1.

INTRODUCTION

1.1 Commodity Market

What is “Commodity”?

Any product that can be used for commerce or an article

of commerce which is traded on an authorized commodity
exchange is known as commodity. The article should be
movable of value, something which is bought or sold and which
is produced or used as the subject or barter or sale. In short
commodity includes all kinds of goods. Indian Forward
Contracts (Regulation) Act (FCRA), 1952 defines “goods” as
“every kind of movable property other than actionable claims,
money and securities”. In current situation, all goods and
products of agricultural (including plantation), mineral and
fossil origin are allowed for commodity trading recognized
under the FCRA. The national commodity exchanges,
recognized by the Central Government, permits commodities
which include precious (gold and silver) and non-ferrous
metals, cereals and pulses, ginned and un-ginned cotton,
oilseeds, oils and oilcakes, raw jute and jute goods, sugar and
gur, potatoes and onions, coffee and tea, rubber and spices.
Etc.

What is a commodity exchange?

A commodity exchange is an association or a company or

anyother body corporate organizing futures trading in

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commodities for which license has been granted by regulating
authority.

What is Commodity Futures?

A Commodity futures is an agreement between two parties to

buy or sell a specified and standardized quantity of a
commodity at a certain time in future at a price agreed upon at
the time of entering into the contract on the commodity
futures exchange. The need for a futures market arises mainly
due to the hedging function that it can perform. Commodity
markets, like any other financial instrument, involve risk
associated with frequent price volatility. The loss due to price
volatility can be attributed to the following reasons:

Consumer Preferences: - In the short-term, their influence

on price volatility is small since it is a slow process permitting
manufacturers, dealers and wholesalers to adjust their
inventory in advance.

Changes in supply: - They are abrupt and unpredictable

bringing about wild fluctuations in prices. This can especially
noticed in agricultural commodities where the weather plays a
major role in affecting the fortunes of people involved in this
industry. The futures market has evolved to neutralize such
risks through a mechanism; namely hedging.

The objectives of Commodity futures: -

Hedging with the objective of transferring risk related to the

possession of physical assets through any adverse moments in

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price. Liquidity and Price discovery to ensure base minimum
volume in trading of a commodity through market information
and demand supply factors that facilitates a regular and
authentic price discovery mechanism.

.Maintaining buffer stock and better allocation of resources as

it augments reduction in inventory requirement and thus the
exposure to risks related with price fluctuation
declines.Resources can thus be diversified for investments.

· Price stabilization along with balancing demand and supply

position. Futures trading leads to predictability in assessing the
domestic prices, which maintains stability, thus safeguarding
against any short term adverse price movements. Liquidity in
Contracts of the commodities traded also ensures in
maintaining
the equilibrium between demand and supply.

· Flexibility, certainty and transparency in purchasing

commodities facilitate bank financing. Predictability in prices of
commodity would lead to stability, which in turn would
eliminate the risks associated with running the business of
trading commodities.This would make funding easier and less
stringent for banks to commodity market players.

Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic

price discovery and an efficient price risk management. The
beneficiaries include those who trade in the commodities being
offered in the exchange as well as those who have nothing to
do with futures trading. It is because of price discovery and risk
management through the existence of futures exchanges that a
lot of businesses and services are able to function smoothly.

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1. Price Discovery:-Based on inputs regarding specific market
information, the demand and supply equilibrium, weather
forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears,
buyers and sellers conduct trading at futures exchanges. This 4
transforms in to continuous price discovery mechanism. The
execution of trade between buyers and sellers leads to
assessment of fair value of a particular commodity that is
immediately disseminated on the trading terminal.

2. Price Risk Management: - Hedging is the most common

method of price risk management. It is strategy of offering
price risk that is inherent in spot market by taking an equal but
opposite position in the futures market. Futures markets are
used as a mode by hedgers to protect their business from
adverse price change. This could dent the profitability of their
business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers,
manufacturers, exporters, importers etc.

3. Import- Export competitiveness: - The exporters can

hedge their price risk and improve their competitiveness by
making use of futures market. A majority of traders which are
involved in physical trade internationally intend to buy
forwards. The purchases made from the physical market might
expose them to the risk of price risk resulting to losses. The
existence of futures market would allow the exporters to hedge
their proposed purchase by temporarily substituting for actual
purchase till the time is ripe to buy in physical market. In the
absence of futures market it will be meticulous, time
consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain

commodities is highly price elastic. The manufacturers have to

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ensure that the prices should be stable in order to protect their
market share with the free entry of imports. Futures contracts
will enable predictability in domestic prices. The manufacturers
can, as a result, smooth out the influence of changes in their
input prices very easily. With no futures market, the
manufacturer can be caught between severe short-term price
movements of oils and necessity to maintain price stability,
which could only be possible through sufficient financial
reserves that could otherwise be utilized for making other
profitable investments.

