A Report

On

MANAGING VOLATILITY

IN

COMMODITY FUTURES MARKET

By

AKSHAY BHALLA

Enrollment No. – 11bsp1274

Batch – 2011-13

A Report

On

Managing Volatility

In

Commodities Market

A report submitted in partial fulfillment of the requirements ofPGPM of ICFAI Business School, Gurgoan

By

Akshay Bhalla (11bsp1274)ICFAI Business School, Gurgoan

Distribution List

Faculty In-charge: Prof. DEEKSHA SINGH

Company Guide: Mr. N.S Kochhar

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ACKNOWLEDGEMENT

I would like to express my deepest gratitude and sincere thanks to my faculty Guide Prof. DEEKSHA SINGH for her valuable suggestions, scholarly guidance, and constant encouragement at every step of the project.

I owe a great deal to IBS for laying the building blocks of logic and pragmatism in my life. This report, in a way is a reflection of these values. The Summer Internship Program (SIP) provided me with a unique opportunity of working with an organization.

I am deeply indebted to my Company Project guide Mr. N.S Kochhar (Senior Relationship Manager) whose guidance has been a welcoming help that saw me through the completion of my project amd other staff members of AMRAPALI with whom I have interacted during the course of the project, for offering their kind co-operation and providing knowledge to encompass my views of this field.

These are some persons who have helped me a lot during this project. All these people have given me the right track whenever I was going away from the required objectives.

Last but not the least, I express my profound gratitude to the team of Amrapali Aadya, Delhi for providing a congenial and competitive work environment, which was a catalyst for a great learning experience.

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Table of Contents

CONTENTS Page No.

1. ABSTRACT………………………………………………………………… 3

2. OVERVIEW OF COMPANY…………………………………………………. 5

3. INTRODUCTION…………………………………………………………… 9

4. OBJECTIVE AND SCOPE……………………………………………………. 11

5. LIMITATIONS OF THE PROJECT………………………………………… 13

6. METHODOLOGY. 14

6.1 Phase1………………………………………………………………………… 15

6.2 Phase2………………………………………………………………………….. 24

6.3Phase3…………………………………………………………………………... 27

6.4Phase4…………………………………………………………………………… 27

6.5Phase5………………………………………………………………………........ 28

7. MAIN BODY…………………………………………………………………… 31

7.1 Fundamental Analysis of Copper……………………………………………….. 33

7.2 Generation of database………………………………………………………….. 47

7.3 Preparation of daily e- newsletter……………………………………………….. 50

7.4Volatility………………………………………………………………………… 54

7.5 Beta of commodities…………………………………………………………… 64

7.6 Portfolio Design……………………………………………………………….. 69

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8. VALUE ADDITION TO THE COMPANY…………………………………. 76

9. CONCLUSION/RECOMMENDATION…………………………………….. 78

10. Learning’s from Sip……………………………………………………………. 79

11. REFRENCES…………………………………………………………………. 80

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1. Abstract

TITLE: Managing Volatility in Commodity Futures Market

ORGANIZATION: Amrapali Aadya Limited

REPORTING OFFICER: Mr. N.S Kochhar

FACULTY GUIDE: Prof. DEEKSHA. SINGH

STUDENT’S NAME: Akshay Bhalla

Financial world is fast changing man has discovered new and new ways of trading; Commodity market is a new arena of investments for investors in which they can trade with the commodities they deal in. From the past few years commodity markets has strengthen its roots in India and tools like Hedging and commodity management has become essential for the companies who deal in these commodities to safeguard themselves from price volatility. Rising raw material costs (input cost) has affected the profitability of companies to a great extent which has made essential for such companies to trade on these exchanges in order to hedge their risk from price volatility of their respective commodities they deal in. This report will give an insight of commodity market workings and how hedging can be used as a tool by the companies who are suffering from price volatility in safeguarding their company profitability. Report will also try to answer questions of various bullish run in commodities like Gold, copper and risk associated with each of it. Important aspects like effect of global scenario on commodity market, interdependence of world-wide commodity exchanges and portfolio including commodities are clearly explained in this report. All he technicalities along with basic concepts are given in this report to make it well understandable by the readers. Various observations made during contacting different base metal industries and some of the live cases during the project are also a part of this report. Many technical analyses like:

Calculating Value at Risk Calculation of Volatility of base metals

Analyzing price trends and finding out correlations etc. are also included in this report.

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The project “Managing volatility in commodity markets” includes understanding the

technique of Hedging (technique which help to set off loss caused by the presence of price

volatility) and spreading the awareness of hedging in the companies dealing in the procurement

of base metal. The project also includes creating a database of companies which procure base

metals and then establishing a point of contact with them and learning how do they tackle price

volatility, making them aware of hedging and designing strategy for them. Generating a daily

news letter which enfolds daily news about the happenings in commodity market around the

globe, prices of base metals from different exchanges present globally etc is also a part of the

project. This daily news letter is meant for the companies which are already clients of Amrapali

or which are now included in the database for spreading awareness. Project also includes

business development part which is about making new clients for Amrapali Aadya who is

interested in hedging for setting of their losses. These clients are big companies having a

turnover of near about Rs. 100 cr. per year. On the one hand project deals in commodity research

in which include both fundamental and technical research, on the other hand it includes

promotion of the concept of hedging among the companies which procure base metals on the

national level.

Commodity market can solve these problems of rising input cost, inflation very efficiently. Only we need for it is the complete understanding of commodity market and its functioning. This study will help me to find the relation between the economy and commodity market in deeper sense.

.

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2. Overview of the Company

1.1 About Amrapali Aadya

Amrapali Aadya family welcomes all the investors to a highly committed and dependable financial organization that strives to deliver the best of investment related services. At Amrapali Aadya, we believe and dare to do what other financial and stock broking houses feel impossible in terms of client satisfaction. We are new but confident name in financial market. The company is always aggressive to adopt the latest technologies for its operations. Amrapali Aadya is using some of the best brains in trading and some of the best software and hardware systems to give its clients maximum profit. We are incorporated in 2004, having membership of National Stock exchange (NSE).

We offer a large variety of investment avenues to cater to the needs of different classes of investors by our physical presence in different parts of India.

1.2 What are the AMRAPALI advantage s?

Trade from anywhere in India

Amrapali, with its network of branches across the length and breadth of the country, is always within your reach, no matter where you are. This gives you the facility to trade from anywhere in India.

Reliable research

Amrapali has a dedicated team of research analysts who work round the clock to provide the best research newsletters and advices. They reach your desk daily, weekly and monthly.

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Personalized Services

Amrapali, with its wide array of personalized services from registry to stock broking takes the pleasure of adding one more service, commodities broking with the same personal touch.

State of Infrastructure

The strong IT backbone of Amrapali helps them to provide customized direct services through their back office system, nation-wide connectivity and website.

Round the clock operations in commodities trading

Indian commodities market, unlike stock market keeps awake till 11 in the night and Amrapali is all poised to offer round the clock services through its dedicated team of professionals.

1.4 About Amrapali Aadya Limited

Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system. The futures contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for hedging the risks of the farmers, importers, exporters, traders and large scale consumers. They also make open an avenue for quality investments in precious metals. The commodities market, as it is not affected by the movements of the stock market or debt market provides tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into this market.

Amrapali Aadya Limited is another venture of the prestigious Amrapali group. With their well established presence in the multifarious facets of the modern Financial services industry from stock broking to registry services, it was natural for them to make foray into the commodities derivatives market which opened yet another door for them to deliver their service to the investor public at large.

The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, they offer a wide reach through their branch network of over

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225 branches located across 180 cities.

1.5Who are the Competitors of Amrapali Aadya Limited?

Religare Commodities Limited

Religare Commodities Limited (RCL) was initiated to spearhead Exchange based Commodity Trading. As a member of NCDEX, MCX and NMCE, RCL is a trade facilitator providing the platform to trade in commodities. Grounded in the Religare philosophy, highly skilled and dedicated professionals strive to offer the client best investment solutions across the country.

The Operating Fabric - Commodities Business

In terms of the business structure, RCL caters to retail clients; its Arbitrage Desk caters to the farmers and commodity traders in the rural areas through it’s Mandi locations across the country and the Corporate / Institutional business through one of the “best in class” Corporate Desks.

Their business philosophy is to treat each client situation as unique, requiring customized solutions. Their list of corporate clients reads like a Who’s Who of the Indian Industry and they have been successful in providing them with practical customized solutions for their requirements. They are propelled by our group vision and desire to strive tirelessly and aim to be the best within this category.

The Religare edge

Pan India footprint

Ethical business practices

Nationwide presence including Mandi Locations for in-depth and firsthand information

Offline/Online delivery models

Powerful research and analytics supported by a pool of highly skilled Research Analysts

Single window for all investment needs through your unique CRN

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AnandRathi

AnandRathi is a leading full service securities firm providing the entire gamut of financial services. The firm, founded in 1994 by Mr. AnandRathi, today has a pan India presence as well as an international presence through offices in Dubai and Bangkok. AR provides a breadth of financial

and advisory services including wealth management, investment banking, corporate advisory, brokerage & distribution of equities, commodities, mutual funds and insurance, structured products - all of which are supported by powerful research teams. The firm's philosophy is entirely client centric, with a clear focus on providing long term value addition to clients, while maintaining the highest standards of excellence, ethics and professionalism. The entire firm activities are divided across distinct client groups: Individuals, Private Clients, Corporates and Institutions and was recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth managers for the ultra-rich.

In year 2007 Citigroup Venture Capital International joined the group as a financial partner.

Motilal Oswal Commodities Broker (P) Ltd.

