MANGAL KESHAV Dhanashri Academy

MANGAL KESHAV Snapshot of Indian Commodity Market

MANGAL KESHAV Two Major Commodities Exchange in India  MCX (Multi Commodity Exchange)  NCDEX (National Commodities & Derivatives Exchange)

MANGAL KESHAV Commodities traded on the exchanges Agri Products:  Jeera  Pepper  Chilli  Turmeric  Guar Seed  Guar Gum  Soya bean  Sugar  Maize Precious Metals :  Gold  Silver  Platinum

MANGAL KESHAV Commodities traded on the exchanges Base Metals:  Copper  Nickel  Lead  Zinc  Aluminum  Tin Energy:  Crude oil  Natural Gas

MANGAL KESHAV Other Information  Exchange Timings  Agri Products: 10:00 AM To 5:00 PM  Other Commodities: 10:00 AM To 11:30 PM  Instrument Traded: Futures Contract  Expiry of Contracts : Different for different commodities

MANGAL KESHAV What are Commodity futures?  A Financial Contract  The underlying commodity is bought or sold at a future date  A tool used by Investors, Hedgers, Arbitrageurs, Day Traders

MANGAL KESHAV Why futures trading in Commodities?  Portfolio diversification and risk management  Additional investment opportunity  Low cost business  No Transportation, storage, insurance, security charges  Low Margins – High leverage  Intrinsic value of the commodity  Domain knowledge of industry  Hedging/ Arbitrage

MANGAL KESHAV Purpose of Futures Markets  Meet the needs of three groups of future market users  Those who wish to discover information about future prices of commodities (suppliers)  Those who wish to speculate (speculators)  Those who wish to transfer risk to some other party (hedgers)  Those who want to take advantage of price difference in different markets (Arbitrageurs)

MANGAL KESHAV Commodity Futures Market – Participants  Hedgers  Producers – Farmers  Consumers – Refineries, Food processing companies  Speculators  Institutional proprietary traders  Brokerage houses  Spot Commodity traders  Arbitrageurs  Brokerage houses  Investors

MANGAL KESHAV Exchange vs. Bilateral Trading ExchangeBilateral trading Common platform for all tradersRestricted access Price transparencyTraded prices unknown to other players Low transaction costsHigh cost and time consuming negotiations Absence of counter party credit risk Counter party credit risk Market prices available to wider world Difficulty in price dissemination

MANGAL KESHAV Risks encountered by industry  Price volatility depends on International market movement  Results in higher procurement cost reducing operational margins  No options or tools were available earlier  Directionless market  No control measures  Counter party Risk  Credit risk especially during periods of volatile prices  Quantity risk during shortages  Quality Risk

MANGAL KESHAV Benefits…  Investor:  Portfolio diversification and risk management  Additional investment opportunity  Physical trader :  Low cost business  No Transportation, storage, insurance, security Charges  Domain knowledge of industry  Traders:  Low Margins – High leverage  No balance-Sheet, P&L, EBITDA  Hedging/ Arbitrage

MANGAL KESHAV Hedging  Purpose  Avoid risk of adverse market movements  Rationale  Cash and Futures prices tend to move in tandem  Converge at close to expiry  Types of Hedges  Long Hedge, Short Hedge  Advantages  Lock in a price and margin in advance  Disadvantages  Limits opportunities if prices move favorably

MANGAL KESHAV Types of Hedging  Long Hedge  Hedges that involve taking a long position in futures contract  Appropriate when a company plans to owns certain asset in the future  Short Hedge  Hedges that involve taking a short position in futures contract  Appropriate when the hedger already owns the asset or likely to own the asset and expects to sell it in future

MANGAL KESHAV Short Hedge - Example  Suppose:-  COPPER producer wants to sell COPPER in future.  There is an equal chances of price going up or down.  There is a risk if price goes down. Copper Producer Stock Expecting/having stock50000 Kg (50MT) of Copper Case If price goes up by Re. 1Gain – Rs /- If price goes down by Re. 1Loss – Rs /-

MANGAL KESHAV Short Hedge- Example contd… DateSpotFuture 30 th NovRs. 280/KgsRs. 295/Kgs 30 th NovBuy/HoldSell With Hedge (You rule out a loss) 30 th DecSpotFutureNet Result Case 1 - Rs. 270/Kgs Loss Rs. 10/Kgs Profit Rs. 25/Kgs Profit Rs. 15/Kgs Case 2 - Rs. 305/Kgs Profit Rs. 25/Kgs Loss Rs. 10/Kgs Profit Rs. 15/Kgs Without Hedge Case 1 - Rs. 270/Kgs Loss Rs. 10/Kgs --Loss Rs. 10/Kgs Case 2 - Rs. 305/Kgs Profit Rs. 25/Kgs --Profit Rs. 25/Kgs

MANGAL KESHAV Long Hedge- Example  Scenario of consumer who wishes to lock input prices  There is an equal chances of price going up or down.  There is a risk if price goes up. Copper ConsumerStock Wants to buy Copper in future50,000 Kg (50 MT) of copper Case If price goes up by Re. 1Loss – Rs /- If price goes down by Re. 1Gain – Rs /-

MANGAL KESHAV Long Hedge - Example contd… DateSpotFuture 30 th NovRs. 280/KgsRs. 295/Kgs 30 th NovWait till NovBuy With Hedge (You rule out a loss) 30 th DecSpotFutureNet Result Case 1 - Rs. 270/Kgs Profit Rs. 10/Kgs Loss Rs. 25/Kgs Loss Rs.15/Kgs Case 2 - Rs. 305/Kgs Loss Rs. 25/Kgs Profit Rs. 10/Kgs Loss Rs. 15/Kgs Without Hedge Case 1 - Rs. 270/Kgs Profit Rs. 10/Kgs --Profit Rs. 10/Kgs Case 2 - Rs. 305/Kgs Loss Rs. 25/Kgs --Loss Rs. 25/Kgs

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