THE FINAL REPORT ON

COMMODITY MARKET:-

MANAGING VOLATILITY IN THE

COMMODITY MARKET

3/27/2008 SONIA SARAOGI(07BS4271)

FACULTY GUIDE: PROF. P.K.BANERJEA

INDUSTRY GUIDE: MR. ANURAG KATARIA

SSSSSSSS

SUMMER INTERNSHIP PROGRAM AT

Phone: 9881048552
Email: Saraogi_soniya@yahoo.co.in
 Project proposal

A
REPORT
ON
COMMODITY MARKET:-

MANAGING VOLATILITY IN THE

COMMODITY MARKET
BY
SONIA SARAOGI

A report submitted in partial fulfillment of the

requirements of PGPBA Program of
ICFAI Business School

Distribution List
FACULTY GUIDE: PROF. P.K.BANERJEA
INDUSTRY GUIDE: MR. ANURAG KATARIA

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ACKNOWLEDGEMENT

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. I would like to express my earnest
gratitude to Ms. Jyoti Tilak (SIP Coordinator) for her support and kind blessing.
I thank Prof.Ashwini Sovani at the threshold for her support in the initial phase of the
programme and her judgment to pass the responsibity to a capable and experienced man, Mr.
P.K.Banerjea.
I am indebted to my Faculty Guide Prof. P.K.Banerjea, ICFAI Business School, Pune for
extending his untiring guidance to me, by constantly discussing the project matter and
helping me in clarifying my thinking in several pertinent issues and providing a meaning full
insight into the subject. The more I try to thank them the least I am able to because words
cannot ever express my indebtedness to them.
I wish to place on record my deep sense of gratitude to my Company guide Mr. Anurag
Kataria (Regional Head Commodities) for providing me an opportunity to take up this
project and giving me a platform which has formed the first step of my professional career.
I sincerely thank Mr. Abhijit Singh, Mr. Ravi Gaikwaid, Mr. Gaurav Lanjekar,
Mr Ashlesh Gosain, Ms.Sonali,Mr. Ashish, Mr. Shwetang Singh, Mr. Tushar, Mr. Sachin,
Mr.Ishwer and other staff members of KARVY 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.
In the end I would like to thank many unknown individuals, whom I interacted with for n
number of my needs. All of them with their due cooperation and at times with detachment
taught me the real lessons of business world.
SONI
A SARAOGI

IBS PUNE

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Project proposal
INDEX OF CONTENT

S. NO. PARTICULARS PAGE NO

1 ABSTRACT 4

2 KARVY COMTRADE LIMITED 6

3 METHODOLOGY 7

4 INTRODUCTION 8

5 BASIC TERMINOLOGY 22
6 MANAGING VOLATILITY 27
7 FUNDAMENTAL ANALYSIS 32
8 TECHNICAL ANALYSIS 40
9 NEWSLETTER 58
10 BUILDING CORPORATE CONTACT 60
11 PORTER’S FIVE FORCE MODEL 66
12 LIMITATIONS 69
12 REFERENCE 68
13 ANNEXURES 70

ABSTRACT

The Project undertaken at Karvy Comtrade Limited is an endeavor to study the in-depth
operation of the Risk management process and in particular to study the various techniques
and the initiatives that can be taken to keep a check on the risk containment.
TITLE: Commodity market- managing volatility in the commodity market
ORGANIZATION: Karvy Comtrade Limited

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REPORTING OFFICER: Mr. Anurag Kataria

FACULTY GUIDE: STUDENT’S NAME: Sonia Saraogi

India has a long history of commodity futures trading, extending over 125 years. Still such
trading was interrupted suddenly since the mid seventies in the fond hope ushering in an
elusive socialistic pattern of society. As the country embarked on economic liberalization;
policies and signed the GATT agreement in the early nineties the government realized the
need for future trading to strengthen the competitiveness of Indian agriculture and the
commodity trade and industry. Future trading began to be permitted in several commodities,
and the ushering of the 21st century saw the emergence of new National Commodity
Exchange with the country wide reach for trading in almost all primary commodities and
their products.

The project allotted of Managing volatility in the Futures commodity market, and to
understand the concept of Hedging is concerned with converting various opportunities in
commodity markets into high returns on investment by working on various
techniques/strategies. For this, study of fundamental and technical analysis is must. But we
will be able to know success of this study when we will apply these strategies on various
commodities and would be able to establish future trends in these commodities successfully.

OBJECTIVES OF THE PROJECT:

 Study the commodity future market in the Indian and International

context

 Learn about the causes and effects of volatility and study the existing the
trends

 Assist companies in minimizing the risk associated with volatility and

finding ways and techniques to overcome it

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 Designing a portfolio (including both equities and commodity)

 Analyzing the past data on crude and forecast the price for the same using
trend analysis technique.

The project focuses on commodity markets, National & International, and provides an
understanding of various strategies of investments; it might be for profit or for risk
management. It also helps build a relation between the economy and commodity market.
U.S. economic reports are studied on a regular basis and their effect on the prices of base
metals has to be observed vigilantly for thorough understanding.

The primary aim of the project however, is to study the probable causes for the existing
volatility in the base metals market and develop strategies to overcome the hurdles hence
unraveled. For this, study of fundamental and technical factors is a must.

The project also includes

 Gaining a point of contact with companies dealing in base metals

 Educating companies about hedging

 To generate a daily news letter on the commodity market

KARVY COMTRADE LIMITED: AN OVERVIEW

ABOUT KARVY GROUP

Karvy has traveled the success route, towards building a reputation as an integrated financial
service provider, offering a wide spectrum of services for over 20 years. Karvy, a name long
committed to service at its best. A fame acquired through the range of corporate and retail
services including mutual funds, fixed income, equity investments, insurance, to name a few.
Its value and vision of attaining total competence in our services has served as a building
block for creating a great financial enterprise.

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The birth of Karvy was on modest scale in the year 1982. It began with the vision and
enterprise of a small group of practicing Chartered Accountants based in Hyderabad, who
founded Karvy. We started with consulting and financial accounting automation, and then
carved inroads into the field of registry and share transfer.

KARVY GROUP COMPANIES

Karvy Consultants Limited

Karvy Stock Broking Limited

Karvy Investor Services Limited

Karvy Computershare Private Limited

Karvy Global Services Limited

Karvy Comtrade Limited

Karvy Insurance Broking Pvt. Limited

Karvy Mutual Funds Services

Karvy Securities Limited

ABOUT KARVY COMTRADE

Karvy Comtrade Limited is another venture of the prestigious Karvy

Group. With well established presence in the multifarious facets of the
modern financial services industry from stock broking to registry services,
it is indeed a pleasure to make foray into the commodities derivatives
market which open yet another door to deliver services to beloved
customers and the investor public at large. The company provides
investment, advisory and brokerage services in Indian Commodities
Markets. And most importantly, it offers a wide reach through its branch
network of over 620 branches located across 180 cities.
METHODOLOGY
The project is divided into different sub-tasks. They are:
1. Understand the project and the objective of the project.

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2. Getting Familiar with the Risk Management Process:

Identifying the risks
Managing risk

For performing the above mentioned tasks the following measures have to be carried forth:
• Understanding Commodity Market i.e. MCX in both qualitative as well as
quantitative aspect.

• Correlating domestic Exchanges with International Exchanges with respect to price

movement, volume and contract specification.

• Understanding the concept of Hedging & Price Movement of all the base metals for
the last 3 years.

• Understanding the volatility in base metals and its impact on the OEM’s who are
exposed to these commodities.

• Contacting the Company’s who procure base metal (Cu, Zn, Ni, Al, and Pb).

• Studying their procurement pattern and price fixing mechanism with their customer.

• Design a customized strategy for the company which gives a clear understanding on
the following topics.

• How it will encounter the volatility.

• Operation clarity

• Execution details
• Reporting pattern

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INTRODUCTION
The term `Derivative' indicates that it has no independent value, i.e. its value is entirely
`derived' from the value of the underlying asset.

The underlying asset can be securities, commodities, bullion, currency, livestock or anything
else. In other words, derivative means a forward, future, option or any other hybrid contract
of pre-determined fixed duration, linked for the purpose of contract fulfillment to the value
of a specified real or financial asset or to an index of securities.

The most commonly used derivatives are forwards, futures and options
Forwards: A forward contract is an agreement to buy or sell an asset on a specified date for
a specified price. One of the parties to the contract assumes a long position and agrees to buy
the underlying asset on a certain specified future date for a certain specified price. The other
party assumes a short position and agrees to sell the asset on the same date for the same
price. Other contract details like delivery date, price and quantity are negotiated bilaterally
by the parties to the contract.
.
Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. But unlike forward contracts, the futures
contracts are standardized and exchange traded. To facilitate liquidity in the futures
contracts, the exchange specifies certain standard features of the contract. A futures contract
may be offset prior to maturity by entering into an equal and opposite transaction. More than
99% of futures transactions are offset this way.

Options: An option is a contract that gives the buyer the right, but not the obligation, to
buy or sell an underlying asset at a specific price on or before a certain date. An option, just
like a stock or bond, is a security. It is also a binding contract with strictly defined terms and
properties.

COMMODITY FUTURES AND DERIVATIVES

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A commodity futures contract is a contractual agreement between two parties to buy or sell a
specified quantity and quality of commodity at a certain time in future at a certain price
greed at the time of entering into the contract on the commodity futures exchange.
Commodity market is a derivative market.

