1.
Introduction to the Study:
Commodities Market: A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. A market where commodities are traded is referred to as a commodity market. These commodities include bullion (gold, silver), non-ferrous (base) metals (copper, zinc, nickel, lead, aluminum, tin), energy (crude oil, natural gas), agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, etc. Existence of a vibrant, active, liquid, and transparent commodity market is normally considered as a sign of development of an economy. It is therefore important to have active commodity markets functioning in a country. Gold is one of the precious metal and preferred commodity for investment apart from investment it have industrial application and also used for medical applications. Today there are 165,000 metric tonnes of stocks in existence above ground. Out of which around 60% of todays gold becomes jewellery, where India and China with their expanding economic power are at the forefront of consumption. In East Asia, India and the Middle East, gold has powerful cultural meaning, accounting for approximately 70% of the worlds gold jewellery in 2009. But jewellery creates just one source of demand; investment, central bank reserves and the technology sector are all significant. A significant portion of investment demand is transacted in the over-thecounter market, therefore not easily measurable. However, theres no doubt that investment demand in gold has increased considerably in recent years. Since 2003, investment has represented the strongest source of growth in demand. The last five years to the end of 2009 saw an increase in value terms of around 119%. In 2009 alone, investment attracted net inflows of approximately US$41bn. Numerous factors motivate people and institutions to seek gold investments. The positive price outlook is underpinned by expectations that growth in demand will continue to outstrip that of supply. Of the key drivers behind investor demand, one common thread emerges: all are rooted in gold's abilities to insure against instability and protect against risk. Gold investment can take many forms. Some investors choose to combine two or more of these different forms for flexibility.
The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear. This is especially true since it is possible to invest in bullion without actually taking physical delivery. The growth in investment demand has sparked numerous innovations in gold investment, ranging from online bullion sales to gold ETFs. There are now a wide variety of investment products to suit both the private and institutional investor. India known for its culture and gold is a important part of Indian culture but as due to Globalization and leverage on technology has changed the scenario in country now Gold is not only used for jwellary purpose but also as investment option. Tradionally investor use to buy gold in physical form. But technology is known for change in society and it did with Gold investment also when the first Gold Exchange traded fund launched by Benchmark asset Management Company on NSE. Now Gold ETF is more preferable mode of investment then physical form of gold, mainly there are 6 Gold ETF are listed on NSE. The price of Gold in market is mainly determined London Metal Exchange based on demand supply pattern and macroeconomic factors and it is acceptable by all other market in the World. Objective of Study To find out relation between Nifty index movement and return on Gold ETF. To find out relation between USD fluctuation and Gold Prices.
2. Industry Profile:
Industry Profile: The financial sector in India includes services like broking firms, investment services, financial consulting, national banks, private banks, mutual funds, car and home loans, equity
market and other banking services. Financial services have grown immensely in the last few years. Finding India as a promising market, foreign institutional investors (FIIs) have purchased stocks and debt securities worth US$ 223.26 billion in the fiscal 2010-11, according to the latest available data with Securities and Exchange Board of India (SEBI). Average assets under management (AUM) of the Indian mutual fund industry stood at 7,036.7 billion (US$ 158.26 billion) during January to March 2011, according to the Association of Mutual Funds in India (AMFI). India continues to be a very attractive destination for PE investments, locally and from abroad. Pent-up demand is poised to help propel 2011 past 2010 as an investment year, said Sri Rajan, Managing Director of Bain in India. As the economy grows, investors view banking and financial services, healthcare and consumer products as the most attractive sectors. Infrastructure and energy are also expected to see a strong influx of investment, with nearly 40 per cent of all PE investments in India targeting infrastructure projects, according to the report. Investment Scenario Foreign investors see huge long-term growth possibilities that India presents according to Ernst & Youngs 2011 Indian Attractiveness Survey. The growing corporate interest in India is explained not only by the countrys economic growth potential, but also by perceptions about how the country will change as its GDP grows over the next decade. Seventy-five percent of the global businesses already present in India, and which formed part of the survey, indicated that they would expand their operations. The survey confirms that India is undergoing a transition, both in terms of investor perceptions of its market potential, and in reality. With economic growth GDP projected to surpass 8 per cent annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding
