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Agenda. Overview Arbitrage Opportunities Hedging Opportunities Investment Opportunities Institutional Participation NCDEX. Role of an Exchange. Anonymous auction for price discovery Neutrality - conflict of interest avoided Transparent real time price dissemination

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agenda
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
role of an exchange
Role of an Exchange
  • Anonymous auction for price discovery
  • Neutrality - conflict of interest avoided
  • Transparent real time price dissemination
    • Benchmark reference price
    • Liquidity to participants
  • Risk Management in a volatile market
    • Robust Clearing & Settlement systems - counter party credit risk mitigated
    • Fair, safe, orderly market - rigorous financial standards and surveillance procedures
benefits of trade on futures market
Benefits of trade on Futures Market
  • Risk transfer platform from actual users to traders / speculators
    • Helps hedgers concentrate on core activity
  • Long term price signals help
    • Farmers to decide cropping pattern
    • Corporate managers to take investment / capital expenditure decisions
      • Cover sales and raw materials risk
      • Cost of Capital reduced
    • A good investment option
      • Arbitrage opportunities
myths about commodity exchanges
Myths about commodity exchanges
  • Commodity exchanges are speculative markets not meant for actual users
    • Speculators infuse liquidity to enable hedgers to transfer their price risk
  • If commodity exchanges do not enable physical delivery, they are then only for speculators
    • Exchanges are meant for price discovery and physical delivery is only incidental

As Exchanges gain liquidity actual users will separate hedging from physical delivery

slide6

Myths about commodity exchanges

  • How can trading volume be greater than actual production in that commodity?
    • Open Interest is the only true indicator of the depth of the market
    • E.g.: Trading volume in Infosys / Reliance in the Capital markets is a multiple of the outstanding shares
  • Can an Exchange have a price view?
    • Exchange is a platform for price discovery– It is only the thermometer of the price movements and is not responsible for the price movements

NCDEX rigorously monitors & controls level of and composition of Open interest in any commodity

evolution of commodity markets in india
Evolution of Commodity markets in India
  • Ban in forward trading in mid-sixties
  • Emergence of national level online multi-commodity exchanges
    • 3 National level and 21 regional
    • Trade in 60 commodities compared with just 8 in 2000
    • Volumes of Rs 571,000 crores in 2004-05
      • Volume first two months of 2005-06 reached 1,90,000 crores (800 % growth over 25,000 crores in 2004-05)

Traded volume in 2004-05 around 20% of India’s GDP

regulatory structure in india

Regulatory Structure in India

Regulatory Structure in India

Ministry of Finance

Ministry of Finance

Ministry of Consumer

Affairs

Ministry of Consumer

Affairs

National

Housing Bank

Company

Law Board

FMC

National

Housing Bank

Company

Law Board

FMC

Insurance Regulatory

Development Authority

(IRDA)

Pension Funds Regulatory

Development Authority

(PFRDA)

Insurance Regulatory

Development Authority

(IRDA)

Pension Funds Regulatory

Development Authority

(PFRDA)

Commodity

Exchanges

Commodity

Exchanges

Housing Finance

Companies

Insurance

Pension

Funds

Corporates

Housing Finance

Companies

Insurance

Pension

Funds

Corporates

SIDBI

RBI

SEBI

NABARD

SIDBI

RBI

SEBI

NABARD

State Financial

Institutions

Banking /

NBFCs

Capital

Markets

Co-operative Banks &

Regional Rural Banks

State Financial

Institutions

Banking /

NBFCs

Capital

Markets

Co-operative Banks &

Regional Rural Banks

slide9

Structure of Indian Commodity Futures Exchanges

FMC

CommodityExchanges

Nationalexchanges

Regionalexchanges

NCDEX

NMCE

MCX

NBOT

20 Other Regional Exchanges

growth in volumes of indian commodity exchanges
Growth in volumes of Indian Commodity Exchanges

Rs Crores

Impressive growth of 341 % between 2003-04 to 2004-05

agenda12
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
arbitrage opportunities
Arbitrage opportunities
  • Law of One Price – “a commodity cannot command two different prices in two different markets ”
  • Arbitrage opportunities emerge out of pricing inefficiencies
    • Between the cash & derivatives market
    • Between two futures contracts with different expiry dates
    • Between two or more exchanges
agenda15
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
slide17