BENEFITS OF COMMODITY FUTURES

Commodities Futures are beneficial to a large section of society, be it farmer, businessmen,
industrialist, importer, exporter, consumer. It forms a good investment option because of the
following reasons:

• Diversification

• Less manipulation

• High leverage

• Hedge against price fluctuation

Diversification: The returns in the commodities market are free from direct influence of the
equity and debt market, which means that they are capable of being used as effective
hedging instruments providing better diversification.
Less Manipulation: Commodities markets, as they are governed by international price
movements are less prone to rigging or price manipulations by individuals.
High Leverage: The margins in the commodity market are less than the F&O section of the
Equity market.
Hedge against price fluctuations: Commodities market helps the importers and exporters
to procure or sell the commodities at a price decided months before the actual transaction,
thereby ironing out any fluctuation in prices that happen subsequently.

COMMODITY MARKET: ORIGIN AND PURPOSE

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Commodity exchanges are those which trade in a particular commodities, neglecting the
trade of securities, stock index futures and options etc.

In the middle of 19th century in the United States, businessmen began organizing market
forums to make the buying and selling of commodities easier. These central marketplaces
provided a place for buyers and sellers to meet, set quality and quantity standards, and
establish rules of business.
Agricultural commodities were mostly traded but as long as there are buyers and sellers, any
commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to
bring chaotic condition in New York market to a system in terms of storage, pricing, and
transfer of agricultural products.
Grain merchants of that era initially designed the concept of Forward contract to help
Balance the supply, demand, and delivery of crops through the year. By 1865 the forward
contract concept evolved into Futures contracts- Contracts that related to cash commodity
market yet highly standardized in terms of quality, delivery time, and location.
In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in
New York through the merger of four small exchanges – the National Metal Exchange, the
Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide
Exchange.
The major commodity markets are in the United Kingdom and in the USA. In India there are
25 recognized future exchanges, of which there are three national level multi-commodity
exchanges. After a gap of almost three decades, Government of India has allowed forward
transactions in commodities through Online Commodity Exchanges, a modification of
traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and
delivery of commodities. The three exchanges are:

• National Commodity & Derivatives Exchange Limited (NCDEX)

• Multi Commodity Exchange of India Limited (MCX)
• National Multi-Commodity Exchange of India Limited (NMCEIL)

REGULATORY FRAMEWORK

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Exchanges in India are regulated by FORWARD MARKET COMMISSION in respect of

future trading in commodities. Besides, exchanges in India is subjected to various laws of
land like the companies Act, Stamp Act, Contracts Act, Forward Commission Regulation
Act, and various other legislations, which impinge on its working.
The trading of commodity derivatives on the exchanges is regulated by Forward Market
Commission .Under the forward Contract Regulation Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges,
which are granted recognition by the central government (Department of Consumer Affairs,
Ministry of Consumer Affairs, Food and public Distribution).
WHAT IS THE NEED OF COMMODITY MARKET IN AN ECONOMY?
Developing countries produce and export a large amount of raw material commodities, such
as crude oil, copper and agricultural commodities, such as tobacco and cocoa. In particular,
some developing countries’ exports are highly concentrated in one or two leading
commodities. This heavy reliance on commodities exposes these economies to price
volatility in a form of terms of trade shocks, raising two related concerns.
The first one is the large fluctuations in revenue collections, and the other is that it
complicates public debt management. Either concern, if realized, will have an adverse
impact on the economy. Price volatility is likely to affect the fiscal balances of economies
whose revenues rely heavily on commodity-related taxes, royalties, and dividend income (in
heavily state-owned commodity sectors). When commodity prices drop, revenue will fall,
forcing countries to cut spending or incur debt. By contrast, a rise in commodity prices may
create a revenue windfall, raising questions about an economy’s absorptive capacity and
ways to spend the excess revenue.
The second concern arises because governments cannot accurately predict future revenues
and financing needs; therefore, they face difficulty in projecting external borrowing need. In
the worst-case scenario, countries dependent of commodity revenues may not be able to
make debt payments or may have to pay high interest rates for new external debt when price
shocks cause fiscal balances to deteriorate, the exact time that they need resources for
financing.

COMMODITIES TRADED IN EXCHANGES

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Some of the World’s Major Commodity Exchanges

Sr. Name and Address Contracts Traded

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No.
1 Chicago Mercantile Exchange Butter, Milk, Diammonium Phosphate, Feeder
(CME) cattle, Frozen Pork bellies, Lean Hogs, live
Cattle, Non-fat Dry Milk, Urea, Urea Ammonium
Nitrate, etc.
2 New York Mercantile Exchange Light Sweet Crude Oil, Natural Gas, Heating Oil,
(NYMEX) Gasoline, RBOB Gasoline, Electricity, Propane,
Gold, Silver, Copper, Aluminum, Platinum,
Palladium, etc.
3 London International Financial Cocoa, Robusta Coffee, Corn, Potato, Rapeseed,
Futures and Options Exchange White Sugar, Feed Wheat, Milling Wheat, etc.
(LIFFE)
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 Gasoline, Kerosene, Crude Oil, Gold, Silver,
Exchange(TOCOM) Platinum, Palladium, Aluminium, Rubber, etc.
8 Sydney Futures Exchange (SFE) Greasy Wool, Fine Wool, Broad Wool, Cattle, etc.
9 Dubai Gold and Commodities Gold, Silver, Fuel Oil, Steel, Freight Rates,
Exchange (DGCX) 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 Wheat, Cotton, Sugar, etc.
(CZCE)
14 Central Japan Commodity Gasoline, Kerosene, Gas Oil, Eggs, Ferrous
Exchange Scrap, etc.
15 Shanghai Futures Exchange (SHFE) Copper, Aluminium, Natural Rubber, Plywood &
Long Grained Rice
16 Brazilian Mercantile and Futures Anhydrous Fuel Alcohol, Arabica Coffee,
Exchange Robusta-Conillon Coffee, Corn, Cotton, Feeder

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cattle, Live Cattle, Soybean, Crystal Sugar, Gold,

etc.
17 Kansai Commodity Exchange Soybean, Raw Sugar, Raw Silk, Shrimp (frozen),
Coffee, Corn, Azuki beans (Red), etc.
18 Osaka Mercantile Exchange (Ribbed Smoked Sheets) RSS3, (Technically
Specified Rubber) TSR20, Nickel, Aluminium,
Rubber Index
19 Singapore Commodity Exchange Coffee, Rubber (RSS1, 2, 3)
20 Tokyo Grain Exchange (TGE) Corn, Soybean Meal, Soybeans, Red Beans,
Coffee, Sugar, Raw Silk, Vegetables, etc.
21 Intercontinental Exchange (ICE) Brent Crude Oil, Coal, Electricity, Emissions, Gas
Oil, Heating Oil, Gasoline (RBOB), Natural Gas,
WTI and all the futures contracts of its subsidiary
– The International Petroleum Exchange (IPE)

FUNCTIONS OF THE COMMODITY EXCHANGES

 Trade Guarantee
 Risk Management
 Price Discovery
 Transactional Efficiency
 Liquidity
 Customer Protection

Following are few commodities traded in the exchanges which have been
dealt with during the course of the project:

Commodit Unit of Quotation/ Initial Delivery Available

y trading base value margin (%) centre month
Aluminium 2MT 1 Kg 5 Bhiwandi All months

Copper 1 MT 1 Kg 7 Mumbai March,

May, July,
Sep, Dec

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Crude oil 100 Rs. Per 5 Mumbai All months

Barrels Barrel
Gold 1 KG 10 Gms 5 Mumbai, Dec , Feb.,
Ahmedaba
Apr ,June,
d
Aug ,

Oct.
Nickel 250 Kg 1 Kg 8 Mumbai All months

Silver 30 Kg 1 Kg 6.5 Ahmedaba March,

d, May, July,
Sep, Dec
Chennai,
Delhi
Sugar 10 MT Rs. Per 5 Delhi All months
Quintal
Tin 500 Kg 1 Kg 5 Mumbai All months

Zinc 5 MT Rs. Per Kg 7 Mumbai All months

BASE-METALS OVERVIEW
The project primarily focused on the six base metals

 Aluminium

 Copper

 Lead

 Nickel

 Tin

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 Zinc
An overview of these metals is thereby crucial to understand the nitty gritty of the project.

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.

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 f nickel.

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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 in the world.

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 several other sectors. The rapid growth in the Asian region
is mainly the trigger for rise in global zinc consumption.

ANALYSIS- FUNDAMENTALS AND TECHNICALS

The project required through analysis of the market and the various factors that affect the
base metal price. A qualitative as well as quantitative research has been carried out during
the course of the project.

Fundamental analysis: It is the method of interpreting price direction over time based on
the economic laws of supply and demand.

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Technical analysis: it is a method of anticipating future price movement using historical

price patterns, trading volume, open interest, trend analysis, and other trading data. Some
common technical analysis tools include:

 CHARTING

 TREND ANALYSIS

 VOLUME & OPEN INTEREST

 SUPPORT & RESISTANCE

 CORRELATION

BENEFITS OF STUDY

In a dynamic era as today, a small error can lead to the downfall of a large entity. Thereby, it
is crucial to acknowledge the risk and barter the need/want for return against it.
Logical thinking, thorough understanding and interpretation of the historical data can help an
investor to forecast better, since the high volatility in the market makes it impossible to
predict the movements with utter accuracy.
The project has focus on interpretation of existing data to develop any kind of relation that
may exist and to identify the trend lines, if any. The output would help an investor make
calculative investment to attain maximized return.

CORPORATE CONTACT:

Alongside, the project required building corporate contacts with

companies procuring base metals. The primary phases of this task:

 Developing a data base

 Making calls to develop a point of contact
 Pitching the concept of hedging

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 Converting the calls into contracts

Newsletter generation:

A daily newsletter was generated and circulated to the existing and

probable client base.

BASIC TERMINOLOGY USED IN COMMODITY MARKET

CASH AND FUTURES
The cash market represents the place in which suppliers sell and users buy physical
commodity based on negotiated terms including quality, quantity, delivery time and location.
The price of cash commodity market transactions are quoted for either spot or forward price
contracts.