5. Benefits for farmers/Agriculturalists: - Price instability

has a direct bearing on farmers in the absence of futures
market. There would be no need to have large reserves to
cover against unfavorable price fluctuations. This would reduce
the risk premiums associated with the marketing or processing
margins
enabling more returns on produce. Storing more and being
more active in the markets. The price information accessible to
the farmers determines the extent to which traders/processors
increase price to them. Since one of the objectives of futures
exchange is to make available these prices as far as possible, it
is very likely to benefit the farmers. Also, due to the time lag
between planning and production, the market-determined
price information disseminated by futures exchanges would be
crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk

management tools would attract the marketing and processing
of commodities to high-risk exposure making it risky business

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activity to fund. Even a small movement in prices can eat up a
huge proportion of capital owned by traders, at times making it
virtually impossible to payback the loan. There is a high degree
of reluctance among banks to fund commodity traders,
especially those who do not manage price risks. If in case they
do, the interest rate is likely to be high and terms and
conditions very stringent. This posses a huge obstacle in the
smooth functioning and competition of commodities market.
Hedging, which is possible through futures markets, would cut
down the discount rate in commodity lending.

7. Improved product quality: - The existence of warehouses

for facilitating delivery with grading facilities along with other
related benefits provides a very strong reason to upgrade and
enhance the quality of the commodity to grade that is
acceptable by the exchange. It ensures uniform standardization
of commodity trade, including the terms of quality standard:
the quality certificates that are issued by the exchange-
certified warehouses have the potential to become the norm for
physical trade.

1.2 HISTORY OF ORIGIN OF COMMODITY MARKETS

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 Commodities future trading was evolved from need of
assured continuous supply of seasonal agricultural crops. The
concept of organized trading in commodities evolved in
Chicago, in 1848. Butone can trace its roots in Japan. In Japan
merchants used to store Rice in warehouses for future use. To
raise cash warehouse holders sold receipts against the stored
rice. These were known as “rice tickets”. Eventually, these rice
tickets become accepted as a kind of commercial currency.
Latter on rules came in to being, to standardize the trading in
rice tickets. In 19th century Chicago in United States had
emerged as a major commercial hub. So that wheat producers
from Mid-west attracted here to sell their produce to dealers &
distributors. Due to
lack of organized storage facilities, absence of uniform
weighing & grading mechanisms producers often confined to
the mercy of dealers discretion. These situations lead to need
of establishing a common meeting place for farmers and
dealers to transact in spot grain to deliver wheat and receive
cash in return.
Gradually sellers & buyers started making commitments
to exchange the produce for cash in future and thus contract
for “futures trading” evolved. Whereby the producer would
agree to sell his produce to the buyer at a future delivery date
at an agreed upon price.

In this way producer was aware of what price he would

fetch for his
produce and dealer would know about his cost involved, in
advance.
This kind of agreement proved beneficial to both of them. As if
dealer is not interested in taking delivery of the produce, he
could sell his contract to someone who needs the same.
Similarly producer who not intended to deliver his produce to
dealer could pass on the same responsibility to someone else.

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 The price of such contract would dependent on the price
movements in the wheat market. Latter on by making some
modifications these contracts transformed in to an instrument
to protect involved parties against adverse factors such as
unexpected price movements and unfavorable climatic factors.
This promoted traders entry in futures market, which had no
intentions to
buy or sell wheat but would purely speculate on price
movements in market to earn profit.

Trading of wheat in futures became very profitable which

encouraged the entry of other commodities in futures market.
This created a platform for establishment of a body to regulate
and supervise these contracts. That’s why Chicago Board of
Trade (CBOT) was established in 1848. In 1870 and 1880s the
New York Coffee, Cotton and Produce Exchanges were born.
Agricultural commodities were mostly traded but as long as
there are buyers and sellers, any commodity can be traded. In
1872, a group of Manhattan dairy merchants got together to
bring chaotic condition in New York market to a system in
terms of storage, pricing, and transfer of agricultural products.
In 1933, during the Great Depression, the Commodity
Exchange, Inc. was established in New York through the
merger of four small exchanges – the National Metal Exchange,
the Rubber Exchange of New York, the National Raw Silk
Exchange, and the New York Hide Exchange.

The largest commodity exchange in USA is Chicago Board

of Trade, The Chicago Mercantile Exchange, the New York
Mercantile Exchange, the New York Commodity Exchange and
New York Coffee, sugar and cocoa Exchange. Worldwide there
are major futures trading exchanges in over twenty countries
including Canada, England, India, France, Singapore, Japan,
Australia and New Zealand.

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 1.3 OBJECTIVE OF STUDY

Our research objectives emphasizes on:

 To test the efficiency of non-precious metals
(Copper,Zinc) futures market on MCX.

 To understand the conceptual framework and

mechanics of metals market.

 Policy Recommendation on basis of the result of

Research.

