future trading (1).ppt

Future Trading

1. Future Trading: Prospects
for Farming Community

2. Types of Risks in Agriculture
•Production or Yield risk
•Technology risk
•Price or Market risk
•Financial risk

3. Risk Management Tools
•Strategies
–On-farm measures
•Diversification
–Risk Sharing
•Production contract
•Marketing contract
•Vertical integration
•Deal in Futures

4. Future Trading
Covers price risk
Provide credit facility

5. Physicalmarkets(Spotmarkets):
Amarketwheregoods,bothperishableandnon-
perishable,aresoldforcashanddelivered
immediatelyorwithinashortperiodoftime
Deliveryandpaymentwithin11days
Forward markets/contracts
Delivery of goods and/or payment of price after
11 days.

6. Future Markets
An agreement entered on an exchange to
trade a commodity of specified quality at a
specified time in future
Standardization of contract
Trading in exchange
Clearinghouse

7. Forwards Futures
Characteristics Forward Contracts Futures Contract
Competitiveness of price Depends on the negotiationYes
Default risk Some No
Ease of re-contracting or offsetDepends on the negotiationYes
Physical delivery Yes Seldom
Search cost & transaction cost
Risk of dishonour
Dispute settlement
Trading in exchange
Clearinghouse
Standardization of contracts

8. Contract specification
•Size of the contract
•Basis Grade
•Deliverable grade
•Contract Months
•Delivery places
•11 bales; delivery=55 bales
•Shankar-6; Fine
•Good, Fully Good, Fine,
Superfine
•Every month, 3 active contracts
•Ahmedabad

9. Components of Future Markets
Genuine Buyers & Sellers
Speculators
Hedgers
Arbitrageurs

10. Speculation:
BuyingorSellingoffutureswiththeaimof
makingaquickprofit.
Arbitrage:
Act of taking opportunity of taking advantage
between the price difference between two
different markets for the same stock or
commodity.
Hedging:
SellingorBuyingacommodityonaparticular
datewithcorrespondingBuying&Sellingon
futuredatetooffsetpricerisk

11. Introduction to Indian Future markets
Evolution of the concept.
Uncertainty of future.
People want safety
Such people come together
Price agreement started In Europe and Japan
Trading sophistication in 19
th
Century in USA

12. History
•More than 125 yrs old
Bombay Cotton Trade Association –1875
Active futures markets in various commodities like Bullion,
oilseeds, wheat, jute, cotton etc.
•During the World War II Futures trading in most
of the commodities suspended.
•1952ForwardContractsRegulationActpassed.
•Tillthelate1990sfuturestradingprohibited/
suspendedinallmajorcommodities.

13. Reopening of the Markets
•Asprocessofliberalizationofeconomystartedin
90stheFuturestradingpermittedinanincreasing
numberofcommoditiesafter1991(Coffee,Jute,
Sugar,EdibleOilseedcomplex)
•The“NationalAgriculturalPolicy”announcedin
July2000emphasizedtheneedforallowingfutures
tradinginagriculturalcommoditiesforrisk
managementandpricediscovery.
•Futurestradingpermittedinallthecommodities
(April2003)

14. 20 Other Regional
Exchanges
NMCE
Commodity Exchanges
MCX
Structure of Indian Commodity Futures
Exchanges
National
exchanges
Regional
exchanges
FMC
NBOTNCDEX

15. Exponential Growth of markets
•22 Recognized Exchanges
4 ‘National’ Exchanges
–MCX, NCDEX , NMCE and ICEX
18 Regional Exchanges
•Futures trading presently conducted
over 100 commodities.
•Volume and value of trading

16. Volume and Value of Trade
Commodity Derivatives
Year Volume
(In Mn. tonnes)
Value
(in Rs. crores)
2000-01 17.98 27,386
2001-02 21.77 34,495
2002-03 31.46 66,530
2003-04 49.30 1,29,363
2004-05 194.21 5,71,759
2005-06 678.88 21,55,122
2006-07 612.93 36,76,926
2007-08 557.34 40,65,989
2008-09 686.34 52,48,956
2009-10
(Feb 10)
841.85 62,33,824

17. 100 Commodities Available for Trading
–Metals-Gold,Silver,Copper,Zinc,Copper,
Aluminumetc.
–Foodgrains-Gram,Pulses,Maize,etc.
–Energy_CrudeOil,NaturalGasetc.
–Spices-Turmeric,Pepper,etc.
–Edibleoilseedcomplexeslikegroundnut,
mustardseed,cottonseed,sunflower,ricebran,
soyoil,etc.
–Fibres-Cotton,Jute,etc.
–Other-Castorseed,Gur,

18. Regulation
•Purpose:
To ensure that markets perform the
twin economic functions of
price discovery and
risk management efficiently.