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The forward cash contracts calls for future delivery of a commodity. The negotiated grade,
quantity, delivery location, and time are specified and the price is set based on a relationship
to the appropriate deferred future contracts.
RELATIONSHIP BETWEEN CASH AND FUTURES
The term basis refers to the difference between the cash market price and related future
contract price.
CASH PRICE – FUTURE PRICE = BASIS
Basis is a function of several factors including:

• Storage Cost

• Transportation Cost

• Handling Cost & Processing margin

• Quality

• Local supply and demand

But the original futures contracts as well as the futures contracts that exist today’s have a
two major functions:
PRICE DISCOVERY
Price discovery reflects the collective opinion of market participants worldwide and provides
a benchmark for cash markets.
The process of price discovery:-
Future prices increases and decreases largely because of the myriad factors that influence
buyers’ and sellers’ judgments about what a particular commodity will be worth at a given
time in the future. A new supply and demand development occur and as a new and more
current information become available, these judgments are reassessed and the price of a
particular future contract may be bid upward or downward. The process of reassessment of
price discovery is continuous. The futures price serves as a global benchmark for cash grain
and oilseed prices.
PRICE RISK TRANSFER

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Price risk transfers allow market participants to shift inherent market risk to others that are
willing to assume market risk for profit opportunity. For this especially in case of
industrialist, they transfer their risk by hedging their commodity in commodity market.

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. Margin requirement are
determined on the basis of market risk and contract value.
TYPES OF MARGINS:
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 a preemptive move. 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.
TYPES OF FUTURES ORDERS
Market orders: The market order is executed at the best possible price available at the time
the order reaches the electronic trading form.

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Limit orders: An order to buy or sell a stated amount of a commodity at a specified price, or
at a better price, if obtainable at the time of execution.
Stop orders: Stop order is used for two reasons:
To minimize the loss on a position
To protect the profit on a position
Commodities notified under section 15 of the Act can be conducted only on the exchanges,
which are granted recognition by the Central Government.

MARKET PARTCIPANTS:

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WHO ARE THE PLAYERS IN FUTURES MARKET?

 SPECULATORS

 HEDGERS

 ARBITRATORS

1. SPECULATORS- MECHANICS & FUTURES STRATEGIES:

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Speculation is a strategy in which participants called speculators are willing to take risk in
the expectation of making profit. If a speculator feels that market is in bullish mode then he
will buy the commodity or vice versa. Speculators provide liquidity in the market.
Speculators are in the commodity market to take benefit of favorable price movement.
BUY LOW AND SELL HIGH
OR
SELL HIGH AND BUY LOW
Any entity having opinion on the price movements of a given commodity can speculate
using the commodity market. Speculation is a strategy in which participants called
speculators are willing to take risk in the expectation of making profit

For example, assume it’s now April, the May aluminum future contract is presently quoted
at Rs1560 per 100 kg and over the coming months you expect the price the price to increase.
You decide to deposit the required initial margin of, say Rs 109200@ 7 %.( you want to take
position of 100 Tones). Further assume that May contract has risen to Rs1580 per 100 kg &
you decide to take your profit by selling. Since you took the position of 100 Mt then your
profit would be Rs200 x 100 Mt less transaction cost and brokerage.

2. HEDGERS- MECHANICS & FUTURES STRATEGIES

Hedgers use the future markets to offset the price risk they face in the cash market.

TYPES OF HEDGERS:
 Long hedgers: Buyers who face the risk of higher prices.
 Short hedgers: Sellers who face the risk of lower prices.

3. ARBITRAGE- MECHANICS & FUTURES STRATEGIES

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Arbitrage is the practice of taking advantage of a price differential between two or more
markets: a combination of matching deals is struck that capitalize upon the imbalance, the
profit being the difference between the market prices. If the price of the same asset is
different in two markets, there will be operators who will buy in the market where the asset
sells cheap and sell in the market where it is costly. This activity termed as arbitrage,
involves the simultaneous purchase and sale of the same or essentially similar securities in
two different markets for advantageously different prices. The buying cheap and selling
expensive continue till prices in the two markets reach equilibrium. Hence, arbitrage helps to
equalize prices and restore market efficiency.

CONDITIONS FOR ARBITRAGE

Arbitrage is possible when one of three conditions is met:
1. The same asset does not trade at the same price on all markets.
2. Two assets with identical cash flows do not trade at the same price.
3. An asset with a known price in the future does not today trade at its future price
discounted at the risk free rate of return(or, the asset does not have negligible costs of
storage; as such, for example, this condition holds for grain but not for securities).

However, it should be kept in mind that these groups are not rigid and there might exist a set
of people involved in more than one of these investing strategies.

CASH AND CARRY

The term come into picture when there is an opportunity for traders to earn profit by
purchasing commodity at spot price in physical market & sell it in future commodity market
with the intention of delivery.

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This works when

Future price is > spot price + cost of carry
Let’s take some idea in detail about it.
CONTANGO= FUTURE PRICE > SPOT PRICE
BACKWARDATION= FUTURE PRICE < SPOT PRICE
FOR TRADERS IT IS BENEFICIAL WHEN
SPOT PRICE + VARIOUS EXPENSES < FUTURE PRICE

MANAGING VOLATILITY
VOLATILITY

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Volatility refers to the amount of uncertainty or risk about the size of changes
in a commodity’s value. A higher volatility means that a commodity's value can potentially
be spread out over a larger range of values. This means that the price of the commodity can
change dramatically over a short time period in either direction. A lower volatility means
that a commodity value does not fluctuate dramatically, but changes in value at a steady pace
over a period of time. In other words, it is a statistical measure of the dispersion of returns
for a given market index. Volatility can either be measured by using the standard deviation
or variance between returns from that same security or market index. Thereby, higher the
volatility, the higher is the risk in the security.

Price volatility is not a new concept, even if go back in the 40’s and 50’s we can see the
price volatility in the prices of oils etc.
The price volatility is going to stay for long because:
1. Price volatility is triggered by number of factors. For e.g. natural disasters
2. Price volatility is here to stay due to global imbalance in supply and demand
3. Political uncertainty also affects the prices of the commodities. For e.g. energy sector.
4. Rising living standards
5. The cycle of abundance and scarcity is going to continue always.
One cannot totally get off from the price volatility, it’s better to find key strategies to
manage price volatility as it would stay as it is in future.

HEDGING
Commodity price risk is simply the potential for adverse movements in commodity prices.
For example, a sugar farmer faces the risk of falling sugar prices in the domestic or
international market, resulting in a loss of income. Commodity price risk management, or
hedging, is simply the process of identifying and managing commodity price risk. Whilst

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commodity price risk cannot be eliminated, it can be effectively managed. You will know
that movements in the value of commodity prices can have a significant impact on the cash
flow and profitability of your business.

WHO ARE HEDGERS?

Hedgers are those who hold simultaneous positions in the spot market also. These are
generally the actual consumers or the producers of the commodities.
The large scale consumers of the products can also make use of the futures to secure their
purchase. For e.g.: A cool drinks can manufacturing company may buy tin futures, so that
even if the prices happen to rise later, they can be assured of the supply of raw materials at
the pre-determined price.
One has to understand that the primary goal of commodity price risk management is to
protect the economic value of your business from the negative impact of commodity price
fluctuations, at the lowest possible cost. Because commodity price volatility also provides
opportunity for gains, a secondary goal is to strike a balance between risk and return. Risk
management provides the ability to accurately budget on cash flow receipts.
It is also fair to explain that some form of risk taking is inherent to any business activity.
Some risks are considered to be “natural” to specific businesses, such as the risk of oil prices
increasing or decreasing is natural to oil drilling and refining firms. Other forms of risk are
not wanted, but cannot be avoided without hedging. Not all hedges are financial instruments:
a producer that exports to another country, for example, may hedge its currency risk when
selling by linking its expenses to the desired currency. Banks and other financial institutions
use hedging to control their asset-liability mismatches, such as the maturity matches between
long, fixed-rate loans and short term (implicitly variable rate) deposits
Hedging for any other reason is a combination of speculation and hedging - a hybrid called
HEDGULATION.
TYPES OF HEDGERS:
Long hedgers: Buyers who face the risk of higher prices.
Short hedgers: Sellers who face the risk of lower prices.

THE TWO STRATEGIES OF HEDGING ARE:

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1. The buying hedge or long hedge

Locking in a price level to eliminate the risk of rising prices

2. The selling hedge or short hedge

Locking in a price level to eliminate the risk of declining prices

WHEN TO HEDGE

By knowing the cost of production, we can determine at what prices you might consider
forward pricing a portion of the commodity. Thus, it is imperative that a producer knows
his/her cost of production when hedging a commodity. Hedging was created not only for
novice traders or hedgers but for the professional as a refresher or to learn an alternative
methodology as well. Whether someone has just began to trade or have been trading for
years, it is important to acquire this knowledge of exceptional trading fundamentals and
methods and mastering markets. Therefore, it is ever so important for companies involved in
international trade to “think globally, act locally”.
Whatever the exposure is, there’s no way to eliminate the risk but we can certainly manage
it. Which is very important to understand, because commodity price volatility also provides
opportunity for gains; a secondary goal is to strike a balance between risk and return. The
primary objective of hedging is not to make money. The primary objective of hedging is to
minimize risks and this includes using hedging to minimize losses.

BENEFITS OF HEDGING
Hedging is the most common method of price risk management. It is the strategy of
offsetting price risk that is inherent in a spot market by taking an equal but opposite position
in the futures market. Futures markets are used as a mode by hedgers to protect their
businesses from adverse price changes, which could dent the profitability of their business.
Hedging benefits all participants who are involved in trading of commodities.
Besides the basic advantage of risk management, hedging also has other advantages:

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 Hedging stretches the marketing period. For example, a soybean producer does not
have to wait until his crop is ready to market before he can sell them.

