YOUR GUIDE TO THE FINANCIAL JUNGLE

www.sharekhan.com
 Contents CONTENTS

Foreword by a Sheru 2

Prologue 3

Demystifying Commodities 4

Epilogue 27

What is Sharekhan? 28

Services you can avail of at Sharekhan outlets 28

Sharekhan branches 28

SHAREKHAN
 Foreword FOREWORD

Welcome to a whole new world of opportunities!

The process of economic liberalisation in India began in 1991. As part of this
process, several capital market reforms were carried out by the capital
market regulator Securities and Exchange Board of India. One such measure
was to allow trading in equities-based derivatives on stock exchanges in
2000. This step proved to be a shot in the arm of the capital market and
volumes soared within three years. The success of the capital market
reforms motivated the government and the Forward Market Commission
(the commodities market regulator) to kick off similar reforms in the
commodities market. Thus almost all the commodities were allowed to be
traded in the futures market from April 2003. To make trading in commodity
futures more transparent and successful, multi-commodity exchanges at
national level were also conceived and these next generation exchanges
were allowed to start futures trading in commodities on-line.

Commodities exchanges have seen a surge in commodity futures volumes

in the last few months. This rise in volumes has been led by bullion (gold and
silver) trading. Today a whole lot of commodities are available for trading in
futures and the list is getting bigger by the day. No wonder then that the
commodity futures market is being viewed as a significant business
segment by many– businessmen, investors, institutions, brokers, banks et
al.

Of course there are still millions of Indians who are not aware that
commodities other than gold and silver can also be traded in on commodity
exchanges, a là equities. Fewer still know that commodities can be traded
on-line!

Hence to educate Indian investors in the benefits of trading in commodities

Sharekhan has decided to bring out a compilation of questions on the
subject along with their answers. Demystifying Commodities seeks to cover
every aspect of commodity trading and has been written in a language that
is simple and lucid, a characteristic of Sharekhan.

I am certain that Demystifying Commodities will go a long way in generating

awareness about commodity trading among Indian investors. The various
money-making trading strategies for the commodities market discussed in
Demystifying Commodities will also be of immense help to those billion
investors who are already trading in commodities.

A Sheru

December 2004

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 Prologue PROLOGUE

Last week I was in Kolkata to meet our local high net worth clients. I like the
city for its investment savvy people and mouth-watering rosogullas. Of
course a lot can be written on the two subjects but here I want to speak of a
particular experience of mine in the City of Joy.

I was putting up in a posh hotel in south Kolkata. On the first evening of my

stay there, I was relaxing in the hotel lounge after a long and fruitful meeting
when I heard a middle-aged man coming down the stairs, talking on his cell.
From parts of the conversation I could make out that he was talking to his
broker about an investment related matter. Clad in a crisp white safari suit,
he looked like a typical Marwari businessman, tall, fair and well-built.

After finishing his conversation he took the seat opposite mine with a
worried frown. As he settled down I went back to the investment magazine I
was reading. Shortly I heard a well-modulated voice asking me for a pen. It
was the same gentleman. I took out my Parker and gave it to him with a
smile. After thanking me profusely he started taking down notes from a
financial daily. He returned the pen after a few minutes and thanked me
again. He seemed inclined to talk, more so after he noticed that I was
reading an investment magazine.

Shortly he started the conversation by telling me that his name was Rajiv
Mittal and he'd used my pen to take down some stock prices from the
financial daily. At the sound of the word stock my antennae were on alert and
I asked him if he invested in the stock market. He told me that although he
mainly traded in grains and oils yet he has been investing in stocks for many
years. A rich businessman from Ahmedabad he had come to Kolkata for a
business deal. “I have even traded in that new thing called Derivatives and
liked it very much,” he told me with a grin.

At this juncture I couldn't resist introducing myself. On learning that I was a

stockbroker of repute, he got excited and immediately came and sat next to
me. “Can I discuss certain things with you for a while?” he asked. “Sure,” I
said, smiling, and kept the magazine aside. Mr Mittal moved closer to me
and said, “Although my business is doing well and I have invested a good
amount in various schemes, I want to diversify my portfolio. Can you please
advise me? Also is there some way of reducing risks in my core business of
grains and oils?” In response I very gently made a suggestion, “Start
investing in the commodity futures market.”

It is for the benefit of investors like Mr Mittal that I have penned down the
various aspects of commodity trading I'd explained to him that evening in
Kolkata. I present them in a question-and-answer form to keep things
simple.

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 DEMYSTIFYING COMMODITIES

Demystifying
Commodities
Mr Mittal: Can you please tell me how trading started at commodity
exchanges?

Sharekhan: Most of the commodity exchanges of today were started in the

late 19th century and the early 20th century. To understand how the
commodities market works in India, we need to understand how it works
outside India. That is because the ever-increasing pressure on the other
global markets to integrate with each other and with the US markets, and
the liberalisation process that started in our country in the early 90s
necessitate the study of global markets. Let us thus take a look at how it all
began.

It all started in an American city called Chicago. In the 1840s, Chicago had
become a commercial centre with railroad and telegraph lines connecting it
with the East. Around the same time, the McCormick reaper was invented
which eventually led to higher wheat production. Farmers from the Midwest
came to Chicago to sell their wheat to dealers, who, in turn, shipped it all
over the country.

The Midwest farmers brought their wheat to Chicago hoping to sell the same
at a good price. The city had few storage facilities and no established
procedures either for weighing grains or for grading the same. In short, the
farmers were often at the mercy of the dealers.

The year 1848 saw the opening of a central place where the farmers and
dealers could meet to deal in "spot" grain, ie to exchange cash for
immediate delivery of wheat.

The futures contract, as we know it today, evolved as the farmers (sellers)

and the dealers (buyers) began to commit to future exchanges of grain for
cash. For instance, a farmer would agree with a dealer on a price to deliver to
the latter 5,000 bushels of wheat at the end of June. The bargain would suit
both the parties. The farmer would know how much he would be paid for his
wheat while the dealer would know his costs in advance. The two parties
would even exchange a written contract to this effect along with perhaps a
small amount of money representing a "guarantee.”

Such contracts became common and were even used as collateral for bank
loans. They also began to change hands before the delivery date. If the
dealer decided that he did not want the wheat, he would sell the contract to

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 DEMYSTIFYING COMMODITIES

someone who did. Or the farmer who didn't want to deliver his wheat would
pass his obligation to another farmer. The price would go up and down,
depending on what happened in the wheat market. In the event of bad
weather, the people who had contracted to sell wheat would hold more
valuable contracts because the supply would be lower; if the harvest were
bigger than expected, the seller's contract would become less valuable. It
wasn't long before people who had no intention of ever buying or selling
wheat began trading the contracts. They were speculators, hoping to buy
low and sell high or sell high and buy low.

This saw the birth of the first central exchange in 1848 in Chicago under the
name Chicago Board of Trade (CBOT). The emergence of the derivatives
market as an effective risk management tool in the 70s and the 80s resulted
in the rapid creation of new exchanges and the expansion of the old ones.