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 2. INDIA COMMODITY FUTURE MARKET

2.1 History of Commodity Market in

India:-

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 The history of organized commodity derivatives in India
goes back to the nineteenth century when Cotton Trade
Association started futures trading in 1875, about a decade
after they started in Chicago. Over the time datives market
developed in several commodities in India. Following Cotton,
derivatives trading started in oilseed in Bombay (1900), raw
jute and jute goods in Calcutta (1912), Wheat in Hapur (1913)
and Bullion in Bombay (1920). However many feared that
derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the
underlying commodities, resulting in to banning of commodity
options trading and cash settlement of commodities futures
after independence in 1952. The parliament passed the
Forward Contracts (Regulation) Act, 1952, which regulated
contracts in Commodities all over the India. The act prohibited
options trading in Goods along with cash settlement of forward
trades, rendering a crushing blow to the commodity derivatives
market. Under the act only those associations/exchanges,
which are granted reorganization from the Government, are
allowed to organize forward trading in regulated commodities.
The act envisages three tire regulations: (i) Exchange which
organizes forward trading in commodities can regulate trading
on day-to-day basis; (ii) Forward Markets Commission provides
regulatory oversight under the powers delegated to it by the
central Government. (iii) The Central Government- Department
of Consumer Affairs, Ministry of Consumer Affairs, Food and
Public Distribution- is the ultimate regulatory authority.

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 The commodities future market remained dismantled and
remained dormant for about four decades until the new
millennium when the Government, in a complete change in a
policy, started actively encouraging commodity market. After
Liberalization and Globalization in 1990, the Government set
up a committee (1993) to examine the role of futures trading.
The Committee (headed by Prof. K.N. Kabra) recommended
allowing futures trading in 17 commodity groups. It also
recommended strengthening Forward Markets Commission,
and certain amendments to Forward Contracts (Regulation) Act
1952, particularly allowing option trading in goods and
registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and
futures’ trading was permitted in all recommended
commodities. It is timely decision since internationally the
commodity cycle is on upswing and the next decade being
touched as the decade of Commodities.

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Commodity exchange in India plays an important role where
the prices of any commodity are not fixed, in an organized
way. Earlier only the buyer of produce and its seller in the
market judged upon the prices. Others never had a say. Today,
commodity exchanges are purely speculative in nature. Before
discovering the price, they reach to the producers, endusers,
and even the retail investors, at a grassroots level. It brings a
price transparency and risk management in the vital market. A
big difference between a typical auction, where a single
auctioneer announces the bids and the Exchange is that people
are not only competing to buy but also to sell. By Exchange
rules and by law, no one can bid under a higher bid, and no
one can offer to sell higher than someone else’s lower offer.
That keeps the market as efficient as possible, and keeps the
traders on their toes to make sure no one gets the purchase or
sale before they do. Since 2002, the commodities future
market in India has experienced an unexpected boom in terms
of modern exchanges, number of commodities allowed for
derivatives trading as well as the value of futures trading in
commodities, which crossed $ 1 trillion mark in 2006. Since
1952 till 2002 commodity datives market was virtually non-
existent, except some negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which

there are three national level multi-commodity exchanges.
After a gap of almost three decades, Government of India has
allowed forward transactions in commodities through Online
Commodity Exchanges, a modification of traditional business
known as Adhat and Vayda Vyapar to facilitate better risk
coverage and delivery of commodities. The three exchanges
are: National Commodity & Derivatives Exchange Limited
(NCDEX) Mumbai, Multi Commodity Exchange of India Limited
(MCX) Mumbai and National Multi-Commodity Exchange of
India Limited (NMCEIL) Ahmedabad.There are other regional
commodity exchanges situated in different parts of India.

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Legal framework for regulating commodity futures in
India:-

The commodity futures traded in commodity exchanges are

regulated by the Government under the Forward Contracts
Regulations Act, 1952 and the Rules framed there under. The
regulator for the commodities trading is the Forward Markets
Commission, situated at Mumbai, which comes under the
Ministry of Consumer Affairs Food and Public Distribution.

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward

Contracts (Regulation) Act, 1952. Commission consists of
minimum two and maximum four members appointed by
Central Govt. Out of these members there is one nominated
chairman. All the exchanges have been set up under overall
control of Forward Market Commission (FMC) of Government of
India.

National Commodities & Derivatives Exchange Limited

(NCDEX)

National Commodities & Derivatives Exchange Limited

(NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life
Insurance Corporation of India (LIC), National Bank of
Agriculture and Rural Development (NABARD) and National
Stock Exchange of India Limited (NSC). Punjab National Bank
(PNB), Credit Ratting Information Service of India Limited
(CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO),
Canara Bank and Goldman Sachs by subscribing to the equity
shares have joined the promoters as a share holder of

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exchange. NCDEX is the only Commodity Exchange in the
country
promoted by national level institutions. NCDEX is a public
limited company incorporated on 23 April 2003. NCDEX is a
national level technology driven on line Commodity Exchange
with an independent Board of Directors and
professionals 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 spectrum of
commodity
derivatives driven by best global practices, professionalism and
transparency.

NCDEX is regulated by Forward Markets Commission(FMC).

