conducted on the Commodity market gives us an exhaustive idea regarding
the risks associated with commodities exchange and it emphasizes more on the hedging
and Arbitrage procedures by utilizing the futures, which helps in reducing the loss
to a negligible degree to shield the interests of the investors.
markets have been portrayed as nonstop sale markets and as a clearing house for
the most recent data about the free market activities. They are like the meeting
places of purchasers and sellers of a consistently extending rundown of the commodities
that today incorporates agricultural items, metals, financial instruments, foreign
exchange, oil, and stock indices.
trade in commodity futures goes about as a commercial center for people interested
by arbitrage. The elements driving arbitrage are the differences and view of
differences of the equilibrium prices dictated by the free market activity at various
the futures markets, the exercise of arbitrage are brought out through the
exchange of paper promissory notes to purchase or to sell an item at a settled
upon price at a future date. As people with various view of where demand and
supply right now and where demand and where supply will be in the future, the
prices of the commodity are headed towards equilibrium. As new data enters the
market, people recognize change and the way toward arbitraging starts once
risk can happen for various reasons. For rural items, price risk may happen
because of dry season, near record produce, an increased demand, diminished international
supply, and so on.
commodity futures markets give a way for the transfer of risks between people
holding the physical (hedgers) and different hedgers or people speculating in
trades do exist and are highly effective in light of the rule that hedgers may
do without some benefit potential in return for less risk and speculators will
approach increased profit potential from accepting this risk.
The huge geographical extent of India and its large
population is highly complemented by the size of its market. The classification
of the Indian Market can be made in terms of: the commodity market and then the
bond market. In this study, we shall deal with the former in a little detail.
The commodity market in India consists of all visible
markets that we come across in our day to day lives, and these markets act as
institutions that help in the facilitation of exchange of goods for money.
Indian Commodity Market can be subdivided into the following two categories:
The old or orthodox wholesale Indian market dealt with whole-sellers who
purchased goods from the manufacturers and the agricultural farmers and then they
sold the goods to retailers after making profits or gains in the process. The
goods were then sold to the consumers by these retailers.
Lately, the retail market (both unorganized
and organised) has developed by a wide margin. This the development of the
commodity market of India as of late is mostly based on the development created
by the retail sector. Relatively all commodities, both agricultural and
industrial are currently being provided across retail outlets all through the
Additionally, these retail outlets
have a place with both the organised and also the unorganized areas. The unorganized
retail outlets do comprise of small shop proprietors who are the price takers
whereas, the customers confront an exceedingly aggressive price structure.
India, which is a commodity based
economy where approximately about two-third of entire population rely upon various
rural items, shockingly has a very under developed commodity market. Very unlike
the physical market, the futures market exchanges in commodities are to a great
extent utilized as a risk management (hedging) component on either physical
item itself, or the open positions in commodity market. For example, a jeweler
can hedge his stock against a expected short-term downturn in the gold prices
by going short in future markets.
The gradual evolution of the Indian Commodity has actually
been of high significance for the country’s economic growth and also prosperity.
The Indian commodity market consists of varieties of products like- agricultural
products like rice, wheat, cattle, gold, silver, aluminum and many more. There
are many delicate commodities also such as sugar, cocoa, and coffees, which are
perishable, and so they cannot be put in stock for long time. The commodity
futures exchanges were evolved in the 1800’s with the primary objective of
meeting the demand for exchangeable contracts for trading agricultural
commodities. Commodities have gained importance along with the development of the
commodity futures indexes and also with the mobilization of greater resources
in the commodity market.
“A commodity can be defined as an article, a
product or material that is bought and sold. It can be classified as every kind
of movable property, except Actionable Claims, Money & Securities.”
Leading Commodity Markets of the World
Some of the leading exchanges of the world are New
York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) and the
Chicago Board of Trade (CBOT).
Commodity Markets of India
The government of India has now allowed various national
commodity exchanges, similar to BSE & NSE, to come up and to deal in
commodity derivatives through the creation of an electronic trading
environment. These exchanges are expected to offer nation-wide anonymous, order
driven, screen based trading system. The Forward Markets Commission (FMC) will
regulate these exchanges.
Consequently four commodity exchanges have been
approved to commence business in this regard. They are:
Multi Commodity Exchange (MCX) located in Mumbai
National Commodity and Derivatives Exchange Ltd.
(NCDEX) located in Mumbai
National Board of Trade (NBOT) located at Indore
National Multi Commodity Exchange (NMCE) located in
Framework to Regulate Commodity Futures in India
The Commodity futures contracts and the commodity
exchanges are regulated by the government under the Forward Contracts
(Regulation) Act, 1952. The nodal agency to regulate the future market is the
Forward Markets Commission (FMC), situated in Mumbai, which functions under the
aegis of the ministry of consumer affairs.