These old exchanges are located mainly in developed nations. However a

few were created in developing countries too. The Buenos Aires Grain
Exchange in Argentina, established in 1854, is one of the oldest in the world.

Mr Mittal: Is the concept of trading in commodity futures new in India?

Sharekhan: No. You will be surprised to learn that the first organised futures
market in India was set up way back in 1875 in the form of the Bombay
Cotton Trade Association. However the Bombay Cotton Exchange founded
in 1893 was the first organised commodity exchange in India.

The Gujarati Vyapari Mandali in 1900 carried futures trading in oilseeds:

groundnut, castor seed and cotton. The Chamber of Commerce at Hapur set
up in 1913 was the most notable futures exchanges for wheat. Futures
trading in bullion began in 1920 in Bombay. In 1919 jute trading was
conducted by the Calcutta Hessian Exchange. But organised futures trading
in raw jute began only in 1927 with the establishment of the East Indian Jute
Association.

Most of these exchanges traded in region-specific commodities and the lack

of a national level exchange that could offer multiple commodities at the
same platform was felt time and again. So about a couple of years back, at a
time when 21 regional exchanges in India were offering various
commodities for trading, the government came out with the concept of
demutualised, electronic (on-line, screen-based), national level multi-
commodity exchanges as part of its agricultural and economic liberalisation
programme.

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 DEMYSTIFYING COMMODITIES

The most prominent national level multi-commodity exchanges in India at

present are the National Commodity & Derivatives Exchange (NCDEX) and
the Multi Commodity Exchange (MCX). All the traditional and generation
next commodity exchanges are regulated by the Forward Market
Commission (FMC) under the Ministry of Consumer Affairs and Public
Distribution.

Mr Mittal: Which commodities can be traded on these exchanges?

Sharekhan: A cash commodity* must satisfy three basic criteria to get
successfully traded in the futures market:

1. It has to be standardised and, for agricultural and industrial

commodities, it must be in a basic, raw, unprocessed state. There are
futures contracts on wheat, but not on flour. Wheat is wheat (although
different types of wheat have different futures contracts). The miller
who needs a wheat future to help him avoid losing money on his flour
transactions with customers wouldn't need a flour future. A given
amount of wheat yields a given amount of flour and the cost of
converting wheat into flour is fairly fixed and hence predictable.

2. Perishable commodities must have an adequate shelf life because

delivery on a futures contract is deferred.

3. The cash commodity's price must fluctuate enough to create

uncertainty, which means both risk and potential profit.

* The actual physical product on which a futures contract is based. This

product can be an agricultural commodity, bullion, stock, interest rate,
index or a financial instrument.

Mr Mittal: How does a commodity exchange work?

Sharekhan: In most exchanges trading floors are divided into pits (or rings),
where traders stand facing one another. These are more or less shallow
octagonal areas with raised steps around the edge. Each pit is designated
for trading one or more futures contracts. For instance, at the CBOT there are
large pits for trading T-bonds, soy bean and corn futures among many
others. The Commodities Exchange Center in New York houses more than
one futures exchange; there you will find trading pits for such diverse
commodities as coffee, sugar, frozen orange juice, cocoa, gold, cotton and
heating oil.

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However the generation next exchanges like the NCDEX and the MCX are
technology driven. These exchanges trade on an electronic platform, having
consciously moved away from the age-old traditional platform in order to
provide a pan-India network and improved transparency in deals, a là the
equities market. These exchanges allow trading in almost all commodity
futures.

Mr Mittal: Is there any relation between commodities and the other

financial instruments?
Sharekhan: Many believe that most other financial markets, ie the markets
for currency, bonds and stocks, operate independent of the commodities
market. However that is not the case. The following chart shows how closely
integrated all these markets are in reality.

Let us understand this integration better.

The Spiral Effect
1. As you know any change in interest rates affects the currency
market, leading to an impact on bond prices.
CURRENCY STOCKS
2. Any resulting change in the bond prices would affect the
treasury and the prospects of the country, thereby affecting
industry and stock prices.

3. The ups and downs in the stock prices, as a result of all that,
would then signal a message to the currency market about the
BOND COMMODITY
economic prospects of the country. The resulting changes in
the currency market would affect the bond market.

4. Again, the prospects of the country's economy would affect the

interest rates, thereby influencing commodity prices and the economy
itself. This again would affect the stock prices, which would again send
signals to the other three markets.

This chain process, or the "Spiral Effect" as we call it, would continue. Hence
the world over all the financial markets are interrelated. Financial markets of
a country do not move in isolation. Thus the understanding of one financial
market leads to the reading of the other.

Clearly the commodities market does not work in isolation and whatever
happens in this market always has an impact on the other major financial
markets.

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 DEMYSTIFYING COMMODITIES

Mr Mittal: How can we get some information on commodities? Which are

the important factors that affect futures prices?
Sharekhan: The fundamental approach to forecasting futures prices
involves monitoring demand and supply. The investors and traders gather
this information from a number of sources including trade organisations,
private news gathering/research firms and the press. A very important and
complete source of such information in our country is the government,
through its departments of agriculture and commerce, and the central bank,
as well as trade associations of commodities like the Bombay Bullion
Association, the Solvent Extraction Association, the Bombay Metal
Exchange etc.

As a broker Sharekhan offers exclusive products, market letters, analyses

and trading calls to suit varied needs. We also have a lot of information and
research reports on commodities on our website www.sharekhan.com.

Mr Mittal: Who trades in commodity futures and why?

Sharekhan: Basically there are two types of futures participants: hedgers
and speculators.

In general, the hedgers use futures for protection against adverse future
price movements in the underlying cash commodity. The rationale of
hedging is based upon the demonstrated tendency of cash prices and of
futures values to move in tandem.

The hedgers are very often businesses, or individuals, who at one point or
another deal in the underlying cash commodity. Take, for instance, a soy
trader who buys soy seed for oil; if soy prices go up he has to pay the farmer
or the soy seed dealer more. For protection against higher soy prices, the
trader/processor can "hedge" his risk exposure by buying enough soy
futures contracts to cover the amount of soy he expects to buy. Since cash
and futures prices tend to move in tandem, the futures position will profit if
soy prices rise enough to offset cash soy losses.

The speculators are the second major group of futures players. These
participants include independent traders and investors. For the
speculators, futures have important advantages over the other
investments. The speculators need to invest fewer amounts in futures than
in cash since here they need to pay only a fraction of the value of the
underlying contract (usually between 5-10%) as margin. Commodity futures
are highly leveraged investments.

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Also commission/brokerage charges on futures trades are small compared

to what they are in case of physical trade and other investments. Moreover
there are no transportation charges, no insurance costs, no storage charges
and no security concerns when someone trades in futures.

