A

RESEARCH PROJECT
ON
“TO STUDY THE IMPACT OF MONEY SUPPLY ON
COMMODITY FUTURES GOLD, CRUDE AND US DOLLER
VOLATILITY
FOR EIGHT QUARTERS (1ST JAN 08 TO 31 DEC2009)”
SUBMITTED TO:
KURUKSHETRA UNIVERSITY, KURUKSHETRA,
IN THE FULFILLMENT OF DEGREE OF
“MASTER OF BUSINESS ADMINISTRATION (MBA)”
SESSION (2008-10)

UNDER THE SUPERVISION OF: SUBMITTED BY:

DR. VIKAS DARYAL Vishal Luthra
DIRECTOR TIMT, YNR S/o Sh Kharaiti lal Luthra
Class Roll. No. 1116/08
Univ.Regd. No. 04-rk-745
Univ. Regd. No…………..

Tilak Raj Chadha Institute of Management & Technology (TIMT)

(Affiliated to Kurukshetra University, Kurukshetra and Approved By AICTE)
MLN College Educational Complex, Yamuna Nagar- 135001 (Haryana)
Ph. 01732-220103, 234110. Fax:+91-1732-220103 E-mail: info@timt.ac.in,
Web Site: www.timt.ac.in
 CONTENTS

• Declaration
• Certificate from institute
• Acknowledgement
• Executive summary
• Introduction
 Profile of the study(Area\Organization)
• Research Objectives
• Theoretical Framework
 Construct
 Variables
• Literature Survey & Review
• Research Methodology and Analytical tools
 Research Design
 Sampling and Sampling Design
 Analytical Tools
 Statistical Tools
 Data Collection Methods
 Hypothesis Testing
 Limitations of the Study
• Results and Discussions
• Policy Implications
• Conclusion
• Bibliography
• Annexure
 DECLARATION

I Vishal luthra, Roll No.1116/08, MBA (4th Semester) student of the Tilak Raj
Chadha Institute of Management and Technology, Yamunanagar hereby declare
that the Research Report entitled “Impact of moneysupply on fluctuations in
commodity futures with special reference to gold, crude oil and us doller prices
volatility for eight quarters (1st jan 08 to 31 dec 2009)”

It is an original work done by me under the guidance of Dr. Vikas Daryal, TIMT,
Yamuna Nagar in partial fulfillment of M.B.A Degree during academic year 2009-10. All
the data represented in this project is true & correct to the best of my knowledge & belief.
This work has not been submitted for any other degree/diploma exam elsewhere.

(Vishal luthra)
 ACKNOWLEDGEMENT
A Project usually falls short of its expectation unless guided by the right person at the
right time. Success of a project is an outcome of sincere efforts, channeled in the right
direction, efficient supervision and the most valuable professional guidance.

This project would not have been completed without the direct and indirect help and
guidance of such luminaries. They provided me with the necessary recourses and
atmosphere conductive for healthy learning and training.

At the outset I would like to take this opportunity to gratefully acknowledge the very kind
and patient guidance I have received from my project guider Dr.VIKAS DARYAL
(Director), TIMT Without his critical evaluation and suggestion at every stage of the
project, this report could not have reached its present form. I would like to extend my
gratitude, to all the faculty members, TIMT for their moral support & guidance required
for the realization of this project report.

Lastly, I would like to thank my colleagues who gave me fruitful information to finish
my project.

(Vishal luthra)
 Derivative market

Derivatives have had a long presence in India. The commodity derivative market has
been functioning in India since the nineteenth century with organized trading in cotton
through the establishment of Cotton Trade Association in 1875. Since then contracts on
various other commodities have been introduced as well.

Exchange traded financial derivatives were introduced in India in June 2000 at the two
major stock exchanges, NSE and BSE. There are various contracts currently traded on
these exchanges.National Commodity & Derivatives Exchange Limited (NCDEX) started
its operations in December 2003, to provide a platform for commodities trading.