 

Motilal Oswal Commodities Broker (P) Ltd. has been providing commodity trading facilities and related products and services since 2004. It is a wing of Motilal Oswal Financial Services which is a well diversified financial services group having businesses in securities, commodities, investment banking and venture capital. With 1300 business locations and more than 3,85,000 customers in over 425 cities, Research is the solid foundation on which Motilal Oswal Commodities advice is based.

The organization finds its strength in its team of young, talented and confident individuals.

Qualified professionals carry out different functions under the able leadership of its promoters,

Mr. Motilal Oswal and Mr. Raamdeo Agrawal. Stringent employee selection process, focus on

continuous training and adoption of best management practices drive the quest to achieving our

Core Purpose and Value

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3. Introduction

A commodity exchange/market is an exchange where commodities are traded. Commodity

market in various aspects is different from that of financial market whether we take the physical

delivery concept in the commodities or the quality of underlying asset which differentiate it from

latter. This project is a blend of both marketing as well as finance concepts, it emphasis on the

application of the concepts in real business scenario. Project deals in Commodities Future

Market and is planned to give basic as well as in-depth knowledge about the commodities future

market. Since commodities market is very vast therefore our project is limited to base metals like

copper, zinc, aluminum, lead, tin etc and touches Gold and crude oil among the rest of

commodities. Project mainly emphasis on the Price Volatility and Hedging of the commodities in

the commodity market and how these things affect the business units who deals with these

commodities.

A commodity is anything for which there is supply, but which is demanded

without qualitative differentiation across a foreign market. More clearly we can say any item that

can be bought and sold taken to refer to Exchange– traded items including sugar, wheat, soya

beans, coffee and tin. To be considered a commodity, an item must satisfy three conditions:

It must be standardized (for agricultural and industrial commodities it must be in a "raw" state).

It must be usable (i.e., have a shelf life) upon delivery. Its price must vary enough to justify creating a market for the item.

In recent years it has been seen that almost all the companies who are dealing in base metals have incurred losses due to price volatility in the metals they are using. But if companies do proper commodity management this volatility can itself give them a competitive edge on those who are not managing their commodities effectively. Companies can turn price volatility in raw materials and finished products into a key differentiator, giving them more opportunity to reduce costs, achieve higher average profitability and expand market share. An effective commodity management strategy has two fundamental characteristics:• It is holistic, with a focus on managing the net exposure between the buying side and the selling side.

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• It is based on informed insight and strong analytics.Developing and executing this type of strategy is no small undertaking, but the path is usually clear and the results can help companies in their efforts to achieve business goals and objectives.The holistic approach to managing commodities takes a very different view: that volatility can be transformed into a source of competitive advantage by integrating all the major functions of a business including procurement, manufacturing, finance, sales and marketing, and technology.The centerpiece of the holistic approach is the integration of procurement and sales activities to help manage net exposure. This is an important departure from traditional approaches because it takes into account all of a company’s influencers. Accurately assessing net exposure can be a complex effort that few if any organizations are undertaking. A chemical producer may be buying 10 or more raw materials, each with a different exposure to volatility. At the same time, it is selling a variety of products that each have their own volatility exposures. Companies need to understand the movement of prices on both sides, and they need insight into future prices to manage net exposure effectively.

A broad, holistic approach can support vital strategic actions in a way that most other approaches cannot. It should be noted that organizations benefit most from this approach when they use it to closely integrate their procurement and sales operations. However, a strategy that encompasses both the buying and selling sides is not feasible or even necessary in all situations. Consumer product companies have extensive exposure on the buying side, but far less volatility on the selling side because terms and prices generally cannot be linked to material price spreads. In contrast, an integrated holistic approach is highly appropriate for industries like chemicals, basic metals, and pulp and paper, where commodities are routinely purchased and processed into new commodities for sale to other industrial customers. Whether an integrated approach is ultimately taken or not, most companies that are just embarking on this path are encouraged to focus their initial efforts on procurement.

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4. Objective and Scope of Study

Objective of the study: The objective of study is to understand the commodity futures

market in detail and to get acquainted with the tools and concepts used in it. Spreading

awareness about hedging and developing business for Amrapali Aadya is also the main objective

of the study.

Overall the study focuses on fulfillment of following objectives:

Study the present scenario of commodity future market in the Indian context To learn about the causes and effects of volatility and study the existing the trends To assist the company in minimizing the risk associated with volatility and finding

ways and techniques to overcome it. Generating business for the company Educating the companies who deal in base metals about hedging

Scope of study: Accepting the fact that commodity futures market is a vast area and three

months are not enough to study all the commodities in detail so the scope of my study is limited

to the non-ferrous metals or base metals like Aluminum, zinc, copper, nickel, tin and in other

commodities my project touches only Gold in precious metals. Some basic information about the

metals on which this report and project is concentrated is given below:

ALUMINIUM

Aluminium is one of the most widely used industrial raw materials all over the world. Aluminium is an important material used in a wide spectrum of industries ranging from aerospace, engineering, transportation, logistics and construction Global consumption of Aluminium in 2007 registered a growth of near about 4 percent to approximately 35 million tons in. India is rated as the fifth largest producer of Aluminium in the world. LME, NYMEX, TOCOM, SHFE are the leading centers of global aluminum trade.

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COPPER

Copper is a metal that has played vital role in human civilization. One of the earliest metals harnessed by the human beings, copper is still widely used as an industrial raw material. Copper is the third largest consumed metal after steel and aluminum in the world. Copper is used as electrical conductor, construction material and as components in telecommunications and alloys.

LEAD

As is the case with copper, lead has also been a familiar metal used by human beings since ancient times. Lead, a highly malleable and easy to melt metal, is widely used in various industries even today. However, due to its highly toxic nature, the use of lead has been facing pressure from environmentalists in recent years. The pressure to end manufacture of lead-based paints is an example of the growing concern on the potential health hazards caused by lead.NICKEL

Nickel, belonging to iron group, is a silvery white metal known for its hard and ductile properties. Mainly used as an alloy in steel, demand and supply of Nickel is closely linked with the fortunes of stainless steel. Nickel is a highly volatile traded commodity due to its importance as a critical input in stainless steel manufacture. Rising demand and limited supply is the major feature of global nickel industry at present. Russia tops in global nickel output followed by Australia, Canada and New Zealand. China, US and European Union are the main consumers of nickel.

TIN

A white silvery metal, Tin is well known for its corrosion resistance against distilled and salt water and ordinary tap water. It is not a metal in abundance in the world. Tin is widely used in electronics, soldering, food packaging, engineering alloys, anti-corrosion coatings and several other industries. Growth in the Asian electronics industry and replacement of lead-based solders are the key triggers for tin consumption in the world. As is the case with many other metals, China is the leading consumer of Tin world-wide.

ZINC

Zinc is the fourth widely used metal after steel, aluminum and copper in the world. Mainly used for galvanizing steel, zinc is also used in alloys, batteries, rubber, paint, electroplating metal spraying and many other metals. The rapid growth in the Asian region is mainly the trigger for rise in global zinc consumption.

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5. Limitations of study

Doing fundamental and technical analysis in commodities gives us a predicted price trend

and technical analysis gives price limits for commodities. But dependence of commodity

market on various global factors like as interest rate changes, political situation of the

countries, government policies and various other macro variables reduces certainty of

such predications which is a limitation to the project.

Hedging is a new concept, and awareness about the concept is still in its nascent stage,

many people in industry take hedging as a profit making tool which is a wrong approach

as it a tool which is not meant for making profits it is basically a technique with which

losses can be set off and profitability of company can be safeguarded from losses. This

lack of awareness and wrong approach in itself a limitation to project.

Finding industries which deals in procuring metals in large quantities limits project to

high end only.

Project is very much dependent upon the understanding of the person with whom we are

interacting because his lack of understanding or any misconception can lead to failure of

whole exercise.

Perception of people in industry of not accepting change is again a limitation to the

project as many of the time people are not ready to change the traditional way of doing

business and take these tools as non worthy for their business.

Project demand establishing contact with decision maker of the company which is a

difficult job.

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6. Methodology

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Phase 7Making a report on whole project and submitting it to company as well as

college guide

Phase 6

Analyzing the research and implementation of the research

Phase 5

Technical analysis of commodities

Phase 4

Contacting the companies and doing market research on their ways to counter volatility in the commodity market

Phase3

Preparation of database of companies procuring base metals for their production

Phase2

Fundamental research on commodities

Phase1

Understanding commodities future market and related concepts

6.1 Phase1 – Understanding commodities future market and related concepts

Evolution of the commodity market in India:

Bombay Cotton Trade Association Ltd which was set up in 1875 was the first organized futures market in India. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay Cotton Trade association. First time futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali, which carried on futures on futures trading in groundnut, castor seed and Uttar Pradesh. The most notable futures exchange for wheat was chamber of commerce at Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920. Calcutta Hessian Exchange Ltd was established in 1919 for futures trading in raw jute and jute goods. But if we talk about an organized futures trading in raw jute it began in 1927 with establishment of East India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods. It was in 1952 when Forward Contracts (Regulation) Act was enacted and the Forward Markets Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and Public Distribution. In due course, several other exchanges were created in the country to trade in diverse commodities. Following is the table which shows different commodity exchanges in India and the products in which they deal in.