NCDEX is also subjected to the various laws of land like the
Companies Act, Stamp Act, Contracts Act, Forward Contracts
Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members
in more than 550 centers through out India. NCDEX currently
facilitates trading of 57 commodities.
Commodities Traded at NCDEX:-
· Bullion:-
Gold KG, Silver, Brent
· Minerals:-
Electrolytic Copper Cathode, Aluminum Ingot, Nickel
Cathode, Zinc Metal Ingot, Mild steel Ingots
· Oil and Oil seeds:-
Cotton seed, Oil cake, Crude Palm
Oil,Groundnut(inhell),Groundnut expeller Oil, Cotton,
Mentha oil, RBD Pamolein, RM
seed oil cake, Refined soya oil, Rape seeds, Mustard
seeds,
Caster seed, Yellow soybean, Meal

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· Pulses:-
Urad, Yellow peas, Chana, Tur, Masoor,
· Grain:-
Wheat, Indian Pusa Basmati Rice, Indian parboiled
Rice (IR-
36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow
red maize
· Spices:-
Jeera, Turmeric, Pepper
· Plantation:-
Cashew, Coffee Arabica, Coffee Robusta
· Fibers and other:-
Guar Gum, Guar seeds, Guar, Jute sacking bags,
Indian 28
mm cotton, Indian 31mm cotton, Lemon, Grain Bold,
Medium
Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,
Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
· Energy:-
Crude Oil, Furnace oil
Multi Commodity Exchange of India Limited (MCX)
Multi Commodity Exchange of India Limited (MCX) is an
independent and de-mutulized exchange with permanent
reorganization from Government of India, having Head
Quarter in Mumbai. Key share holders of MCX are Financial
Technologies (India) Limited, State Bank of India, Union
Bank of India, Corporation Bank of India, Bank of India and
Cnnara Bank. MCX facilitates online trading, clearing and
settlement operations for commodity futures market
across the country.
MCX started of trade in Nov 2003 and has built strategic
alliance with Bombay Bullion Association, Bombay Metal
Exchange,
Solvent Extractors Association of India, pulses Importers
Association
and Shetkari Sanghatana. CX deals wit about 100
commodities.

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 Commodities Traded at MCX:-
· Bullion:-
Gold, Silver, Silver Coins,
· Minerals:-
Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead

· Oil and Oil seeds:-

Castor oil/castor seeds, Crude Palm oil/ RBD
Pamolein,
Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy
meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower
oil,
Sunflower Oil cake, Tamarind seed oil,
· Pulses:-
Chana, Masur, Tur, Urad, Yellow peas
· Grains:-
Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
· Spices:-
Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove,
Ginger,
· Plantation:-
Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut,
Coffee,

· Fiber and others:-

Kapas, Kapas Khalli, Cotton (long staple, medium staple,

short staple), Cotton Cloth, Cotton Yarn, Gaur seed and
Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato,
Art
Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute
Sacking,

· Petrochemicals:-

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 High Density Polyethylene (HDPE), Polypropylene (PP),
Poly
Vinyl Chloride (PVC)

· Energy:-

Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour
Crude Oil, Natural Gas National Multi Commodity
Exchange of India Limited
(NMCEIL) National Multi Commodity Exchange of India
Limited
(NMCEIL) is the first de-mutualised Electronic Multi
Commodity
Exchange in India. On 25th July 2001 it was granted
approval by
Government to organize trading in edible oil complex. It is
being
supported by Central warehousing Corporation Limited,
Gujarat
State Agricultural Marketing Board and Neptune Overseas
Limited. It got reorganization in Oct 2002. NMCEIL Head
Quarter
is at Ahmedabad.

2.2 INTERNATIONAL COMMODITY EXCHANGES

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 Futures’ trading is a result of solution to a problem related
to the maintenance of a year round supply of
commodities/ products
that are seasonal as is the case of agricultural produce.
The United
States, Japan, United Kingdom, Brazil, Australia, Singapore
are homes
to leading commodity futures exchanges in the world.

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the world’s biggest

exchange for trading in physical commodity futures. It is a
primary
trading forum for energy products and precious metals.
The exchange
is in existence since last 132 years and performs trades
trough two
divisions, the NYMEX division, which deals in energy and
platinum and
the COMEX division, which trades in all the other metals.

Commodities traded: - Light sweet crude oil, Natural

Gas, Heating
Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold,
Silver, Copper,
Aluminum, Platinum, Palladium, etc.

London Metal Exchange:-

The London Metal Exchange (LME) is the world’s
premier non-ferrous market, with highly liquid contracts.
The exchange
was formed in 1877 as a direct consequence of the
industrial

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 revolution witnessed in the 19th century. The primary
focus of LME is in
providing a market for participants from non-ferrous
based metals
related industry to safeguard against risk due to
movement in base
metal prices and also arrive at a price that sets the
benchmark
globally.

The exchange trades 24 hours a day through an

inter office
telephone market and also through a electronic trading
platform. It is
famous for its open-outcry trading between ring dealing
members that
takes place on the market floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead,

Tin, Zinc,
Aluminum Alloy, North American Special Aluminum Alloy
(NASAAC),
Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade:-

The first commodity exchange established in the world

was the Chicago Board of Trade (CBOT) during 1848 by
group of
Chicago merchants who were keen to establish a central
market place
for trade. Presently, the Chicago Board of Trade is one of
the leading

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 exchanges in the world for trading futures and options.
More than 50
contracts on futures and options are being offered by
CBOT currently
through open outcry and/or electronically. CBOT initially
dealt only in
Agricultural commodities like corn, wheat, non storable
agricultural
commodities and non-agricultural products like gold and
silver.

