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Price Risk Management of Cotton using Exchange Futures

Price Risk Management of Cotton using Exchange Futures. Commodity, futures, contract?. “ Commodity” is a product having commercial value and which can be produced,bought, sold and consumed “Futures” are standardized forward contracts traded on regulated exchanges.

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Price Risk Management of Cotton using Exchange Futures

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  1. Price Risk Management of Cotton using Exchange Futures

  2. Commodity, futures, contract? “Commodity” is a product having commercial value and which can be produced,bought, sold and consumed “Futures” are standardized forward contracts traded on regulated exchanges. “Futures contract” is a contractual agreement between two parties to buy or sell an asset of a specified quantity and quality at a specific time in future at a specific price through the Exchange • The “main functions” of an Exchange traded futures contract are – Ø Trade Guarantee Ø Risk Management Ø Price Discovery Ø Transactional Efficiency Ø Liquidity

  3. Cotton Contracts (Important Features):

  4. Trading..

  5. ICE-MCX Price Correlation (Year wise)

  6. Cotton snapshot • App Indian market size : Rs. 60,000 Crores • Annualized price volatility in 2015: 17% • Exposure to price risk: More than Rs. 10,000 Crores • Since launch MCX has witnessed trading about 10 crore bales • Highest single day volume : 5,56,000 bales • More than 6 lac bales are delivered through MCX since launch • Market share almost 100% • More than 90% correlation with ICE prices • Contract specifications covers more than 75% of cotton grown in India • Minimum impact cost due to high liquidity

  7. MCX Cotton 2015 Onwards Volume & Open Interest

  8. Who are all...? Producers: to sell Consumers: to buy Traders : to buy or sell Arbitragers : to exploit the differences between markets Speculators/Investors gain or loose from the preconceived desirous price movement

  9. And you are … ? to transfer / manage /mitigate the undesired price risk Ginners – by selling Yarn mills/ spinning mills – by buying / selling

  10. To put it simple … Stocks in hand – risk of price falling Sell NOW in exchange Stocks required for future – risk of price rising Buy NOW in exchange

  11. Why this works…? • Future price = spot price + carrying cost • Future and spot prices move in tandem But in past it was different..!!!! Future price < spot price

  12. Let us get into reality.. # price Rs / candy source :SIMA

  13. Spot and futures.. Last 4months Spot (sankar 6) price (rs/candy) – source – SIMA -CBE

  14. You bought stock on Apr 15th for future ( July ) consumption.. (worried of price going down) In MCX.. 1.On 15th April – sell MCX @ 36470 2. On 15th July – buy MCX @ 47171 You are in loss of Rs 10701 (47171 – 36470) In your business … 1. On 15th Feb – bought @34100 2. On 15th Apr – consumed @ 48000 You are in a Profit of Rs.13900 (48000– 34100) NET Profit Rs.3199 (13900-10701)

  15. You want to buy on Apr29th for Jul29th consumption …. ( worried of price going up ) In MCX.. 1.On Apr 29th – buy MCX may @ 37285 2. On July 29th – sell MCX may @ 47004 You are in Profit of Rs.9719 (47004-37285) In your business … 1. On Apr 29th – price @34700 2. On July 29th – procured @ 46600 You are in a loss of (34700-46600) Rs.11900 at business The Net Loss of Rs.2181 (9719-11900) against the price rise

  16. Then delivery…??? • Don’t need hedging.. need only physical stock … • how do I do…? • Take at the price you bought for the future date (no matter price goes up / down!!!) • And you get at Rajkot (Base), Kadi, Mundra (Gujarat), Yavatmal, Jalna, Jalgaon (Maharashtra), Sirsa (Haryana), Raichur (Karnataka) and Adilabad (Telugana)

  17. Delivery Process Yamada/Origo DEPOSITOR WH Moisture Testing at WH Samples Drawn (5 Bales) Staking LAB (WAKEFIELD) Lab Testing (5 Samples) Goods Deposited WH Receipts Issued EXCHANGE ACCREDITED WH

  18. DELIVERY CENTERS WITH LOCATION DISCOUNT Sirsa (-250) Kadi (- 50) Mundra Rajkot (Basis) Yavatmal (- 200) Jalna/Jalgaon (- 150) Adilabad(-200) Raichur (- 200)

  19. Oh..quality..premium discount? STAPLELENGTH MICRONAIRE Below 28 mm = Rejected Below 28.50 to 28.0 = Discount of 2% 28.5 to 29.0 = No Premium/ Discount Above 29.0 to 30.0 = Premium 1% Above 30 mm = Premium 2% Below 3.5 = Rejected Below 3.6 and up to 3.5 = Discount of 0.3% 3.6 to 4.8 = No Premium/ Discount Above 4.8 and upto 4.90 = Discount of 0.3% Above 4.9 = Rejected TRASH ` COLOR GRADE Below 3.5% and up to 2% = Premium Of 1:0.5 Basis = 3.5% Up to 5% = Discount 1:1 Above 5% = Rejected Up to 31-3=No premium/discount 41-3 = Discount 5% 42-3=Discount 6% MOISTURE Basis = 8.5% Up to 9.5% = 1:1 Discount Above 9.5% = Rejected STRENGTH Minimum 28 GTex

  20. MCX Transaction Charge

  21. Cost of Delivery ( Indicative)

  22. DEPTH MEASURES • Trading volumes • Increased Liquidity in • mid-months • Number of participants • Impact cost Key liquidity dimensions

  23. MONTH-WISE DELIVERY & STOCKS

  24. What is in it for me…? • Margin money (5%) • Volumes • Assured quality • Assured delivery • Brokers at your next door KOTAK –CBE.

  25. Thank You All views expressed in this presentation are based on the personal opinion of the author, looking at historical data, past trends and own understanding of market, and are not to be construed as an assurance or guarantee of any kind of return or profit. Market participants are expected to conduct all due diligence on their own before trading. The author or sender or presenter of this presentation shall not be liable for any trading loss incurred, under any circumstances, whatsoever.

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