impact on disposable income, domestic demand is expected to grow exponentially. Indias young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI, said Rajiv Memani, Country Managing Partner at Ernst & Young India. Stock markets The share of Indian equities in global market is increasing. Market capitalization of India as a proportion of world market cap has risen to a record high. The country's market capitalization as a proportion of the world market cap was 3.34 per cent as on September 22, 2010. India's market-cap as on September 22, 2010 was US$ 1.55 trillion as compared with world market-cap of US$ 46.5 trillion. This was higher than the 3.12 per cent share India enjoyed at the market peak of January 2008. India has a flourishing insurance industry, with several national and international players competing and growing at rapid rates. The insurance industry is expected to continue to outpace the rapid economic growth to reach US$ 350-400 billion in premium income by 2020, making India amongst the top three life insurance markets and top 15 non-life insurance markets by the year, according to an industry report titled India Insurance Turning 10, Going on 20. The report stated that the total penetration of insurance (premium as percentage of GDP) has increased from 2.3 per cent in 2001 to 5.2 per cent in 2011. Apart from this, there has been a vast increase in the coverage of insurance. The report added that the number of life policies in force has increased nearly 12 fold over the past decade and health insurance, nearly 25 times. The total premium of the general insurance industry has seen a growth of 22 per cent to US$ 9.58 billion in 2010-11. The total premiums of 23 life insurance companies have gone up by 15 per cent to US$ 28.3 billion in 2010-11. The US$ 41 billion Indian life insurance industry is considered the fifth largest life insurance market, and is growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance Council.
Total premium collected by the life insurance industry increased 13 per cent to US$ 41.05 billion in calendar year 2010 from US$ 36.23 billion in 2009, according to the data released by Life Insurance Council, the apex industry body of all life insurance companies in India. The new business premium of life companies grew by 28 per cent year-on-year (yoy) to US$ 19.14 billion till December 31 2010 as compared to US$ 15 billion in 2009. The growth comes in the backdrop of significant regulatory changes made in product profile of ULIPs (unitlinked insurance products) in 2010, which was also a year in which a few private life insurers completed a decade of their existence, the Life Insurance Council said in a statement. Key Highlights
Indian retail investors are betting big on Exchange Traded Funds (ETFs). The category emerged as an outperformer during financial year 2010-11, even as the mutual fund sector witnessed erosion of assets in other categories.
Edelweiss Tokio Life Insurance Company Limited, a joint venture between the Edelweiss Group, Indias leading diversified financial services conglomerate and Tokio Marine, one of the worlds largest Insurance group headquartered in Japan, has received the second stage R2 approval from the Insurance Regulatory & Development Authority (IRDA) to operate in the Life Insurance space.
Company Profile: A premier financial services organization providing individual and corporate with customized financial solutions. They work towards understanding the individuals and corporate goals and risk profile. Their expertise combined with thorough understandings of the financial markets results in appropriate investment solutions for the clients. BMA WC inherits the legacy of BMA group which has been one of the dominant entities in Ferrous and Ferro Alloy industry in India. The BMA Group has created its niche in by
promoting successful ventures in the fields of coal mining, refractory, steel and Ferro alloy. The strive to achieve excellence and dynamic growth has been possible through optimum mix of technology, customer orientation, best business practices, forging alliances, high quality standards and proactive business culture. BMAWC financial services corporate entities are represented by: BMA Wealth Creators Limited: It holds corporate membership in National Stock Exchange Ltd, Bombay Stock Exchange Ltd and Central Depositories Securities Ltd. BMA Commodities Limited: It holds corporate membership in commodities exchange of NCDEX and MCX. It is also is SEBI approved and AMFI registered Mutual Fund. Mission: To be a premier financial supermarket providing integrated investment services. Vision: To provide integrated financial services building investor wealth and confidence.
Products of the company:
The company has a wide range of portfolios covering all the financial derivatives. Financial derivatives like equity, commodity, Derivatives, Mutual fund, Global Investment, BMA Fin School, Insurance, etc.,
3. Research Market: Def: A market is conventionally defined as a place where buyers and sellers meet to exchange goods or services for a consideration. This consideration is usually money. In an Information Technology-enabled environment, buyers and sellers from different locations can transact business in an electronic marketplace. Hence the physical marketplace is not necessary for the
exchange of goods or services for a consideration. Electronic trading and settlement of transactions has created a revolution in global financial and commodity markets.