Steel: Need for hedging mechanism

  • Characterized by high volatility during the last 2 years
  • Steel market expected to remain volatile
  • Participants need a mechanism to reduce price risk
  • Steel futures can help mitigate price risk
  • Steel futures will give an indication of future trend in steel prices
seller s hedge assumptions
Seller’s hedge - assumptions
  • Price of saleable steel falls by 10% in FY02
  • Steel hedged at FY01 prices
  • Decrease in PBDIT solely due to fall in price of saleable steel
seller s hedge
Seller’s Hedge

(* Saleable steel constitutes approx. 72% of sales)

If hedged completely, could have made incremental profits of

Rs 518 crores, 44% higher

buyer s hedge assumptions
Buyer’s Hedge - assumptions
  • Prices increase by 17% in FY04
  • Prices hedged at FY03 prices
  • Decrease in PBDIT is solely because of increase in raw material component
case study buyers hedge
Case Study-Buyers Hedge

The company could have saved the loss of around Rs 97 crores by hedging,

i.e. 15% higher profits

effect of price shock
Effect of Price shock

Rs crores

Source: CMIE

Even an increase of 5 % in cost of raw materials could wipe out the profits of a raw material intensive commodity

agenda23
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
conducive drivers
Conducive drivers
  • Beginning of the Bull phase after 20 years of Bear market
  • Escalating commodities demand from Asia, especially China
  • Depreciating dollar – shift to hard currencies like Gold
  • Inflationary pressures build-up
  • Surging energy prices – leading to energy crisis
  • Rise in commodity demand with economic recovery
ncdex agri vs nse nifty

1350.00

2500

1300.00

2000

1250.00

1500

1200.00

1150.00

1000

1100.00

500

1050.00

1000.00

0

16-Dec-02

05-May-03

22-Sep-03

09-Feb-04

28-Jun-04

15-Nov-04

04-Apr-05

NCDEX Index

NSENIfty

NCDEX Agri vs. NSE-Nifty

Correlation coefficient is 0.02

correlation 1997 05
Correlation: 1997-05

Data: LBMA bullion prices, NSE Nifty, NSE G-Sec Index

Benefit of diversification can be seen from the

Risk Adjusted Returns

volatility comparison 1997 05
Volatility comparison – 1997-05

Average annual volatility

  • Sensex or Nifty - 25-30%
  • Govt Sec Index - 5-10%
  • Gold - 12-18%
  • Silver - 15-20%
  • Cotton - 10-12%
  • Oil seeds - 15-20%
  • Commodities are less volatile compared to equity market, but more volatile as compared to G-Sec’s
portfolio diversification value investing
Portfolio diversification & value investing
  • Low co-relation between stocks/bonds and the commodities market
    • Better diversification of portfolio
  • Commodity markets are less risky compared with stock market.
    • Reduces risks in a diversified portfolio
agenda30
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
regulatory facilitation
Regulatory Facilitation

Institutional Participation

Banks,MFs, PFs, FIIs

Pool the retail money to the

market, boost liquidity & volume

Exchange Traded

Options

Benefit of ‘upside’ for

value-investing

Trading on

Commodity Indices

Benchmarking the market

banks present scenario
Banks - Present Scenario
  • Not allowed to trade on commodity exchange
  • Not allowed to do margin financing against commodities
  • Bank lending to commodities remained very low
    • Commodity a ‘sensitive sector’
    • Not under priority sector lending
    • Credibility of Warehouse receipts
    • Reliability of the warehouse
    • Hedging not possible

Bank lending against commodities was only Rs 9,952 cr out of Rs 8,64,143 cr

i.e. 1.1% as on March’04

involvement of banks
Involvement of Banks
  • Banks as aggregators
    • Institutions with good rural presence and sufficient financial expertise and infrastructure
  • Banks can hedge their agri and corporate loans
  • Banks as market makers for price stabilization
    • Role similar to the role of RBI for stabilization of dollar prices
  • Banks as dealers in commodity markets
fii presence
Benefits