“A Commodities Exchange is a place where different
commodities and their derivative items are traded.” Almost all commodity
markets around the world trade in agriculture products and also other items
(like wheat, sugar, maize, cotton, wheat cocoa, coffee, oil, metals etc.) and such
contracts based on them. These contracts can include spot prices, forwards,
futures and options on the futures.
Among the four exchanges discussed above MCX and
NCDEX are used more. These are discussed below:
Commodity & Derivative Exchange Limited (NCDEX)
National Commodity & Derivatives Exchange
Limited (NCDEX) is a professionally managed on-line multi commodity exchange. “The
shareholders of NCDEX comprises of large national level institutions, large
public sector bank and companies. It is promoted by ICICI Bank Limited (ICICI),
Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural
Development (NABARD) and National Stock Exchange of India Limited (NSE). Canara
Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser
Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE),
Shree Renuka Sugars Limited, Jaypee Capital Services Limited and Build India
Capital Advisors LLP, Oman India Joint Invesmtnet Fund, IDFC Private Equity
Fund III by subscribing to the equity shares have joined the initial promoters
as shareholders of the Exchanges.”
NCDEX is a nation-level, technology driven de-mutualised on-line
commodity exchange with an independent Board of Directors and professional
management – both not having any vested interest in commodity markets. It is
committed to provide a world-class commodity exchange platform for market
participants to trade in a wide range of commodity derivatives driven by best
global practices, professionalism and transparency.
NCDEX is regulated by Securities and Exchange Board of India. NCDEX is
subjected to various laws of the land like the Securities Contracts
(Regulation) Act, 1956, Companies Act, Stamp Act, Contract Act and various
NCDEX headquarters are located in Mumbai and offers facilities to its
members from the centres located throughout India. As of March 31, 2015, the
Exchange offered trading in 26 commodities, which included 21 agricultural
commodities, 2 bullion commodities, 2 metals and 1 commodity in energy &
Commodity Exchange of India Ltd. (MCX)
The Multi Commodity Exchange of India Limited
(MCX), India’s first listed exchange, is a state-of-the-art, commodity futures
exchange which facilitates online trading, and clearing and the settlement of the
commodity futures transactions, thereby providing a platform for risk
management. The Exchange, which started operations in November 2003, operates
under the regulatory framework of Securities and Exchange Board of India
MCX offers trading in varied commodity futures
contracts across segments including bullion, ferrous and also non-ferrous
metals, energy and agricultural commodities. The Exchange focuses on providing
commodity value chain participants with neutral, secure and transparent trade
mechanisms, and formulating quality parameters and trade regulations, in
conformity with the regulatory framework. The Exchange has an extensive
national reach, with 1731 members, operations through 475,519 trading terminals
(including CTCL), spanning over 1811 cities and towns across India.
Benefits to the Industry from Futures Trading
Hedging the price risk associated
with futures contractual commitments
Spaced out purchases possible
rather than large cash purchases and its storage
Efficient price discovery
prevents seasonal price volatility
To facilitate an informed lending
The hedged positions of processors
would reduce the risk of default which would be faced by the banks.
Lending to the agricultural
sector would increase due to greater transparency in the pricing and storage.
Difference Between Cash and Futures Market
“Cash market is the market for buying and selling
physical commodity at a negotiated price. Delivery of the commodity takes place
“Futures market is the market for buying and
selling standardized contract of the commodity at a pre-determined price.
Delivery of the commodity takes place during a future delivery period of the contract
if the option of delivery is exercised.”
Futures and Price Risk Management
The two major economic functions of a commodity
futures market are price risk management and price discovery. Among these, the price
risk management is by far the most important, and is the backbone of a
commodity futures market. The need for price risk management, through what is
commonly called “hedging”, arises from price risks in most commodities. The
larger, the more frequent and the more unforeseen is the price variability in a
commodity, the greater is the price risk in it. Whereas insurance companies
offer suitable policies to cover the risks of physical commodity losses due to
fire, pilferage, transport, mishaps etc., they do not cover similarly the risks
of value losses resulting from adverse price variations. The reason for this is
obvious. The value losses emerging from price risks are much larger and the
probability of the recurrence is far more frequent than the physical losses in
both the quantity and quality of goods caused by accidental fires and mishaps,
or occasional thefts.
In a liquid market, the number of speculators
(people looking to profit from price fluctuations) far outnumbers the number of
hedgers (those protecting themselves against price risks)