MCX IPF PRESENTATION

1. MCX IPF PRESENTATION COTTON PRICE RISK MANAGEMENT

2. Type Of Commodity Market There are different type of Commodity Market: • Spot Market: bought & sold for cash and the delivery takes place immediately. Physical contracts for cotton are not standardized and specific to each transaction (volume, quality, location, etc). 2) Forward Market: The trading takes place directly between the buyer & seller. Terms such as Qty, Quality, Delivery date and price and negotiated between buyer & Seller (two person only). 3) Futures Trading: Future trading in commodities results in transparent and fair price discovery due to the large scale participation from all entities associated with the value chains involved. Future market/ financial markets have uniformed standard contracts: 1) Delivery location/place, 2) Delivery procedures, 3) Quantity (Lot size), 4) Quality (like length, mic, moisture, trash, grade) and 6) Price etc Did you Know? The first organized futures market – Bombay Cotton Trade Association was started in 1875. Trading in certain commodities was stopped in 1960’s and 1970’s and resumed only in 2002-03.

3. What is Commodity Exchange What is Commodity Exchange ? • In simple terms, a commodity exchange is a market place where different commodities are traded. • Commodities are traded in standardized contracts of different maturities call futures contract • It is regulated by SEBI • Exchange has no role in pricing of contracts • Buyers and sellers determine the price. • In future markets, one trader’s gain is another’s loss (Zero Sum Game) • What is the need of Commodity Futures Exchange ? • A future exchange provides future price signals . • In the absence of price signals, one has access only to current prices. a) he can not plan for the future and b) policy makers would not be able to prepare for future plan. • Price Discovery • Price Risk Management/Hedging.

4. present commodity exchange ECOSYSTEM VAULTS CCRL COMMODITY DERIVATIVES EXCHANGE

5. Active Commodities on national Exchanges & Commodities traded at MCX * Agri includes Cereals, Pulses, Oilseeds, Oil cakes, Spices, Fibres, Sweeteners, Plantation, Dry fruits & other non-farmer linked agri commodities Commodities traded at MCX , Chana

6. MCX in Indian Market EXTENSIVE REACH ( As on March 31, 2018) 668 Members 52,497 Authorized Persons 1,211 cities / towns across India Market share of 89.58 % MCX: MARKET SHARE IN KEY SEGMENTS FOR FY17-18 AVERAGE DAILY VOLUME – Single Side (INR Crore)* * Option trading in gold contracts commenced on 17th October, 2017

7. Price Risk Management (Hedging) Price risk management is very important and essential for market participants, such as farmers, ginners, traders, exporters, spinners and textile companies etc. • The importance of risk management cannot be overstated; an expert committee set up by Government of India found that commodity derivative exchanges are efficiently fulfilling their functions of price discovery and price risk management. The Concept of Hedging: • Hedging is the process of reducing or controlling risk. It involves, taking equal and opposite positions in two different markets (such as physical and futures market), with the objective of minimising or reducing risks associated with price changes. • It is a two step process, where a gain or loss in the physical position due to changes in price will be offset by changes in the value on the futures platform, thereby reducing or limiting risks associated with unpredictable changes in price. • Reducing risk may not always improve earnings, but failure to manage risk will have direct repercussion on the risk bearers long term income. • Finally, the purpose of HEDGING is to REDUCE price uncertainty and the impact of adverse Cotton price movements. It can enhance credit worthiness, ability to borrow and improve stability in profits.

8. Hedging Illustration ( Falling Prices) Scenario 1: Assume a ginner is holding stocks of 1000 bales of cotton (29mm) in February. By hedging, he can lock in the price for his stock in February itself and protect himself against the possibility of falling prices. The spot price of cotton today is Rs 19,000/bale and the price of April 2019 futures contract is Rs 19500 a bale. The ginner sells (short) 40 lots of April 2019 contract in February (today) at Rs20,000 for a delivery in April 2019. He deposits and pays only 5% of the contract value as initial margin to the exchange for entering a position in the futures market. Assume the prices fall in April Rs 500 a bale. The ginner sells his stock in physical market @ Rs20,000 a bale and takes an opposite position in the futures market, by buying 40 lots of April 2019 futures contract at Rs20,500 a bale (square off).