Commodity Exchange Products

National Board of Trade, Indore Soya, mustard

National multi commodity exchange, Ahmedabad

Multiple

Ahmedabad commodity exchange Castor, cotton

Rajdhani oil & oilseeds Mustard

Vijai Beopar chamber Ltd. Muzazaffarnagar

Gur

Rajkot seeds, oil & bullion exchange Castor, groundnut

IPSTA, cochin PepperChamber of commerce, Hapur Gur, mustard

Bhatinda Om and oil exchange Gur

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The Government of India permitted establishment of National-level Multi-Commodity exchanges in the year 2002 and accordingly three exchanges have come into picture. They are

Multi-Commodity Exchange of India Ltd, Mumbai (MCX).

National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).

National Multi Commodity Exchange, Ahmedabad (NMCE).

However there is regional commodity exchanges functioning all over the country.

Commodities Traded in Exchanges

Broadly commodities traded in exchange are classified as

Metals(Copper, Zinc etc) Agri-Products(sugar, soya been etc) Bullion(Gold, Silver etc) Energy(Crude Oil etc)

Detail classification of commodities traded in commodity exchange is given in following diagram:

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Margin - Financial Integrity of Futures

A futures contract is highly leveraged product requiring only a fraction of its actual value on deposit with their registered commodity broker. In the world of future market the fund on deposit when trading futures contracts are called margins. These margins can be better described as the performance bond or good faith money. An initial margin is meant to cover the largest potential loss over a one day horizon. Margin requirement are determined on the basis of market risk and Contract Value

Types of margins are as follows:

1) Initial Margin: It is the amount of money required per contract to initiate a future transaction. It is required of both buyer and seller. This margin is meant to cover maximum potential loss in one day.

2) Maintenance Margin: Maintenance margin is a minimum equity balance in a margin account that must be maintained at all time. If the balance falls below maintenance level, a margin call will occur requiring you to deposit additional funds into your margin account.

3) Hedge Margin: Hedge margin is less than initial margin and only applies to hedger. Hedge margin is usually same as the maintenance margin for speculator.

4) Additional Margin: In case of sudden higher than expected volatility, the exchange call for an additional margin, this is preemptive move to prevent breakdown. This is imposed when the exchange fears that markets have become too volatile and may result in some payments crises, etc.

5) Mark-to Market Margin (MTM): At the end of each trading day, the margin account is adjusted to reflect the trader’s gain or loss. All futures contracts are settled daily reducing the credit exposure to one day’s exposure. The accounts are either debited or credited on how well the positions fared in the day’s trading session. If the account falls below the maintenance margin level the trader needs to replenish the account by giving additional funds.

As these margins are predetermined by exchange on various techniques of VAR etc

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Following is a TABLE SHOWING THE DETAILS OF MARGIN ON MAJOR COMMODITIES TRADED ON MCX & NCDEX

MCX Commodity Initial

Margin Quotation Lot Size Delivery

Centre Available months

Gold 3.5% 10 Gms 1 Kg Mumbai, Ahmadabad

Feb, Apr, Jun, Aug, Oct, Dec

Silver 5% 1 KG 30 KG Ahmadabad Mar, May, Jul, Sep, Dec

Crude Oil 5% 1 bbl 100 bbls Mumbai All months Soy Oil 3% 10 KG 10 MT Indore All months Pepper 8% 10 KG 100 KG Kochi All months Soy Seed 4% 1 MT 10 MT Indore All months

NCDEX Commodity Initial

Margin* Quotation Lot Size Delivery Centre Available

months Guar Seed 5-10 % 100 KG 10 MT Jodhpur All months Soy Oil 5-10 % 100 KG 10 MT Indore All months Sugar M 5-10 % 100 KG 10 MT Muzaffarnagar All months Gold 5-10 % 10 Gms 1 Kg Mumbai Feb, Apr, Jun,

Aug, Oct, Dec

Silver 5-10 % 1 KG 30 KG New Delhi Mar, May, Jul, Sep, Dec

Wheat 5-10 % 100 KG 10 MT Delhi All months Pepper 5-10 % 100 KG 1 MT Kochi All months Chana 5-10 % 100 KG 10 MT Delhi All months Soy Bean 5-10 % 100 KG 1 MT Indore, Nagpur,

Kota All months

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Commodity exchanges work on a global scenario where every commodity exchange has an impact on another like LME is known for base metals and due to unmatchable price discovery, depth etc and hence are taken as standards in determining base metal prices all over the world like-wise following table gives information about major world commodity exchanges and major commodity traded in these exchanges.

S ome of the World’s Major Commodity Exchanges

Sr. No.

Name and Address Contracts Traded

1 Chicago Mercantile Exchange (CME)

Butter, Milk, Diammonium Phosphate, Feeder cattle, Frozen Pork bellies, Lean Hogs, live Cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc.

2 New York Mercantile Exchange (NYMEX)

Light Sweet Crude Oil, Natural Gas, Heating Oil, Gasoline, RBOB Gasoline, Electricity, Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.

3 London International Financial Futures and Options Exchange (LIFFE)

Cocoa, Robusta Coffee, Corn, Potato, Rapeseed, White Sugar, Feed Wheat, Milling Wheat, etc.

4 Chicago Board of Trade (CBOT) Corn, Soybeans, Soybean Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice, Gold, Silver, etc.

5 London Metal Exchange (LME) Aluminium, Copper, Nickel, Lead, Tin, Zinc, Aluminium Alloy, North American Special Aluminium Alloy (NASAAC), Polypropylene, Linear Low Density Polyethylene, etc.

6 New York Board of Trade (NYBOT)

Cocoa, Coffee, Cotton, Ethanol, Sugar, Frozen Concentrated Orange Juice, Pulp etc.

7 Tokyo Commodity Exchange(TOCOM)

Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Palladium, Aluminium, Rubber, etc.

8 Sydney Futures Exchange (SFE) Greasy Wool, Fine Wool, Broad Wool, Cattle, etc.

9 Dubai Gold and Commodities Exchange (DGCX)

Gold, Silver, Fuel Oil, Steel, Freight Rates, Cotton, etc.

10 Bursa Malaysia Berhad Refined Bleached Deodorized Palmolein, Crude Palm Oil, Palm Kernel Oil, etc.

11 Winnipeg Commodity Exchange Canola, feed Wheat, Western Barley, etc.

12 Dalian Commodity Exchange Corn, Soybean, Soybean Meal, Soy Oil, etc.

13 Zheng Zhou Commodity Exchange (CZCE)

Wheat, Cotton, Sugar, etc.

14 Central Japan Commodity Exchange

Gasoline, Kerosene, Gas Oil, Eggs, Ferrous Scrap, etc.

15 Shanghai Futures Exchange (SHFE)

Copper, Aluminium, Natural Rubber, Plywood & Long Grained Rice

16 Brazilian Mercantile and Futures Exchange

Anhydrous Fuel Alcohol, Arabica Coffee, Robusta-Conillon Coffee, Corn, Cotton, Feeder cattle, Live Cattle, Soybean, Crystal Sugar, Gold, etc.

Hedging (A tool to fight against price volatility) – The Concept

Hedging is a strategy designed to reduce investment risk using call options, put options, short-

selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the

volatility of a portfolio by reducing the risk of loss. Many of the participants in the commodity

futures market are hedgers. These participants use these futures market to reduce a particular risk

that they face. This risk might relate to the prices of wheat \,copper or any other commodity the

person deals in.

Example of hedging: There is a wheat farmer who wants to hedge the risk of fluctuations in the

price of wheat around the time that his crop is ready for harvesting. By selling his crop forward,

he obtains a hedge by locking in to predetermined price. Hedgers can be a government

institutions, private corporations like financial institutions, trading companies and even other

participants like farmers, contractors, processors who are influenced by the commodity prices.

Basic principles of hedging

When an individual or a company decides to use the futures markets to hedge a risk, the

objective is to take a position that neutralizes the risk as much as possible. Let’s take the case of

the company that knows that it will gain Rs. 100000 for each 1 rupee increase in the price of the

commodity over the next three months and will lose Rs. 100000 for each 1 rupee decrease in the

price of the commodity over the same period. To hedge the company should take a short position

that is designed to offset the risk. The future position should lead to a loss of Rs. 100000 for each

1 rupee increase in the price of the commodity over the next three months and a gain of Rs.

1000000 for each 1 rupee decrease in the price during this period. Now, if the price of

commodity goes down, the gain on the futures position offset the loss on the commodity. If the

price of the commodity goes up, the loss on the futures position offset by the gain on the

commodity.

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There are two kinds of hedges that can be taken

Short Hedge

Long Hedge

Short Hedge: - A short hedge is a hedge that requires a short position in futures contracts.

Short position is a position in which the hedger already owns the asset or is likely to own the

asset and expects to sell it at some time in the future.

Long Hedge: - A long hedge is a hedge that requires a long position in a future contract. Long

position is a position in which an edger knows that he will have to purchase a certain asset in

future price and wants to lock in a price now.

Advantages of Hedging

It stretches the marketing period for example; a livestock feeder doesn’t have to wait until

his cattle are ready to market before he can sell them.

It protects inventory values, for example a merchandiser with a large unsold inventory

can sell futures contracts that will protect the value of inventory even if the price of the

commodity drops.

It permits forward pricing of products for example a jewelry manufacturer can determine

the cost of gold, silver or platinum by buying a futures contract, translate that to a price

for the finished products and make a forward sales to stores at a firm prices.

Limitations of Hedging

The asset whose price is to be hedged may not be exactly the same as the asset

underlying the futures contract. If a hedger has an underlying asset that is exactly the

same as the one that underlies the futures contract, he would be a better hedge. Like if a

company require to hedge from steel prices and steel is not traded he will have to hedge

with nickel as an underlying commodity whose prices have an effect over the steel prices.

