Study Of Commodity Markets At Karvy Comtrade Ltd. Project Report
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OBJECTIVE
OF THE PROJECT
(1) To analyze the view of commodity traders.
(2) To make understand the process of future
commodity trading in India.
(3) To know the investment pattern of
commodity traders and people.
Table of
contents
Chapters
|
Title
|
Page no.
|
1
|
Introduction
|
|
1.1 derivatives
(financial &commodity derivatives)
|
||
1.2 spot versus forward transaction
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||
1.3 limitations of the study
|
||
2
|
Company
profile
|
|
2.1 vision of karvy comtrade ltd.
|
||
2.2 products and services offered.
|
||
2.3 NSEL (national spot exchange limited)
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2.4 technical snapshot
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||
3
|
History
of commodity trading and precious metals
|
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3.1 commodity trading in india
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||
3.2 forward market commission
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||
3.3 Indian commodity future exchange
|
||
3.4 MCX platform
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||
3.5 NCDEX platform (commodities traded)
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||
4
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Instruments
available for trading
|
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4.1 forward contract
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4.2 commodity futures ( trading cycle & payoff)
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4.3 commodity options (payoff ‘s: long/short call,
long/short put)
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5
|
Trading
system
|
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5.1 futures trading system
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||
5.2 clearing and settlement
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6
|
Fundamental
and technical analysis
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6.1 fundamental analysis
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6.1.1 consumption of gold in india
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6.1.2 uses of gold
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6.2 technical analysis
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6.2.1 dow theory
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||
6.2.2 line ,bar and candlestick charts
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||
6.3 mathematical indicators (simple and exponential moving
avg.
|
||
7
|
Research
Methodology
|
|
7.1 sampling units- commodity traders and govt. servants
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||
7.2 sample size –
80 people
|
||
7.3 methods of data collection –primary and secondary
|
||
7.4 limitations –restricted to bhilai city.
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||
8
|
Data
analysis
|
|
9
|
Findings
& Recommendations
|
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10
|
Appendix
|
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10.1 Questionnaire
|
||
10.2 Bibliography
|
LIST
OF FIGURES
- Indian commodity exchanges................................................................................
- Payoff for buyer of gold …………………………………………………………………………………….
- Payoff for buyer of gold futures…………………………………………………………………………
- Payoff for seller of chilli futures………………………………………………………………………….
- Payoff for buyer of call options on gold………………………………………………………………..
- Payoff for writer of call options on gold………………………………………………………………..
- Payoff for buyer of put option on cotton ……………………………………………………………..
- Structure of trading system…………………………………………………………………………………..
- Trading screen………………………………………………………………………………………………………
- Clearing and settlement process……………………………………………………………………………
- Physical delivery process of commodities at MCX………………………………………………….
- Primary trend and secondary reactions.....................................................................
- Three Phases of bull market.....................................................................................
- Three Phases of a bear market..................................................................................
- Line chart..................................................................................................................
- Bar chart of Gold.....................................................................................................
- Japanese candlesticks of gold.............................................................................
- Candlesticks formation chart..............................................................................
- Chart showing long & short shadows…………………………………………………………………….
- Support and resistance levels of gold …………………………………………………………………….
- SMA Chart ………………………………………………………………………………………………………….
22.
EMA Chart.............................................................................................................
LIST OF
TABLES
- Commodity Futures trade in India during Jan ’12 to mar’12…………………………………….
- Total volume and value of trade during the 1st quarter 2012………………………………….
- Active contracts traded in MCX……………………………………………………………………………….
- Active contracts traded in NCDEX…………………………………………………………………………..
- Distinguish between futures and forward contract.…………………………………………........
- Gold contract specifications..........................................................................................
- 10-days highest, lowest and closing prices of gold.........................................................
- 10-days Prices of Gold (open, high, low, close) …….................................................
- 35 days high, low and close price of gold...................................................................
- Gold price Five days Simple Moving Average.............................................................
- Gold price of Five – Day EMA.....................................................................................
CHAPTER
-1 Introduction
Derivatives
– A security whose price is dependent upon or derived from one or
more underlying assets. The derivative itself is merely a contract between
two or more parties. Its value is determined by fluctuations in
the underlying asset. The most common underlying assets
include stocks, bonds, commodities, currencies, interest rates
and market indexes.
Trading on derivatives first started to protect farmers from the risk of their values against fluctuations in the price of their crop. From the time crop was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products the farmers can transfer their risk (i.e. fully or partially) by locking the price of their products. These were simple contracts developed to reduce the risk of the farmers. Let’s take an example A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price .Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty
Trading on derivatives first started to protect farmers from the risk of their values against fluctuations in the price of their crop. From the time crop was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products the farmers can transfer their risk (i.e. fully or partially) by locking the price of their products. These were simple contracts developed to reduce the risk of the farmers. Let’s take an example A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price .Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty
On the other hand, a merchant with
an ongoing requirement of grains too would face a price risk - that of having
to pay exorbitant prices during dearth, although favorable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly
made sense for the farmer and the merchant to come together and enter into a
contract whereby the price of the grain to be delivered in September could be
decided earlier. What they would then negotiate happened to be a futures-type
contract, which would enable both parties to eliminate the price risk.
