Commodity Exchange

1. Commodity Exchange AnitChandran(08) Geostany Jose(29)

2. Commodity Exchange The exchanges where raw or finished products are traded. 1848-first commodity exchange CBOT 1882-New York Mercantile Exchange August 3, 1994,NYMEX and the Commodity Exchange, merged to become the world's largest physical commodity futures exchange

4. TraditionalCommodity market VS Derivative market producers B S S B Clearing house CLEARINGHOUSE S Traders and warehouse B S B Exporters & USERS

6. Trading methods 1.) spot trading -where the delivery takes place immediately or in minimum time 2.) forward contract -where the buyer and seller agree to a price for a commodity, which is to be delivered at a mutually agreed date and quantity 3.)futures contract - conditions same as forward contract but transactions are through futures exchange 4.) option contract -option holder has the right, but not the obligation to buy (or sell) the quantity

7. Major commodity exchanges • New York Mercantile Exchange(NYMEX)-Crude Oil, Heating Oil • Chicago Board of Trade -Soy Oil, Soy Beans, Corn • London Metals Exchange -Al, Copper, Tin, Lead • Tokyo Commodity Exchange -Silver, Gold, Crude oil, Rubber • Malaysian Derivatives Exchange -Rubber, Soy Oil, Palm Oil

8. WHY COMMODITIES SHOULD BE IN YOUR PORTFOLIO?

9. For an investor • Diversification • Less Manipulations • High Leverage

10. Large scale buyer • Cost control • Ensured supply • Effective use of discounts on lot sizes

11. Large scale producer • Fixed price on future out puts • Demand is assured • Storing can be planned

12. How the price changes? • Supply & Demand • Stockpile decisions • Rumors and anticipation • Seasonal

13. Why regulation? • Risk on quality • As a backing for insurance • political interest • To check improper marketing Commodity futures trading commission-USA Forward Market Commission -INDIA

14. INDIAN SCENARIO Ministry of Food, Agriculture and Public Distribution Forward Market Commission MCX NCDEX NMCE regional exchanges • Multi-Commodity Exchange of India Ltd, Mumbai (MCX). • National Commodity and Derivatives Exchange of India, Mumbai (NCDEX). • National Multi Commodity Exchange, Ahmadabad (NMCE).

15. Recent news from India • India Ends Turnover Tax to Foster $1 Trillion Commodity Market • Turnover on India’s MCX-3rd biggest bullion bourse, and its local rivals may jump from1.08 T to $ 1.28T. • Overseas funds and institutions are barred from trading commodity futures in India-this rule is under discussion.

18. INDIA’S PLACE IN COMMODITY MARKET

20. COMMODITY ECOSYSTEM

21. COMMODITY MARKET STRUCTURE

22. Future Market Analysis A futures contract • is a standardized contract, • to buy or sell • a specified commodity of standardized quality • at a certain date in the future, • at a market determined price-known as futures price.

23. Factors of Commodities Market • Spot Price- It is a present delivery price of a given commodity being traded on the spot market. • Future Prices: - The price at which the two participants in a futures contract agree to transact at on the settlement date • Cost of Carrying: - The difference between future prices and spot prices is called cost of carrying or carrying cost. Carrying costs include interest, insurance, storage, transaction cost etc. • Volume: - It is the quantity traded of a commodity

24. Contd….. 5. Open Interest: -It is the total number of outstanding contracts that are held by market participants at the end of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised. Market Parameters

25. Option • An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date

26. Types of Options • Call Option: -A call gives the holder the right to buy an asset at a certain price within a specific period of time.  • Put Option:-A put gives the holder the right to sell an asset at a certain price within a specific period of time.

27. Terminologies • Strike Price: - The price at which a specific derivative contract can be exercised is called strike price. • Premium: - The option premium is the price the buyer of the options contract pays for the right to buy or sell a security at a specified price in the future.

28. Contd…. • Expiration: - The day on which an options or futures contract is no longer valid and, therefore, ceases to exist. • Naked Position: - A securities position that is not hedged from market risk. • Open Position: - Any position that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.

30. Chain of events NOVEMBER, 1991: U.S. broker David Threlkeld informs the London Metals Exchange that Sumitomo's YasuoHamanaka asked him for a confirmation on $425 million in fake trades. The LME claims it found nothing wrong within its jurisdiction. SEPTEMBER, 1993: A copper "squeeze" develops: Despite plentiful supplies, spot prices are higher than the three-month futures price. The LME fingers Hamanaka; he denies manipulation. OCTOBER, 1995: Pricing anomalies again appear and rumors circulate that Hamanaka has locked up a large chunk of the supply. The Commodity Futures Trading Commission begins investigating. NOVEMBER, 1995: Patrick Thompson, head of the New York Mercantile Exchange, warns that copper in the LME's Long Beach (Calif.) warehouse is piling up "and may be part of a squeeze or other market misconduct." The LME starts investigating Hamanaka.

31. APRIL, 1996: CFTC authorities inform Sumitomo that they have uncovered irregularities in the company's trading accounts. $1,860 a metric ton, down from $2,145 MAY 17, 1996: Sumitomo pulls Hamanaka back from his position as top copper trader and confirms the move after traders hear of it. JUNE 13: Sumitomo announces losses of $1.8 billion. 1998 –CFTC fined SUMITOMO corp. 150M$

32. Bibliography • Nymex.com • Investorguide.com • International Research Journal of Finance and Economics • MCX Website • Investopedia