The hedger may be uncertain as to the exact date when the asset will be bought or sold.

Multiple rollovers in hedging can lead to short term cash flow problems.

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All the commodities which are traded are some way or another affected by global happenings

like what is current global demand and supply scenario or what are the business environment

around the world. Other than these there are certain exchanges which are famous for the

commodities which are traded in it and also set some price standards for those commodities all

around the world exchanges. For example London Metal Exchange (LME) is famous for non

ferrous metals and hence whenever there prices of these metals are taken LME is taken as a

standard for the prices and the following tables show commodity exchanges and relative

commodity for which they set standards.

Different exchanges and commodities traded in it are shown in the table

below.

EXCHANGE MAJOR COMMODITIES TRADED

New York Mercantile Exchange (NYMEX) Crude Oil, Heating Oil

Chicago Board of Trade Soy Oil, Soy Beans, Corn

London Metals Exchange Aluminum, Copper, Tin, Lead

Chicago Board Option Exchange Options on Energy, Interest rat

Tokyo Commodity Exchange Silver, Gold, Crude oil, Rubber

Malaysian Derivatives Exchange Rubber, Soy Oil, Palm Oil

Who are the participants in the commodity markets?

There are three types of participants who trade in the commodity market or we can say in the

derivatives markets as whole. These are as follows:

Hedgers: Hedgers are the participants which use the futures or options market to reduce or

eliminate the risk.

Speculators: Speculators are the participants who wish to bet on the future movements in the

price of an asset.

Arbitragers: Arbitragers are those who work at making profits by taking advantage of

discrepancy between prices of the same product across different markets.

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6.2 Phase2 – Fundamental research on commodities

Fundamental analysis in commodities trading looks at economic factors such as weather predictions and crop yields, new mines opened, new oil extraction technology, etc. In short, factors affecting the causes of supply and demand. Fundamental analysis is the study of the factors that affect supply and demand of any particular asset class. Gathering and interpreting information pertaining to demand and supply of commodities is important in understanding commodity price behavior. To gain a better understanding of the demand-supply dynamics, we need to know the laws of demand and supply and how these factors affect the final price.General economic principle says demand and supply determines price. This is true for commodity market too. But factors affecting demand and supply are diverse and independent having different origin. Therefore prices of commodity fluctuate so often that it becomes difficult to determine the exact price at a particular point of time. Since commodity price for which future trading is done, is volatile and changes on real time basis, thus for traders of future market, it is important to know where price is likely to head sometime down the line. Traders, speculators, hedgers all anticipate price movements and take appropriate position in the markets

LAW OF DEMANDThe key components of this economic theory are consumer behaviour, and how individual consumer responses are reflected in the market place. Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price.

Thus, demand is a relationship between price and quantity, with all other factors remaining constant. Demand is represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis.

Generally the relationship between price and quantity is negative. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the

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higher will be the quantity demanded. Market demand is the sum of the demands of all individuals within the marketplace. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Ultimately the market value for any good or service is determined by its value to the consumer. It is important to understand that a free market economy is driven not by producers but by consumers. Higher prices can lead to higher profits, which provide you with the incentive and the means to expand production of those goods and services that consumers value the most. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits. Losses reduce the producer’s incentive to produce things that have weak demand, which will ultimately force production cuts.

This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce. 

LAW OF SUPPLYSupply is another important component of fundamental commodity market analysis. An understanding of the factors affecting supply in the past will help with the development of supply expectations in the future and the impact upon market price. The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behavior of producers. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis.

An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market, therefore the relationship between the price and

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supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behaviour include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. Lower prices are the market’s signal to producers that they have produced too much of something or that it is something consumers do not want.

HOW SUPPLY AND DEMAND DETERMINES PRICES OF COMMODITIES The interaction of supply and demand determines price. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price" This can be graphically illustrated as follows:

Supply and demand are said to be in balance or “equilibrium” when both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire the commodity, which the producer is unwilling to supply resulting in a product shortage. Consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand is once again in balance. Conversely, if prices rise above P, there would be surplus quantity and the market would be in surplus - too much supply relative to demand. Producers would have to lower their prices in order to clear the market of excess supplies. Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of pulses and grains, with more products being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess

xxviii

supplies off the market. Consumers will buy more but only at a lower price.

Likewise a shift in demand due to changing consumer preferences will also influence the market price. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Similarly, other factors include changes in consumer preferences, technology, etc. More and more use of technology results in reducing the costs of production on a per unit basis, which in turn results in shift of the supply curve rapidly. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products. Fundamental analysis tasks like Fundamental Analysis of Copper and comparing Gold with world economic fundamentals were done during internship.

6.3 Phase3– Preparation of database of companies procuring base metals for their production

After acquiring sufficient knowledge about commodity market and doing the fundamental analysis the stage was reached where capacity of analyzing those companies who would require base metals and can do hedging was reached. So the next phase was to prepare the database of the companies capable of using the concept and fits our criteria both value and volume-wise. It is explained in detail in main body.

6.4 Phase 4 – Contacting the companies and spreading awareness about hedging

The potential of an idea can be judged only if it is strong enough that it can be sold to anyone.

The fourth phase purposed methodology deals in the same. In this actual industry scenario was to

be judged and the objective was to find out that whether companies are being affected by this

price volatility and what steps are they taking in countering it. Spreading awareness about the

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concept and selling it where ever possible was the ultimate goal of the process. This phase was

moreover about application of knowledge in real business scenario. Fulfilling the requirement of

clients in form of customized data, reports, and presentations was included in this phase.

6.5 Phase 5 - Technical analysis of commodities

Technical analysis, by contrast, is based on the idea that trends can be detected by charting

mathematical manipulations of a few basic variables: price, volume and a few others. Most

macro-economic factors are given much less weight. Actual market activity in the recent past is

what is considered most important to predict future prices.

Technical analysis involves using quasi-statistical techniques and formal statistics to identify the trend and pattern of time series data. Usually price data is put on chart and inference is made out based on some principles that are called indicators. Technical Analysis involves forecasting of future financial price movements based on the study of the behaviour of historical price movements. Technical analysis does not result in absolute predictions about the future. Instead, it helps anticipating what is "likely" to happen to prices over time. A wide variety of charts and tools are used to show price over time.

Technical analysis is based on patterns of historical price movement. Combining fundamental and technical analysis will give us a better understanding of the market forces that are affecting the price movements in financial markets.Technical analyst uses following information for charting purpose:

Open, High, Low and Closing price Open Interest Volume

A few indicators are listed below that a technical analyst often uses in analysis: Trend lines Support and Resistance Moving Average Divergence RSI Oscillators Moving Average Convergence Divergence Fibonacci Retracement

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Elliot wave pattern Candlestick chart pattern There are mainly three types of chart, which is popular amongst analyst. Candlestick Bar Chart Line Chart

TYPES OF CHARTS

LINE CHARTThese are simple charts showing the closing prices of each period and connecting them as a single line. 

BAR CHART The bar chart is one of the most popular types of charts used in technical analysis. It shows the intra-day movements of the market. Each bar represents one period showing the Open, High Low and Close for the day. The vertical bar drawn connects the high and the low of the contract during the day and thus represents the “range” of movement of the price during the day.

 

THE TREND LINE

The trend line is the simplest of all technical tools available and is the most up- to- date indicator

by including the most recent price action and giving a clear path for the market to follow. It can

be applied to any type of chart, whether it is a line chart, bar chart or a candlestick chart.

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Following are some rules on trend line applications:

Trend lines should touch at least two points (highs or lows) and possibly be confirmed by

a third point.

The breaking of a trend line is the best signal that the market has changed direction.

The longer the trend line stays intact and the more times the trend line is tested, it

signifies the strength of the underlying trend.

The steepness of a trend line has a major significance. The trend line being too steep is generally

not a favorable sign. It can indicate that the trend is rising too fast and cannot be held at the

increasing rate. If the trend line is flat, the uptrend or downtrend is generally thought to be weak

with the general uncertainty of a trend less market.

The 45-degree line is the most preferred. It is generally felt that the market is in balance with

price and time rising and falling together. A trend line close to the above 45 degree angle

signifies a more stable trend where prices are moving at the desirable / best speed.

Many technical analysis are done in project for which this phase plays an important role, as the

basic technicalities are laid by this phase which enable technical analysis in the project.

Technical analyses done in project are:

Calculating Value at Risk for commodities

Finding out volatility of commodities

Portfolio Design

Calculating and analyzing various correlation between global paramenters

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7. Main Body

In whole internship all the works done try to catch the different aspects of commodity futures

market in both technical as well as fundamental front. Since, it was an entire new financial

market which was having a number of dissimilarities from that of the stock market in which we

calculate dividends etc. So the first task done toward the project was to understand the

commodity futures market on a global scenario and get acquainted with different financial terms

of this market and how trading is done at this platform, delivery of goods is made and various

other aspects. The fundamentals of whole internship are laid down by this task and each and

every source of learning is valuable for my understanding as well as my internship. To check the

concepts grasped by me, company guide took a presentation on the basics focusing on the price

volatility and how this is affecting the companies in their daily course of working as it has been

seen that the companies who procure commodities as a part of their manufacturing process

generally are very much effected by the price volatility associated with the respective

commodities. Since the project is also about managing this price volatility for the companies

who procure base metals which made the presentation very important for the project. One more

thing which was different in this task was that the presentation which was made by me and was

not based on a written content. It was based upon an audio which was given by respective

company guide explaining the price volatility, commodity management and its effect on various

companies. The completion of the task made me aware about the whole scenario and gives a

brief idea of how this all new market works. Once whole of this induction was over the next task

assigned was of the commodity research. As we know that equity research is done in stock

market where we try to find out the future trend of different equities, likewise in commodity

markets we do study about the various commodities and try to find out what is going to be the

overall trend of these commodities in the future. Whole internship includes variety of projects

covering various aspects of commodity futures market. Projects cover both fundamental and

technical details which are important for proper understanding of commodity market as a whole.