 Hedging protects inventory values. For example, a merchandiser with a large, unsold
inventory can sell futures contracts that will protect the value of the inventory, even if
the price of commodity drops.

 Hedging permits forward pricing of future. For example, a jewelry manufacturer can
determine the cost of gold, silver or platinum by buying a futures contract by buying a
future contract, translate that to a price for the finished products, and make forward
sales to stores at firm prices.
DIFF B/W HEDGING & SPECULATION
Hedging
Used to reduce risk and manage margins
Reduces the fluctuations in propane prices for retailers and end users
Used to "back to back" sales to residential/commercial customers at a fixed profit margin
An important part of managing and growing your retail propane company
Speculation
"Betting" the market will move in one direction
Retailers buy product on a fixed price but charge market-based prices to their consumers
Speculation increases risk and creates uncertainty on retail margins
Can literally put you out of business

EXAMPLE
The following is a hypothetical illustration of the benefits of hedging:
An automobile manufacturer purchases huge quantities of steel as raw material for
automobile production. The automobile manufacturer enters into a contractual agreement to
export automobiles 3 months hence to dealers in East European market. This presupposes
that the contractual obligation has been fixed at the time of signing the contractual
agreement for exports. The automobile manufacturer is now exposed to risk in the form of

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increasing steel prices. In order to hedge against price risk, the automobile manufacturers
can buy Steel futures contracts, which would mature 3 months hence. In case of increasing
or decreasing steel prices, the automobile manufacturer is protected.
Let us analyze the different scenarios:
Scenario1: Increasing Steel Prices
If steel prices increase, this would result in increase in the value of the Futures contracts,
which the automobile manufacturer has bought. Hence, he makes profit in the futures
transaction. But the automobile manufacturer needs to buy Steel in the physical market to
meet his export obligation. This means that he faces a corresponding loss in the physical
market. But this loss is offset by his gains in the futures market. Finally, at the time of
purchasing steel in the physical market, the automobile manufacturer can square off his
position in the futures market by selling the Steel Futures contract, for which he has an open
position.
Scenario 2: Decreasing Steel Prices
If steel prices decrease, this would result in decrease in the value of the Futures contracts,
which the automobile manufacturer has bought. Hence, he makes losses in the futures
transaction. But the automobile manufacturer needs to buy Steel in the physical market to
meet his export obligation. This means that he faces a corresponding gain in the physical
market. The loss in the futures market is offset by his gains in the physical market. Finally,
at the time of purchasing steel in the physical market, the automobile manufacturer can
square off his position in the futures market by selling the Steel Futures contract, for which
he has an open position. This results in a perfect hedge to lock the profits and protect from
increase or decrease in raw material prices. This also provides the added advantage of Just in
Time Inventory management for the automobile manufacturer.

MECHANICS OF HEDGING

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ANALYSIS

FUNDAMENTAL ANALYSIS

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.
Fundamental analysis of any commodity involves knowing following facts

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 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

 Government interference

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LAW OF DEMAND
The key components of this economic theory are consumer behavior, 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 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. Thus the demand for an agricultural commodity is a
typically derived from the demand for a finished product.
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 as farmers lose more and more money.

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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 SUPPLY
Supply 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. The total supply is the sum of the individual quantities of product that each
farmer brings to the market.
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 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 behavior 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 farmers 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

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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

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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 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
A presentation on the brief up of the various economic reports is submitted below as a hyper
link.

US ECONOMIC DATA ANALYSIS

May 13th, 2008 Import Price Index (April) Expected 1.70% Previous 2.80%
This index shows the total price paid by the importers in US. The Import Price Index
becomes useful in determining whether a change in import volume has actually increased

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from a higher foreign demand or from a real increase in prices for foreign goods. The
consensus is that the index is expected to decline. Keeping in view the soaring crude oil
prices declining index suggests a possible decline in the volume of imports.

May 15th, 2008 Industrial Production Index (April) Expected -0.30% Previous 0.30%
The month of March the industrial production increased significantly, posing reviewed
outlook for the manufacturing sector thereby appreciating the dollar. However in the month
of April it is expected to post a decline. Any significant decline in the index will depreciate
the dollar thereby proving to be a positive factor for bullion prices.

May 13th 2008 Business Inventories (Mar) Expected 0.40% Previous 0.60%
As the wholesale inventories fell in the previous week fell by 0.1% mom. Total business
inventories are therefore expected to decline. The declining inventories suggest a
considerable increase in the market activity and the increasing sales. The decline in more
than the consensus will work positive for the economy.

May 14th, 2008 Consumer Price Index (April) Expected 0.30% Previous 0.30%
The CPI index measures the prices paid by the consumers for the goods and services. This
index is of prime importance as it throws light on the inflation prevalent in the economy.
The change in CPI was recorded at 0.4% in the month of February and January. However for
the month of April it’s expected to remain unchanged at 0.30%. The inflationary concerns
have started taking toll on the Fed’s decision regarding interest rates. Any increase in the
CPI will throw light on further action regarding interest rates.
For the
May 16th, 2008 Housing Starts (April) Expected 940k Previous 947K

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The housing starts are posing a continuous decline from the past few months. The data is
expected to post yet another decline due to the increasing number of foreclosures. The more
than expected decline will reinforce the comment of the Fed chairman that the foreclosures
will continue to weigh down the growth of the economy, causing the bullion prices to rise.

May 16th, 2008 Building Permits (April) Expected 915K Previous 928K
Building Permits refer to the applications for New Buildings filed with the Federal
Government. The building permit is a forward looking indicator because looking at the no of
permits the future construction activity can be measured. The building permits along with
the housing starts have an inverse relation with bullion prices. A more than expected decline
in these permits will depreciate the dollar as it signals slower economic growth in the future,
thereby leading to higher bullion prices.

TECHNICAL ANALYSIS
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 behavior of
historical price movements. Technical analysis does not result in absolute predictions about

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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

 Moving Average Convergence Divergence

 Fibonacci Retracement

 Elliot wave pattern

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

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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)/3
Resistance Level 1 = (2*PP)-L
Support Level 1 = (2*PP)-H
Resistance Level 2 = (PP-S1) + R1
Support Level 2 = PP - (R1 - S1)
Resistance Level 3 = H + 2*(PP - L)
Support Level 3 = L - 2*(H - PP)

Applying the above mentioned formula the pivot, resistance and support levels are determined for
all the base metals on a daily basis.

Commodit Pivot
y Symbol High Low Open Close Point R1 S1 R2 S2

1126. 1117.83 1129.66 1109.1 1138.33 1097.3

NICKEL 5 1106 1114 1121 3 7 67 3 33

ZINC 92.85 90.1 90.25 91.05 91.333 92.567 89.817 94.083 88.583

1053. 1050.58 1056.16 1047.4 1059.33 1041.8

TIN 75 1045 1045 1053 3 7 17 3 33

LEAD 96.05 90.45 92 94.5 93.667 96.883 91.283 99.267 88.067

ALUMINIU 118.9 121.5 119.20 116.85

M 121.9 118.2 5 5 120.550 122.900 0 124.250 0

339.43 334.76
COPPER 346.7 338.4 341.2 344.1 343.067 347.733 3 351.367 7

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CORRELATION:
A negative correlation between sensex and base metals price is derived through the analysis;
which indicates that there is a scope for diversifying our investment in commodities
SENSEX ZINC LEAD COPPER ALUMINIUM NICKEL TIN GOLD

OCT 18500 2973.17 3717.09 8006.28 2441.43 31034.35 16048.91 9707.913

NOV 19264 2540 3316.36 6965.23 2505.68 30589.32 16667.95 10254.9

DEC 19827 2351.5 2600.14 6585.36 2380.58 25935 16241.11 10308.8

JAN 19325.63 2339.5 2605.57 7059.18 2444.64 27670 16315.23 11213.96

FEB 17696.29 2437.05 3077.76 7886.24 2776 27941.43 17211.25 11776.91

MARCH 16244.32 2658.95 3190.85 8566.4 3105.4 32416 19315 12658.42

CORRELATION -0.3780 -0.4782 -0.9394 -0.9559465 -0.66217 -0.8938 -0.77667

A negative correlation between sensex and base metals price is also found to exist;
indicating that there is a scope for diversifying our investment in commodities

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CORRELATION BETWEEN COMMODITIES AND DOLLAR PRICES FOR THE

LAST 3 MONTHS

Commodity Correlation
silver -0.88732
lead -0.37329
aluminium 0.742281
zinc 0.829548
tin -0.47167
gold -0.93911
nickel 0.475492
copper 0.436618
crude -0.95923

Inference:
Crude and gold have a strong negative correlation with the dollar prices in the month of 1st
three months of year 2008. Thereby if the dollar price falls, the prices of crude and gold
should rise. Whereas aluminium, zinc, nickel and copper have a positive correlation with the
dollar prices.

