A study on commodity derivative market and trading in India.

Powerful Essays
CHAPTER-1:
INTRODUCTION & RESEARCH METHODOLOGY

Introduction:- commodity market
Commodities futures trading have evolved from the need for ensuring continuous supply of seasonal agricultural crops in Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as “rice tickets” Eventually such rice tickets became accepted as a kind of general commercial currency. Rules came into being, to standardize the trading in rice tickets.
The concept of organized trading in commodities evolved in the middle of 19th century, in Chicago, United States. Chicago had emerged as a major commercial hub with railroad and telegraphs lines connecting it with the rest of the world, thereby attracting wheat producers from Mid-West to sell their products to the dealers and distributors. However, lack of organized storage facilities and absence of a uniform weighing/ grading mechanism often confined them to the mercy of dealer’s discretion. This led to inherent need to establish a common meeting place both for framers and dealers to transact in “spot” grain-to deliver wheat and receive cash in return. This happened in 1848.
Gradually, the farmers (sellers) and dealers (buyers) started to make commitments to exchange the produce for cash in future. This is have the contract for “futures” trading evolved whereby the producer would agree to sell his produce (wheat) to the buyer at a future delivery date at an agreed upon price. In this way the framers knew in advance about what he would receive for his produce and the dealer would know about his costs involved. This arrangement was beneficial to both the producer and the trader.
These contracts became popular very quickly and started changing hands even before the delivery date of the product. If a dealer is not interested in taking delivery of the product, he would sell his contract to someone who needed the same.

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