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List of projects undertaken are as follows:

Fundamental Analysis of copper

Preparation of base metal procuring company’s database

Generating daily metal’s newsletter

Calculation of volatility for base metals

Calculating and analyzing Value at Risk

Calculating beta(β) of commodities

Portfolio Design

Finding place for Gold in investor’s portfolio

Making promotional presentations and articles

Every project done was with predefined objectives. As different aspects of commodity market

were touched by these projects thereby the objective of doing them was also different from each

other. Detail description of all the projects with clearly defined task and objectives are given one

after another.

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7.1Fundamental Analysis of Copper

Task: - To do fundamental analysis of copper

Objective: To predict future price trend of copper for (2011-2012)

This task demands the study of copper right from the scratch like where this metal is used, what

are the demand and supply scenario, how smelters where copper is extracted from ore responds

to change in industry along with future application of metal, geopolitical environment,

Fundamental analysis of any commodity involves knowing following facts

Economic factors and reports and there affect on base metals Production and consumption Usual trade practice Cultivation period Impact of weather and technology Scope and potential of production and consumption for particular commodity

and its Rivalry with other similar kind of commodity that may in turn may be near

substitute for it. Taxation, such as sales tax, import tax, export tax, custom duty, octroi Import and export regulations Inflation, Foreign currency exchange rate

To begin with the most basic thing taken in to consideration was to find out the applications

where that commodity is being used. So the first step toward this analysis was to find out the

uses of copper; some of the main uses of copper are as follows:

Use in electricity

Communication

Construction

Transportation

Industrial machinery and equipment

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Consumer and general products

cookware

Major uses of copper by end sector use

22

337

18

812

Japan

31

10105

41

3

Europe

BuildingElectricityGen. EnggeneringLight EnggeneringTransportOthers

Source: International wrought copper council

The most interesting thing about copper is its recyclability. Recyclable copper fulfill world-wide demand of copper to a great extent as the recycleable copper has 95% of its properties similar to

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50

21

9

10 10Unites States

that of new copper and it is difficult to distinguish between the two. In order to understand the contribution made by recycleable copper in world-wide demand, year on year trend of recyclable copper use was taken in consideration.

2007 2008 2009 2010 2011

6975 6921 6926

74887591

Recyclable copper production

Rec

ycla

ble

cop

per

(th

ou-sa

nd

met

ric

ton

nes

)

Copper Demand and Supply Scenario

The most important analysis in a commodity research is about commodity’s demand and supply scenario as any commodity price is very much dependent on global demand and supply for that particular commodity. Thus proper research on this aspect was done so that any relation between the two can be derived out and the future trend indication can be given. The first thing for this was to check the major importing and exporting countries which are contributing in copper’s demand and supply most.

Leading copper exporting countries

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Source: ICSG, 2009

The chart above clearly shows that Chile is the major exporter of copper. Political scenario, labour conditions and mining activities in this country particularly will affect the copper prices to a great extent. Thus analyzing situations in this country was very essential for the research.

Leading copper importing countries

Source: ICSG, 2009

The import was dominated by the countries like Japan, India and China. Copper demand and supply both has increased year by year but there has always been a deficit between the copper demand and supply which has resulted in the increase in copper prices. The deficit can be said due to increasing use of copper in the electronics, housing and various industrial goods whereas the capacity of smelters has not increased in tandem with demand.

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Following graph shows the change in smelter’s capacity:

<100 100 to

200

200 to

300

300 to

400

400 to

500

500 to

600

600 to

700

010203040506070

% capacity 1998

% capacity 2003

Source: us smelter survey

There has been a tremendous increase in the world-wide copper consumption whereas if we

compare it with the production side the change is not at par with that of consumption. The

following two graphs will clear the point further:

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World- wide copper production

2006 2007 2008 200913500

14000

14500

15000

15500

16000

16500

1452714983

1574315965

in 000 tonnes

World-wide copper consumption

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2006 2007 2008 200915500

16000

16500

17000

17500

18000

1668716450

17355

17790 In 000 tonnes

This situation is not a case of year or two, from past many years copper has been in a deficit and

many of world copper agencies has time and again tapped the situation like :

Acc to ICSG, world mine production in 2006 rose by 9, 00,000 tonnes (6.6%), still world

was having a production deficit of 7,00,000 tons.

Stocks fell to 9, 20,000 tons in 2007 from 1.13MT of 2003-2004.

Acc to ICSG (2008) demand–supply deficit was 6,90,000 tons.

In 2009 although world copper stock was 8, 90,000 tons but still it was not even enough

for 2.5 week of world-wide copper consumption.

As far as the supply side is concerned, it is not able to meet the world-wide demand. Many of the

times it is seen that the bottleneck in the copper smelters has resulted in the short supply of the

metal. e.g.

Acc. to copper development association USA: - Copper resources are nearly 6 trillion

pound and throughout history only 700 billion pound of copper has been mined. Not only this, in

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US out of total 26 mines 17 form 99% of its copper production that clearly shows that the supply

side is not clearly opened by the country which again results in its deficit. Other than this the off

shore sources of copper are still untapped which indicates the problem in supply side which has

not been rectified in past years and due to various technical problems and cost of extracting

copper from these sources reduces the chances of opening new supplies is next few years and if

any of the untapped sources is used the cost will be so high that it will not be able to stand with

the price of copper from other sources.

Copper and its substitutes

After supply and demand analysis another most important part is to look at the substitutes

available for copper. If copper is easily substitutable then it will have an effect over its prices as

compared to the case where it is not easily substitutable (easily substitutable means price will

decrease and vice versa). For the analysis of this part all the areas where copper is used was

taken in comparison with the metals which can substitute it in that application. In table the

comparison is shown between copper bearing product and competing material/products

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Whenever the copper applications are tried to be substituted by the substitute it has time and

again proved its usage better than by those who replaced it by its versatility and a number of

properties which it possess. It was in 1990 era when copper got replaced by fiber optics and its

prices were at 25 years low but it come out of it by proving its identity in all economic sectors

even in telecommunication too where it was replaced. Copper even being used for over 10,000

years is still used in high technology instruments like (semiconductors). Even if we substitute

whole of the copper demand with that of Aluminium it not have depth even to stand for two

weeks of copper demand thus it is very clear that so called substitutes for copper are not a

substitute for its application as there is no depth in them to take over copper.

Copper past price trend

Copper has been a metal of concern for the companies which use it in their production because

of the soaring prices it has affected profitability of almost all the companies which are dealing in

it. Acc to Business Standard 29th March 2009 all the SMUs who are dealing in copper has

suffered in loss in last financial year and only those who were big enough to enter into hedging

contracts were saved from the volatility.

Following points were analyzed from the past copper prices analysis:

Avg. cash price of copper at LME has surged by 330% between 2002-2006

In May 2006 Comex spot price have reached a record high of $4.08 per pound than $2.28 in Dec 2005

Investors interest have increased in this non precious element

For 2008 copper surplus forecast has decreased from 5,27,000 to 2,49,000

The points are more clearly explained by the past price trend graphs.

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LME copper prices (2002-2008)

2002 2003 2004 2005 2006 2007 20080

10002000300040005000600070008000

1578 1558 17802868

3684

6727 7123

Source: LME

Copper COMEX prices (2002-2008)

2002 2003 2004 2005 2006 20070

50100150200250300350

72.57 71.69 80.99129.17

168.31

309.419999999999

0

COMEX

Avg. price period in US cents per pound of copper

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Relation between Warehouse inventory and Copper prices

In commodity market warehouse inventory is a very important factor to determine the prices of

that commodity. If warehouse inventory is decreasing the prices will increase and vice versa.

Warehouse inventory gives an idea about the consumer sentiments and the demand of

commodity in the market in commodity this is due to this relationship that warehouse inventory

is a very important data taken for each metal specially and LME ware house inventory is

followed by every investor. Generally following trend are seen:

If warehouse inventory is decreased: there is an upward trend in price

If warehouse inventory is more than expected: there is an downward trend in price

This relation can be very well described by the following graph which shows the clear

relationship between the copper inventory and its prices.

Copper inventory has shown a declining trend as we take LME as the standards for base metals

therefore LME warehouse inventory was analyzed to track the trend. The trend has been as

follows:

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US recession danger and copper future

Another interesting part of this fundamental analysis was to find out what exactly would be the

impact of US economy going in to recession on the prices of copper as US economy plays a very

important role in copper prices as being one of the major producer as well as consumer of

copper. Housing pattern in US involves a lot more copper than other nations and contribute to

50% of its demand for copper. Subprime issue which has affected US housing segment adversely

is a danger for copper demand. To analyze copper future trend it was must to study this part

thoroughly and if anything happen with US economy, which countries can recover the loss done

by US to the copper. For this purpose I analyze different countries demand for copper and their

future demand for this metal. It was seen that the demand from India and China is strong enough

to recover whatever losses will be made by US going into recession as a lot of infrastructure

programmes are in pipeline and even about to start in these countries. To prove this inference of

mine let’s look at both the economies.