Mr Mittal: Investment in commodities is new to me. Why should I invest in

commodities? What are the benefits of trading in commodity futures?
Sharekhan: Of course with the other asset classes offering attractive
returns, "Why commodities?" is the inevitable question that pops up in
one's mind today. Well, commodity derivatives provide unique money-
making opportunities to a wider section of market participants, starting
from investors, hedgers, arbitragers, traders, manufacturers, planters to
exporters, importers et al. Trading in commodity futures is not new to the
agrarian Indian population and business class. They are well aware of the
advantages of commodity futures trading. Trading in commodities is easy
and simple as:

l No balance sheets, Profit & Loss statements, understanding of EBITDA

(earnings before interest, tax, depreciation and amortisation) and
reading between the lines required. Commodity trading is about the
simple economics of demand and supply.

l No breaking of heads over market direction. Seasonality patterns quite

often provide clue to both short- and long-term traders and investors.

l Commodity trading comes with almost nil insider trading and company
specific risks.

What's more, why invite risk by investing in a metal company when you can
trade in the metal itself? After all, while the stock price of the company is
dependent on several factors including the company's own fundamentals,
the price of the metal is driven by the simple economics of demand and
supply. The more the demand for the metal, the higher its price and vice
versa. Also compared to equities it is much cheaper to trade in commodities,
where margin requirements are lower. Further a bull phase in the
commodities market lasts for 10 to 15 years.

To understand everything about commodity futures you may please call any
of our branches or visit our website www.sharekhan.com. Trading in futures
is like trading in forward contracts with some differences.

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 DEMYSTIFYING COMMODITIES

Mr Mittal: What are forward contracts?

Sharekhan: A forward contract is a customised contract between a buyer
and a seller where settlement takes place on a specific date in future at a
price agreed today. The rupee-dollar exchange rate is a big forward contract
market in India with banks, financial institutions, corporates and exporters
being the market participants. The forward contracts are negotiated over-
the-counter products and each contract is customised and unique in terms
of the contract size, expiration date, asset/commodity type, asset quality
etc.

Mr Mittal: What is a commodity futures contract? How does it work?

Sharekhan: Unlike a stock, which represents equity in a company and can
be held for a long time if not indefinitely, futures contracts have finite life.
They are primarily used for hedging commodity price-fluctuation risks or for
taking advantage of price movements, rather than for buying or selling the
actual cash commodity. The word "contract" is used because a futures
contract requires the delivery of the commodity in a stated month in the
future unless the contract is liquidated before it expires.

The buyer of the futures contract (the party with a long position) agrees on a
fixed purchase price to buy the underlying commodity (gold, silver, castor
seed, refined soy oil or rubber) from the seller at the expiration of the
contract. The seller of the futures contract (the party with a short position)
agrees to sell the underlying commodity to the buyer at expiration at the
fixed sales price. As time passes, the contract's price changes relative to the
fixed price at which the trade was initiated. This creates profits or losses for
the trader.

Mr Mittal: What are the features of a futures contract? Please explain with
an example.
Sharekhan: Futures are exchange traded standardised contracts to buy or
sell an asset (or say a commodity) in future at a price agreed upon today. The
asset can be a share, index, interest rate, bond, sugar, crude oil, gold, silver,
cotton, coffee etc.

The standard terms in any futures contract are:

l Quantity of the underlying asset (the market lot for trading and for
delivery)
l Quality of the underlying asset (very important in case of commodity
futures)
l The unit price quotation base (price per 10 gram/per kilogram etc)
l Expiration date of the contract
l Tender and delivery period for the commodity
l Minimum fluctuation in price (tick size)
l Settlement style (in cash or physical).

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For example: when you are dealing in February 2005 gold futures contract
on the MCX, you know that the market lot, ie the minimum quantity you can
buy or sell, is 1 kilogram with minimum 0.995 fineness; the price of gold is
quoted per 10 gram on ex-Mumbai basis which includes 1% sales tax. The
contract expires on February 03, 2005 (you need to square off the trade or
roll it over on or before January 31, 2005 if you are not interested in
giving/taking the physical delivery). The tick size is Re1 per 10 gram (100*1),
ie Rs100 per contract/market lot. The delivery period is from February 01 to
February 03, 2005. The contract can be settled in cash or in physical form as
per the exchange regulations.

You need to read the delivery and settlement procedure for each commodity
carefully, as it differs from exchange to exchange and from commodity to
commodity. The trading unit and the delivery unit are normally different for
different commodities.

Mr Mittal: What is the difference between a forward contract and a futures

contract?
Sharekhan: A futures contract is nothing but a form of forward contract. You
can differentiate a forward contract from a futures contract on the following
lines:

l Customised vs Standardised contract: forward contracts are

customised while futures contracts are standardised. Terms of forward
contracts are negotiated between the buyer and the seller. The terms of
futures contracts are decided by the exchanges on which these are traded.
For example, in futures contracts the quantity and the expiry date are fixed
and decided by the exchanges whereas the expiry date and the quantity
can be different for different parties in case of a forward contract.

l Counter-party risk: in case of forward contracts there is a risk of

counter-party default. In case of futures, the exchanges become
counter-party to each trade and guarantee the settlement of each trade.
Hence there is no counter-party risk in trading through the exchanges.

l Liquidity: futures are much more liquid and their price is transparent as
their price and volume are reported in the media. Moreover futures
exchanges attract participants from all over the country on a single
platform. In case of forward contracts all the participants are not on a
common trading platform.

l Squaring off: a forward contract can be reversed only with the same
counter-party with whom it was entered into. A futures contract can be
reversed on the screen of an exchange, as the latter is the counter-party
to all the futures trades.

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 DEMYSTIFYING COMMODITIES

Mr Mittal: How to arrive at future prices of a commodity?

Sharekhan: The theoretical price of a futures contract is the spot price of the
underlying commodity plus the cost of carry. Please note that futures are not
about predicting the future prices of the underlying asset or commodity.

In general, Futures Price = Spot Price + Cost of Carry.

The cost of carry is the sum of all costs incurred if a similar position is taken
in the cash market and carried to expiry of the futures contract less any
revenue that may arise out of holding the asset. The cost typically includes
interest cost in case of financial futures; in case of commodity futures,
insurance and storage costs etc are also considered. Revenue may be in the
form of dividend in case of stocks and financial instruments.

Though one can compute the theoretical price, the actual price may vary
depending upon the demand and supply of the underlying asset or
commodity.

Mr Mittal: How are the commodity futures priced?

Sharekhan: Suppose (0.995 fineness) imported gold is quoting at Rs6,000
per 10 gram in the physical spot market in Mumbai. The interest rate is about
6% per annum. The cost of carry for one month would be Rs30
(6,000*6%/12). As such a gold futures contract with one month's maturity
should quote at nearly Rs6,030. However it has been observed on several
occasions that futures quote at a discount or premium to the theoretical
price, meaning below or above the theoretical price. This is due to demand-
supply pressures and future expectations.

Every time a commodity future contract trades over and above its cost of
carry (above Rs30 in this case) the arbitragers step in and reduce the extra
premium commanded by the futures contract due to demand. For example,
they buy the commodity in the cash/physical market and sell the equal
amount in the futures market, thereby creating a risk-free arbitrage for the
discount/premium.

Mr Mittal: What happens to a futures price as a contract approaches expiry?