ALUMINIUM’S PRICE MOMENT ALONG LME AND MCX FOR THE YEAR
APRIL’07-MARCH’08

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ALUMINIUM LME MCX

Apr-07 2813.553 120.68

18

May-07 2793.81 115.53

56

Jun-07 2676.405 110.48

2

Jul-07 2731.977 111.37

9

Aug-07 2513.977 104.04

57

Sep-07 2390.1 98.125

54

Oct-07 2441.435 97.466

83

Nov-07 2505.682 99.797

5

Dec-07 2380.5 94.965

8 5

Jan-08 2444.6 96.491

4 35

Feb-08 2776 111.19

Mar-08 3105.4 121.87

66

CORRELATION 0.9540
19

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COPPER’S PRICE MOMENT ALONG LME AND MCX FOR THE YEAR APRIL’07-
MARCH’08
COPPER LME MCX

Apr-07 7764.026 328.708

3

May-07 7680.381 316.239

8

Jun-07 7472.881 304.782

Jul-07 7971.227 318.892

3

Aug-07 7508.795 302.071

6

Sep-07 7646.125 305.859

3

Oct-07 8006.283 313.472

1

Nov-07 6965.227 274.524

5

Dec-07 6585.361 267.719

5

Jan-08 7059.1 279.596

8 6

Feb-08 7886.2 311.933

4

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Mar-08 8566.4 336.003

6

CORRELATION 0.94202
1

INTERPRETATION:
From the above mentioned data and both charts we can see that prices of base metals in
MCX moves according to the prices of base metals in LME. Likewise the same trend can
be seen in all the base metals.

VOLATILITY IN THE PRICES OF BASE METALS (4 YEARS):

These analysis and calculations are further used to make strategies and forming some
base to our understanding.
Price volatility for ALUMINIUM:

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YEAR PRICE
VOLATILITY
2005 3.6
2006 1.9
2007 1
2008 1.6

Price volatility for COPPER

YEAR PRICE VOLATILITY

2005 1.5269
2006 2.0627
2007 1.5629
2008 1.7711

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VALUE AT RISK:
VAR FOR 2007(JAN-DEC)

Graph for copper, aluminium and zinc at 95% confidence level

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BASIC TERMINOLOGY USED

CORRELATION:

In probability theory and statistics, correlation, (often measured as a correlation coefficient),

indicates the strength and direction of a linear relationship between two random variables. In
general statistical usage, correlation or co-relation refers to the departure of two variables
from independence. In this broad sense there are several coefficients, measuring the degree
of correlation, adapted to the nature of data.

Correlation Negative Positive

Small −0.3 to −0.1 0.1 to 0.3
Medium −0.5 to −0.3 0.3 to 0.5
Large −1.0 to −0.5 0.5 to 1.0 VOLATILITY:

Volatility most frequently refers to the standard deviation of the change in value of a
financial instrument with a specific time horizon. It is often used to quantify the risk of the
instrument over that time period. Volatility is typically expressed in annualized terms, and it
may either be an absolute number ($5) or a fraction of the mean (5%). Volatility can be
traded directly in today's markets through options and variance swaps.

VALUE AT RISK:

In economics and finance, Value at Risk (VaR) is the maximum loss not exceeded with a
given probability defined as the confidence level, over a given period of time. Although VaR
is a very general concept that has broad applications, it is most commonly used by security
firms or investment banks to measure the market risk of their asset portfolios (market value
at risk). VaR is widely applied in finance for quantitative risk management for many types of
risk. VaR does not give any information about the severity of loss by which it is exceeded.
Other measures of risk include volatility/standard deviation , semivariance (or downside
risk) and expected shortfall.

THE VARIANCE-COVARIANCE METHOD:

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This method assumes that returns are normally distributed. In other words, it requires that we
estimate only two factors - an expected (or average) return and a standard deviation - which
allow us to plot a normal distribution curve.
The advantage of the normal curve is that we automatically know where the worst 5% and
1% lie on the curve. They are a function of our desired confidence and the standard
deviation ( ):

PORTFOLIO CONSTRUCTION

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CONSTRUCTING A PORTFOLIO WHICH CONTAINS EQUITY AND

COMMODITIES:

The project required us to construct a portfolio. The criterion was to include both equity and
commodities in it. Among the array of mutual funds, the balanced and index mutual funds
were selected. Out of these 10 mutual funds (the top performers in the fund market) were
considered for the portfolio. The relevant data on these funds were collected from the site
www.mutualfundindia.com. On the other hand, 4 commodities namely- Gold, Copper, Crude
oil and Soya bean were selected. The historical data on these commodities were accumulated
from the relevant exchanges i.e. www.mcxindia.com for copper, www.ncdex.com for soya
bean, www.eia.com for crude and the www.metalsmarket.net for gold.

Once the data collection phase was completed the construction of the portfolio was set to
roll. The first stage was to calculate the returns from each mutual fund and commodity. This
was done on a monthly basis and the monthly returns were attained in percentage terms.

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The following mutual funds and commodity were selected and their monthly returns were
calculated:

RETURN
%
MUTUAL FUND JAN FEB MARCH
LIC MF Index Fund -
A1 Sensex Plan - Growth -14.0617 -3.8138 -0.69968
ICICI Prudential Index
A2 Fund -16.3702 -1.66945 -5.9995
Franklin India Index Fund -
A3 BSE Sensex Plan - Growth -12.111 -3.6805 -6.20335
HDFC Index Fund - Sensex
A4 Plus Plan -13.3966 -3.62265 -5.25465
HDFC Index Fund - Sensex
Plus Plan (Post Addendum)
A5 -13.3966 -2.42108 -5.25193
Birla Balance Fund -
B1 Growth -13.9684 -1.01695 -3.35785
Franklin Templeton India
B2 Balanced Fund - Growth -9.96434 -3.1574 -4.51916
HDFC Balanced Fund -
B3 Growth -8.22314 -1.41509 -5.73287
DSP Merrill Lynch
B4 Balanced Fund - Growth -14.6964 -0.70894 -4.87855
Sundaram BNP Paribas
B5 Balanced Fund - Growth -10.8277 -0.92968 -6.46719
C1 GOLD 10.36981 7.357396 -3.39283
C2 COPPER 7.573502 16.68987 0.313573
C3 CRUDE -4.14201 14.81164 3.732272
C4 SOYA -1.05339 10.71939 -7.45156

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Then a correlation matrix was built which showed the existing correlation of each item with
the others. During the penultimate stage, the major hiccup faced was to allocate weights to
each item in the portfolio. To resolve this problem, the linear programming method was
used.

OPTIMAL PORTFOLIOS - ALTERNATIVES

COMPOSITION - WEIGHTS
OF INDIVIDUAL ITEMS
Sum
of
A A A A weig
A1 2 3 4 5 B1 B2 B3 B4 B5 C1 C2 C3 C4 hts
0.1 0.30 0.19
0.3608 0 0 0 0 0 0 39 0 0 72 28 0 0 1
0.1 0.28 0.21
0.3444 0 0 0 0 0 0 56 0 0 3 7 0 0 1
0.1 0.25 0.24
0.3281 0 0 0 0 0 0 72 0 0 88 12 0 0 1
0.1 0.23 0.26
0.3118 0 0 0 0 0 0 88 0 0 46 54 0 0 1
0.2 0.21 0.28
0.2955 0 0 0 0 0 0 05 0 0 04 96 0 0 1
0.2 0.18 0.31
0.2792 0 0 0 0 0 0 21 0 0 62 38 0 0 1
0.2 0.16 0.33
0.2628 0 0 0 0 0 0 37 0 0 19 81 0 0 1
0.2 0.13 0.36
0.2465 0 0 0 0 0 0 53 0 0 77 23 0 0 1
0.2 0.11 0.38
0.2302 0 0 0 0 0 0 7 0 0 35 65 0 0 1
0.2 0.08 0.41
0.2139 0 0 0 0 0 0 86 0 0 93 07 0 0 1
0.3 0.06 0.43
0.1976 0 0 0 0 0 0 02 0 0 51 49 0 0 1
0.3 0.04 0.45
0.1812 0 0 0 0 0 0 19 0 0 09 91 0 0 1
0.3 0.01 0.48
0.1649 0 0 0 0 0 0 35 0 0 67 33 0 0 1
0.3
0.1244 0 0 0 0 0 0 76 0 0 0 0.5 0 0 1
0.4
0.0307 0 0 0 0 0 0 69 0 0 0 0.5 0 0 1

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The portfolio weights for the mutual funds and commodities for different standard deviations
were calculated assuming a target monthly return starting from 0.1% to 1.6%. Beyond which
no feasible solution was being generated.

Model used: Markowitz Model

The objective was to minimize portfolio risk (standard deviation) for a certain target return.

Constraints:

1. Weights of individual item in the portfolio should be greater or equal to zero

2. Total commodity weights should be equal to 50%

3. Total weight of portfolio should be equal to 100%

Portfolio performance was measured using Sharpe Ratio and Ranks were assigned to that.

Sharpe Ratio= (Rp-Rf)/бp

WHERE Rp = PORTFOLIO RETURN

Rf = RISKFREE RETURN (ANNUAL 5% OR MONTHLY 0.416667%)
Бp= PORTFOLIO STD. DEV.

These alternatives are then ranked with the help of the Sharpe ratio and an efficient frontier
graph is plot.

TARGET SHARPE
BEST STD. MONTHLY INDEX (Rp- SHARPE
DEV. RETURN% Rf)/бp RANK
2.6956255 0.1 -0.11747 15
2.8125382 0.2 -0.07704 14
2.9294509 0.3 -0.03983 13
3.0463636 0.4 -0.00547 12
3.1632763 0.5 0.026344 11
3.280189 0.6 0.055891 10
3.3971017 0.7 0.083404 9
3.5140144 0.8 0.109087 8

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3.6309271 0.9 0.133116 7

3.7478398 1 0.155645 6
3.8647524 1.1 0.176812 5
3.9816651 1.2 0.196735 4
4.0985778 1.3 0.215522 3
4.2174191 1.4 0.23316 2
4.3654521 1.5 0.248161 1
NO FEASIBLE
SOLUTION 1.6

Efficient frontier graph:

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The portfolio which ranks 1st on the Sharpe index is selected as the optimal and final
solution. A hypothetical investment figure of Rs.50 lakh is taken and the net return for the
minimized portfolio risk is calculated.