China and Copper

Acc to china copper industry report 2006-2007China copper industry has developed

rapidly but still cannot satisfy the demand even though output increase by 23% YOY

In near 20 years copper consumption in china is expected to increase by an avg. rate of

5%-10% towards 2006-2010 and peak in 2015-2020

Standard chartered has predicted a downfall in copper production of china

Effected copper price (up)even world see a drop in demand from US & Korea in 2005

China is about to enter into a Free Trade agreement with Australia for copper supply

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Other than this various official reports of China has also predicted its increasing demand for

copper and inability of domestic resources in fulfilling the rise in demand. Below is the predicted

demand of copper by a China official report.

The report clearly shows a continuous deficit of copper for China which means more demand of

copper from China resulting in a upward price trend of copper.

India and Copper prices

With booming Indian economy and more and more development projects going on, India has a

great potential of driving up the copper prices. The progress with which infrastructure

programmes are being carried in the country clearly shows the demand of country for copper as

copper being one of the most important raw material used in infrastructure projects. In the recent

Union Budget following points proves my analysis.

Major infrastructure projects in pipeline

Rural infrastructure development (14000 crores)

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Power sector projects – 800 crores to accelerated power development plan

Total 221 projects(129575 crores) are in pipeline of public and private partnership acc to

economic survey2007-2008

Future of Copper

Applications of copper are going to be increased in future as the wide applicability of copper into

various areas whose advancement will result in more demand for this metal. Some of the future

uses of copper are as follow:

Use in solar energy- which in future is going to be a very important source of energy.

High speed broad band speed- As there will be a technical advancement, and increase in

users the demand for internet connections will increase resulting in more demand for

copper.

Increased use in high tech trains- Applications of copper has been increased by 3 MT in

every new high tech train.

Copper replacing silver- In the areas like semiconductors where silver is used, copper is

being considered for replacing silver due to more depth and properties than silver.

More use in airplanes- Increase copper applications in airplanes will also increase

demand for copper.

Inference from the study:

Keeping the objective of the study in mind following inferences were drawn :

Copper will remain bullish in 20011-2012

US economy danger will be covered by demand from countries like India and China

No proper substitute is available for the metal

To maintain the reliability of the study only official sources of information were taken by me

some of them are as follows:

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US geological survey mineral year books

China mining association

Copper development association(USA)

International Copper Study Group(ICSG)

7.2 GENERATION OF DATABASE

This was a market oriented task in which a database was suppose to be made which act as an information base of companies which deal in base metals (Al, Ni, Sn, Pb, Zn). The database acted as the primary tool to build point of contacts with the top management of companies to learn how they tackle base metal price volatility, making them aware of hedging and promoting Amrapali Aadya Limited to them. The info base was generated by two methods:

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METHOD1

SEARCHING SECONDARY DATA OVER THE WORLD WIDE WEB (USING COMMON SEARCH ENGINES, ONLINE INDUSTRIAL DIRECTORIES).

REFERENCES FROM DIFFERENT SOURCES

METHOD2

CONTACTING DIFFERENT MARKET RESEARCH ORGANISATIONS FOR PURCHASING DATABASE

CONTACTING CORPORATE ASSOCIATIONS TO GET INFORMATION ABOUT THEIR MEMBERS

To maintain uniformity in the data collection and for the convenience of making telephonic calls all the particulars in the database were predefined which are given as follows:

Company nameContact PersonDesignation of Contact PersonEmailPhone No.

Fax No.Product/ServicesAddressWebsite

In order to have a proper feedback of whatever company we are pitching in and it don’t coincide with another one i.e. same company is not contacted by two different people, proper coordination was established between each other. Once we pitch to a company the initial task is to talk with the officials of the company who have a decision making capacity in the organization for the subject like hedging. Officials like CEO or head of the company, CFO or financial head of the company were the target audience for the purpose. Once the call is transferred to the concerned person next step was to brief them about hedging and try to know their perspective about hedging. Following are the observations which were made during this task:

Observation 1:

One most important thing which was analyzed during this task was that all the companies who were dealing in base metals were facing problems in dealing with price volatility in their respective commodities and were incurring financial losses. Only those companies who were passing the volatility to their customers i.e. those who were not following fixed pricing strategy at their customer end were not incurring losses due to this price volatility.

Observation 2:

Many people who knew about the concept were reluctant in applying it in their organizations. These are those organizations that don’t go for changes and are lagging behind those who are competitors. This observation was made on the basis that those who are big companies(doing

l

well in their respective business) were mostly appreciating the concept . Such companies were either already into hedging or were planning to do so.

Observation 3:

Hedging is not a concept for all, only those companies who have capacity (value-wise as well as volume-wise can take benefit from it. The company policies also have a role in deciding about hedging. Sometimes a company’s procurement policy or selling policy don’t have any scope for hedging.

Observation 4:

Top officials of many companies are not themselves aware about the concept. This shows lack of awareness in the industry about a concept which is an effective tool for safeguarding their companies from price volatility.

Observation 5:

There are some companies who are doing hedging of base metals in which they deal directly from London Metal Exchange(LME) which shows that how much important for them the concept is. These are mostly those companies who are volume-wise very big in their procurement and any fluctuation in the prices lead to a heavy loss to them.

Observation 6:

Hedging is a tool which is not meant for making profits, it is a tool which safeguards company’s profitability from volatile prices of commodities in which they deal. But many people look at it as a profit making tool and try to make profit by hedging, a wrong approach is followed by people.

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7.3 PREPARATION OF DAILY E-NEWSLETTER ON BASE METALS (RELOZ DE METAL):

A newsletter was prepared on daily basis on base metals carrying the news that moved the market, some basic fundamental and technical analysis and an amalgamation of expert opinions collected from different sources which can help investors to make informed decisions for the day. This daily email news letter was sent to the existing and potential clients of Amrapali as a promotional tool and as a part of niche marketing strategy. Preparation of news letter was not a day or two work it took a week period before it got finalized in which different domestic and international news’s were analyzed with their effect on the commodity market . Various formats of newsletter were tried and to distinguish this newsletter from other Amrapali newsletter a Spanish name Reloz De metal was chosen which means Metal for You. This newsletter was a very important tool to establish a contact with management of companies and to show our presence in the industry. Many company officials appreciated the news letter work which act as a boost to the efforts of spreading awareness about hedging in the industry.

News letter was divided into various segments which were as follows:

a) Top story: Highlights a particular base metal

This part covers the most important happening of the commodity market.

b) London Metal Exchange warehouse details

Since LME is very important for base metals, the segment in which news letter was concentrated therefore daily inventory of the newsletter dispatch day was included in it.

c) Metals Update: Daily news update on base metals and daily high, low, open, close prices and % change in MCX & LME.

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METAL WATCH

RELOZ DE METALDD/MM/YY

d) Economic events for the day: Includes economic events globally with main focus on USA.

These events play a very important role for investors in judging the market sentiments and since commodity markets work globally this segment were of utmost importance in the newsletter.

e) Technical details: pivot point & support – resistance levels for base metals.

On daily basis these calculations were done so that investors can have an idea about the levels of different commodities and what resistance and support level each included commodity seem to have. The formulas used for this technical analysis are as follows:

SUPPORT AND RESISTANCE LEVELS Support and Resistance Levels are price levels at which movement should stop and reverse direction. The Support level acts as a floor whereas the Resistance level acts as a ceiling to future price movements.

Support - A price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower.

Resistance - A price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher. When a stock price reaches a support/resistance level. It can either act as a reversal point: in other words, when a stock price drops to a support level, it will go back up. On the other hand, the levels may reverse roles once they are penetrated. For example, when the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level. Support and resistance levels can be identified by trend lines. Some traders believe in using pivot point calculations.

Pivot Analysis Calculation:Pivot Point = (H+L+C)/3Resistance Level 1 = (2*PP)-LSupport Level 1 = (2*PP)-HResistance Level 2 = (PP-S1) + R1Support Level 2 = PP - (R1 - S1)Resistance Level 3 = H + 2*(PP - L)Support Level 3 = L - 2*(H - PP)

Where:

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H= High during the dayL= Low during the dayC= Closing pricePp= Pivot PointS1= Support Level 1S2= Support Level 2

f) Highlights:This segment includes all the important news which should be watched by investors and are capable enough of moving the market.

g) Shanghai Updates: Includes Shanghai Futures Exchange (SHFE) metal price update and SHFE/LME spread. Futures spread are an arbitrage technique in which a trader buys one commodity and sells another contract of the same commodity to capitalize on a discrepancy in prices.

 h) Shanghai Warehouse Stock Details: On weekly basis (Friday).

i) EIA Crude Oil Inventory: On a weekly basis (Thursday).

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j) LME Metals Contango/backwardation: Includes LME base metals contango/backwardation movement graphs.

These graphs are important as Contango is a situation where future prices are high than present and backwardation is the one in which present prices are higher than future. Thus its gives an idea of market direction to the investor.

CONTANGO= FUTURE PRICE > SPOT PRICEBACKWARDATION= FUTURE PRICE < SPOT PRICEFOR TRADERS IT IS BENEFICIAL WHENSPOT PRICE + VARIOUS EXPENSES < FUTURE PRICELME metals contango and backwardation is shown in following graph.

LME METALS CONTANGO/BACKWARDATION

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7.4 Volatility

Task: - To calculate volatility of all metals which are traded on MCX

Objective: - To see the volatility associated with each metal

COMMODITY PRICE VOLATILITY – A GLOBAL PHENOMENON

7.4.1. A Growing Challenge

Price volatility in raw materials is a fact of life that is taking a toll on companies that produce everything from basic materials and intermediates to components and consumer goods. Virtually any manufacturer with significant commodity or energy costs is feeling the impact on its earnings, market share and ability to plan. For the past six years, and especially since 2004, we have seen greater instability in the price of energy sources and basic feed stocks such as oil and natural gas, with a broad ripple effect in chemicals to basic metals to plastics. This volatility is the result of supply issues as well as changes in global consumption and demand. Because raw material costs generally cannot be transferred quickly and efficiently down the value chain, volatility is leading to weaker, more unpredictable earnings and depressed share prices. In fact over the past a few years, there has been an increase of companies that have missed the earnings targets they provide to investors and analysts while misidentifying the true cause of the problem.

