CHAPTER-1

INTRODUCTION

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Introduction:
Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an ever-expanding list of commodities that today includes agricultural products, metals, petroleum, financial instruments, foreign currencies and stock indexes. Trading has also been initiated in options on futures contracts, enabling option buyers to participate in futures markets with known risks. Notwithstanding the rapid growth and diversification of futures markets, their primary ++purpose remains the same as it has been for nearly a century and a half, to provide an efficient and effective mechanism for the management of price risks. By buying or selling futures contracts--contracts that establish a price level now for items to be delivered later--individuals and businesses seek to achieve what amounts to insurance against adverse price changes. This is called hedging. Other futures market participants are speculative investors who accept the risks that hedgers wish to avoid. Most speculators have no intention of making or taking delivery of the commodity but, rather, seek to profit from a change in the price. That is, they buy when they anticipate rising prices and sell when they anticipate declining prices. The interaction of hedgers and speculators helps to provide active, liquid and competitive markets. Speculative participation in futures trading has become increasingly attractive with the availability of alternative methods of participation. Whereas many futures traders continue to prefer to make their own trading decisions--such as what to buy and sell and when to buy and sellPage 2

-others choose to utilize the services of a professional trading advisor, or to avoid day-to-day trading responsibilities by establishing a fully managed trading account or participating in a commodity pool which is similar in concept to a mutual fund.

Speculation in futures contracts, however, is clearly not appropriate for everyone. Just as it is possible to realize substantial profits in a short period of time, it is also possible to incur substantial losses in a short period of time. The possibility of large profits or losses in relation to the initial commitment of capital stems principally from the fact that futures trading are a highly leveraged form of speculation. Only a relatively small amount of money is required to control assets having a much greater value. As we will discuss and illustrate, the leverage of futures trading can work for you when prices move in the direction you anticipate or against you when prices move in the opposite direction.

Forward Contract
Under this contract the seller undertakes to provide the client with a fixed amount of a commodity on a fixed future date at a fixed price. A forward contract differs from a futures contract in that the former is a once-only deal (while futures contracts are standardized contracts), which cannot be closed out by a matching transaction.

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Commodity option
A commodity option is the right (not an obligation!) to buy or sell a fixed quantity of a commodity at a particular date, or within a specified period, and at a fixed price, called exercise price or strike price). An option to buy is called a call option and is purchased in the expectation of a rising price; an option to sell is called a put option and is bought in the expectation of a falling price. The holder will only exercise his option, if the price of the underlying commodity moves favorably, by an amount sufficient to provide a profit when the option is sold. If the price moves in the opposite direction, only the price for the option (called premium is lost. The option price is therefore a kind of insurance premium. The seller of the option is correspondingly more exposed to risk. Apart from exercising an option or letting it expire, there is on some options exchanges also the possibility to sell it. Options, as well as futures, enable users and producers to hedge against the risk of wide price fluctuations. However, they also allow speculators to gamble for large profits with limited liability. Therefore the range of users is diverse: a speculator may buy coffee call options in the expectation that unseasonable weather in Brazil will drive up world coffee prices, or, an airline may hedge its fuel requirements with kerosene calls. Professional traders in options make use of a large range of strategies, often purchasing combinations of options that reflect particular expectations (e.g. butterfly; straddle).

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It is important to know, that there are two different types of options: European-style options can only be exercised on the expiry date, whereas American-style options can be exercised at any time between the date of purchase and the expiration date. European-style options are therefore cheaper, but most exchange-traded options are of American-style.

Commodity swap
This is an over-the-counter product, which is very important for the individual hedger. The user of a particular commodity who wants to secure a maximum contract price for the long term may agree to pay a financial institution a fixed price, in return for receiving payments based on the market price for the commodity involved.

A producer, however, who wishes to fix his income, may agree to pay the market price to a financial institution, in return for receiving a fixed payment stream. The vast majority of commodity swaps involve oil. Although most commodities are priced in dollars, commodity swaps are also available in other currencies, so that a user of a commodity may obtain protection in his own currency.