Commodities Traded: - Corn, Soybean, Oil, Soybean

meal, Wheat,
Oats, Ethanol, Rough Rice, Gold, Silver etc.

TOCOM’s recent tie up with the MCX to explore

cooperation an business opportunities is seen as one of
the steps towards providing platform for futures price
discovery in Asia for Asian players in Crude Oil since the
demand-supply situation in U.S. that drives NYMEX is
different
from demand-supply situation in Asia. In Jan 2003, in a
major overhaul of its computerized trading system,
TOCOM fortified its clearing system in June by being first
commodity exchange in Japan to introduce an in-house
clearing system. TOCOM launched options on gold futures,
the first option contract in Japanese market, in May 2004.

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 Commodities traded: - Gasoline, Kerosene, Crude Oil,
Gold, Silver,
Platinum, Aluminum, Rubber, etc

CHICAGO MERCANTILE EXCHANGE:-

The Chicago Mercantile Exchange (CME) is the largest

futures exchange in the US and the largest futures
clearing house in
the world for futures and options trading. Formed in 1898
primarily to
trade in Agricultural commodities, the CME introduced the
world’s first
financial futures more than 30 years ago. Today it trades
heavily in
interest rates futures, stock indices and foreign exchange
futures. Its
products often serves as a financial benchmark and
witnesses the
largest open interest in futures profile of CME consists of
livestock,
dairy and forest products and enables small family farms
to large Agribusiness to manage their price risks.
Trading in CME can be done
either through pit trading or electronically.

Commodities Traded: - Butter milk, Diammonium

phosphate, Feeder
cattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat
Dry Milk,
Urea, Urea Ammonium Nitrate, etc

2.3 HOW COMMODITY MARKET WORKS?

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 There are two kinds of trades in commodities. The first is
the spot trade, in which one pays cash and carries away the
goods. The second is futures trade. The underpinning for
futures is the warehouse receipt. A person deposits certain
amount of say, good X in a ware house and gets a warehouse
receipt. Which allows him to ask for physical delivery of the
good from the warehouse. But some one trading in commodity
futures need not necessarily posses such a receipt to strike a
deal.
A person can buy or sale a commodity future on an
exchange based on his expectation of where the price will go.
Futures have something called an expiry date, by when the
buyer or seller either closes (square off) his account or
give/take delivery of the commodity. The broker maintains an
account of all dealing parties in which the daily profit or loss
due to changes in the futures price is recorded. Squiring off is
done by taking an opposite contract so that the net
outstanding is nil. For commodity futures to work, the seller
should be able to deposit the commodity at warehouse nearest
to him and collect the warehouse receipt. The buyer should be
able to take physical delivery at a location of his choice on
presenting the warehouse receipt. But at present in India very
few warehouses provide delivery for specific commodities.
Following diagram gives a fair idea about working of the
Commodity market.

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Today Commodity trading system is fully computerized.
Traders need not visit a commodity market to speculate. With
online
commodity trading they could sit in the confines of their home
or office
and call the shots.

2.4 HOW TO INVEST IN A COMMODITY

MARKET?

With whom investor can transact a business?

An investor can transact a business with the approved clearing

member of previously mentioned Commodity Exchanges. The
investor
can ask for the details from the Commodity Exchanges about
the list of
approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will

ask
for identity proof. For which Xerox copy of any one of the
following can
be given
a) PAN card Number
b) Driving License
c) Vote ID
d) Passport

What statements should be given for Bank Proof?

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The front page of Bank Pass Book and a canceled cheque of a
concerned bank. Otherwise the Bank Statement containing
details can
be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing

member
will insist on Xerox copy of Ration card or the Pass Book/ Bank
Statement where the address of investor is given.

What are the other forms to be signed by the

investor?

The clearing member will ask the client to sign

a) Know your client form
b) Risk Discloser Document
The above things are only procedure in character and the risk
involved and only after understanding the business, he wants
to
transact business.

What aspects should be considered while selecting a

commodity broker?

While selecting a commodity broker investor should ideally

keep
certain aspects in mind to ensure that they are not being
missed in
any which way. These factors include

· Net worth of the broker of brokerage firm.

· The clientele.

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· The number of franchises/branches.
· The market credibility.
· The references.
· The kind of service provided- back office functioning being
most important.
· Credit facility.
· The research team.

These are amongst the most important factors to calculate

the credibility of commodity broker.

BROKER:-

The Broker is essentially a person of firm that liaisons between

individual traders and the commodity exchange. In other words
the
Commodity Broker is the member of Commodity Exchange,
having
direct connection with the exchange to carry out all trades
legally. He
is also known as the authorized dealer.

How to become a Commodity Trader/Broker of

Commodity
Exchange?