SHAR TOTAL
MONTH PE PORTFOL
LY INDEX IO
RETURN (Rp- SHARPE INVESTM
STD. DEV. % Rf)/бp RANK ENT
0.2481
4.365452076 1.5 61 1 50 LAKHS

Cash
CLOSI Marg take
ITE NG NO. Total in n for
M OPTIMAL PRICE OF valu paid MTM
COD WEIGHT INVESTM 1ST LO e of (10% (50%
E AGE ENT JAN TS lots ) )
A1 3.07% 153580
A2 0 0
A3 0 0
A4 0 0
A5 0 0
B1 0 0
B2 0 0
B3 46.93% 2346420

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B4 0 0
B5 0 0
C1 0 0
8061 8061 4030
C2 50% 2500000 268.7 3 00 0 50
C3 0 0
C4 0 0
100.00% 5000000

Further moderations were made to the model and different combinations were determined
altering the weights on commodities and mutual funds providing returns as high as 30% per
annum with a moderate change in the standard deviation.
However, the drawback in the model was that the weights were mostly allotted to the same
commodities; thereby it did not serve the purpose for a person who was looking for lower
risk and lower return.

Objective to build the portfolio:

The primary objective of making the portfolio (including commodity and mutual funds) was
to educate investors that there are various tools of investment and they can diversify their
risk of portfolio by including commodities and mutual fund (because they are negatively
correlated).
In the last three months when it was witnessed that most mutual funds were giving
negligible or negative returns, the commodities were found to bring forth better gains.
In fact in the process of iteration, when we changed the percentage of weight on the
commodities in the portfolio, it was witnessed that the portfolio returns in the span shot up to
as high as 30% per annum.
This proves that an investor if evens out a fair balance between equities and commodities, he
a profitable figure can be attained.
The portfolio has been constructed keeping the 3 month period in time Jan 2008-march
2008, to clearly display the negative correlation and the probable returns an investor could
have made in that time frame.

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BASIC TERMINOLOGY USED IN PORTFOLIO CONSTRUCTION

MARKOWITZ MODEL:

An investor might choose to invest a proportion of his or her wealth in a portfolio of risky
assets with the remainder in cash - earning interest at the risk free rate (or indeed may
borrow money to fund his or her purchase of risky assets in which case there is a negative
cash weighting). Here, the ratio of risky assets to risk free asset does not determine overall
return - this relationship is clearly linear. It is thus possible to achieve a particular return in
one of two ways:

1. By investing all of one's wealth in a risky portfolio,

2. Or by investing a proportion in a risky portfolio and the remainder in cash
(either borrowed or invested).

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For a given level of return, however, only one of these portfolios will be optimal (in the
sense of lowest risk). Since the risk free asset is, by definition, uncorrelated with any other
asset, option 2 will generally have the lower variance and hence be the more efficient of the
two.

This relationship also holds for portfolios along the efficient frontier: a higher return
portfolio plus cash is more efficient than a lower return portfolio alone for that lower level of
return. For a given risk free rate, there is only one optimal portfolio which can be combined
with cash to achieve the lowest level of risk for any possible return. This is the market
portfolio.

LINEAR PROGRAMMING

In mathematics, linear programming (LP) problems involve the optimization of a linear

objective function, subject to linear equality and inequality constraints.

Put very informally, LP problems determine the way to achieve the best outcome (such as
maximum profit or lowest cost) given some list of requirements represented as linear
equations.

More formally, given a polytope (for example, a polygon or a polyhedron), and a real-valued
affine function

Defined on this polytope, the goal is to find a point in the polytope where this function
has the smallest (or largest) value. Such points may not exist, but if they do, searching
through the polytope vertices is guaranteed to find at least one of them.

SHARPE RATIO:

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a

measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a
trading strategy. Since its revision made by the original author in 1994, it is defined as:

where R is the asset return, Rf is the return on a benchmark asset, such as the risk free
rate of return, E[R − Rf] is the expected value of the excess of the asset return over the
benchmark return, and σ is the standard deviation of the excess return.

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Note, if Rf is a constant risk free return throughout the period,

RELOZ DE METAL-NEWSLETTER
A daily newsletter was generated and circulated to existing and probable client base of the
company. The newsletter was meant to give a powerful insight to the happening in the
commodity market and provide investors a technical outlook based on the current base metal
prices.
The newsletter had different divisions which are:
a) Top story: Highlights a particular base metal

b) London Metal Exchange warehouse details

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

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

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

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f) Highlights: Relevant news highlights including news those move the market.

g) Shanghai Updates: Includes Shanghai Futures Exchange (SHFE) metal price update
and SHFE/LME spread. A future spread is 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).

j) LME Metals Contango/backwardation: Includes LME base metals

contango/backwardation movement graphs.

k) Star event: Economic event that may hold significance to the metals market.

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MAKING CONTACT POINTS WITH CORPORATE PROCURING BASE METAL

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Database
Tele calling

NO Criteria
Reject
Match

YES
The initial task was to prepare an information base of companies which deal in base metals
(Al, Ni, Sn, Pb, and Zn). The database acted as the primary tool to build point of contacts

Contact decision makers

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with the top management of companies to learn how they tackle base metal price volatility,
making them aware of hedging. The information was generated by two methods:

The database contained details such as :

 The name of the organization

 The contact details such as address,telephone number, website,email , fax number etc.

 The product/service line of the company

 The name and details of the managing board of the company

 A contact person in the company and his/her designation

The subsequent task was to narrow down efforts to certain companies depending on pre
fixed criteria.

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The criteria were:

The next phase

of the project
was to call up
these short
listed
companies and
to contact the
decision makers
via the contact
person specified
in the data base.
It required
explaining the
concept of
hedging at each
level, sending
forth mails and documentation. Once the organization was convinced with the concept a
checklist was sent forth.

A sample checklist:

CHECKLIST
Name Of Company
Location of The Company
Contact person's Name
Designation

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Contact No.
Email ID
Traders/Manufacturers
What do they manufacture?
Non-Ferrous metals required
Quantity reqd. per month
Clients
Suppliers
Competitors
Turnover
Pricing strategy
Inventory Management strategy
Are they aware about hedging?
Are they into hedging?
If into hedging, then with which exchange?
If not interested, then references

The details provided in the checklist helped Karvy match the criteria required for hedging. If
the criterions were met a meeting was set forth which led to the final phase of converting the
company into a client.

Some potential companies:

name of Designati
company name of person on email id
Metal Gems, finance mailto:info@mehta-
Mumbai MR MEHTA head group.com
Poona
radiators Mr.Iqbal Director proin@vsnl.com
JAYBANAS
METALS Mr.jitendra jain Director export@jaybanas.com
finance
Alcobex metals Mr bhandari head accounts@alcobex.com
Capital metals Mr rajhans Director info@rajhanssimpex.com
Apple eng pvt works suvidh@appleinternational.co
ltd Mr suvidh mehta manager m

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Lawrence lawrenceradiators@rediffmail
radiators mr rajesh shah Director .com
Man industries Mr niranjan gm finance niranjan.shetty@maninds.org
Glasspane finance
industries Mr Dhelia head gaipl@bom3.vsnl.one
Bhoruka shreenivas rao/ajay sec/fin
industries dalmia head sreenivasa@bharukainds.com
Met trade India rk gupta fin head rk.gupta@mtil.com
Impact metals Balachander Director bala.hyd@gmail.com

Probable clients:

Companies which procure non ferrous metals (criteria)

• copper-(minimum50 tons)

• aluminium-(minimum100 tons)

• lead-(minimum100tons)

• zinc-(minimum100tons)

• nickel(minimum100tons)

• annual turnover should be more than 100 crores

ANALYSIS OF THE IMPORTANCE OF HEDGING TO A COMPANY

USING THE
PORTER’S FIVE FORCE MODEL:

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Michael Porter provided a framework that models an industry/organization as being

influenced by five forces. The strategic business manager seeking to develop an edge over
rival firms can use this model to better understand the industry context in which the firm
operates. This model gave a better perspective of any industry to an entrant. These five
forces exhaustively cover the entire industry and can forecast a company’s growth in the
particular industry.

1. Entry of Competitors

How easy or difficult is it for new entrants to start to compete? What are the challenges
faced by competition?

The manufacturing industry is a growing sector and seeing the potential in the sector many
ventures are started in the dimension every day. Most companies we deal with are
manufacturing concerns and thereby, they are faced with a constant threat of new
competitors entering the segment, invading their share of customer base and profit.
Thereby, it is crucial that the companies maintain an edge among the existing client base and
in the market. Often due to the competition faced by new entrants companies cannot raise
the prices of their finished products and suffer in the account of their profitability.

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In such a scenario if the price of the input materials (base metals) are increasing and the
prices are forced to be kept constant due to competition; it might result in

2. Threat of Substitutes
How easy can a product or service be substituted?
The manufacturing sector is a booming sector. In spite of the zooming development in
technology it is not feasible to completely substitute the requirement of base metals in the
production process. Thereby, a manufacturer should realize that however high the prices
may rise; the utilization of these metals cannot be completely stopped.
So to cover future losses or fall in profit margin, the company can hedge.

3. Bargaining Power Of Buyers

How strong is the position of buyers?
An important factor we look at while deciding whether a company should indulge in the
hedging process is what kind of pricing mechanism exists at the customer end.
If the position of the buyers is strong and the manufacturer has to supply his goods at a fixed
rate, then to cover his profit margins/probable losses, he should invest in hedging.
On the other hand, if the buying masses are weak. Then the company may negotiate its rates
and maintain its margins. Thereby, in such scenario it is not crucial for him to enter the
hedging process.