Placing of order
Usually, orders are placed, by telephone, with brokers representing users and producers. If an order is executed the client receives a confirmation.
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An order should contain the following specifications: Buy or sale, the number of contracts, the month of contract, type and quality of the commodity, the exchange, a price specification and the period of validity.

Possible price specifications:

Good Till Cancelled (GTC) Order: An order to buy or sell that remains in effect until it is either executed or cancelled. Also called "open order". Limit Order: An order to buy or sell a stated amount of a commodity at a specified price, or at a better price, if obtainable at the time of execution. Market Order: An order to buy or sell a stated amount of a commodity at the most advantageous price obtainable after the order is represented in the trading crowd. Stop Limit Order: An order to buy or sell at a specified price or better (called a stop-limit price), but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. Stop Order:

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An order to buy or sell at the market price once the commodity has been traded at a specified price, called the stop price. A stop order may be a day-limit order, a GTC order, or any other form of time-limit order. A stop order becomes a market order when the stop price is reached.

Arbitrage
Arbitrage denotes the purchase and simultaneous sale of the same commodity in different commodity markets in order to take advantage of differences in commodity prices between the two markets.

Such a transfer of funds is risk-free, because an arbitrageur will only switch from one market to another if prices in both markets are known and if the profit outweighs the costs of the operation. Opportunities for arbitrage tend to be self-correcting: due to the increased demand for the commodity, there is an upward pressure on its price in the market where it is bought, whereas the increased supply in the market where it is sold results in a downward price movement. Modern computer technology has accelerated the arbitrage mechanism, reducing the opportunity for exploiting price differences. In futures and options markets, cash and carry arbitrage exploits a situation where the price of a particular future is higher than the spot price of the underlying commodity (plus the interest cost of borrowing that amount until the future becomes deliverable), namely by buying the physical commodity and simultaneously selling a future.
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Cash and carry arbitrage with futures on commodities is rare, since the purchase and delivery of the underlying commodity is onerous. It is more frequently used with financial and currency futures.

Hedging
Hedging is used both to insure against losses due to a change in the value of a commodity already held, and to protect an open position, especially a future purchase or sale of a commodity that is likely to fluctuate in price. Commodities transactions can be hedged by futures and options contracts sometimes put and call together. In the commodity markets hedging is generally effected by taking a position in the futures market opposite to that held in the physicalmarket. For instance, a manufacturer who needs a certain amount of a raw material, say, in six months, may (instead of buying it forward) engage in a hedging operation: He will first buy an equivalent amount of futures to be settled at the time he requires the actual raw material (i.e. in six months). Secondly, he will buy the raw material in the spot market in six months time. Any fall or rise in the price of the actual raw material will be offset by the profit or loss that results from the futures contracts. A trader who wants to sell at some future time will hedge by selling an equivalent amount of futures.

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Hedgers
The details of hedging can be somewhat complex but the principle is simple. Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level--weeks or months in advance--for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market). In this way they attempt to protect themselves against the risk of an unfavorable price change in the interim. Or hedgers may use futures to lock in an acceptable margin between their purchase cost and their selling price.

Speculators
Were you to speculate in futures contracts, the person taking the opposite side of your trade on any given occasion could be a hedger or it might well be another speculator--someone whose opinion about the probable direction of prices differs from your own. The arithmetic of speculation in futures contracts--including the

opportunities it offers and the risks it involves--will be discussed in detail later on. For now, suffice it to say that speculators are individuals and firms who seek to profit from anticipated increases or decreases in futures prices. In so doing, they help provide the risk capital needed to facilitate hedging. Someone who expects a futures price to increase would purchase futures contracts in the hope of later bring able to sell them at a higher price. This is known as "going long." Conversely, someone who expects a futures price to
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decline would sell futures contracts in the hope of later being able to buy back identical and offsetting contracts at a lower price. The practice of selling futures contracts in anticipation of lower prices is known as "going short." One of the attractive features of futures trading is that it is equally easy to profit from declining prices (by selling) as it is to profit from rising prices (by buying).