To become a commodity trader one needs to complete certain

legal and binding obligations. There is routine process followed,
which
is stated by a unit of Government that lays down the laws and
acts

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with regards to commodity trading. A broker of Commodities is
also
required to meet certain obligations to gain such a membership
in
exchange.
To become a member of Commodity Exchange the broker of
brokerage firm should have net worth amounting to Rs. 50
Lakh. This
sum has been determined by Multi Commodity Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person

should comply with the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completed 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by
statutory/regulatory authority,
There are following three types of Memberships of Commodity
Exchanges.

2.4 CURRENT SCENARIO IN INDIAN COMMODITY MARKET

Need Of Commodity Derivatives For India:-

India is among top 5 producers of most of the Commodities, in

addition to being a major consumer of bullion and energy
products.
Agriculture contributes about 22% GDP of Indian economy. It
employees around 57% of the labor force on total of 163 million
hectors of land Agriculture sector is an important factor in
achieving a

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GDP growth of 8-10%. All this indicates that India can be
promoted as
a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National

Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in
terms of trade volumes, further it has even become the third
largest in
bullion and second largest in silver future trading in the world.
Coming to trade pattern, though there are about 100
commodities traded on MCX, only 3 or 4 commodities
contribute for
more than 80 percent of total trade volume. As per recent data
the
largely traded commodities are Gold, Silver, Energy and base
Metals.
Incidentally the futures’ trends of these commodities are
mainly driven
by international futures prices rather than the changes in
domestic
demand-supply and hence, the price signals largely reflect
international scenario.
Among Agricultural commodities major volume contributors
include Gur, Urad, Mentha Oil etc. Whose market sizes are
considerably small making then vulnerable to manipulations.

Pattern on National Commodity & Derivatives Exchange

(NCDEX):-

NCDEX is the second largest commodity exchange in the

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country after MCX. However the major volume contributors on
NCDEX
are agricultural commodities. But, most of them have common
inherent problem of small market size, which is making them
vulnerable to market manipulations and over speculation.
About 60
percent trade on NCDEX comes from guar seed, chana and
Urad
(narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE):-

NMCE is third national level futures exchange that has been

largely trading in Agricultural Commodities. Trade on NMCE had
considerable proportion of commodities with big market size as
jute
rubber etc. But, in subsequent period, the pattern has changed
and
slowly moved towards commodities with small market size or
narrow
commodities.
Analysis of volume contributions on three major national
commodity exchanges reveled the following pattern,

Major volume contributors: - Majority of trade has been

concentrated in few commodities that are
· Non Agricultural Commodities (bullion, metals and energy)
· Agricultural commodities with small market size (or narrow
commodities) like guar, Urad, Mentha etc.

3 Investment In Non-Precious Metals

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 (Specially reference to copper and Zinc)
3.1Copper

Copper was the first metal mined and crafted by man, and has
been the most important one in the oldest times of history,
because it was available in great quantities and was initially
extractable almost at the surface of ground. In addition, it
was suitable to craft weapons and tools, art objects and
ornaments.

Very likely the original center of metallurgy was onIran

highlands, where copper was easily found. Archaelogical
excavations proved that copper crafting was known in Iran, and
by Sumerians, since the beginning of Neolithic era. At the end
of the fourth millennium B.C., copper working had reached high
technical levels in Iran, Mesopotamia and Egypt.

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 INVESMENT IN COPPER

Investing in the Copper Market

The price of copper has skyrocketed in the past year.

In fact on May 1, 2006, copper hit an important milestone.

On that day, according to the NYMEX, the underlying value of

the U.S. nickel (which is composed of 75% copper) surpassed
its face value for the first time. With copper prices soaring to
$3.50 per pound, the value of the nickel coin hit $0.0535
approximately 107% of its face value.

Despite the fact that prices have dipped a bit since peaking in
May, with copper now trading just above $3.00 a pound, the
overall outlook for this base metal remains extremely
promising.

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 ZINC

Introduction

Zinc is an essential mineral that is naturally present in some

foods, added to others, and available as a dietary supplement.
Zinc is also found in many cold lozenges and some over-the-
counter drugs sold as cold remedies.

Zinc is involved in numerous aspects of cellular metabolism. It

is required for the catalytic activity of approximately 100
enzymes [1,2] and it plays a role in immune function [3,4],
protein synthesis [4], wound healing [5], DNA synthesis [2,4],
and cell division [4]. Zinc also supports normal growth and
development during pregnancy, childhood, and adolescence
[6–8] and is required for proper sense of taste and smell [9]. A
daily intake of zinc is required to maintain a steady state
because the body has no specialized zinc storage system [10].

MCX registered highest turnover in zinc contracts on its

platform on Monday, Nov 2006 surpassing its previous record.
Zinc contracts posted a record turnover of Rs. 1,031.92 crore
on November 27, 2006 on MCX trading platform. Over 50,100
tonnes of zinc was traded on the day on the exchange. The
open interest in zinc contracts was 11,225 tones as on
November 27, 2006. This is the first time when the daily
volume of zinc bettered Rs. 1000 crore surpassing the previous
record of Rs. 998.2 crore on MCX since its inception in March
2006. “MCX is the only liquid exchange in the world after LME
that provides the opportunity in zinc to hedge against the
prices fluctuations. Zinc has about 97.41 per cent correlation

32 | P a g e
with LME prices,” an

MCX is the largest Indian exchange for zinc futures with about
99.9 per cent market share. MCX, India’s largest commodity
futures exchange in also has a sizeable market share in the
base metals futures market with more than 99 per cent market
share. Copper, zinc and aluminum are three most liquid base
metals that are traded on the exchange. The exchange also
offers trading in nickel,tin and lead.