4. Bargaining Power Of Suppliers

How strong is the position of sellers, are there many or only few potential suppliers, and is
there a monopoly

The pricing technique at the suppliers end is also crucial. If the manufacturer gets the base
metals at a fixed price then he does not need to worry about the volatility existing in the

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metal prices. However, if the suppliers follow the market price volatility then the producer
may suffer losses/diminishing profit. So it is helpful for a company to use the hedging
process to deal with the volatility in the base metal prices.

5. Rivalry Among The Existing Players

Is there a strong competition between the existing players, is one player very dominant or
all equal in strength/size.

In today’s dynamic era, an active and aggressive competition exists between players in the
market. The market leaders often set the price trends which have to be followed by the other
participating companies in the industry. The rivalry among the existing players leads to price
cuts which may affect the books of a company.

Thereby all the 5 factors would play an essential role in deciding whether it is important
and fruitful enough for a company to use the hedging mechanism to deal with price
volatility existing in the base metals market.

LIMITATIONS OF THE PROJECT

Non availability of accurate information about companies is a limitation of the project.
Even though prices of commodity is dependent on some fundamental and technical
parameters, there are various other factors such as political situation of the countries,
government policies and other various other macro variables, which affects it. Therefore it is
difficult to find the future trend in the prices.

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Hedging is a new concept, which is often misunderstood by people. They consider it to be a

way of generating profit in the commodity market so they end up doing speculating while
hedging is a technique to set off losses and not promote gains. So a dissonance exists.
Finding industries dealing in procuring metals in large quantities
Contacting the top management for interaction as the major decisions about adopting new
strategies is taken by them alone.

CONCLUSIONS:
The commodity market is at its nascent stage in India and will take time to mature.
Economy of country is benefited by it and it provides a good tool for industrialist to hedge
their position in markets.
It provides a technique for common man to fight against increasing rate of inflation.
It provides various strategies to invest in commodity market from high risk taking to risk
adverse techniques.
People who are risk averse can go for arbitrage and hedging concept.
The trend of commodities future market is very new to the India and it requires a lot of
awareness to bring people forward for investment in commodity trading.

REFERENCES
In order to carry on my research project I have referred to the following:
Reports

 Karvy Comtrade
 MF Global Reddi A C OPTIONS – Pricing, Hedging, and Training, Published by

 Derivatives Groups, Chennai

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Associations
 Aluminum casters association of India
 Confederation of Indian Industry

 Maharashtra Chamber Of Commerce, Industries and Agriculture

Internet –
 www.google.com
 www.mcxindia.com
 www.fxstreet.com
 www.bloomberg.com
 www.metalsmarket.net
 www.basematals.com
 www.reuters.com
 www.india.gov.in
 www.indiatimes.com
 www.karvycomtrade.com

 http//mam.econoday.com
All company websites related to base metals
The Icfai journal of Derivatives Market, Vol. III No. 4, October 2006
Website for Central Statistical Organization, mospi.gov.in.
Along with the above references, views and opinions of senior colleagues have also been
incorporated for secondary research purpose

FACULTY GUIDE
Prof. Ashwini Sovani

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Faculty, IBS Pune

INDUSTRY GUIDE
Mr. Anurag Kataria
Regional Head Commodities
Karvy Comtrade Ltd.
Telephone Numbers: 9860794801
E-mail: anurag.kataria@karvy.com

ANNEXURES:
CALCULATION OF NET ASSET VALUE FOR THE FUNDS:

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RETUR
JAN Feb Mar N

BEG END Beg END Beg END JAN FEB MARCH

- -
45.595 - 0.0166 0.0599
ICICI 55.1 46.08 47.92 47.12 5 42.86 0.1637 9 9
- - -
FRANK 46.686 0.1211 0.0368 0.0620
LIN 56.23 49.42 51.08 49.2 1 43.79 1 1 3
- -
32.557 0.1406 0.0381
LIC 40.18 34.53 35.66 34.3 8 32.33 2 4 -0.007
Hdfc- - - -
sensx 184.70 176.51 167.23 0.1339 0.0362 0.0525
plus 214.83 186.05 191.65 72 02 52 7 3 5
Hdfc- - - -
post 176.51 0.1339 0.0242 0.0525
add 214.83 186.05 191.65 187.01 02 167.24 7 1 2

- - -
0.0822 0.0141 0.0573
HDFC 41.14 37.757 38.16 37.62 36.439 34.35 3 5 3
- - -
0.1469 0.0070 0.0487
DSP 58.79 50.15 50.78 50.42 48.99 46.6 6 9 9
- - -
0.1396 0.0101 0.0335
BIRLA 37.37 32.15 32.45 32.12 31.27 30.22 8 7 8
- -
Sundar 41.197 39.933 37.351 0.1082 - 0.0646
am 46.2 6 41.95 41.56 9 3 8 0.0093 7
Frankli - - -
n- 41.911 39.686 37.893 0.0996 0.0315 0.0451
growth 46.55 6 42.44 41.1 6 1 4 7 9

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CACULATION OF STANDARD DEVATION FOR THE FUNDS:

prob*r square varian
month returns prob eturn difrnc h ce s.d.
LIC MF
Index
Fund -
Sensex
Plan - - -
Growth 14.061 4.6825 7.8761 62.034 20.657
jan 7 0.333 5 81 23 4
- -
- 1.2699 2.3717 5.6251 1.8731
feb 3.8138 0.333 9 4 69 81
- - -
0.6996 0.2329 5.4858 30.094 10.021
march 8 0.333 9 6 68 53
-
6.1855 32.552 5.7054
4 11 46
ICICI
Pruden
tial - -
Index 16.370 5.4512 8.3651 69.976 23.302
Fund jan 2 0.333 9 89 38 14
- -
1.6694 0.5559 - 40.139 13.366
feb 5 0.333 3 6.3356 8 55
- -
- 1.9978 2.0055 4.0222 1.3394
march 5.9995 0.333 3 5 37 05
-
8.0050 38.008 6.1650
5 1 71
Frankli jan - 0.333 - 4.7866 22.912 7.6298
n India 12.111 4.0329 98 48 55
Index 5
Fund -
BSE
Sensex
Plan -
Growth

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- -
- 1.2256 3.6437 13.277 4.4212
feb 3.6805 0.333 1 7 09 7
- - -
6.2033 2.0657 1.1209 1.2564 0.4184
march 5 0.333 1 3 83 09
-
7.3242 12.469 3.5312
7 53 23
HDFC
Index
Fund -
Sensex - -
Plus 13.396 4.4610 5.9794 35.753 11.905
Plan jan 6 0.333 8 18 44 89
- - -
3.6226 1.2063 3.7945 14.398 4.7948
feb 5 0.333 4 8 81 03
- -
5.2546 - 2.1625 4.6766 1.5573
march 5 0.333 1.7498 7 99 41
-
7.4172 18.258 4.2729
2 04 43
HDFC
Index
Fund -
Sensex
Plus
Plan
(Post - -
Adden 13.396 4.4610 6.3804 40.710 13.556
dum) 6 0.333 8 45 07 45
- - -
2.4210 0.8062 4.5951 21.115 7.0313
8 0.333 2 1 08 21
- - -
5.2519 1.7488 1.7642 3.1126 1.0365
3 0.333 9 6 14 01
-
7.0161 21.624 4.6501
9 28 91

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Birla
Balanc
e Fund
- - -
Growth 13.968 4.6514 7.8601 61.781 20.573
jan 4 0.333 9 3 65 29
- - -
1.0169 0.3386 5.0913 25.921 8.6319
feb 5 0.333 4 4 79 55
- - -
3.3578 1.1181 2.7504 7.5649 2.5191
march 5 0.333 6 4 35 23
-
6.1082 31.724 5.6324
9 37 39
Frankli
n
Templ
eton
India
Balanc
ed
Fund - - -
Growth 9.9643 3.3181 4.0899 16.727 5.5702
jan 4 0.333 3 21 46 43
- -
- 1.0514 2.7170 7.3821 2.4582
feb 3.1574 0.333 1 2 95 71
- - -
4.5191 1.5048 1.3552 1.8367 0.6116
march 6 0.333 8 6 31 32
-
5.8744 8.6401 2.9394
2 45 12
HDFC
Balanc
ed
Fund - - -
Growth 8.2231 2.7383 3.1045 9.6383 3.2095
jan 4 0.333 1 63 12 58
- - -
1.4150 0.4712 3.7034 13.715 4.5673
feb 9 0.333 3 8 79 57
- -
5.7328 1.9090 0.6142 0.3773 0.1256
march 7 0.333 5 91 54 59
- 7.9025 2.8111
5.1185 74 52

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8
DSP
Merrill
Lynch
Balanc
ed
Fund - - -
Growth 14.696 4.8938 7.9418 63.072 21.003
jan 4 0.333 9 5 98 3
- - -
0.7089 0.2360 6.0455 36.549 12.170
feb 4 0.333 8 9 11 85
- - -
4.8785 1.6245 1.8759 3.5193 1.1719
march 5 0.333 6 8 01 27
-
6.7545 34.346 5.8605
3 09 53
Sundar
am
BNP
Pariba
s
Balanc
ed
Fund - - -
Growth 10.827 3.6056 4.7589 22.647 7.5415
jan 7 0.333 3 24 35 69
- -
0.9296 0.3095 - 26.410 8.7946
feb 8 0.333 8 5.1391 39 6
- -
6.4671 2.1535 0.3984 0.1587 0.0528
march 9 0.333 7 05 26 56
-
6.0687 16.389 4.0483
8 08 43