In 1848, the Chicago Board of
Trade (CBOT) was established to bring farmers and merchants together. A group
of traders got together and created the `to-arrive' contract that permitted
farmers to lock in to price upfront and deliver the grain later. Today,
derivative contracts exist on a variety of commodities such as corn, pepper,
cotton, wheat, silver, etc. Besides commodities, derivatives contracts also
exist on a lot of financial underlying like stocks, interest rate, exchange
rate, etc.
Due to the high
volatility in Financial Market with high risk & low rate of return had made
investors to choose alternate investments such as Bullion market in Commodity
market. In India gold has traditionally played a multi-faceted role. Apart from
being used for ornamental purpose, it has also served as an asset of the last
resort and a hedge against inflation and currency depreciation. But most
importantly, it has most often been treated as an investment.
Many people have become very rich in commodity
markets. It is one of the areas where people can make extraordinary profits within
a short span of time. For example, Richard Dennis borrowed $1600 and turned it
into a $200 million fortune in about ten years.
The Forwards Contracts (Regulation) Act, 1952,
regulates the forward/ futures contracts in commodities all over India. However
when derivatives trading in securities was introduced in 2001, the term
security in the Securities Contracts Regulation Act, 1956 (SCRA), was amended
to include derivative contracts in securities.
Products and participants:
Derivative
contracts are of different types. The most common ones are forwards, futures,
options and swaps. Participants who trade in the derivatives market can be
classified as:-
1. Hedgers:
Hedgers face risk associated with the price of an asset. They use the futures
or options markets to reduce or eliminate this risk.
2. Speculators:
Speculators are participants who wish to bet on future movements in the price
of an asset. Futures and options contracts can give them leverage; that is, by
putting in small amounts of money upfront, they can take large positions on the
market. As a result of this leveraged speculative position, they increase the
potential for large gains as well as large losses.
3. Arbitragers:
Arbitragers work at making profits by taking advantage of discrepancy between
prices of the same product across different markets. If, for example, they see
the futures price of an asset getting out of line with the cash price, they
would take offsetting positions in the two markets to lock in the profit.
4. Day
traders: They hold in futures position for a few hours , but never longer
than one trading session .thus they open and close to futures within the same
trading day(intraday). Most often they attempt to profit from scheduled
announcements related to money supply, trade deficit etc.
5.
Delivery based-Delivery
based trading means buying shares and holding them for certain period of time
is called delivery based trading. The shares you bought will be in your demat
account. Once you take delivery of shares you can hold them as
long as you want. To take delivery of shares, you must have sufficient funds in
your account. You don’t get any margin to buy shares in delivery.
6. Square off- It
means to settle the position, if you square off a trade it means you have no
position at the end of the day- only Profit or Loss.
Financial derivative & Commodity derivatives
The
basic concept of a derivative contract remains the same whether the underlying
happens to be a commodity or a financial asset. In the case of financial derivatives, most of these
contracts are cash settled. Since financial assets are not bulky, they do not
need special facility for storage even in case of physical settlement. On the
other hand, due to the bulky nature of the underlying assets, physical
settlement in commodity derivatives
creates the need for warehousing. Similarly, the concept of varying quality of
asset does not really exist as far as financial underlying are concerned.
However, in the case of commodities, the quality of the asset underlying a
contract can vary largely. This becomes an important issue to be managed.
Spot versus forward transaction:
Let us try to understand the
difference between spot and derivatives contract. Every transaction has three
components like trading, clearing and settlement. A buyer and seller come
together, negotiate and arrive at a price this is trading. Clearing involves
finding out the net outstanding, that is exactly how much of goods and money
the two should exchange.
For example
‘A’ buys goods worth Rs.1000 from ‘B’ and sells goods worth Rs.400 to ‘B’. On a
net basis ‘A’ has to pay Rs.600 to ‘B’. Settlement is the actual process of
exchanging money and goods.
In a spot transaction, the trading,
clearing and settlement happens immediately, i.e. on the spot. For example on
1March 2009, Suman wants to buy some gold. The goldsmith quotes Rs.15000 per 10
grams. They agree upon this price and Suman buys 20grams of gold. He pays
Rs.30000 to the goldsmith and collects his gold. This is a spot transaction.