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Differences in technology, product mix, geography and management information likely means that these consequences are not being felt to the same extent by all organizations. The result: relative competitive positions are being hurt as well. Based on current forecasts, this price volatility is expected to intensify before it subsides. A look at the forces causing it can help define the scope of the problem and clarify the challenges that companies affected by it should address.

Computing Volatility

Volatility can be computed from a number of methods, the method used by me for computing volatility for this task is “Historical Volatility”. Method:Historical volatility of all the metals was calculated by using excel sheet by putting the daily closing prices of metals by year on year basis and daily return was calculated by using log function available in excel sheet. Formula used for calculating daily returns is LN (today’s close price / yesterday’s close price) which can calculated in the next column of

closing prices. After calculating daily returns next step is to find out the standard deviation of all

the daily returns which can be calculated by using STDEV function in Excel. The calculated

standard deviation expressed as percentage is the’ historical volatility’ for that metal over that

period of time.

The statistical formula for volatility is:

ó = Standard deviation

R = Mean of observations

N = No. of observations

The Drivers of Volatility

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Global commodity markets have become much more volatile, and they are likely to stay that way. Price volatility in raw materials is triggered by a number of factors. In the energy sector, political uncertainty and natural disasters, notably Hurricane Katrina in August 2005, have caused significant supply outages and interruptions. The increasingly global economy is another source of volatility. In the past, soaring demand for commodities in remote markets would scarcely have been noticed by most U.S. companies. Now, it is generating supply-demand imbalances that are having a marked influence on these organizations. For example, consumption of chemicals in India is climbing more than 10 percent per year. (In contrast, demand for chemicals in the U.S. is growing at an annual rate of 3 to 4 percent.) Likewise, demand for steel in China is spiraling 25 percent annually, and world markets are stretched thin from trying to meet this need.The corresponding shift in manufacturing capacity over the past five years has had a pronounced effect on U.S. companies, as more products flow into this country from the Middle East and the Far East. These developments make it far more difficult to predict the influence of the supply-demand cycle on the U.S. economy. As fast-growing markets push prices higher, manufacturers that have long been accustomed to assessing capacity on a local basis will likely need to take a broader view. Price volatility in commodities is a global problem that will likely continue for the foreseeable future and traditional management strategies, which seek to avoid volatility at all costs and even eliminate it altogether, have not been able to effectively accomplish these objectives. Today, a different kind of approach needs to be considered; one which recognizes that volatility may be a constant. Companies should consider price volatility as a powerful tool and use it to help them better manage its impact and possibly gain a competitive edge.

Inference from the study

As per the objective set for the study volatility of copper, aluminium, zinc, nickel, lead was

calculated and the thing analyzed was that all the metals have been volatile year on year which

keeps on fluctuating. The amount of fluctuation in these metals year on year itself is a concern

for the companies dealing with them. Metal wise volatility and graph is shown below:

Price volatility of copper

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2005 2006 2007 20080.5

1

1.5

2

2.5

3

1.52689999999999

2.0627

1.5629

1.77109999999998

Vol

atili

ty

YEAR PRICE VOLATILITY

2005 1.5269

2006 2.0627

2007 1.5629

2008 1.7711

Price Volatility of Aluminium

2005 2006 2007 20080

0.5

1

1.5

2

2.5

3

3.5

4

3.6

1.9

1

1.6

Vol

atili

ty

Year PRICE VOLATILITY

2005 3.6

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2006 1.9

2007 1

2008 1.6

Price Volatility of Zinc

2006 2007 20082.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

2.78221

2.4879

2.881685

YEAR PRICE VOLATILITY

2006 2.78221

2007 2.4879

2008 2.881685

Price Volatility of Lead

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2006 2007 20082.4

2.5

2.6

2.7

2.8

2.9

3

3.1

3.2

2.65486899999997

2.81633299999998

3.117925

YEAR PRICE VOLATILITY

2006 2.654869

2007 2.816333

2008 3.117925

Price Volatility of Nickel

2006 2007 20082.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

2.824315

2.4286

2.5108

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YEAR PRICE VOLATILITY

2006 2.824315

2007 2.4286

2008 2.5108

Please note that volatility of 2008 is calculated from Jan-Mar

.

7.5 β of commodities:

Task: To calculate beta for all base metals, crude and refined soya oil

Objective: To find out risk factor which commodities include with respect to commodity indexes.

Calculation of β for stock is generally easy and more important than in the case of commodities. The reason lies in the importance of index in both the market. In stocks movement of index is very important as it gives an overall trend of all the stocks traded in the index. If index is up generally the stocks in it will show the same movement and vice versa whereas in case of commodities index is not a good representative of overall commodities movement which comprises it. Before going in to technicalities of beta let’s first of all understand some important points about β.

Beta (â) is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole (most people use the S&P 500 Index to represent the market). Beta is also a measure of the covariance of a stock with the market. It is calculated using regression analysis.

A beta of 1 indicates that the security's price is expected to move with the market.

A beta greater than 1 indicates that the security's price is expected to be more volatile

than the market.

A beta less than 1 means that the security’s price is expected to be less volatile than the

market.

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Since there are different indexes in commodities future market for energy, Agri-products and metals, so regression line for the calculating β was drawn with respect to the indices which represent that commodity.

For example:

For metals - MCX Metal Index is taken

For crude oil – MCX Energy Index is taken

For Agri products – NCDEX Agri index is taking.

Formula used for calculating β is

β = Covariance(X, Y)/variance(Y)

Where,

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X= commodity returns

Y= Index returns

Detail calculations for calculating β is shown in excel sheet.

Inference:

First of all let’s see the characteristic lines of the indices used in calculating β

Commodities BetaCopper .762Crude Oil .99Zinc .021Nickel .78Gold .36

MCX Metal Index Characteristic Line

0 2 4 6 8 10 120

2

4

6

8

10

12

MCX Metal Index returns

MCX

Met

al In

dex

Ret

urns

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MCX Energy Index Characteristic Line

0 2 4 6 8 10 120

2

4

6

8

10

12

MCX Energy Index Retuns

MCX

Ene

rgy

Inde

x Re

turn

s

Commodity wise Beta:

β of Copper= .762

Copper Index Line

-0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35

-0.1

-0.05

0

0.05

0.1

0.15

0.2

MCX Metal Index returns

Copp

er r

etur

ns

β of Crude Oil=.99

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Crude Index Line

-0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

MCX Energy Index Retuns

Crud

e Re

turn

s

β of Zinc=.021

Zinc Index Line

-0.1 -0.05 0 0.05 0.1 0.15 0.2

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Zin

c R

etu

rns

β of Nickel = .78

Nickel Index Line

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-0.1 -0.05 0 0.05 0.1 0.15 0.2

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Nic

kal R

etur

ns

β of Gold = .36

Gold Index Line

-0.1 -0.05 0 0.05 0.1 0.15 0.2

-0.2

-0.1

0

0.1

0.2

0.3

0.4

Gol

d re

turn

s

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7.6 Portfolio Design

Task: To design a portfolio which includes equity, debt along with commodities and to find the weights assigned to them i.e. in which proportion investment should be made in three asset classes.

Objective: To make some place for commodities in the portfolio and decide the optimum weight age. Designing a portfolio was the most exhaustive task in the internship; it includes a detail study of various financial aspects which are used for designing a portfolio like:

Expected Risk and Returns Risk management Markowitz Portfolio Theory

To begin with the task there were total Rs.51, 00,000 for the investment in three asset classes (commodities, equity and debt). In commodities top commodities by volume are taken which are as follows:

Copper Zinc Nickel

Crude Oil Refine Soya Oil Gold M Silver M

In debt and equity top 5 performing equity diversified and debt diversified mutual funds were taken on the basis of their past 12 month’s performance.

Debt funds taken in portfolio are as follows:

DBS Chola Monthly Inc -Plan

Escort Income Bond-Gr

Pr. Monthly Inc Plan Plus-Gr

LIC MF floating rate fund

Pr. Monthly Inc Plan -Gr

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Equity funds taken in portfolio are as follows:

Std Chartered Premier Equity Fund-Gr

Rel. Regular Saving Fund-eq-Gr

Dws Invest. Opp Fund-Gr

Escort Growth Plan -Gr

SBI magnum Comma Fund

The first thing done was gathering data from Jan07-Mar08 comprising of daily NAVs of all

funds and daily open, high, low, close of all the commodities were taken.

Equal investments were supposed to be made in all assets of the portfolio on 1st Jan 2007. Once

the initial investment was done keeping in mind the margins to be paid in each commodity

(margins were taken double of its original) following number of contracts in commodities and

units in mutual funds were in the hands of investors. It has been seen that there exist an negative

correlation between stock market and commodity market i.e. when stock market moves up

generally commodity market moves down and vice versa. So if an investor has both commodity

as well as equity/debt in his portfolio he can make his portfolio a more stabilized one and loss in

one can be set off by other asset class. Now if we invest in these asset classes how much should

we invest in each of them or better to say what should be proportion in which investment should

be made. This question is tried to answer through this task.

Structure of all assets portfolio is given on next page.