19. Scheme of Regulation
Three Tier System
1.Central Government has the powers to
permit/prohibit Commodities for futures
trading
2.FMC has the powers to regulate.
3.Exchanges have the powers to regulate as
per their Articles/Bye-Laws approved by
FMC.

20. Economic Functions of
the Futures Markets

21. Economic Functions of the Futures Markets
1.PRICE DISCOVERY
•Price Discovery takes place in the Spot
Markets also.
•But its for the Present only.
•Its also inefficient and localized.
Price Discovery in Futures Markets-
i)Efficient
ii)Takes place at National level
iii)Available for future Months.

22. 2. Price Risk Management or Hedging
•Futures Markets provide facility –
To Companies to protect themselves against the
adverse movements in the prices of raw materials or
products
Exporters–hedge against an increase in the price of their
inputs at the time of meeting export commitments.
Stockiest -hedge the value of their inventory against a price
decline
Processors-hedge against an increase in the price of raw
material.
To farmers to protect against the adverse movement
in the prices of their produce.

23. Other Benefits
1.Price Stabilization
2.Auto Regulation of consumption and
storage
3.Financing of Marketing Operations
4. Value addition to farmers.

24. 1. Price Stabilization
If futures prices >> spot prices
-selling in futures and buying in spot
If futures prices << spot prices
-buying in futures and selling in spot
•Both the processes reduce gap between spot
and future
•Therefore gap between prices in season and off
season reduces.

25. 2. Auto Regulation of consumption and storage
High future prices indicate less availability of commodity
in future.
Therefore tendency to consume less and store more
Low future prices indicate more availability of commodity
in future.
Therefore tendency to consume more and store less
This process avoids over/under consumption and
unnecessary hoarding of commodity

26. 3. Financing of the Marketing Operations
1.Credit needs of primary producers are high and access
to credit is tough.
2.Farmer forced to sell in spot because of immediate
need of money.
3,If waits for higher prices then has to take finance on
the basis of warehouse receipt but there is substantial
haircut.
4.Futures Contracts may provide better security to Bank.
5. Federal Bank has started financing on the basis of
futures contracts in Kerala.

27. 4. Value Addition to Farmer
1.Farmers go for sale of ungraded
produce.
2.Emphasis on grading in futures market
increasing awareness about grading
3.Grading may increase overall realization.
4.Some share of value addition goes to
farmer

28. The farmers can derive benefit from these markets
First Phase
•Farmers can be benefited by Futures Markets by using
price signals for better bargaining capacity. This requires
creation of awareness and dissemination of price
information
Second Phase
Utilization of knowledge and information-
For taking pre sowing and post sowing decisions
For finalizing marketing strategy after harvest
Third Phase
Direct Participation in the Market –
For selling the produce
For pure hedging

29. Aggregation
Aggregation brings to the Exchange platform those
farmers who are unable to participate in futures
trading because of the following constraints:
Large contract sizes.
Lack of awareness
Unable to meet quality standards
High membership fees, Bank guarantees etc
Technological requirements.

30. •Whatdocorporatewanttohedge?
•Uncertaintyinpricesofrawmaterialorfinished
goods.Especiallyifitislargeenoughtobother
them.
•Forinstance,ayarnmanufacturerisexposedtocotton
pricefluctuationswhichiscloseto80%ofhiscosts.
•Apoultryfeedmanufacturerisexposedtoprice
fluctuationsinsoyandmaizewhichaccountforover70%
ofhiscosts.
•Abuilderisexposedtosteelpricevariationasitforms
15–18%oftheconstructioncosts.

31. 31
•Doweneedtwomarkets?
•Yes,spotmarketclearsthegoodsforimmediateconsumption.
•Forwardmarketscatertotheneedsofdiscoveringandsending
futurepricesignaltotheparticipantswhocanuseitforfuture
planning.
•Doesspotmarketcompetewithforward/futuresmarket?
•No,theycomplementeachother.Therolesofthesemarketsare
clearandcategorical.
•Whatistheuseofhavingtwomarketforthesameasset?
•Sincetheassetisthesame,bothspotandforwardmarketsshould
exhibitsimilarmovementinpriceforanexternalevent.Thismakes
itconvenienttocreateanearequalbutoppositepositioninone
markettothatcreatedintheotherthroughtheprocessofhedging.

32. What is a commodity futures exchange?
Afutures exchange is a financial
market where different groups of
participants trade commodity-linked
contracts