Sharekhan: As a futures
CONVERSIONS OF FUTURES & CASH PRICES contract approaches
expiry, the cost of carry
8 reduces in tandem with the
{Basic difference between Futures & Cash}

6
reduction in the time to
4
2
expiry; thus futures prices
0
and cash prices start
-0 converging. On the expiry
-4 day, the futures price
-6 should equal the
-8 cash/physical market
-10 Towards Maturity price.
-12

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Mr Mittal: How can I use commodity futures contracts?

Sharekhan: You can use commodity futures in different ways. You can do
directional trading using futures. In case you are bullish on the underlying
commodity (gold, silver, soya, rubber etc) and feel that its price will go up,
you can simply buy futures of that particular commodity. Similarly if you are
bearish on the underlying commodity and feel that its prices will fall, you can
sell futures of that commodity. You can also hedge your natural exposure
by using futures, thereby minimising the price risk.

Mr Mittal: Can I square off my position at any time before the expiry of the
contract?
Sharekhan: Yes. It is not necessary to wait for the expiry day once you have
initiated a position. You can square up your position at any time during the
contract period, booking profit or cutting losses.

Mr Mittal: What are the advantages and risks of trading in futures

compared to trading in the cash market?
Sharekhan: The two biggest advantages of futures are that you can short
sell them without having stock of the commodity and that you can carry your
position for a long time. The same is not possible in the physical market
because you have to give delivery of the commodity within a specified date.
Conversely you can buy futures and carry the position for a long time
without taking delivery by rolling over the contract.

Moreover futures positions are leveraged positions, meaning you can take a
Rs100 position by paying just Rs5-10 margin and daily mark-to-market
(MTM) loss, if any. This can enhance the return on the capital invested. For
example, you expect silver
price to go up from
LONG FUTURES SHORT FUTURES Rs10,000 per kilogram to
Rs11,000 per kilogram in
one month. One option is to
buy silver (say 30 kilogram)
in the physical market by
Profit and Loss

Profit and Loss

paying Rs3 lakh (30

kilogram @ Rs10,000 per
kilogram). You make
Rs30,000 (Rs1,000 per
Spot Price Final Pay-off Spot Price Final Pay-off kilogram) on an investment
of Rs3 lakh, getting about
10% returns. Alternatively
you take futures position in
silver by paying about Rs1,000 per kilogram (Rs30,000 per contract) toward
initial and MTM margin. You make Rs30,000 on an investment of Rs30,000,
ie about 100% return! Please note that taking leveraged position is very
risky as you may even lose your full capital in case the price moves against
your position.

The other advantages is that trading in futures is cheaper as you do not incur
transportation, insurance, storage, sales tax, octroi, security charges etc.

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Mr Mittal: How can I hedge my commodity positions using futures?

Sharekhan: Suppose you are holding a stock of a commodity in which you
deal and that has futures trading on it in a commodity exchange. You feel
that the price of that commodity may fall in the next few days but you cannot
sell the entire stock in the market for that short time, as you also need to
keep the stock with you. But if the price of the commodity falls, you will lose
because you have to sell the same at a lower price. So you want to hedge or
minimise the loss for the expected adverse price movement of the stock for
those few days.

One option is to sell the stock and buy it back after a few days when the price
falls. This involves heavy transaction costs. Alternatively you can sell
futures of that commodity to hedge your position in that commodity. Using
commodity futures you can virtually sell your commodity and buy it back
without losing the possession of the stock. This transaction is much more
economical as it does not involve costs of storage, insurance,
transportation etc.

You might say that if the price of the commodity had moved up, you would
have made a profit without hedging it. However it is also true that in case of a
fall, you might have lost without hedging. Please note that a hedge is not a
tool to maximise profits, it is a device to minimise losses. As it is said, “A
hedge does not result in a better outcome but in a predictable outcome”.
Actually hedging is not speculation, “not hedging” is speculation.

Mr Mittal: Are arbitrage opportunities available in commodity futures just

as they are in equities?
Sharekhan: Yes. Arbitrageurs in the futures markets monitor the
relationship between cash and futures constantly in order to exploit such
opportunities. If, for example, an arbitrageur realises that gold futures in a
certain month are overpriced in relation to the cash gold market and/or
interest rates, he would immediately sell those contracts knowing that he
can lock in a risk-free profit.

Mr Mittal: If I have some liquid money, how can commodity futures help me
to earn risk-free money?
Sharekhan: It is easy. You can deploy your surplus money in the commodity
futures market to earn risk-free money. Suppose, for example, spot gold
price is Rs6,000 per 10 gram in Mumbai on April 16, 2004 and at the same
time the June contract of gold at the MCX is trading at Rs6120.

You can earn some risk-free return here by following the steps mentioned
below:

l Buy 10 kilogram of gold from the market (keep it at a security vault of

course) and sell the MCX June contract at Rs6120.

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l Pay Rs60 lakh in cash to take delivery of the gold in the physical market.
l On expiry of the contract, at the time of the delivery period you opt for
giving the delivery to the buyer.
l Complete the formalities related to physical delivery of the gold.
l Whatever happens to the gold price, you earn Rs120 per 10 gram of gold
for two months.
l Thus there is a risk-free gross profit of Rs120 per 10 gram or of Rs1.20 lakh
for 10 kilogram gold (on an investment of Rs60 lakh). You need to deduct
the transaction charges to arrive at the net gain in the transaction.

Mr Mittal: If futures of an underlying commodity are quoting below the spot

price in the physical market, can I gain using commodity futures?
Sharekhan: Yes, of course you can but in that case you should have that
commodity in your possession. Suppose two months' pure silver futures
are quoting at 11,800 per kilogram while at the same time silver is quoting at
Rs12,140 in the physical spot market. The market lot for silver is 30 kilogram
for delivery on the MCX and the NCDEX. By following the steps mentioned
below you can make some risk-free money:

l Sell 30 kilogram of 0.999 fineness pure silver in the cash market at

Rs12,140 per kilogram.
l At the same time buy one contract of 30 kilogram silver two months'
contract at Rs11,800 per kilogram.
l Receive Rs12,140 per kilogram of silver. Use part of this money for paying
the initial margin and invest the rest.
l On expiry during the delivery period you will get the delivery of 30
kilogram silver–pay for this.
l Whatever happens to the price of silver, you earn Rs340 (12,140-11,800)
per kilogram on your holding of silver.

We at Sharekhan constantly monitor such risk-free money-making

opportunities and inform the investors of these opportunities whenever
these arise. You just need to give us a call or visit our website
www.sharekhan.com to learn of such opportunities.

Mr Mittal: Which are the various national level multi-commodity

exchanges?
Sharekhan: As I told you, there are some 21 commodity exchanges in India.
However most of them are regional, off-line (non-screen-based) and
commodity specific; hence these are almost inoperative. The major national
level multi-commodity exchanges to trade in all permitted commodities are:

l Multi Commodity Exchange of India Ltd, Mumbai (MCX)–

www.mcxindia.com. The exchange is promoted mainly by professionals
and supported by Financial Technology. The exchange started
operations in November 2003.