Commodity: Def: A commodity is a product that has commercial value, which can be produced, bought, sold, and consumed. Commodities are basically the products of the primary sector of an economy. The primary sector of an economy is concerned with agriculture and extraction of raw materials such as metals, energy (crude oil, natural gas), etc., which serve as basic inputs for the secondary sector of the economy.
To qualify as a commodity for futures trading, an article or a product has to meet some basic characteristics: The product must not have gone through any complicated manufacturing activity, except for certain basic processing such as mining, cropping, etc. In other words, the product must be in a basic, raw, unprocessed state. There are of course some exceptions to this rule. For example, metals, which are refined from metal ores, and sugar, which is processed from sugarcane. The product has to be fairly standardized, which means that there cannot be much differentiation in a product based on its quality. For example, there are different varieties of crude oil. Though these different varieties of crude oil can be treated as different commodities and traded as separate contracts, there can be a standardization of the commodities for futures contract based on the largest traded variety of crude oil. This would ensure a fair representation of the commodity for futures trading. This would also ensure adequate liquidity for the commodity futures being traded, thus ensuring price discovery mechanism. A major consideration while buying the product is its price. Fundamental forces of market demand and supply for the commodity determine the commodity prices.
Usually, many competing sellers of the product will be there in the market. Their presence is required to ensure widespread trading activity in the physical commodity market. The product should have adequate shelf life since the delivery of a commodity through a futures contract is usually deferred to a later date (also known as expiry of the futures contract). Commodity Market - A perspective A market where commodities are traded is referred to as a commodity market. These commodities include bullion (gold, silver), non-ferrous (base) metals (copper, zinc, nickel, lead, aluminium, tin), energy (crude oil, natural gas), agricultural commodities such as soya oil, palm oil, coffee, pepper, cashew, etc. Existence of a vibrant, active, liquid, and transparent commodity market is normally considered as a sign of development of an economy. It is therefore important to have active commodity markets functioning in a country. Markets have existed for centuries worldwide for selling and buying of goods and services. The concept of market started with agricultural products and hence it is as old as the agricultural products or the business of farming itself. Traditionally, farmers used to bring their products to a central marketplace (called mandi / bazaar) in a town/village where grain merchants/ traders would also come and buy the products and transport, distribute, and sell them to other markets. In a traditional market, agricultural products would be brought and kept in the market and the potential buyers would come and see the quality of the products and negotiate with the farmers directly on the price that they would be willing to pay and the quantity that they would like to buy. Deals were struck once mutual agreement was reached on the price and the quantity to be bought/ sold. In traditional markets, shortage of a commodity in a given season would lead to increase in price for the commodity. On the other hand, oversupply of a commodity on even a single day could result in decline in pricesometimes below the cost of production. Neither farmers nor merchants were happy with this situation since they could not predict what the prices would be on a given day or in a given season. As a result, farmers often returned from the market with
their products since they failed to fetch their expected price and since there were no storage facilities available close to the marketplace. It was in this context that farmers and food grain merchants in Chicago started negotiating for future supplies of grains in exchange of cash at a mutually agreeable price. This type of agreement was acceptable to both parties since the farmer would know how much he would be paid for his products, and the dealer would know his cost of procurement in advance. This effectively started the system of forward contracts, which subsequently led to futures market too.
Cash Market: Cash transaction results in immediate delivery of a commodity for a particular consideration between the buyer and the seller. A marketplace that facilitates cash transaction is referred to as the cash market and the transaction price is usually referred to as the cash price. Buyers and sellers meet face to face and deals are struck. These are traditional markets. Example of a cash market is a mandi where food grains are sold in bulk. Farmers would bring their products to this market and merchants/traders would immediately purchase the products, and they settle the deal in cash and take or give delivery immediately. Cash markets thus call for immediate delivery of commodities against actual payment.
Forwards and Futures Markets: In this case, the agreements are normally made to receive the commodities at a later date in future for a pre-determined consideration based on agreed upon terms and conditions. Forwards and Futures reduce the risks by allowing the trader to decide a price today for goods to be delivered on a particular future date. Forwards and Futures markets allow delivery at some time in the future, unlike cash markets that call for immediate delivery. These advance sales help both buyers and sellers with long-term planning. Forward contracts laid the groundwork for futures contracts. The main difference between these two contracts is the way in which they are negotiated. For forward contracts, terms like quantity, quality, delivery date, and price are discussed in person between the buyer and the seller. Each contract is thus unique and not standardized since it takes into account the needs of a particular seller and a particular buyer only. On the other hand, in futures contracts, all terms (quantity, quality, and delivery date) are standardized.