CORRELATION MATRIX FOR THE 4 COMMODITIES and 10 FUNDS

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A1 A2 A3 A4 A5 B1 B2 B3 B4 B5 C1 C2 C3 C4
- - -
A 1.0 0.8 0.8 0.9 0.8 0.9 0.9 0.6 0.8 0.6 0.8 0.1 0.6 0.0
1 00 70 68 28 89 23 15 20 68 85 18 59 63 55
-
A 0.8 1.0 1.0 0.9 0.9 0.9 0.9 0.9 1.0 0.9 0.4 0.3 0.9 0.4
2 70 00 00 91 99 93 95 26 00 55 28 49 46 44
-
A 0.8 1.0 1.0 0.9 0.9 0.9 0.9 0.9 1.0 0.9 0.4 0.3 0.9 0.4
3 68 00 00 90 99 92 94 28 00 56 24 53 48 48
-
A 0.9 0.9 0.9 1.0 0.9 1.0 0.9 0.8 0.9 0.9 0.5 0.2 0.8 0.3
4 28 91 90 00 96 00 99 67 90 07 45 20 94 20
-
A 0.8 0.9 0.9 0.9 1.0 0.9 0.9 0.9 0.9 0.9 0.4 0.3 0.9 0.4
5 89 99 99 96 00 97 98 10 99 42 64 11 32 08
-
B 0.9 0.9 0.9 1.0 0.9 1.0 1.0 0.8 0.9 0.9 0.5 0.2 0.9 0.3
1 23 93 92 00 97 00 00 74 92 12 34 34 00 33
-
B 0.9 0.9 0.9 0.9 0.9 1.0 1.0 0.8 0.9 0.9 0.5 0.2 0.9 0.3
2 15 95 94 99 98 00 00 84 95 20 17 53 09 52
-
B 0.6 0.9 0.9 0.8 0.9 0.8 0.8 1.0 0.9 0.9 0.0 0.6 0.9 0.7
3 20 26 28 67 10 74 84 00 28 96 56 76 98 49
-
B 0.8 1.0 1.0 0.9 0.9 0.9 0.9 0.9 1.0 0.9 0.4 0.3 0.9 0.4
4 68 00 00 90 99 92 95 28 00 56 25 52 47 47
-
B 0.6 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 1.0 0.1 0.6 1.0 0.6
5 85 55 56 07 42 12 20 96 56 00 41 11 00 90
- - - - - - - - - - -
C 0.8 0.4 0.4 0.5 0.4 0.5 0.5 0.0 0.4 0.1 1.0 0.6 0.1 0.6
1 18 28 24 45 64 34 17 56 25 41 00 98 12 20
-
C 0.1 0.3 0.3 0.2 0.3 0.2 0.2 0.6 0.3 0.6 0.6 1.0 0.6 0.9
2 59 49 53 20 11 34 53 76 52 11 98 00 34 95
-
C 0.6 0.9 0.9 0.8 0.9 0.9 0.9 0.9 0.9 1.0 0.1 0.6 1.0 0.7
3 63 46 48 94 32 00 09 98 47 00 12 34 00 10
-
C 0.0 0.4 0.4 0.3 0.4 0.3 0.3 0.7 0.4 0.6 0.6 0.9 0.7 1.0
4 55 44 48 20 08 33 52 49 47 90 20 95 10 00

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CALCULATION OF STANDARD DEVIATION FOR COMMODITIES:

GOLD
RETUR PRO EXPECTD EXPECTD
N B RETRUN R-RETURN
10.36
JAN 981 0.33 3.4220 2.88049 2.738089
16.71
FEB 215 0.33 5.5150 -3.46184 3.954837
13.07
MAR 048 0.33 4.3133 0.17982 0.010671
TOTAL 13.2503 6.703597

s.d 2.589131
COPPE
R
RETUR PRO EXPECTD EXPECTD
N B RETRUN R-RETURN
7.573 42.52689
JAN 502 0.33 2.4993 11.3521 9
24.76 11.26190
FEB 74 0.33 8.1732 -5.8418 7
25.00 12.21391
MAR 93 0.33 8.2531 -6.0837 0
66.00271
TOTAL 18.9256 6

s.d 8.124206
CRUDE
RETUR PRO EXPECTD EXPECTD
N B RETRUN R-RETURN
-
4.142 29.68981
JAN 01 0.33 -1.3669 9.4852 3
FEB 8.203 0.33 2.7071 -2.8601 2.699531

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335
12.13 15.20083
MAR 018 0.33 4.0030 -6.7870 0
47.59017
TOTAL 5.3432 3

s.d 6.898563
SOYBE
AN
RETUR PRO EXPECTD EXPECTD
N B RETRUN R-RETURN
-
1.053 10.98639
JAN 39 0.33 -0.3476 5.7699 3
11.27 14.19889
FEB 604 0.33 3.7211 -6.5595 1
4.069
MAR 907 0.33 1.3431 0.6466 0.137986
25.32326
TOTAL 4.7165 9
5.032223
s.d 064
VALUE AT RISK:
TIME
METAL MONTH ST. DEV. (DAYS) 95% 99%
Lead Jan 55.30853 19 -397.789 -561.726
Feb. 127.9279 20 -943.983 -1333.02
March 36.8819 22 -285.436 -403.07
Apr 32.12976 19 -231.083 -326.317
May 90.56566 21 -684.79 -967.006
Jun 135.4166 21 -1023.92 -1445.9
Jul 220.517 22 -1706.62 -2409.96
Aug 147.5121 22 -1141.62 -1612.11
Sept 219.3305 20 -1618.45 -2285.44
Oct 146.8684 23 -1162.19 -1641.15
Nov 322.5072 21 -2438.56 -3443.54

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Dec 154.3378 18 -1080.42 -1525.68

TIME
METAL MONTH ST. DEV. (DAYS) 95% 99%
copper Feb. 304.8439 20 -2249.45 -3176.5
march 341.4898 22 -2642.85 -3732.03
April 307.5143 19 -2211.7 -3123.19
may 359.0172 21 -2714.62 -3833.37
June 127.8803 22 -989.689 -1397.56
July 121.8536 22 -943.048 -1331.7
Aug 307.6104 23 -2434.16 -3437.33
Sept 324.7746 20 -2396.52 -3384.18
Oct 190.3171 23 -1506 -2126.66
Nov 355.1391 22 -2748.49 -3881.2
Dec 164.3166 18 -1150.27 -1624.33
TIME
METAL MONTH ST. DEV. (DAYS) 95% 99%
Zinc Jan 206.7675 23 -1636.18 -2310.48
Feb 166.0944 21 -1255.88 -1773.46
March 84.45207 23 -668.28 -943.692
Apr 166.8145 20 -1230.93 -1738.22
May 184.5551 22 -1428.31 -2016.94
June 148.7679 22 -1151.34 -1625.84
July 115.6784 22 -895.257 -1264.21
Aug 192.6107 23 -1524.15 -2152.29
Sept 111.8968 21 -846.08 -1194.77
Oct 106.0768 24 -857.452 -1210.83
Nov 200.132 23 -1583.67 -2236.33
Dec 69.78286 19 -501.891 -708.731

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METAL MONTH ST. DEV. TIME

TIME 95% 99%
METAL MONTH ST. DEV. (DAYS)
(DAYS) 95% 99%
nickel
aluminium Jan Jan 3094.759
67.11541 21
18 -23400.2
-469.832 -33044
-663.46
Feb. 2023.841 19 -14555.8 -20554.6
Feb 60.71427 20 -448.012 -632.647
march 2304.235 22 -17832.9 -25182.2
March 50.42124 22 -390.219 -551.037
Apr 1265.238 18 -8857.12 -12507.3
Apr 28.62734 19 -205.893 -290.746
May 1331.58 21 -10068.4 -14217.8
may 37.67276 21 -284.853 -402.247
June 4656.57 21 -35209.5 -49720.1
jun 39.72047 21 -300.336 -424.111
July 1982.555 22 -15343.4 -21666.7
Aug July 34.4817
1693.532 22
22 -266.86
-13106.6 -376.839
-18508.1
Sept Aug 81.81301
2536.023 22
20 -633.166
-18713.4 -894.107
-26425.6
Oct Sept 34.19741
788.8604 20
23 -252.344
-6242.35 -356.34
-8814.95
Nov Oct 45.68278
2022.3 23
22 -361.493
-15651 -510.473
-22101
Dec Nov 48.54736
436.2196 22
17 -375.717
-2967.66 -530.558
-4190.69
Dec 48.5436 22 -375.688 -530.517

VAR AT 99 %
Copper

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Auminium

Zinc

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Nickel

Lead:

CORRELATION BETWEEN BASE METALS AND DOLLAR PRICES:

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dolla
r silve
price r
s price alumi copp
avera nyme lead nium zinc tin gold nicke er crude
ge x lme lme lme mcx mcx l lme lme lme

feb 39.71

jan 39.37
2600. 2351.
574.4 1030 2593 6585.
dec 39.48 14.37 14 94.97 5 2 8.80 5.00 36 91.74
3316. 2540.
580.4 1025 3058 6965.
nov 39.46 14.66 36 99.80 0 9 4.90 9.32 23 94.63
3717. 2973.
641.8 9707. 3103 8006.
oct 39.55 13.57 09 97.47 17 7 91 4.35 28 85.66
3223. 2880.
615.8 9286. 2951 7646.
sept 40.38 12.91 40 98.13 13 2 58 4.50 13 79.63
3116. 104.0 3248.
525.7 8872. 2763 7508.
aug 40.79 12.28 71 5 64 6 24 4.09 80 72.36
3081. 111.3 3550.
460.6 8746. 3340 7971.
july 40.44 12.93 93 8 17 6 81 7.50 23 74.15
2424. 110.4 3602.
570.0 8790. 4169 7472.
june 40.81 13.09 41 8 43 6 61 0.95 88 67.53
Corre - - - - -
latio 0.887 0.373 0.742 0.829 0.471 0.939 0.475 0.436 0.959
n 317 29 281 55 67 11 492 62 2

NEWSLETTER:

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