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l National Commodity and Derivative Exchange, Mumbai

(NCDEX)–www.ncdex.com. The exchange is promoted by the ICICI,
National Stock Exchange, Life Insurance Corporation of India and
NABARD. The exchange started trading in December 2003.
l National Multi Commodity Exchange of India Ltd, Ahmedabad
(NMCE)–www.nmce.com.

Mr Mittal: Can we trade in any of these commodity exchanges through

Sharekhan?
Sharekhan: Sharekhan is the founder member of both the major commodity
exchanges, ie the MCX and the NCDEX, and provides trading facility through
both the exchanges.

Mr Mittal: Which commodities are available for trading in these exchanges?

Sharekhan: The following commodities are available in various categories
on both the MCX and the NCDEX:

l Bullion: gold and silver;

l Metals: steel, aluminum, zinc and tin;
l Oil and oil seed: castor seed, soy seed and soy oil, rape/mustard seed
and oil, crude palm oil and RBD Palmoline;
l Spices and plantation: pepper and rubber;
l Other commodities: cotton, chana (gram), guar, jute, sugar, wheat and
pulses; and
l More commodities like coffee, tea etc are expected to be added in due
course.

Mr Mittal: How much margin is required for trading in commodities?

Sharekhan: As in case of stocks, in commodities too the margin is calculated
by the VaR system. Normally it is between 5-10% of the contract value. The
margin is different for each commodity. Just like in equities, in commodities
also there is a system of initial margin and MTM margin. The margin keeps
changing depending on the change in the price and volatility. The MCX
charges a flat margin on the contract amount while the NCDEX calculates the
margin as per the SPAN system.

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Mr Mittal: Can you give me the details of the contracts available, margin
required, trading and delivery units etc?
Sharekhan: Sure. Check this table out.

MCX
MCX
Commodity Trading qty Mkt price/Unit (Rs) Quote/ Base Contract value(Rs) Initial margin (%) Delivery unit Quotation base
Gold (995) 1kg 5,700 10g 570,000 5.00 1kg Mumbai
Gold mini (995) 100g 5,700 10g 57,000 5.00 1kg Mumbai
Silver 30kg 8,900 1kg 267,000 5.00 30kg Ahmedabad
Silver mini 5kg 8,900 1kg 44,500 5.00 30kg Ahmedabad
Castor seed 5MT 1,600 100kg 80,000 4.00 10MT Ahmedabad
Black pepper 1MT 8,050 100kg 80,500 8.00 1MT Ernakulam
Rubber 1MT 5,750 100kg 57,500 5.00 10MT Kottyam
Mustard oil 1MT 400 10kg 40,000 3.00 10MT Jaipur
Mustard seed 10MT 400 20kg 200,000 3.00 10MT Jaipur
RBD Palmoline 1MT 400 10kg 40,000 4.00 10MT Mumbai
Refined soy oil 10MT 450 10kg 450,000 4.00 10MT Indore
Castor oil 1MT 400 10kg 40,000 4.00 10MT Kandla
Guar seed 5MT 1,500 100kg 75,000 7.00 10MT Jodhpur
Groundnut oil 1MT 475 10kg 47,500 4.00 10MT Rajkot
Soy seed 1MT 1,600 100kg 16,000 4.00 10MT Nagpur
Steel long 25MT 21,400 1MT 535,000 5.00 25MT Taloja / Kalamboli
Steel flat 25MT 27,700 1MT 692,500 5.00 25MT Taloja / Kalamboli
Copper 1MT 120 1kg 120,000 5.00 9MT Mumbai
Nickel 250kg 520 1kg 130,000 8.00 3MT Mumbai
Tin 500kg 420 1kg 210,000 5.00 5MT Mumbai
Channa 5MT 1,450 100kg 72,500 5.00 10MT Delhi
Tur 10MT 2,100 100kg 210,000 5.00 20MT Mumbai
Urad 10MT 1,200 100kg 120,000 5.00 20MT Navi Mumbai
Yellow peas 10MT 1,250 100kg 125,000 5.00 20MT Navi Mumbai
Long cotton 26 candy 20,500 1 candy 533,000 3.00 55 bales Mumbai
Med cotton 26 candy 19,000 1 candy 494,000 3.00 55 bales Mumbai

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NCDEX
NCDEX
Commodity Trading qty Mkt price/Unit (Rs) Quote/Base Contract value(Rs) Initial margin (%) Delivery unit Quotation base
Gold (995) 1kg 5,700 10g 570,000 5.00 1kg Mumbai
Gold kilo (999) 1kg 5,600 10g 560,000 Span(5–10) 1kg Mumbai
Gold (999) 100g 5,600 10g 56,000 Span(5–10) 1kg Mumbai
Silver 5kg 8,900 1kg 267,000 Span(5–10) 30kg New Delhi
Silver mega 30kg 8,900 1kg 44,500 Span(5–10) 30kg New Delhi
Soy bean seed 1MT 1,900 100kg 19,000 Span(5–10) 10MT Indore
Refined soy oil * 1MT 450 10kg 45,000 Span(5–10) 10MT Indore
Mustard seed 1MT 400 20kg 20,000 Span(5–10) 10MT Jaipur
Expeller mustard oil 1MT 450 10kg 45,000 Span(5–10) 10MT Jaipur
RBD Palmoline * 1MT 450 10kg 45,000 Span(5–10) 10MT Kakinada
Crude palm oil 1MT 400 10kg 40,000 Span(5–10) 10MT Kandla
MS cotton 18.7 quintals 6,400 100kg 119,680 Span(5–10) 93.5 quintals Bhatinda
(11 bales) (55 bales)
LS cotton 18.7 quintals 6,600 100kg 123,420 Span(5–10) 93.5 quintals Ahmedabad
(11 bales) (55 bales)
Pepper 1MT 8,000 100kg 80,000 Span(5–10) 1MT Kochi
Rubber 1MT 5,800 100kg 58,000 Span(5–10) 1MT Kottayam
Jute 25 bales (500 1,400 100 bags 175,000 Span(5–10) 25 bales (500 West Bengal
bags per bale) bags per bale)
Channa * 10MT 1,600 100kg 160,000 Span(5–10) 10MT Rajasthan Desi-Delhi
Guar seed * 10MT 1,100 100kg 110,000 Span(5–20) 10MT Jodhpur
Guar gum * 10MT 4,100 100kg 410,000 Span(5–20) 10MT Jodhpur
Castor seed ** 10MT 375 20kg 187,500 Span(5–10) 10MT Disa
Sugar M * 10MT 1,750 100kg 175,000 Span(5–10) 10MT Muzzafarnagar
Sugar S * 10MT 1,650 100kg 165,000 Span(5–10) 10MT Navi Mumbai-Vashi
Turmeric * 10MT 3,000 100kg 300,000 Span(5–10) 10MT Nizamabad
Wheat * 10MT 800 100kg 80,000 Span(5–10) 10MT Delhi
Yellow peas * 10MT 1,300 100kg 130,000 Span(5–10) 10MT Mumbai
Jute raw 10MT 1,100 100kg 110,000 Span(5–10) 10MT West Bengal–Kolkatta
Urad * 10MT 1,700 100kg 170,000 Span(5–10) 10MT Mumbai
*Inclusive of sales tax
** Inclusive of all taxes exclusive of sales tax

Please note the above is a snapshot of the contracts. You need to check the
full details, which can be found on our website www.sharekhan.com or at
any of our outlets, before entering into any trade.