The transaction price is discovered through the interaction of supply and demand in a centralized marketplace or exchange. Forward contracts help in arranging long-term transactions between buyers and sellers but could not deal with the financial (credit) risk that occurred with unforeseen price changes resulting from crop failures, inadequate storage or bottlenecks in transportation, factors beyond human control (floods, natural calamities, etc.), or other economic factors that may result in unexpected changes, and hence counterparty default risks for parties involved. This, in turn, led to the development of futures market. As mentioned above, since futures are standardized contracts that are traded through an exchange, they can be used to minimize price risk by means of hedging techniques. Since the exchange standardizes the quality and quantity parameters and offers complete transparency by using risk management techniques (such as margining system with mark-to-market settlement on a real-time basis with daily settlement), the counterparty default risk has been greatly minimized.
Brief History of the Development of Commodity Markets:
Global Scenario: It is widely believed that the futures trade first started about approximately 6,000 years ago in China with rice as the commodity. Futures trade first started in Japan in the 17th century. In ancient Greece, Aristotle described the use of call options by Thales of Miletus on the capacity of olive oil presses. The first organized futures market was the Osaka Rice Exchange, in 1730. Organized trading in futures began in the US in the mid-19th century with maize contracts at the Chicago Board of Trade (CBOT) and a bit later, cotton contracts in New York. In the first few years of CBOT, weeks could go by without any transaction taking place and even the provision of a daily free lunch did not entice exchange members to actually come to the exchange! Trade took off only in 1856, when new management decided that the mere provision of a trading floor was not sufficient and invested in the establishment of grades and standards as well as a nation-wide price information system. CBOT preceded futures exchanges in Europe. In the 1840s, Chicago had become a commercial centre since it had good railroad and telegraph lines connecting it with the East. Around this same time, good agriculture technologies
were developed in the area, which led to higher wheat production. Midwest farmers, therefore, used to come to Chicago to sell their wheat to dealers who, in turn, transported it all over the country. Farmers usually brought their wheat to Chicago hoping to sell it at a good price. The city had very limited storage facilities and hence, the farmers were often left at the mercy of the dealers. The situation changed for the better in 1848 when a central marketplace was opened where farmers and dealers could meet to deal in "cash" grainthat is, to exchange cash for immediate delivery of wheat. Farmers (sellers) and dealers (buyers) slowly started entering into contract for forward exchanges of grain for cash at some particular future date so that farmers could avoid taking the trouble of transporting and storing wheat (at very high costs) if the price was not acceptable. This system was suitable to farmers as well as dealers. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs of procurement well in advance. Such forward contracts became common and were even used subsequently as collateral for bank loans. The contracts slowly got standardized on quantity and quality of commodities being traded. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who needed it. Also, if the farmer didn't want to deliver his wheat, he would pass on his contractual obligation to another farmer. The price of the contract would go up and down depending on what was happening in the wheat market. If the weather was bad, supply of wheat would be less and the people who had contracted to sell wheat would hold on to more valuable contracts expecting to fetch better price; if the harvest was bigger than expected, the seller's contract would become less valuable since the supply of wheat would be more. Slowly, even those individuals who had no intention of ever buying or selling wheat began trading in these contracts expecting to make some profits based on their knowledge of the situation in the market for wheat. They were called speculators. They hoped to buy (long position) contracts at low price and sell them at high price or sell (short position) the contracts in advance for high price and buy later at a low price. This is how the futures market in commodities developed in the US. The hedgers began to efficiently transfer their market risk of holding physical commodity to these speculators by trading in futures exchanges.
The history of commodity markets in the US has the following landmarks:
Chicago Board of Trade (CBOT) was established in Chicago in 1848 to bring farmers and merchants together. It started active trading in futures-type of contracts in 1865.
The New York Cotton Exchange was started in 1870. Chicago Mercantile Exchange was set up in 1919. A legalized option trading was started in 1934.
