Investment FAQs – Commodities

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

www.ncdex.com
A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

C. National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

www.nmce.com
It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).

D. National Spot Exchange Limited (NSEL)

National Spot Exchange Ltd (NSEL) is a state-of-the-art electronic, demutualised commodity spot market. The Exchange is promoted by Financial Technologies (India) Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). It provides an electronic, transparent, well organized and centralized trading platform with the facility to access and participate in the market remotely.

A. Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity. Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.

B. Hedging: It provides a platform for producers to hedge their positions according to their exposure in physical commodity.

C. No Insider Trading: Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.

D. Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.

E. Trade on Low Margin: Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.

F. Seasonality Patterns: Quite often provide clue to both short and long term players.

G. No Counter party Risk: Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.

H. Wide Participation: The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market. It would also ensure bringing the market closer to both, the user and the trader.

I. Evolved Pricing: The rise in participation would decrease the risk of cartelisation, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.

a. Investors.

b. Producers / Farmers.

c. Importers / Exporters.

d. Commodity financers.

e. Agricultural credit providing agencies.

f. Hedgers, speculators, arbitrageurs.

g. Large scale consumers. For e.g. refiners, jewelers, textile mills

h. Corporate having risk exposure in commodities.

The exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the futures and spot prices coincide during the settlement so that the fair price discovery mechanism is in place.

A. Speculators

When a person buys or sells the commodity by just predicting the market movement in future, he becomes the Speculator. The price may or may not go up.

B. Hedgers

Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by the cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.

C. Arbitragers

• Arbitraging is primarily done in two different ways to make profit from the futures market.Purchase and sale goods in two different markets so that the selling price is higher than the buying price by more than the transaction cost, thus enabling a person to make risk-less profits, OR

• Purchase and sale in the Spot market and sale and purchase in the futures markets, so that the selling price is higher than the buying price by more than the transaction cost & the interest cost, again resulting in risk-less profits.