Floor Traders
Persons known as floor traders or locals, who buy and sell for their own accounts on the trading floors of the exchanges, are the least known and understood of all futures market participants. Yet their role is an important one. Like specialists and market makers at securities exchanges, they help to provide market liquidity. If there isn't a hedger or another speculator who is immediately willing to take the other side of your order at or near the going price, the chances are there will be an independent floor trader who will do so, in the hope of minutes or even seconds later being able to make an offsetting trade at a small profit. In the grain markets, for example, there is frequently only one-fourth of a cent a bushel difference between the prices at which a floor trader buys and sells. Floor traders, of course, have no guarantee they will realize a profit. They may end up losing money on any given trade. Their presence, however, makes for more liquid and competitive markets. It should be pointed out, however, that unlike market makers or specialists, floor traders are not obligated to maintain a liquid market or to take the opposite side of customer orders.

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Reasons for Buying futures Reasons contracts contracts

for Selling futures

To lock in a price and thereby To lock in a price and thereby Hedgers obtain protection inst rising obtain prices protection against

declining prices

Speculators floor Traders

and To

profit

from

rising

propagates

To profit from declining prices

Futures Contract
There are two types of futures contracts: 1) Those that provide for physical delivery of a particular commodity or item 2) Those which call for a cash settlement. The month during which delivery or settlement is to occur is specified. Thus, a July futures contract is one providing for delivery or settlement in July.

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Why Delivery
Since delivery on futures contracts is the exception rather than the rule, why do most contracts even have a delivery provision? There are two reasons. One is that it offers buyers and sellers the opportunity to take or make delivery of the physical commodity if they so choose. More importantly, however, the fact that buyers and sellers can take or make delivery helps to assure that futures prices will accurately reflect the cash market value of the commodity at the time the contract expires--i.e., that futures and cash prices will eventually converge. It is convergence that makes hedging an effective way to obtain protection against an adverse change in the cash market price.

The Process of Price Discovery

Futures prices increase and decrease largely because of the myriad factors that influence buyers' and sellers' judgments about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years). As new supply and demand developments occur and as new and more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward. The process of reassessment--of price discovery--is continuous. Thus, in January, the price of a July futures contract would reflect the consensus of buyers' and sellers' opinions at that time as to what the value of a commodity or item will be when the contract expires in July. On any given day,
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with the arrival of new or more accurate information, the price of the July futures contract might increase or decrease in response to changing expectations. Competitive price discovery is a major economic function--and, indeed, a major economic benefit--of futures trading. The trading floor of a futures exchange is where available information about the future value of a commodity or item is translated into the language of price. In summary, futures prices are an ever changing barometer of supply and demand and, in a dynamic market, the only certainty is that prices will change.

After the Closing Bell

Once a closing bell signals the end of a day's trading, the exchange's clearing organization matches each purchase made that day with its corresponding sale and tallies each member firm's gains or losses based on that day's price changes--a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day. Each firm, in turn, calculates the gains and losses for each of its customers having futures contracts.

What to Look for in a Futures Contract

Whatever type of investment you are considering--including but not limited to futures contracts--it makes sense to begin by obtaining as much information as possible about that particular investment. The more you know in advance, the less likely there will be surprises later on. Moreover, even among futures contracts,
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there are important differences which--because they can affect your investment results--should be taken into account in making your investment decisions.

Basic Trading Strategies

A. Buying (Going Long) to Profit from an Expected Price Increase Someone expecting the price of a particular commodity or item to increase over from a given period of time can seek to profit by buying futures contracts. If correct in forecasting the direction and timing of the price change, the futures contract can later be sold for the higher price, thereby yielding a profit.* If the price declines rather than increases, the trade will result in a loss. Because of leverage, the gain or loss may be greater than the initial margin deposit. B. Going short to profit from an expected price decrease the only way

going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as expected, the price declines, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price.