Indian Scenario: History of trading in commodities in India goes back several centuries. But organized futures market in India emerged in 1875 when the Bombay Cotton Trade Association was established. The futures trading in oilseeds started in 1900 when Gujarati Vyapari Mandali (todays National Multi Commodity Exchange, Ahmedabad) was established. The futures trading in gold began in Mumbai in 1920. During the first half of the 20th century, there were many commodity futures exchanges, including the Calcutta Hessian Exchange Ltd. that was established in 1927. Those exchanges traded in jute, pepper, potatoes, sugar, turmeric, etc. However, Indias history of commodity futures market has been turbulent. Options were banned in cotton in 1939 by the Government of Bombay to curb widespread speculation. In mid-1940s, trading in forwards and futures became difficult as a result of price controls by the government. The Forward Contract Regulation Act was passed in 1952. This put in place the regulatory guidelines on forward trading. In late 1960s, the Government of India suspended forward trading in several commodities like jute, edible oil seeds, cotton, etc. due to fears of increase in commodity prices. However, the government offered to buy agricultural products at Minimum Support Price (MSP) to ensure that the farmer benefited. The government also managed storage, transportation, and distribution of agriculture products. These measures weakened the agricultural commodity markets in India. The government appointed four different committees (Shroff Committee in 1950, Dantwala Committee in 1966, Khusro Committee in 1979, and Kabra Committee in 1993) to go into the regulatory aspects of forward and futures trading in India. In 1996, the World Bank in association with United Nations Conference on Trade and Development (UNCTAD) conducted a study of Indian commodities markets. In the post-liberalization era of the Indian economy, it was the Kabra Committee and the World BankUNCTAD study that finally assessed the scope for
forward and futures trading in commodities markets in India and recommended steps to revitalize futures trading. There are four national-level commodity exchanges and 22 regional commodity exchanges in India. The national-level exchanges are Multi Commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), National Multi Commodity Exchange of India Limited (NMCE), and Indian Commodity Exchange (ICEX).
Relevance and Potential of Commodity Markets in India: Majority of commodities traded on global commodity exchanges are agri-based. Commodity markets therefore are of great importance and hold a great potential in case of economies like India, where more than 65 percent of the people are dependent on agriculture. There is a huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. Indian commodities market has an excellent growth potential and has created good opportunities for market players. India is the worlds leading producer of more than 15 agricultural commodities and is also the worlds largest consumer of edible oils and gold. It has major markets in regions of urban conglomeration (cities and towns) and nearly 7,500+ Agricultural Produce Marketing Cooperative (APMC) mandis. To add to this, there is a network of over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various commodities. These marketplaces play host to a variety of commodities every day. The commodity trade segment employs more than five million traders. The potential of the sector has been well identified by the Central government and the state governments and they have invested substantial resources to boost production of agricultural commodities. Many of these commodities would be traded in the futures markets as the foodprocessing industry grows at a phenomenal pace. Trends indicate that the volume in futures trading tends to be 5-7 times the size of spot trading in the country (internationally, it is much higher at 15 to 20 times). Many nationalized and private sector banks have announced plans to disburse substantial amounts to finance businesses related to commodity trading. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities, approving new exchanges, developing exchanges with
modern infrastructure and systems such as online trading, and removing legal hurdles to attract more participants have increased the scope of commodities derivatives trading in India. This has boosted both the spot market and the futures market in India. The trading volumes are increasing as the list of commodities traded on national commodity exchanges also continues to expand. The volumes are likely to surge further as a result of the increased interest from the international participants in Indian commodity markets. If these international participants are allowed to participate in commodity markets (like in the case of capital markets), the growth in commodity futures can be expected to be phenomenal. It is expected that foreign institutional investors (FIIs), mutual funds, and banks may be able to participate in commodity derivatives markets in the near future. The launch of options trading in commodity exchanges is also expected after the amendments to the Forward Contract Regulation Act (1952). Commodity trading and commodity financing are going to be rapidly growing businesses in the coming years in India. With the liberalization of the Indian economy in 1991, the commodity prices (especially international commodities such as base metals and energy) have been subject to price volatility in international markets, since India is largely a net importer of such commodities. Commodity derivatives exchanges have been established with a view to minimize risks associated with such price volatility.
Commodity Markets Ecosystem: After studying the importance of commodity markets and trading in commodity futures, it is essential to understand the different components of the commodity markets ecosystem. The commodity markets ecosystem includes the following components: 1. Buyers/Sellers or Consumers/Producers: Farmers, manufacturers, wholesalers,
distributors, farmers co-operatives, APMC mandis, traders, state civil supplies corporations, importers, exporters, merchandisers, oil refining companies, oil producing companies, etc. 2. Logistics Companies: Storage and transport companies/operators, quality testing and certifying companies, valuers, etc.