9. Hedging Illustration ( Rising Prices) Hedging Strategy for Buyers (Exporters, Spinners, Traders): Buyers can buy their requirement of the years in a futures contract by paying a margin of only 5% and lock their prices for the entire year. They can keep on procuring cotton in the physical market round the year and square off the corresponding position in futures. Thus, even if the cotton prices goes up, they don’t incur any loss, because the profit from furfures market offsets their increased cost of procurement. Example: Suppose that today (in the month of February), an exporter receives an order to export 1000 bales of cotton in April. He is planning to buy cotton from spot market and export it in April. Assume, today’s spot prices is Rs20,000 a bale and April contract trading at 21,000 and he is worried that prices would rise by April. By hedging, he can lock in the purchase price in February itself (today), and protect himself from rise in prices in the spot market. He can exit before expiry of the contract (square off). Exporter buy from the physical market @ Rs. 21,000 a bale (loss of Rs 1000/bale) and sell (short) 40 lots of April 2019 contract at Rs. 22,000 a bale (gains Rs 1000/bale).

10. Impact of Commodity Futures - Synopsis of Evaluation Studies

11. COTTON VALUE CHAIN, participation reach & MCX Cotton Snapshot Fund based Arbitragers (Cash & Carry)

12. Price Volatility, Correlation with international market & spot-futures convergence Efficient price discovery depends on Exchange mechanism for spot-futures price convergence through physical delivery mechanism

13. MCX Cotton Month Wise Volume and Interest

14. 29 MM Cotton Contract Specification

15. Calculation (Indicative) for Farmers / Traders *Assumption (Outturn=34%, Seed = 64%, Wastage=2%)

16. Delivery Procedures WSPs (Yamada, Origo, Navjyoti Logistic and Shubham Logistic) Moisture Testing Weight Measurement Cotton Delivery Delivery Location Samples Drawn (5 Bales) STACKING LAB (WAKEFIELD) Lab Testing (5 Samples) Goods Deposited Exchange Accredited WH WH Receipts Issued

17. Month-Wise Delivery & Stocks

18. CCRL (CDSL Commodity Repository Ltd.) WSP/ Vaults Issue Electronic WR & Confirm withdrawal / revalidation / stock confirmation for pledge Financial Institution CCL Creating masters, Entities, Clearing & Settlement activities In Progress Receipt Pledging CCRL Assayer Client (Seller) Initiate request for deposits, Revalidate, withdraw, transfer, Pay In Sampling & Testing / Grading activities Pledger Client (Buyer) Pledge / un-pledge, invoke activities Accept / Cancel Transfer Requests 18

19. HOW CAN YOU PARTICIPATE ON MCX • Choose the Member Broker • Fulfill KYC at Broker level • Arrange for minimum initial margin requirement • Update yourself on Mark-to-Margin requirements • Know MCX regulations and byelaws • Select the commodity/ product to trade • Read the Dos and Don’ts • Know and distinguish among: • Brokerage and Transaction Charges • Margins, Taxation and Stamp Duty • Default Penalties and Arbitration

20. THANKYOU MultiCommodityExchangeofIndiaLtd. ExchangeSquare,SurenRoad, Chakala,AndheriEast, Mumbai-400093 Ph. – 022 67318888 • The Contents do not constitute professional advice or provision of any kind of services and should not be relied upon as such. MCX does not make any recommendation and assumes no responsibility towards any investments / trading in commodities or commodity futures done based on the information given in the website and any such investment / trade are subject to investment / commercial risks for which MCX shall not be responsible. If financial, investment or any other professional advice is required, please seek advice of competent professionals.