Commodity market is gaining attention worldwide as a best alternative investment options. As the demands for various commodities increase, markets are steady and the fluctuations are predictable. It is also easier to manage and fetch good yields, if done properly. However, the investor needs to monitor commodities market on regular basis at the right time to achieve his investment objectives. The global meltdown has resulted in escalating precious metals such as gold and silver in gaining momentum as alternative investment options. Demand for precious metals is growing world over and owing to this the prices are increasing steadily. Investing on gold and silver fetches good returns in medium to long terms, besides the risks are lesser in comparison to other types of investments such as stock market and commodity market. Thus they serve as ideal alternative investments option for risk-averse investors. Thus the project contains a detailed study about the commodity markets and widely traded commodities all over the world.
CHAPTER 1: COMMODITY AND COMMODITY MARKETS
1.1 WHAT IS COMMODITY?
Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable property other than actionable claims, money and securities". Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubberand spices, etc. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion).
1.2 WHY IS COMMODITY DERIVATIVE REQUIRED?
India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset. A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc Two important derivatives are futures and options:
1. Commodity Futures Contracts:
A futures contract is an agreement for buying or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. Commodity futures are contracts to buy specific quantity of a...
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