3. Markets and Exchanges: Spot markets (mandis, bazaars, etc.) and commodity exchanges (national level and regional level) 4. Support agencies: Depositories/de-materializing agencies, central and state warehousing corporations, and private sector warehousing companies 5. Lending Agencies: Banks, financial institutions The users are the producers and consumers of different commodities. They have exposure to the physical commodities markets, exposing themselves to price risk. In turn, they depend on logistics companies for transportation of commodities, warehouses for storage, and quality testing and certification agencies for assessment and evaluation of commodity quality standards. Commodity derivatives exchanges provide a platform for hedging against price risk for these users.
Benefits of Trading in Commodity Derivatives: Trading in futures provides two important functions of price discovery and price risk management. It is useful to all the segments of the economy, particularly to all the constituents of the commodity market ecosystem. It is important to know how resorting to commodity trading benefits the constituents.
Benefits to Investors, Producers, Consumers, Manufacturers:
Price risk management: All participants in the commodity markets ecosystem across the value chain of different commodities are exposed to price risk. These participants buy and sell commodities and the time lag between subsequent transactions result in exposure to price risk. Commodity derivatives markets enable these participants to avoid price risk by utilizing hedging techniques.
Price discovery: This is the mechanism by which a fair value price is determined by the large number of participants in the commodities derivatives markets. This is the result of automation and electronic trading systems established on the commodities derivatives exchanges.
High financial leverage: This is possible in commodity markets. For example, trading in gold calls for only 4% initial margin. Thus, if one gold futures contract (each gold futures
contract lot size is 1 kg) is valued at Rs 900,000, the investor is expected to deposit an initial margin of only Rs 36,000 to be able to trade. If the price of gold goes up by even 2%, the investor would make a profit of Rs 18,000 on a deposit of Rs 36,000 before the expiry of the contract. This is the benefit of leveraged trading transactions. With futures contracts, the investor trades in the expectation of the price at a later date. This is possible with a margin deposit, which is usually between 5% and 10% of the value of the commodity. Correspondingly, the margins required for equity futures contracts are higher, due to higher volatility in equity markets as compared to commodities futures contracts. The reason for higher volatility in equity markets (especially in India) as compared to commodities derivatives transactions is due to the fact that delivery is possible in commodity derivatives transactions.
Commodities as an asset class for diversification of portfolio risk: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favours commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Even with a marginal distribution of funds in a portfolio to include commodities, the Sharpe ratio is greatly enhanced, thereby indicating a decrease in risk.
Commodity derivatives markets are extremely transparent in the sense that the manipulation of prices of a commodity is extremely difficult due to globalization of economies, thereby providing for prices benchmarked across different countries and continents. For example, gold, silver, crude oil, etc. are international commodities, whose prices in India are indicative of the global situation.
An option for high net worth investors: With the rapid spread of derivatives trading in commodities, the commodities route too has become an option for high networth investors.
Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him. Farmers, for instance, can get assured prices, thereby enabling them to decide on the crop that they want to grow. Since
there is transparency in prices, the farmer can decide when and where to sell, so as to maximize his profits.
Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts. Predictable pricing and transparency is an added advantage.
Corporate entities can benefit by hedging their risks if they are using some of the commodities as their raw materials. They can hedge the risk even if the commodity traded does not meet their requirements of exact quality/technical specifications.
Useful to exporters: Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market.
Improved product quality: Since the contracts for commodities are standardized, it becomes essential for the producers/sellers to ensure that the quality of the commodity is as specified in the contract. The advent of commodities futures markets has also enabled defining quality standards of different commodities.
Credit accessibility: Buyers and sellers can avail of the bank finances for trading in commodities. Nationalized banks and private sector banks have come forward to offer credit facilities for commodity trading.
Benefits to Indian Economy: As the constituents of the commodity market ecosystem get benefited, the Indian economy is also benefited. Growth in the organized commodity markets and their constituents implies that there would be tremendous advantages and benefits accrued to the Indian economy in terms of business generation and growth in employment opportunities. As India imports bulk of raw material (especially in base metals and energy), there is scope for minimizing price risk for international commodities. With the consumption of commodities increasing rapidly, especially in developing countries such as China and India, the prices of commodities are volatile, emphasizing the need for organized commodity derivatives exchanges.