The turnover recorded in base metals trading at MCX for the

period of January to October 2006 is Rs. 157,251 crore, which
is more than 73 times in the corresponding period last year.
The strategic alliance of MCX with LME has helped in the
efficient price discovery of base metals principally zinc and
aluminum at MCX trading platform, which comes to great
benefit for Indian participants.

MCX has registered highest turnover in copper and zinc futures

contracts on its platform on Wednesday (trading ended at
11.55 pm including session I and II). The total turnover of
copper traded on the exchange was Rs 1,548.27 crores in
terms of value and 47,223 tonnes in volume terms.
On Wednesday, the copper prices (November contract)
touched an intra day high of Rs 334.25 per kg and an intra-day
low of Rs 322 per kg witnessing a range of Rs 12.25 per kg.
Meanwhile, open interest in copper has gone up.

On Tuesday, it was 17,985 tonnes (in terms of volume), while it

went up on Wednesday touching 24,990 tonnes indicating
growing interest among participants.

Besides copper, zinc also witnessed a record turnover on MCX

as it touched Rs 958.12 crores (in value terms), while the
turnover in volume was 47,170 tonnes. The turnover of the
base metal was the highest so far on MCX.
The price of zinc (November contract) touched an intra day
33 | P a g e
high of Rs 207.65 per kg, while the intra day low was Rs 197.
The open interest level for the commodity on Wednesday was
7895 tonnes.

4 RESEARCH METHODOLOGY

Data Source

 Secondary Data

The secondary data will be collected from

websites, newspapers, journals etc.

Period

 1 January 2006 to 31 December 2009

Source

 NSE India

 MCX India

 NCDEX India

Techniques

The data collected through various measures will be

tabulated and a number of statistical tests would be
applied on that which may include descriptive statistics,
regression etc.

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 4.1 DESCRIPTIVE STATISTICS

Mean:

The most common expression for the mean of a statistical

distribution with a discrete random variable is the
mathematical average of all the terms. To calculate it, add
up the values of all the terms and then divide by the number
of terms.

Mean of copper Mean of zinc

Logsp 5.664893 4.367503

Logfp 5.662083 4.360312

Dlogsp 0.022146 0.010597

Dlogfp 0.021586 0.010507

This expression is also called the arithmetic mean. There are

other expressions for the mean of a finite set of terms but
these forms are rarely used in statistics. The mean of a
statistical distribution with a continuous random variable,
also called the expected value, is obtained by integrating the
product of the variable with its probability as defined by the
distribution. The expected value is denoted by the lowercase
Greek letter mu (µ).

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Median:

The median refers to the middle value in a distribution. In case

of median one-half of the items in the distribution have a value
size of the median value or smaller and one-half have a value
size of the median value or larger. The median is just the 50 th
percentile value below which 50% of the values in thesample
fall. It splits the observations into two halves.

Median of copper Median of zinc

Logsp 5.742474 4.399862

Logfp 5.741711 4.390732

Dlogsp 0.001595 0.013793

Dlogfp 0.034501 0.026843

SKEWNESS:

Consider the distribution on the figure. The bars on the right

side of the distribution taper differently than the bars on the
left side. These tapering sides are called tails, and they provide
a visual means for determining which of the two kinds of
skewness a distribution has:

 Negative skew: The left tail is longer; the mass of

the distribution is concentrated on the right of the
figure. It has relatively few low values. The
distribution is said to be left-skewed.

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  Positive skew: The right tail is longer; the mass of
the distribution is concentrated on the left of the
figure. It has relatively few high values.

Skewness of copper Skewness of zinc

Logsp -1.34192 -0.16998

Logfp -1.15889 -0.24174

Dlogsp -0.633 -1.06603

Dlogfp -0.83922 -1.36636

KURTOSIS:

Kurtosis tells us the extent to which a distribution is more peak

for flat-topped then the normal curve. If curve is more peaked
then the normal curve it is called LEPTOKURTIC. If curve is
more flat-topped then the normal curve, it is called
PLATYKURTIC. Normal curve itself is known as MESORKURTIC.

37 | P a g e
 Kurtosis of copper Kurtosis of zinc
Logsp 0.662593 -0.7405

Logfp 0.384448 -0.73956

Dlogsp 2.971794 2.019711

Dlogfp 3.010025 3.539797

REGRESSION ANALYSIS

Interpreting the Output of the Regression Program

Taking,

X= Future
spot price

38 | P a g e
 Y= Spot
Price.

Let’s interpret the most critical elements of the regression

output.

THE PLOT:

The plot of the data and the plot of the regression line indicate
that the data line up quite close to the regression line. This
suggests that a straight-line fit to the data will be quite
successful.