Commodities Portfolio

Name of commodity

Margin%

Value/lot (RS)

Number of lots

Margin Paid (RS)

Cash taken for MTM

Total investment made (RS)

Copper 10 285500 2 57100 185757.1429 242857.1429

Zinc 10 955250 1 95525 147322.1429 242857.1429

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Nickel 12 377025 1 37702.5

2051514.6429

242857.1429

Crude Oil 10 272800 2 54560 188297.1429 242857.1429

Refine Soya Oi

10 464700 1 46470 196387.1429 242857.1429

Gold M 8 91320 5 45660 19197.1429 242857.1429

Silver M 10 97375 4 38950 293907.1429 242857.1429

Total 1700000

Equity Diversified Funds in Portfolio:

Name of Fund Nav per unit on

1/1/07

(RS.)

Totals Number of

units in portfolio

Total amount

invested

(RS.)

Std Chartered

Premier Equity

Fund-Gr

13.3157 25533.77 340000

Rel. Regular Saving

Fund-eq-Gr

15.793 21528.53 340000

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Dws Invest. Opp

Fund-Gr

23.69 14352.05 340000

Escort Growth Plan

-Gr

54.9035 6189.64 340000

SBI magnum

Comma Fund

16.21 20974.71 340000

Total 1700000

Debt funds in Portfolio:

Name of Fund Nav per unit on

1/1/07

(RS.)

Totals Number of

units in portfolio

Total amount

invested

(RS.)

DBS Chola Monthly

Inc -Plan

13.306 25551.81 340000

Escort Income Bond-

Gr

20.1716 16855.38 340000

Pr. Monthly Inc Plan

Plus-Gr

12.7109 26748.7 340000

LIC MF floating

rate fund

12.694 22527.89 340000

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Pr. Monthly Inc Plan

-Gr

15.0924 22527.89 340000

Total 1700000

This task will make it more clear to any investor that how much will commodities help in

diversifying the risk of his portfolio and whether he should go for commodities or not

After day to day basis analysis of portfolio from Jan07-Mar08 returns and risk (β) associated

with each asset class was taken on which different scenarios were tested with weights of each

commodities, equity and debt varying to find out different risk and returns and risk associated

with portfolio when different weights combinations were used. Once all the cases were tried

keeping in mind the minimum investment which has to be made in every asset class so that

minimum investment criteria of each asset in the portfolio is fulfilled. After analyzing different

situations Efficient Frontier graph was plotted this shows the risk and returns associated with

portfolio standard deviation and risk associated with portfolio at that point. Portfolio Efficient

Frontier:

Some basic points about portfolio efficient frontier are as follows:

The efficient frontier consists of the set portfolios that has the maximum expected return

for a given risk level.

Optimal portfolio: the portfolio that lies at the point of tangency between the efficient

frontier and his/her utility (indifference) curve.

An investor’s optimal portfolio is the efficient portfolio that yields the highest utility.

A risk averse investor has steep utility curves

The efficient frontier for the portfolio designed by me is as follows:

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20.00% 25.00% 30.00% 35.00% 40.00% 45.00%0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

Portfolio re-turn

Portfolio risk

As its depends upon the investor that how much risk he want to take as per his expected return the weights will be changed as different weights are associated with different risks and returns.

The risk and return of portfolio is calculated by following formulas:

rp = W1r1 + W2r2 + W3r3

s2p = W1

2s12+ W2

2s22+ W3

2s32+ 2W1W2Cov(r1r2)+ 2W1W3Cov(r1r3)+ 2W2W3Cov(r2r3)

The Standard Deviation of the Portfolio equals the positive square root of the variance. To get the optimum portfolio weights concept of Sharpe ratio was used in which the one which is having the least risk associated with maximum return weight is taken. Whenever investments are made there are investment constraints which leads to options executed by investors are as follows:

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Investment Constraints

Investment constraints are those factors limiting the universe of available choices. They include:

1. Liquidity: expected or unexpected cash outflows that will be needed at some specified time.

2. Time horizon: the time period(s) during which a portfolio is expected to generate returns to meet major life events. Longer time horizons often indicate a greater ability to take risk, even if willingness is not evident.

3. Tax concerns: differential tax treatments are applied to investment income and capital gains.

4. Legal and regulatory factors: are externally generated constraints that mainly impact institutional investors.

5. Unique circumstances: special concerns of the investor.

Since Markowitz portfolio theory is used in designing the portfolio hence it is important to know some important points about the theory given below:

Markowitz Portfolio Theory

Any asset or portfolio can be described by two characteristics:

1. The expected return

2. The risk measure (variance)

Portfolio’s variance is a function of not only the variance of returns on the individual investments in the portfolio, but also of the covariance between returns of these individual investments.

In a large portfolio, the covariances are much more important determinants of the total portfolio variance than the variances of individual investments.

Markowitz’s Assumptions

Investors consider investments as the probability distribution of expected returns over a holding period.

Investors seek to maximize expected utility

Investors measure portfolio risk on the basis of expected return variability

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Investors make decisions only on the basis of expected return and risk

For a given level of risk, investors prefer higher return to lower returns

Conclusion:

As per the objective of the study the weights derived from my study are as follows

20.00%

70.00%

10.00%

CommodityEquityDebt

risk and returns associated with the proposed portfolio is:

Expected Return (Er) = 36.93%

Portfolio Risk (σ) = 1.92%

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7 Value Addition to the Company

During internship programme value addition was done to the company in both monetary as well as non monetary terms. Non monetary addition includes promotion of the hedging concept, preparation of promotional articles and providing necessary information whether in terms of newsletter or fresh idea given to company. Monetary value addition was in the form of new clients added in the company’s existing client base generating more revenue for Amrapali Aadya.

Promoting the concept of Hedging

The first value addition to the company was the promotion of the concept in which company deals into. By the promotion activities those in the industry who were not aware about hedging come to know about the concept and making people more aware about it so that they can relate their need with it and can contact company whenever they feel the need.

A separate corporate desk

Amrapali Aadya has a separate corporate desk which handles the need of corporates and target only corporate clients that are companies who deal in base metal. We team of five trainees were acting as a separate corporate desk working parallel to the existing one having its own newsletter, database etc who was contacting industries sending them newsletters and trying to convert leads into clients.

New and fresh ideas

New and fresh ideas in form of new marketing techniques, own inputs in targeting companies for hedging as a value addition for the company.

Expanding the business

The most important value addition to the company was in form of the business which was generated during the internship. Whenever a new company gives it consent to carry forward its hedging activities with Amrapali Aadya new clients were added into company’s existing client base which is again a value addition to the company in monetary terms.

Handling Back Office work:

This project also adds value to the company inform of the back office work done which help the company in targeting it clients more effectively. Various back office job like

Making promotional presentations, articles and customized reports were made.

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8 CONCLUSIONS/Recommendations

The commodity market is at its nascent stage in India and will take time to mature. Amrapali Aadya can use this as an opportunity and can lead way in this market as less market players are involved in market with ample of companies not doing hedging as a pool untapped clients for the company.

Economy of country is benefited by it and it provides a good tool for industrialist to hedge their position in markets.

Volatility in the base metals has affected companies who are dealing with it. So it is a great opportunity for Amrapali Aadya to target such companies.

Commodity markets are a very good medium for price discovery of commodities

Interdependence of commodity market to global scenario results in a number of factors having an impact over it.

Hedging can very useful for company if it knows how to proper implement it

Different companies have different perception toward the concept and hedging can also provide competitive advantage to the companies using it.

Understanding clients (company) need various financials and procurement patterns are very important before suggesting hedging.

A company should be sound enough both value and volume-wise for the concept.

More and more models should be applied to get a better output from the concept.

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Learnings from SIP

Every day is a new learning in itself, being a fresher these 14 weeks of internship were immense learning experience for me. This Sip provides me with an opportunity to get a practical exposure of happenings in the business scenario and give a chance to see the practical application of whatever learnt till date. Every day in the past 14 days was a new learning experience in itself; some of the main learning’s of Sip are as follows:

Commodity Futures Market:

The first thing that I learned in my internship was how this commodity market works. Being new market knowledge about this is limited and my internship at Amrapali Aadya makes sure that I acquire proper knowledge of this new financial world and can pursue further in this field.

Organizational Behaviour:

Till the date organizational behavior was a subject only learned in MBA classes, another learning of Sip was this subject itself. This sip helps in knowing the organization structure of a company and how to behave when you are a part of that organization. Since I was having no prior experience of working in an organization, this is a very important learning for me.

Clarity about goals:

As doing MBA there was still confusion about subjects taken for carrier like whether to go for Finance or Marketing. Another thing which this Sip give me is clarity of goals as it gives me some experience in both the fields and let me know my potential in both the scenario and provide me a clarity that in which stream I should pursue my carrier.

Practical Application

Practical application of all the concepts and think out of box when it comes to business is again a learning of mine from the internship.

Confidence and how to deal corporates

Since my internship was focused on corporate clients, it provides me an immense confidence to deal with top officials of a company and also make me understand how to convey what we want

to these officials keeping in mind the value of time of them as well as our.

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References

Reports:

Amrapali Aadya reports on commodities

Websites:

www.AmrapaliAadya.com

www.basemetal.com

www.metalsmarket.net

www.mcxindia.com

www.ncdexindia.com

www.lme.com

www.ncdexindia.com

www.google.com

www.fxstreet.com

Books:

Investment Analysis & Portfolio Management - Prasanna Chandra

NCFM module on Commodity Market

ICFAI journal on commodity market

Commodity market journal

ICFAI book on Financial Management

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