More liquidity

Broaden and deepen markets

Help in the utilization of capital

Global experiences

Research

Best practices

Issues involved

Concentration and control over prices of crucial commodities

Physical delivery

Withdrawal from the country

FII presence
involvement of mutual funds
Involvement of Mutual Funds
  • Mutual Funds can bring liquidity and professional skill in the commodity market
  • Mutual Funds can mobilize small savings and invest in commodities and commodity derivatives
  • Easiest route for retail investment
options and indices
Options and indices
  • Options
    • Provides benefit of upside
    • Substitute MSP of government
    • Not allowed under FCRA
    • Need for changes in the Act
  • Indices
    • Weather indices
    • Regulatory changes needed
agenda37
Agenda
  • Overview
  • Arbitrage Opportunities
  • Hedging Opportunities
  • Investment Opportunities
  • Institutional Participation
  • NCDEX
ncdex current shareholders
NCDEX – Current shareholders

NABARD

15%

NSE

15%

IFFCO

12%

CRISIL

12%

ICICI Bank

15%

LIC

15%

Canara Bank

8%

PNB

8%

  • Only institutions are our shareholders
  • NCDEX fully compliant with shareholding guidelines
slide40

Product Calendar

Apr-Dec 2004

Jan – May 2005

In pipeline

Dec 2003

Gold, Silver, Crude Palm oil, RBD Palmolein, Cotton, Mustard seed, Mustard oil Soybean, Refined soy oil

Guar seed, Jute sacking, Chana, Rubber, Pepper, Wheat, Castor seed, Guar gum, Raw jute, Urad, Yellow peas, Sugar, Turmeric, Soymeal

Gur, Rice, Maize, Raw silk, Cocoon, Jeera, Chilli, Steel, Cashew, Cottonseed oilcake, Sesame seed, Tur, Arabica & Robusta Coffee, Copper Cathode

Other base Metals, Energy Products, More Agricultural products

Each product is selected after an in-depth research & market feedback

average daily volumes
Average daily volumes

Rs cr

Peak Volume for a single day

Rs. 4271 cr on Mar 30 ‘05

Impressive growth of NCDEX with 85% volume contribution from agriculture

robust deliveries 2005
Robust Deliveries - 2005

Deliveries of over 1,10,000 MT in first quarter 2005-06

deliveries to open interest june 2005
Deliveries to Open Interest – June 2005

Deliveries in over 18 commodities

architecture for price discovery
Architecture for Price Discovery

610

members

Spot Price

polling

6600

terminals

70,000

daily

trades

490

centres

155,0000

daily

orders

37

commodities

80% agri

volume

250

Awareness

Programmes

100 delivery

centres

Monthly

Deliveries of

40-45000 tt

price dissemination choose your crop
Price dissemination: Choose your crop

Radio

TV Channels

E-chaupals

N-logue

News agencies

PCOs

Newspapers &

journals

Kisan call

centres

AGMARKNET

IFFCO, HAFED

Warehouses

Bank branches

pre harvest
Pre-harvest

Price

hedging

NCDEX

Farmers

Aggregator

Insurance

Bank

Finance

Buffering yourself from nature’s vicissitudes

post harvest scenario
Post Harvest Scenario

Farmer sees NCDEX spot and futures prices

Sells futures On NCDEX

Approaches mandi of choice

Lodges goods

in NCDEX/NCMSL warehouse

90 WAREHOUSES

Goods assayed

by approved assayers

Working with

all leading assayers

Warehouse Receipt

in electronic form

NCMSL arranges credit

Bank finance against WR

grading and standards improve your prospects
Grading and Standards: Improve your prospects

IARI

Grading in rice, wheat

maize

Quality

standards

CIRCOT

Grading in cotton

impact of ncdex on prices
Impact of NCDEX on Prices

Prices are those received by the farmers after adjusting for the taxes and other incidentals. The

Prices are from the following mandis: Bikaner, Calcutta and Ahmedabad. Numbers marked in

red pertain to Prices after trading was enabled on NCDEX.