HEDGING COMMODITIES WITH FUTURES

Producers of commodities are faced with price and production risk over time and within a marketing year. Furthermore, increased global free trade and changes
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in domestic policy have increased the price and production risks of producers. As price and production variability increases, producers are realizing the importance of risk management as a component of their management strategies. One means of reducing these risks is through the use of the commodity futures exchange markets. Like the use of car insurance to hedge the potential costs of a car accident, producers can use the commodity futures markets to hedge the potential costs of commodity price volatility. However, like car insurance the gains from an insurance claim may not exceed the cost of the cumulative sum of premiums, the gains from hedging may not cover the costs of hedging. The primary objective of hedging is not to make money. The primary objective of hedging is to minimize price risk and this includes using hedging to minimize losses.

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CHAPTER-2

PROFILE OF THE COMPANY

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Name of the company Year of establishment Location

: Shyam Group of Companies : 1977 : Present in 23 cities across the country.

Board of Directors : Mr. Chandra Prakash Ramsisaria : Mr. Suresh Kumar Ramsisaria : Mr. Murli Manohar Saraf No. of Employees : 250 (excluding factory workers) : 1000 indirect bread earners.

Activities: Manufacturing Name of the company Big Bags International/India Ltd. Nylo Films Pvt. Ltd. Virgo Polymers Ltd. Others Trading: Name of the company P. P. Products Pvt. Ltd. Kamdhenu Polymers Pvt. Ltd. Tarajyot Polymers Ltd. Others

Location Bangalor e Bangalor e Chennai

Activity PP & Jumbo Bags Multi Layer Film PP & Jumbo Bags

Turnover 150.00 50.00 50.00 150.00

Location Bangalor e Bangalor e Bangalor e

Activity Distribution Distribution Distribution

Turnover 135.00 135.00 90.00 50.00

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Agencies Name of the company Shyam Agencies Visura Trading & Inv. (I) Ltd. Pradeep Industrial Packers Pvt. Ltd. Diversification: Name of the company Ramsisaria Flower Estates Sanjay Alloys Pvt. Ltd Meriton Group Grand Total

Location Karnataka Andhra P. Karnataka

Activity Del Credre for GAIL Del Credre for GAIL Del Credre for IOCL

Turnover 150.00 75.00 100.00

Location Bangalore

Activity Cultivation & Marketing Palamaner Iron Ignot & TMT Bars Noida Real Estate Rs Crores

Turnover 10.00 25.00 400.00 1560.00

Contact : Mr. Murli Manohar Saraf (C.E.O.) : Shyam Group of Companies, : 37/12-1, Archana Complex, : IV Cross, Lal Bagh Road, : Bangalore - 27 : Direct +91 80 2295 5141 : Fax +91 80 2223 7620 : Cell +91 99 860 40141

INTRODUCTION

The Group has come a long way in the field of polymer since its small beginning in 1977 with a negative capital. We have associates at 15 places in the Southern India. We have 250 office employees & 1000 factory workers.
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 Group Turnover is about US $ 200 million. Import exposure: Trading : 65KTAs Consumption : 25KTAs Credit facilities from Banking System about US $ 35mn. Good presence in CSR. Sizeable efforts in maintaining the cultural heritage of India

Our Activities
\ Manufacturing Distribution Agency Diversifications

OUR VISIONS

Shyam Group has been built on a very strong foundation and the enduring principles of fair play, mutual co operation and growing investor value. As a strong and mature company, Shyam Group recognises that change is inevitable in corporate life and that the challenge of change can be handled best by pursuing the same principles and vision that provided order and growth in the past. To be strong to withstand all calamities of natural and business risks and can stand tall with the head touching the sky and feet in the earth. We feel business comes automatically when they are happy and confident about our service and have trust in our information.
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Group Philosophy
All the Stake holders in our business shall be satisfied and happy. We believe in adding value in whatever business we are. We wish to be in the top 10 in the country in whatever business we are. We believe in upholding human values in life. Our dealings are open for ethical and moral standards.