Now suppose Suman does not want to
buy the gold on the 1 March, but wants to buy it a month later. Then the
goldsmith quotes Rs.15050 per 10 grams. They agree upon the forward price for
20 grams of gold that Suman wants to buy and Suman leaves. A month later, he
pays the goldsmith Rs.30100 and collects his gold. This is a forward contract,
a contract by which two parties permanently agree to settle a trade at a future
date, for a stated price and quantity. No money changes hands when the contract
is signed. The exchange of money and the underlying goods only happens at the
future date as specified in the contract. In a forward contract the process of
trading, clearing and settlement does not happen immediately. The trading
happens today, but the clearing and settlement happens at the end of the
specified period.
A forward is the most basic
derivative contract. We call it a derivative because it derives value from the
price of the asset underlying the contract, in this case gold.
If on the 1st of April, gold trades
for Rs.15100 in the spot market, the contract becomes more valuable to Suman
because it now enables him to buy gold at Rs.15050. If however, the price of
gold drops down to Rs.15000, he is worse off because as per the terms of the
contract, he is bound to pay Rs.15050 for the same gold. The contract has now
lost value from Suman’s point of view. “Note that the value of the forward
contract to the goldsmith varies exactly in an opposite manner to its value for
Suman”.
Limitations of the
Study:
(1) The suggestion is based on the
study on Fundamental and Technical
Analysis such as price movement, Relationship of gold with other
factors, averages of gold prices .
(2)
This analysis will be holding good for a limited time period that is
based on present scenario and study conducted, future movement on gold price
may or may not be similar.
CHAPTER-2
Company Profile
2.1Vision of karvy comtrade limited -
Overview-
An ISO 9001:2008 certified company,
Karvy Comtrade Limited (KCTL) is India’s leading commodities brokerage house.
We have membership of Multi Commodity Exchange of India (MCX), National
Commodity and Derivatives Exchange (NCDEX), National Multi-Commodity Exchange
of India (NMCE), National Spot Exchange (NSEL), NCDEX Spot Exchange (NSPOT),
Ace Commodity Exchange (ACE) and Indian Commodity Exchange (ICEX).
Using a superior trading platform,
we facilitate futures trading in commodities as per the exchanges. KCTL offers
both trading and exclusive research services to its clients. A subsidiary of
Karvy Stock Broking Limited (KSBL), KCTL commenced operations in early 2005.
At KCTL, we offer a wide reach
through our network of around 900 offices located across 400 cities in India.
That makes us among the top-3 players in
the country, both in terms of number of terminals as well as clients. We
have a formidable and well-established research wing, which helps our clients
to make informed decisions. Our commodities research division has won multiple
accolades and awards in recent years, making it one of India’s best-known
research houses among media, experts and market participants alike.
Apart from offering benefits of
price discovery and risk management, we also provide our huge investor and
trader base an opportunity to diversify their portfolios through commodities as
an asset class.
Awards-
Karvy comtrade has won the Bloomberg
UTV Financial Leadership Award 2011 for the ‘Broker with best corporate desk
for commodity broking of the year.
India’s best Market analysts award
for 2 consecutive years by Zee Business.
Company information
Management
Vice President and country head – Sushil Sinha
Operations Head-
Suresh Raval
Accounts & Finance head – Vinay Joshi
Research head-
Aurobiinda Prasad Gayan
Registered Office
Karvy Comtrade Limited
46, Avenue 4, Street No. 1
Banjara Hills
Hyderabad – 500 034
Andhra Pradesh, India
46, Avenue 4, Street No. 1
Banjara Hills
Hyderabad – 500 034
Andhra Pradesh, India
2.2 Products and services
offered-
SMART TRADE-
it is an effective way to access so far untapped markets through growing
internet awareness and usage.
The key features and benefits of
smart trade are:-
- An efficient and easy interface (ODIN Diet)
- Trade from anywhere ,access live markets on your mobile this is fully customizable
- Intraday research recommendations available from a professional and dedicated team of analysts.
- Online Back office, ledger balance, MTM and obligations sms facilities.
NSEL (Electronic spot market)-
National Spot Exchange Limited
(NSEL), which provides delivery-based spot trading of 30 commodities, has
introduced e-Series commodity products for the first time in India. Retail
investors can now trade and invest in commodities like they do in equities.
This is a unique market segment that functions just like the cash segment in
equities, but offers commodities like gold, silver and copper in demat form in
smaller denominations. Systematic investments in e-Series products promote
savings in a secure manner, offering ease of transaction and flexibility of
trade timings.
The commodities available in the
e-Series are e-Gold, e-Silver, e-Copper, e-Zinc and e-Lead.
Other Services at karvy -
Retail Services-
·
Equities and Derivatives
·
Mutual fund services
·
Depository services
·
Insurance Broking services
·
Portfolio management services
·
Currency Derivatives
Institutional Services-
·
Registrar and transfer agency
·
Investment banking
·
Corporate finance
·
Institutional broking
·
Institutional Equity
·
Debt market services
·
BPO and KPO services.
Wealth management-
·
Private wealth