Commodities Exchanges in India

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Dhanashri Academy

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Snapshot of Indian Commodity Market

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Two Major Commodities Exchange in India

MCX (Multi Commodity Exchange)

NCDEX (National Commodities & Derivatives Exchange)

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Commodities traded on the exchanges

Agri Products:

JeeraPepper

Chilli

Turmeric

Guar SeedGuar Gum

Soya bean

Sugar

Maize

Precious Metals:

Gold

Silver

Platinum

MANGAL KESHAV Commodities traded on the exchanges

Base Metals:Copper Nickel

Lead

Zinc

Aluminum

Tin

Energy:Crude oil

Natural Gas

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Other InformationExchange Timings

Agri Products: 10:00 AM To 5:00 PM

Other Commodities: 10:00 AM To 11:30 PM

Instrument Traded: Futures Contract

Expiry of Contracts : Different for different commodities

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What are Commodity futures?

A Financial Contract

The underlying commodity is bought or sold at a future date

A tool used by Investors, Hedgers, Arbitrageurs, Day Traders

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Why futures trading in Commodities?

Portfolio diversification and risk management

Additional investment opportunity

Low cost business

No Transportation, storage, insurance, security charges

Low Margins – High leverage

Intrinsic value of the commodity

Domain knowledge of industry

Hedging/ Arbitrage

MANGAL KESHAV Purpose of Futures Markets

Meet the needs of three groups of future market users

Those who wish to discover information about future prices of commodities (suppliers)

Those who wish to speculate (speculators)

Those who wish to transfer risk to some other party (hedgers)

Those who want to take advantage of price difference in different markets (Arbitrageurs)

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Commodity Futures Market – ParticipantsHedgersProducers – Farmers

Consumers – Refineries, Food processing companies

Speculators

Institutional proprietary traders

Brokerage houses

Spot Commodity traders

ArbitrageursBrokerage houses

Investors

MANGAL KESHAV Exchange vs. Bilateral Trading

Exchange Bilateral trading

Common platform for all traders Restricted access

Price transparency Traded prices unknown to other players

Low transaction costs High cost and time consuming negotiations

Absence of counter party credit risk

Counter party credit risk

Market prices available to wider world

Difficulty in price dissemination

MANGAL KESHAV Risks encountered by industry

Price volatility depends on International market movementResults in higher procurement cost reducing operational marginsNo options or tools were available earlier

Directionless market

No control measuresCounter party RiskCredit risk especially during periods of volatile prices

Quantity risk during shortagesQuality Risk

MANGAL KESHAV Benefits…

Investor:

Portfolio diversification and risk managementAdditional investment opportunity

Physical trader:

Low cost businessNo Transportation, storage, insurance, security ChargesDomain knowledge of industry

Traders: Low Margins – High leverageNo balance-Sheet, P&L, EBITDA

Hedging/ Arbitrage

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HedgingPurposeAvoid risk of adverse market movements

RationaleCash and Futures prices tend to move in tandem Converge at close to expiry

Types of HedgesLong Hedge, Short Hedge

AdvantagesLock in a price and margin in advance

DisadvantagesLimits opportunities if prices move favorably

MANGAL KESHAV Types of Hedging

Long Hedge

Hedges that involve taking a long position in futures contract

Appropriate when a company plans to owns certain asset in the futureShort Hedge

Hedges that involve taking a short position in futures contract

Appropriate when the hedger already owns the asset or likely to own the asset and expects to sell it in future

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Short Hedge - ExampleSuppose:-COPPER producer wants to sell COPPER in future.There is an equal chances of price going up or down.There is a risk if price goes down.

Copper Producer Stock

Expecting/having stock 50000 Kg (50MT) of Copper

Case

If price goes up by Re. 1 Gain – Rs. 50000/-

If price goes down by Re. 1 Loss – Rs. 50000/-

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Short Hedge- Example contd…

Date Spot Future

30th Nov Rs. 280/Kgs Rs. 295/Kgs

30th Nov Buy/Hold Sell

With Hedge (You rule out a loss)

30th Dec Spot Future Net Result

Case 1 - Rs. 270/Kgs

Loss Rs. 10/Kgs

Profit Rs. 25/Kgs

Profit Rs. 15/Kgs


Profit Rs. 25/Kgs

Loss Rs. 10/Kgs

Profit Rs. 15/Kgs

Without Hedge


Loss Rs. 10/Kgs

-- Loss Rs. 10/Kgs


Profit Rs. 25/Kgs

-- Profit Rs. 25/Kgs

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Long Hedge- Example

Scenario of consumer who wishes to lock input prices

There is an equal chances of price going up or down.

There is a risk if price goes up.

Copper Consumer Stock

Wants to buy Copper in future 50,000 Kg (50 MT) of copper

Case

If price goes up by Re. 1 Loss – Rs. 50000/-

If price goes down by Re. 1 Gain – Rs. 50000/-

MANGAL KESHAV Long Hedge - Example contd…

Date Spot Future

30th Nov Rs. 280/Kgs Rs. 295/Kgs

30th Nov Wait till Nov Buy

With Hedge (You rule out a loss)

30th Dec Spot Future Net Result


Profit Rs. 10/Kgs

Loss Rs. 25/Kgs

Loss Rs.15/Kgs


Loss Rs. 25/Kgs

Profit Rs. 10/Kgs

Loss Rs. 15/Kgs

Without Hedge


Profit Rs. 10/Kgs

-- Profit Rs. 10/Kgs


Loss Rs. 25/Kgs

-- Loss Rs. 25/Kgs

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THANK YOU

Commodities Exchanges in India

Economy & Finance

Transcript of Commodities Exchanges in India