Manufacturing:-

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Distribution

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Agencies

Diversification:
A. Floriculture

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B. Iron & Steel

C. Education

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D. Real Estate

Strengths:

7 x 24 Model Enjoy trust of Suppliers, Customers & Bankers. Marketing Network. Value Added Services to the Customer. Financial Model. Information Network. Research & Analysis. No Litigation with Customers or Suppliers. No Rejection / Crystallization of Documents.
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Weakness:

Volatility in the International Market. Operating in a Monopolized Market. Adverse Taxation Policy CST. Exchange Fluctuation.

Growth in Polymer Imports

80000
60000 40000

20000 0 Category 1 1994-1995 1999-2000 2010-11

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Page 26

CHAPTER-3

RESEARCH METHODOLOGY

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1.

TITLE OF THE STUDY:

A STUDY ON THE HEDGING PROCESS IN THE COMMODITIES MARKET

2. STATEMENT OF THE PROBLEM:

The statement of the problem is hedging process of commodity market.

3. AREA OF STUDY:
The area of the study is in FINANCE (FUTURE COMMODITIES)

4. METHOD OF THE STUDY:

The method adopted for the study is Survey Method

5. SCOPE FOR THE STUDY:

The futures commodities are the up coming market and is it gaining its power in the market. Hence a detail study of commodity market will help us to grow well in terms of knowledge, wealth and we can say as overall development of an individual.

6. TARGETED RESPONDENTS:
20 people of different categories like: Professionals, Businessmen, Self employed and others.

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7. OBJECTIVES OF THE STUDY:

To understand the conceptual frame work within which the key decisions of commodities trading can be analyzed. To study management of risk using hedging process in the commodities market. To analyze various techniques or methods used in managing the risk exposure in commodities market.

8. RESEARCH DESIGN:
It is a planned, designed and detail analysis of the commodities futures, conducted in a systematic manner to check and verify hedging processes. It also extends the frontiers of knowledge. Market research design can be classified on the basis of objectives of the research. fundamental

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Research Design Exploratory Descriptive Casual

9. SAMPLE DESIGN:
Definition of the population : The sample respondents are those who are

trading in Commodities market. Sampling Size Sampling technique : The number of sample size is 20 : QUESTIONNAIRE

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PRIMARY DATA : Data collected from the professionals in the field. SECONDARY DATA: a) Internal Sources : Company brochure, formal and informal business

records b) External Sources : Internet, Websites, Text Books etc.,

10.

DATA COLLECTION INSTRUMENTS:

Filled in by the target customers.

Questionnaire:

11.

ASSUMPTIONS:
be universally applicable.

The mechanisms used in analyzing the hedging process are assumed to The instruments such as commodity futures and options are assumed to be apt in the process risk management. The basic assumption is the futures market participants are speculative investors who accept the risks that hedgers wish to avoid.

12.

LIMITATIONS:

The effort has been made to make the study complete and exhaustive as possible. However the study is not free from certain limitations. The commodities market involves a high degree of volatility in price fluctuations and more complex in nature.
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 Though there are various risk management techniques the factors such as acts of god, political and economic factors are risky to determine. Hedging process as such helps in reduction of risks but it fails in eliminating risk of losses completely. Due to lack of time a detailed study was not possible.

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CHAPTER-4

ANALYSIS OF THE STUDY

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POSITION OF THE INVESTOR:

BUSINESS MEN PROFESSIONAL SELF EMPLOYED OTHERS ANALYSIS
POSITION OF THE INVESTOR

11 5 2 2

8%

8%

21%

63%

BUSINESSMAN

PROFESSIONAL

SELFEMPLOYED

OTHERES

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INTERPRETATION The analysis shows that the businessmen hold the major share in the market and have the potential to make future decisions n understand the market well and analyze the trend of demand and supply affecting the future trading decisions.