Mr Mittal: But if I want to give or take physical delivery, where will it be done?
Sharekhan: The exchanges have specified a delivery centre for each
commodity the same is mentioned in the contract specification of each
exchange. In most cases the price quotation base is the delivery centre. The
exchanges plan to have more than one delivery centre in future.

Mr Mittal: Are any transaction/turnover charges imposed on commodity

futures contracts, as is in the case of stocks?
Sharekhan: The FMC does not impose any transaction charges as of now but
the respective commodity exchanges do. Transaction charges are in the
range of Rs6 and Rs10 per lakh, which differs for each exchange and each
commodity.

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Mr Mittal: Do I need to pay sales tax on all trades? Is registration

mandatory?
Sharekhan: No. If the trade is squared off no sales tax is applicable. The
sales tax is applicable only in the case of a trade resulting into a delivery.
Normally it's the seller's responsibility to collect and pay the sales tax. The
sales tax is applicable at the place of delivery. Those who are willing to opt
for physical delivery need to have a sales tax registration number.

Mr Mittal: Is there any stamp duty on commodity futures?

The indicative stamp duty rates in Maharashtra are as under:

The stamp duty rate differs in each state for different commodities.

Mr Mittal: How many contracts will be available for futures trading? Will
the contracts be of three calendar months as is the case with equities?
Sharekhan: At the NCDEX three consecutive calendar month contracts will
be available for all commodities, the same as the National Stock Exchange
has for equities derivatives. For example: January, February and March 2004.
Sr. No. Commodity Stamp duty rate
1 Bullion Re 1 for every unit of 1kg of gold or part thereof
Re1 for every unit of 50kg of silver or part thereof
2 Oil seeds Re1 for every 10,000kg (100 quintal or 10MT)
of oilseed or part thereof
3 Yarn/non-mineral
oils/spices of any kind Re1 for every 10,000kg or part of thereof the value
4 Cotton Re1 for every unit of transaction of 4,500kg
or part thereof
5 All other commodities Rs20 per contract
{Article 5 (4) of the Bombay Stamp Act.}

The MCX is providing different numbers of contracts in different

commodities. For example, in gold there are six contracts in a year
(February, April, June, August, October and December); in the same way
silver also has six contracts in a year (January, March, May, July, September
and November). For some commodities there are monthly contracts while
for the others the contracts are bi-monthly.

You need to check the exact contract month for the commodity in which you
wish to trade.

Mr Mittal: What is the date of expiry for the contracts?

Sharekhan: At the NCDEX the contracts expire on the 20th day of each
month. If 20th happens to be a holiday the expiry day is the previous
working day.

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At the MCX the expiry day is the 15th of every month except for gold and
silver which expire on the fifth of every month. If the 15th or the 5th happens
to be a holiday the expiry day is the previous working day. In few cases the
expiry day is also other than these dates, to align the contract with
international exchanges.

Mr Mittal: What is the timing of the commodity derivatives market?

Sharekhan: The MCX provides trading facility from Monday to Friday. Its
market hours are from 10:00am to 5:00pm. The exchange also has a trading
session in the evening for gold, silver and a few other international
commodities. The evening session keeps changing as per international
market timings depending on the season. Currently it is 5:30pm to 11:55pm.

The NCDEX provides trading facility from Monday to Saturday. Its market
hours are from 10:00am to 5:00pm in the morning session. The evening
session of the NCDEX is from 5:30pm to 11:55pm. Trading in all expiring
contracts ceases at 5:00pm on the contract expiry date. Trading in non-
expiring contracts continues as per the stated trading hours. On Saturdays
the trading facility is available from 10:00am to 2:00pm.

Mr Mittal: A commodity has several qualities–how do I know which quality

is being traded in the futures market?
Sharekhan: The specification of each commodity is given and mentioned in
the contract. Each participant trades in that particular quality only. For
example, the exchange contract specifications could state gold of 0.995 or
0.999 fineness, silver of 0.999 fineness and rubber of RSS 4 quality. The
price quoted on the exchange terminal will be of that particular quality and
as per contract specification only.

Mr Mittal: Is delivery mandatory in commodity futures trading?

Sharekhan: No. It's not mandatory. However there is always a provision for
delivery in commodity futures trading to ensure that the futures prices are in
conformity with the underlying. The option for delivery is normally with the
seller; the buyer/seller has to express his intention for delivery as per the
rules of the exchanges. The market lot for delivery is normally higher than
the trading lot. The contracts which are not assigned for delivery can be
settled in cash as per exchange regulations. But you need to read the
contract details and settlement/delivery procedures carefully. The details
are available on our website www.sharekhan.com.

In most cases, delivery does not take place. Instead both the buyer and the
seller, acting independently of each other, usually liquidate their long and
short positions before a contract expires; the buyer sells futures and the
seller buys futures.

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Mr Mittal: How are the daily settlement prices arrived at on both the
commodity exchanges?
Sharekhan: The method of arriving at the daily closing/settlement price at
each of the exchange is as follows:

MCX

After the end of a trading session, the system calculates the closing price of
each and every contract traded on the system. The logic for calculation of the
closing price is as follows:

l Closing price is equal to weighted average price of all trades done during
last 30 minutes of a trading session.
l If the number of trades during the last 30 minutes is less than five, then it
is based on the weighted average price of the last five trades executed
during the day.
l If the number of trades done during the day is less than five, then it is
taken as the weighted average of all trades executed during the day.
l If no trades have been executed in a contract on a day, then the official
closing price of the last session is taken as the official closing price.

NCDEX
The daily settlement price, determined by the exchange at the end of every
trading day, is computed on the following basis:

l In single price auction, if the number of contracts is greater than or equal

to 15 and the number of clients is greater than or equal to five, else
l Last half an hour of futures volume weighted average price (VWAP), if the
number of contracts traded during the last half an hour is greater than 25
and the number of clients greater than five, else
l Last one hour of futures VWAP, if the number of contracts traded during
last one hour is greater than 25 and the number of clients who traded is
greater than five, else
l Theoretical futures price
The theoretical futures price is calculated as spot price*{e^(r*t)}, where r =
interest rate/Mumbai inter bank offer rate (or MIBOR) and t = time
remaining till maturity. The spot price will be the price prevailing in the
physical market as on the expiry date of the futures contract and will be
determined through a transparent mechanism of polling. The exchange at
its sole discretion can change the method of computation of the daily
settlement prices via notice/circular given out to the market participants.

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Mr Mittal: What is the due date rate? Is it different from the final settlement
rate? How is the final settlement price arrived at on the expiry date of a
contract?
Sharekhan: Let us first look at the MCX.