R SQUARE:

R Square is a statistical measure of how well the regression

line fits the data. Specifically, it measures the percent of
variance in the dependent variable (Spot Price) explained by
the independent variable (Future Spot Price). R Square ranges
from a low of 0, indicating that there is a no linear relation
between spot price and future spot price, to a high 1,
indicating that there is a perfect linear relation between spot
price and future spot price. In the current case,

 R Square of SP and FP of Copper is 0.90085 which is quite

high. This reinforces our conclusion from looking at the
plot of the data that there is a strong linear relation
between spot price and future spot price.

39 | P a g e
  R Square of SP and FP of Zinc is 0.994268 which is quite
high. This reinforces our conclusion from looking at the
plot of the data that there is a strong linear relation
between spot price and future spot price.

Standard Error:

Less will be the Standard Error more will be the benefits.

Standard of copper Standard of zinc

Logsp 0.220484 0.229408

Logfp 0.224863 0.235282

Dlogsp 0.048466 0.111712

Dlogfp 0.215093 0.118716

40 | P a g e
INTERCEPT AND SLOPE OF THE REGRESSION LINE

P-VALUE:

The p-value corresponding to the intercept and the slope

measure the probability of observing as large as the estimated
coefficient when the true values are Zero.

INTERCEPT

Coefficients P-value

Sp and Fp 25.04116055 0.258976

Sp and FPt-1 75.33591 0.062583

SP and FPt-2 147.2312 0.007344

SP and FPt-3 190.5924 0.005221

SP and FPt-4 238.3846 0.000343

INTERCEPT IS SHOWN AS ALPHA

H0= Null (When Alpha=0)

H1= Alternate (When Alpha # 0)

Level of Significance = 0.5

When P-Value less than Level of Significance then REJECT. On

other hand ACCEPT when P-Value greater than Level of
Significance.

Here, P-Value less than Level of Significance. So, here REJECT

the H0 & ACCEPT the H1.

H0 = REJECTED (In all cases)

H1 = Accepted (In all cases)

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 FUTURE SPOT PRICE

Future Spot Price is shown as Beta

H0= Null (When Beta=0)

H1= Alternate (When Beta # 0)

Level of Significance = 0.5

When P-Value less than Level of Significance then REJECT. On

other hand ACCEPT when P-Value greater than Level of
Significance.

Here, P-Value less than Level of Significance. So, here REJECT

the H0 & ACCEPT the H1.

H0 = REJECTED (In all cases)

H1 = Accepted (In all cases)

42 | P a g e
 5.SUMMARY

This Project the conceptual framework and

mechanics of commodity Market working
on this project. We are able to analyze the
efficiency of non-precious metals on
volatility of cash market. We study all the
data related to future market of copper and
zinc, to evaluate the descriptive statistics
by using the excel tools with the help of
this data we are also able to calculate the
future spot price using concepts of
continuous compounding. While calculating
the future spot price, we analyze that the
future spot price is totally dependent upon
spot price.

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 5.1 LIMITATION:

As we are short of time we are taking only

four non-precious metals
(copper,zinc)among hundreds of metals,
and we are taking only past data of four
and half years, starting from July 2005 to
December 2009.

• Not able to find out primary data.

• H0 is rejected when Alpha is equal to

zero

• H0 is also rejected when Beta is equal to

zero

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 5.2 CONCLUSION

India has a long history of trade in commodity

derivative. But, the commodity futures markets
in India are only four years old .Trading volume
and value of futures markets in the past two
years have increased so much that it pales the
stock market. Thus, commodity futures markets
have become the area of attraction for traders
and researchers. But, there is a dearth of
research work in this field. Few quantitative
studies have been conducted to evaluate the
efficiency of these futures markets. This study is
a step in the same direction.
This study has focused on the week form
efficiency of commodity futures market of copper
and zinc. Market efficiency , here, has been
measured as the long run or equilibrium
relationship between the spot and futures price
series and unbiasedness of these markets. We
conclude that for copper and zinc metals the spot
and futures price series are first diffrence
stationary i.e. I (1). The regression analysis
shows that the futures price Ft-1 at time t-1
contains all available information for predicting
today’s spot price St. The results of different
contegrations techniques used here indicate that
spot price and futures price series are
cointegrated. Cointegration Between these price
series ensures that they do not drift apart. The
45 | P a g e
Presence of Cointegration between the spot and
futures price series is a necessary (but not
sufficient) condition for market efficiency. The
reslts should be unbiased also. The hypothesis
test shows the unbaisedness of results. Thus,
both the conditions for efficiency of markets are
satisfied. So, we can say that future markets are
efficiency in weak form for all selected
commodities.

5.3 Bibliography

Books

• Commodity market by NSE

• Derivative market by NSE

Web

• www.mcxindia.com
• www.economictimes.com
• www.indiamba.com
• www.commodityindia.com
• www.business.mapsofindia.com
• www.bseindia.com
• www.ncdex.com
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 • www.sebi.gov.in, SEBI Bulletin
• www.indiaexpress.com

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