THE BEST WAY TO DESCRIBE COMMODITIES FUTURES TRADING

Based on market news Driven by customer orders Based on technical analysis The "jobbing" approach OTHERS
ANALYSIS
COMMODITY FUTURE

8 4 6 2 0

0% 9%

27%

46%

18%

Based on market news JOBBING APPROACH

Driven by customer orders OTHERS

Based on technical analysis

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INTERPRETATION The future trading of the commodities depends on various factors out of which the market news has the most important significance in trading of the commodities as it reflects accurate information about the market and gives the investor a clear view on how to go about the trade.

HOW FAST DO YOU BELIEVE THE MARKET CAN ASSIMILIATE THE NEW INFORMATION WHEN THE FOLLOWING ECONOMIC ANNOUNCEMENTS FROM THE MAJOR DEVELOPED COUNTRIES DIFFER FROM THEIR MARKET EXPECTATIONS?
LESS THAN 10 SEC 0 0 0 0 LESS THAN 1 MIN 15 15 15 15 LESS THAN 10 MIN LESS THAN 30 MIN 1 1 1 1 OVER30 MIN 0 0 0 0

TRADE DEFICIT INFLATION INTEREST RATE DEMAND & SUPPLY

4 4 4

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ANALYSIS
TRADE DEFICIT

0% 5% 0% 20% 20%

5%

0% 0%

75%

75%

LESS THAN 10 SEC LESS THAN 10 MIN OVER 30 MIN

LESS THAN 1 MIN LESS THAN 30 MIN

LESS THAN 10 SEC LESS THAN 10 MIN OVER 30 MIN

LESS THAN 1 MIN LESS THAN 30 MIN

DEMAND & SUPPLY

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INFLATION

5%

0%

0%

20%

75%

LESS THAN 10 SEC LESS THAN 10 MIN OVER 30 MIN

LESS THAN 1 MIN LESS THAN 30 MIN

INTERPRETATION According to the study the market can assimilate the new information within less than a minute in all the four factors which reflects that these four factors are always to be kept in mind before any decision making as any misinterpretation of data could lead to a loss.

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IN YOUR OPINION, WHICH ONE OF THE FOLLOWING ECONOMIC ANNOUNCEMENT FROM THE MAJOR DEVELOPED COUNTRIES HAS BIGGEST IMPACT ON THE COMMODITY MARKET?
NUMBER OF CLIENTS 2 0 8 2 8 0

UNEMPLOYMENT RATE TRADE DEFICIT INFLATION GNP INTEREST RATE MONEY SUPPLY
ANALYSIS

8 7 6 5 4 3 2 1 0

8 8 ECONOMIC ANNOUNCEMENT

2 0
UNEMPL INFLATION

2 0
INT RATE

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INTERPRETATION Inflation and Interest rate have a great impact on the commodity market as any change in it affects the trading decisions.

IF THE COMMODITY MARKET DOES NOT ACCURATELY REFLECT THE EXCHANGE RATE FUNDAMENTAL VALUE, WHICH OF THE FOLLOWING FACTORS DO YOU BELIEVE ARE RESPONSIBLE FOR THIS? YES EXCESSIVE SPECULATION MANIPULATION BY THE MAJOR TRADING BANKS CUSTOMERS/HEDGE FUNDS EXCESSIVE CENTRAL BANK INTERVENTION 20 0 NO 0 10 NO OPINION 0 10

6 20

10 0

4 0

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EXCESSIVE SPECULATION

MANIPULATION BY THE MAJOR TRADING BANKS

0% 50%

0% 50%

100%

YES

NO

NO OPINION

YES

NO

NO OPINION

CUSTOMER/HEDGE FUNDS

EXCESSIVE CENTRAL BANK INTERVENTION

20% 30%

0%

50%

100%

YES

NO

NO OPINION

YES

NO

NO OPINION

INTERPRETATION If the commodity market does not accurately reflect the exchange rate fundamental value then excessive central bank intervention and excessive speculation are responsible for the same to reflect the rate of exchange.