The due date rate with respect to a contract means the average of the closing
prices of the last five trading days of the contract maturity or the average of
last five days' closing price in the spot market (of the market/place which is
the basis of that contract), whichever is higher. The exchange shall have the
power to alter or modify such due date rate on the basis of upcountry prices,
if it is expedient to do so.

Now, the NCDEX.

The final settlement price will be determined by the exchange at the

maturity of the contract, ie the spot price on the last trading day.

Mr Mittal: What happens in case of a default?

Sharekhan: In case the commodity is of a quality superior or inferior to the
one mentioned in the contract, then there is a provision for
premium/discount at the time of delivery.

The exchanges have a penalty clause in case of any default (non-payment or

non-delivery) by any member. There is also a separate arbitration panel of
exchanges. Both the exchanges (the NCDEX and the MCX) also maintain
settlement guarantee funds.

Mr Mittal: Are any additional margin/brokerage/charges imposed in case

a client wants to take/give delivery of goods?
Sharekhan: Yes. In case of delivery, the margin during the delivery period
increases to 20-25% of the contract value. The brokerage will also be higher
in case of trades resulting in delivery. Both the parties have to incur cost on
transportation, storage, insurance, octroi, sales tax, local taxes, processing
etc.

Mr Mittal: Do these exchanges also have a commodity index? Can I trade in

a commodity index instead of trading in a specific commodity?
Sharekhan: No, as of now none of the Indian commodity exchanges have a
commodity index. But we expect these exchanges to launch some
commodity indices in future.

Mr Mittal: Can you explain to me the entire process of trading as well as the
delivery and settlement procedures at the MCX with an example?
Sharekhan: Yes, sure. Suppose you are bullish on gold and want to buy one
kilogram of gold contract at the MCX.

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l Assume that you bought one kilogram gold June contract @ Rs5,800 per
10 gram (ex-Mumbai) on May 6, 2004 by paying only the initial margin of
just 5% of the contract value (Rs29,000 in this case as the contract's
value will be Rs580,000).
l You need to pay/receive MTM profit or loss on a daily basis till the time
you square off the position.
l You can cover your position any time during the contract period to book
your profit or loss by just doing a reverse trade at the market price.
l Say on May 12, when the market trades at Rs5,900, you can reverse your
earlier transaction. You will make a profit of Rs10,000 in this case (Rs100
per 10 gram, for 1,000 gram) which will be credited to your account.
l Please note that you need to square off or roll over the position to the
next contract if you are not willing to take physical delivery of the gold on
or before May 31 (5 days before the expiry day, ie June 4 in this case).

Alternatively if you do wish to take physical delivery, the procedure is as

follows:
l On June 1 (the first day of the contract expiry month) you are supposed to
pay 25% margin of the contract value (Rs580,000*25% = Rs145,000)
per contract to carry your position during the delivery period of the
contract month.
l On June 2, as a buyer you get to intimate the exchange specifying the
quantity you wish to take the delivery. You can opt against taking
delivery and get your trade squared off automatically on the expiry day
by paying 1% penalty.
l By June 5, your remaining payment should be paid to the exchange.
Assuming that you have paid the entire MTM and delivery margin earlier,
the remaining amount of 75% of the contract value has to be paid.
l On June 7 the delivery will be completed (as June 6 happens to be a
Sunday). On that day, by submitting the warehouse receipt at the
delivery centre, you can take your gold after confirming the quality. The
exchange will release the payment to the sellers only after you confirm
that the delivery is over and subject to no arbitration.
l In all transactions resulting in delivery, transportation, tax, insurance
and warehouse charges, after the seller has given the delivery, are to be
borne by the buyer.
l The detailed settlement and delivery procedure are available on our
website www.sharekhan.com and at all our offices.
l (Please read the settlement and delivery procedures fully and note the
cost involved carefully before investing for physical delivery).

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Mr Mittal: Can you explain to me the delivery and settlement procedure at

the NCDEX with an example?
Sharekhan: The NCDEX has two contracts in silver: silver, which is of 5
kilogram trading lot, and silver mega, which is of 30 kilogram lot.
l Assuming that you are bearish on silver and sold July silver mega contract
(30 kilogram lot) by taking a sell position at Rs9,200 per kilogram on May
6, 2004 by paying the initial margin of around 8% and carrying it forward
till the expiry, your contract size will be Rs276,000 (Rs9,200*30) and the
initial margin amount will be approximately Rs22,100.
l The margin is calculated as per the SPAN system and may vary on a day-
to-day basis, depending on the price movement and volatility. At the
NCDEX the initial margin has two components: Span Margin and Gross
Exposure Margin.
l You need to receive/pay the daily MTM profit/loss as per the daily
settlement price of the silver July contract.
l You can square off your position any time on or before the last trading day
of the contract month (on the NCDEX the last day is the 20th of the
contract month).
l For example, if on July 5 silver is trading at Rs9,000 per kilogram (ex-
Delhi), you can buy back your contract and book profit of
Rs6,000/(Rs200*30) per contract. In the same way you may book your
losses if the price goes up against your view.
l If you want to give physical delivery of silver, you need to put your
intention on the last day on the trading terminal and the buyer is bound to
take the delivery as per the exchange rules.
l Please note as per the NCDEX rules the delivery option in case of silver
mega and gold kilo contract is with the seller. While in case of gold 100
gram lot and silver 5 kilogram lot the delivery takes place only if both the
buyer and seller opt for the physical delivery and it matches.
l All the trades which are not intended for delivery or are not matched are
settled in cash.
l On July 20 as a seller you have to intimate the exchange whether you are
willing to give delivery or not. If yes, then you are supposed to furnish the
electronic account number of the goods (silver, in this case) warehoused
by you, that is earlier converted into electronic account by the designated
centre as prescribed by the exchange.
l The exchange then matches your sell order with that of the buyer, who is
supposed to take delivery. On expiry, your account gets debited and the
same is credited into the buyer's account. Once the buyer takes delivery
subject to no arbitration, the exchange releases the payment to you on
T+4 basis. That is on July 24.
l Say, for example, your selling order is not matched with any buying
intention then all your orders would be settled in cash.
l As an alternative, if you want the exchange to settle your transaction in
cash, all you need to do is not to give any delivery intentions and your
orders would automatically get settled in cash on T+1 basis on July 21.
l (Please read the settlement and delivery procedures fully and note the
cost involved carefully before investing for physical delivery).

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Mr Mittal: Do I need to open a demat account for commodity trading?

Sharekhan: The procedure for delivery is different in each exchange. In case
of the MCX there is no need to have a demat account. However those who
are willing to give/take physical delivery through the NCDEX need to open a
demat account with the empanelled depository participants (DPs). You can
obtain the list of empanelled DPs from my office. The process flow for
delivery at the NCDEX is as follows:

CLIENT Open demat a/c with DP

Gets goods to the warehouse (WH), fills
in Demat Request form for demat credit.