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SELECT SINGLE MOST IMPORTANT FACTOR THAT DETERMINES PRICE MOVEMENTS IN EACH OF THE 3 HORIZONS LISTED?
INTRADAY OVER REACTION TO NEWS SPECULATIVE FORCES ECONOMIC FUNDAMENTALS TECHNICAL TRADING
ANALYSIS
INTRADAY MEDIUM RUN(UPTO 6 MONTHS)

MEDIUMRUN 0 0 16 4

5 10 4 6

LONGRU N 0 0 16 4

0% 0% 24% 16% 20% 20%

40%

80%

OVERREACTION TO NEWS SPECULATIVE FORCES ECONOMIC FUNDAMENTALS TECHNICAL TRADING

OVERREACTION TO NEWS SPECULATIVE FORCES ECONOMIC FUNDAMENTALS TECHNICAL TRADING

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LONGRUN (OVER 6 MONTHS)

20% 0%

0%

80%

OVERREACTION TO NEWS SPECULATIVE FORCES ECONOMIC FUNDAMENTALS TECHNICAL TRADING

INTERPRETATION Economic fundamentals is the most important factor that determines the price movement as it is the most beneficiary in the mid run and long run and the least important factor being over reaction to news as it sustains only for a day and does not has any reflection in the mid run and the long run.

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IF THE COMMODITY MARKET DOES NOT ACCURATELY REFLECT THE EXCHANGE RATE TECHNICAL VALUE, WHICH OF THE FOLLOWING FACTORS DO YOU BELIEVE ARE RESPONSIBLE FOR THIS?
YES EXCESSIVE SPECULATION MANIPULATION BY THE MAJOR TRADING BANKS CUSTOMERS/HEDGE FUNDS EXCESSIVE CENTRAL BANK INTERVENTION 20 0 6 20 NO 0 10 10 0 NO OPINION 0 10 4 0

ANALYSIS
EXCESSIVE SPECULATION MANIPULATION BY THE MAJOR TRADING BANKS

0% 50%

0% 50%

100%

YES

NO

NO OPINION

YES

NO

NO OPINION

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CUSTOMER/HEDGE FUNDS

EXCESSIVE CENTRAL BANK INTERVENTION

20% 30%

0%

50%

100%

YES

NO

NO OPINION

YES

NO

NO OPINION

INTERPRETATION The exchange rate traditional value again depends on excessive central bank intervention which shows that these two factors play a vital role in the trading and that an investor should keep a check on it.

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CHAPTER-5

FINDINGS AND SUGGESTIONS

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FINDINGS:
1) The commodity futures market is an efficient market as compared to the spot

market wherein volatility is high in spot market.

2) The market factors which includes government policies, weather acts of

God, production and supply of commodities in the market etc are the major determinants of price fluctuations in the market.
3) Commodity market is highly speculative in nature wherein there is much

scope for misleading the participants by few major players in the market.
4) Notwithstanding the rapid growth and diversification of futures markets, their

primary purpose remains the same as it has been for nearly a century and a half, to provide an efficient and effective mechanism for the management of price risks.
5) The possibility of large profits or losses in relation to the initial commitment

of capital stems principally from the fact that futures trading are a highly leveraged form of speculation. Only a relatively small amount of money is required to control assets having a much greater value.
6) Futures prices arrived at through competitive bidding are immediately and

continuously relayed around the world by wire and satellite

7) Spurred by the need to manage price and interest rate risks that exist in

virtually every type of modern business, today's futures markets have also become major financial markets.
8) Whatever the hedging strategy, the common denominator is that hedgers

willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.
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9) Futures prices increase and decrease largely because of the myriad factors

that influence buyers' and sellers' judgments about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).
10) Exchange rate depends widely depends on two factors which play a

important role in the trading decisions i.e. excessive speculation and excessive central bank intervention.

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SUGGESTIONS:
1) Follow the trends. This is probably some of the hardest advice for a trader to

follow because the personality of the typical futures trader is not "one of the crowd." Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not "one of the crowd," to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.
2) Trade with the trends, rather than trying to pick tops and bottoms. 3) Use technical signals (charts) to maintain discipline the vast majority of

traders are not emotionally equipped to stay disciplined without some technical tools. Use discipline to eliminate impulse trading.
4) Have a disciplined, detailed trading plan for each trade; i.e., entry, objective,

exit, with no changes unless hard data changes. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade
5) Cut losses short. Most importantly, cut your losses short, let your profits run.

It sounds simple, but it isn't. Let's look at some of the reasons many traders have a hard time "cuttings losses short." First, it's hard for any of us to admit we've made a mistake. Let's say a position starts going against you, and all your "good" reasons for putting the position on are still there. You say to yourself, "it's only a temporary set-back. After all (you reason), the more the position goes against me, the better chance it has to come back the odds will catch up." Also, the reasons for entering the trade are still there. By now
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you've lost quite a bit; you sell yourself on giving it "one more day." It's easy to convince yourself because, by this time, you probably aren't thinking very clearly about the position. Besides, you've lost so much already, what's a little more? Panic sets in, and then comes the worst, the most devastating, the most fallacious reasoning of all, when you figure: "That contract doesn't expire for a few more months; things; are bound to turn around in the meantime.
6) Let profits run. Now to the "letting profits run" side of the equation. This is

even harder because who knows when those profits will stop running? Well, of course, no one does, but there are some things to consider.
7) That kind of reasoning and emotionalism have no place in futures trading;

therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear...don't; out of greed...don't; out of ego... don't; out of impatience...don't; out of anxiety...don't; out of sound fundamental and/or technical reasoning...do.
8) The losses should not be the factor for bad performance instead it should act

as an instrument to boost the morale of the investor and perform well in the coming future as ups and downs is a phase of trade cycle and depends on how an investor reacts to it.

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Conclusion
The Commodities market is an avenue for the investors wherein they can transfer the risks of future price changes. But market as such is highly volatile and is based on the factors such as economic factors etc. the risks caused due to uncertainties can be minimized by the hedging process effectively in order to safeguard the interest of the investors. If the factors determining the various market structure is studied carefully and analyzed technically it would lead to lower risk of bearing the loss which has been shown from the above study.

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BIBLIOGRAPHY

WEB SITES VISITED: www.commodityfutures.com www.google.com

OTHER SOURCES: COMPANY BROUCHER

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QUESTIONNAIRE

PERSONAL AND BACKGROUND INFORMATION: NAME :

1. AGE

2. SEX

3. Your current position Business man/commodity trader Self employed Professional other: ________

4. The best way to describe your Commodity future trading is Based on market news Based on technical analysis approach Driven by customer orders The "jobbing"

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5. How fast do you believe that the market can assimilate the new information when the following economic announcements from the major developed countries differ from their market expectations? trade deficit Inflation

Interest rate Other: _______________

Demand supply

6. In your opinion, which one of the following economic announcements from the major developed countries has biggest impact on the commodity market Unemployment rate Trade deficit Inflation G.N.P Interest rate

Money Supply

7. If the commodity market does not accurately reflect the exchange rate fundamental value, which of the following factors do you believe are responsible for this? Yes Excessive speculation Manipulation by the major Customers/hedge funds Excessive central bank intervention Other: ________
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No

No Opinion

8. Select single most important factor that determines price movements in each of the three horizons listed. Intraday a. Over reaction to news b. Speculative forces c. Economic fundamentals d. Technical trading Medium Run Long Run

9. If the commodity market does not accurately reflect the exchange rate technical value, which of the following factors do you believe are responsible for this? Yes Excessive speculation Manipulation by the major trading banks Customers/hedge funds Excessive central bank interventions No No Opinion

10. Does the failure of a commodity in the market fuelled by Hedging affect the general market trend of the demand for the said commodity, what are your views with regard to the same ?

Strongly agree

Maybe
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Depends on the commodity

Disagree

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