DP Empanelled DPs in which members/

clients open demat account

NSDL Holds commodity balances in

electronic form

R&T AGENT Link between the WH and the depository

WH WH WH WH
Client seller of members Submits commodities
and Demat Request form
Accept goods for storage/
delivery. Assaying done and
information given to
Accept goods WAREHOUSE Assaying done,
NSDL via R&T
delivery norms checked

R&T AGENT Sends data to NSDL

via the R&T

Credits into the ISIN

NSDL balance in demat account
of client with DP

Mr Mittal: Are options also allowed in commodity derivatives?

Sharekhan: Trading in futures is regulated by the Forward Contracts
(Regulation) Act, 1952 of the FMC, under the Ministry of Consumer Affairs
and Public Distribution. Options in goods are presently prohibited under
Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or
person can organise or enter into or make or perform options trading in
goods. However the market expects the government to permit options
trading in commodities soon.

SHAREKHAN 25
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 DEMYSTIFYING COMMODITIES

Mr Mittal: What are the benefits of trading in commodity futures with

Sharekhan?

Sharekhan: Sharekhan provides you the facility to trade in commodities

through Sharekhan Commodities Pvt. Ltd–a wholly-owned subsidiary of its
parent SSKI. With Sharekhan you can trade on two major commodity
exchanges of the country:

(1) Multi Commodity Exchange of India Ltd, Mumbai (MCX) and

(2) National Commodity and Derivative Exchange, Mumbai (NCDEX).

To trade in commodities (bullion: gold/silver, metals and agricultural

commodities) you need to open an account with Sharekhan first. If you are
an existing Sharekhan client, you just need to sign an agreement to the
effect that you wish to begin trading in commodity futures. You can trade in
commodities with the existing client code. If you are not a Sharekhan client
yet, don't worry. Just walk into any of the numerous Sharekhan
branches/franchisees spread across the country and fill up the account
opening form, deposit the required margin and start trading in commodity
futures!

Note on margin: before starting to trade or placing an order for any

commodity, you need to have margin money in your account. The initial
margin is around 5-10% for any commodity. You also need to take care of the
daily MTM margin to avoid any adverse movement in the commodity prices.

Mr Mittal: How does Sharekhan help to trade in commodity futures?

Sharekhan: Sharekhan has launched its own commodity derivatives micro-

site. The site is available through the home page of Sharekhan's website
www.sharekhan.com.

Along with the site Sharekhan has launched several commodity derivatives
products (both research and trading) too. The products have been listed
below:

Commodities Buzz: Daily view on precious metals and agro commodities.

Commodities Beat: Summary of the day's trading activity.

Commodity Trader's Corner: Commodity trading calls; there are two types
of trading calls

RapidFire: (short-term calls–one day to five days–updated daily)

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Medium-term Plays: (medium-term calls–one month to three

months–updated weekly or in between if needed)

Sharekhan Xclusive: commodity research reports and analyses (periodical)

Commodity Scan: daily commodity market data and statistics (end-of-day)

All these products are e-mailed as newsletters to Sharekhan's registered

clients and uploaded on the commodity derivatives section of our site
www.sharekhan.com.

That is not all. You also get personalised research and a lot more trading
strategies from Sharekhan from time to time.

Mr Mittal: How do I get started? How do I open a commodity trading

account with Sharekhan? How do I contact you?

Sharekhan: Sharekhan is always near you. You can visit any of the over 220
Sharekhan outlets spread across the country; or call us on 39708090—a
single access number across India (local call charges applicable).

You may also open an account on-line by visiting our website

www.sharekhan.com; or simply write to me at [email protected]
for opening an account.

Epilogue

Today Mr Mittal is a valuable client of Sharekhan and he trades not only in

stocks but also in commodities. Yes, he opened both stock trading and
commodities trading accounts with Sharekhan soon after returning to
Ahmedabad.

Disclosure: Demystifying Commodities is only informative. The answers to

the questions may change with changes at the exchange level. Please check
with us/exchanges the details before executing any trade. Sharekhan will
not be responsible for the information used or whatsoever.

SHAREKHAN 27
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 Sharekhan

Sharekhan, India’s leading stockbroker is the retail arm of SSKI, an

organisation with over eight decades of stock market experience. With more
than 220 shareshops in 90 cities, and India’s premier portal,
www.sharekhan.com, we reach out to customers like no one
else.Sharekhan offers you trade execution facilities on the BSE and the NSE,
for cash as well as derivatives, commodities trading facilities on MCX &
NCDEX, automated IVRS-based trading facility from your telephone,
depository services and most importantly, investment advice tempered by
80 years of research and broking experience.

For details of our products and services, contact your nearest Sharekhan
outlet or call toll free 39708090.

Sharekhan branches

Bangalore - Jayanagar 080-26534862 / 63 / 64, Gandhi Nagar

080-2202339/ 43, Calicut 0495-2723787 - 89 / 2721830 / 840,
Chennai - Chetpet 044-28362800 / 3008, Chennai - Purasawalkam
044-52176004/ 5 / 7 / 8 / 9, Coimbatore 0422-2218252 / 4282 / 3434,
Erode 0424-2220111 / 2220211, Goa-Mapusa 0832-2262641 / 2263958 /
2253744, Panaji 0832 - 2426824 / 42 / 46 / 47 / 48, Hyderabad 040-5578
0666 / 55789745 / 23746378, Jodhpur 0291-2648000 / 4 / 5,
Kolkata 033-22837197 / 22805555, Kochi 0484-2368411 / 12 / 13 / 14 / 17,
Navsari 02637-572300 / 400 / 243000, New Delhi 011-51513414 - 18,
Palakkad 0491-2510922-27, Pune 020-5520002, Rajkot 0281-2482483 - 85,
Salem 0427-2315792 - 94, Surat 0261-2464600 / 2464500, Thrissur
0487-2446971 / 72 / 72 / 74, Vadodara 0265-2354791 - 93 / 5532270 - 71,
Vijaywada 0866-5529993 / 94, Mumbai Andheri 022-56750755/56/57/58,
Khar 022-26489000, Fort 022-22722781 /82, Ghatkopar 022-25028110,
Opera House 022-23805177 - 80.

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SHAREKHAN 1
 EQUITY &
DERIVATIVES COMMODITIES
TRADING TRADING
Comprehensive Commodities trading
services for equity & facilities on MCX & NCDEX
derivatives trading
on NSE & BSE

ONLINE SERVICES

DIAL-N-TRADE To suit your trading

style The Classic
Automated IVRS-based online account for
trading facility from investors. SpeedTrade
your telephone & SpeedTrade Plus for
active traders

SHAREKHAN
SIMPLIFYING
IT ALL FOR DEPOSITORY YS 1@
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SERVICES
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Demat account
facilities for
10 20

SHARE SHOPS
50 15
30 40
10 20
52 14
31 41
13.15

transparent and
Over 180 share shops in hassle-free trading
90 cities with live
terminals of NSE & BSE
for equities and
derivatives trading

RESEARCH

PORTFOLIO In-depth research,

MANAGEMENT analysis and investment
Personalized portfolio advice on stocks &
management, tracking market trends
and re-structuring
advice

Sharekhan Commodities Pvt. Ltd.

A-206, Phoenix House,
2nd Floor, Senapati Bapat Marg,
Lower Parel, Mumbai 400013, India.