The term “Derivative” indicates that it has no independent value. Its value is entirely
derived form the value of the underlying asset. The underlying asset can be securities,
Commodities, bullion, currency, Stock Index, live stock or anything else.
The term Derivative has been defined in Securities Contracts (Regulations) Act, as :-
“A Contract which derives its value form the price’s or index of prices, of
underlying Securities.”
There are two distinct groups of Derivative:-
• Over-the-counter (OTC) derivatives are contracts that are traded (and privately
negotiated) directly between two parties, without going through an exchange or
other intermediary. Products such as swaps, forward rate agreements, and exotic
options are almost always traded in this way. The OTC derivatives market is
huge. According to the Bank for International Settlements, the total outstanding
notional amount is USD 298 trillion (as of 2005).
• Exchange-traded derivatives are those derivatives products that are traded via
Derivatives exchanges. A derivatives exchange acts as an intermediary to all
 transactions, and takes Initial margin from both sides of the trade to act as a
guarantee. The world's largest[2] derivatives exchanges (by number of
transactions) are the Korea Exchange (which lists KOSPI Index Futures &
Options), Eurex (which lists a wide range of European products such as interest
rate & index products), Chicago Mercantile Exchange and the Chicago Board of
Trade. According to BIS, the combined turnover in the world's derivatives
exchanges totalled USD 344 trillion during Q4 2005.

TYPES OF TRADERS IN A DERIVATIVES MARKET

Hedgers, speculators and arbitrators are the types of traders in derivatives market.
• Hedgers:
Hedgers are those who protect themselves from the risk associated with the price
of an asset by using derivatives. A person keeps a close watch upon the prices
discovered in trading and when the comfortable price is reflected according to his
wants, he sells futures contracts. In this way he gets an assured fixed price of his
produce.
• Speculators:
Speculators are some what like a middle man. They are never interested in actual
owing the commodity. They will just buy from one end and sell it to the other in
anticipation of future price movements. They actually bet on the future movement
in the price of an asset. They are the second major group of futures players. These
participants include independent floor traders and investors. They handle trades
for their personal clients or brokerage firms. Buying a futures contract in
anticipation of price increases is known as ‘going long’. Selling a futures contract
in anticipation of a price decrease is known as ‘going short’.
• Arbitrators:
According to dictionary definition, a person who has been officially chosen to
make a decision between two people or groups who do not agree is known as
Arbitrator. In commodity market Arbitrators are the person who takes the
 advantage of a discrepancy between prices in two different markets. If he finds
future prices of a commodity edging out with the cash price, he will take
offsetting positions in both the markets to lock in a profit. Moreover the
commodity futures investor is not charged interest on the difference between
margin and the full contract value.

CONTRACT TYPE UNDER DERIVATIVE MARKET:

• Futures/Forwards, which are contracts to buy or sell an asset at a specified future

date.
• Options, which are contracts that give the buyer the right (but not the obligation)
to buy or sell an asset at a specified future date.

Swaps, where the two parties agree to exchange cash flows.

What is commodity:
A commodity may be as an article, a product or material that is bought and sold. It can
be classified as every kind of movable property, except actionable claims, money and
securities.
Commodities actually offer immense potential to become a separate asset class for
market savvy investors, arbitrageurs and speculators. Retail investors, who claim to
understand the equity markets, may find commodities an unfavorable market. But
commodities are easy to understand as for as fundamentals of demand and supply are
concerned. Retail investors should understand the risk and advantages of trading in
commodities futures before keeping a leap. Historically, pricing in commodities futures
has been less volatile compared with equity and bonds that provides an efficient portfolio
diversification option.
Meaning of commodity market: Commodity markets are market where raw or primary
products are exchanged. The raw commodities are traded on regulated commodities
exchanges, in which they are bought and sold in standardized contracts.
This article focuses on the history and current debates regarding global commodity
markets. It covers physical product (food, metals, and electricity) markets but not the
ways that services, including those of government, nor investment, nor investment, nor
debt can be seen as commodity. Article on reinsurance markets, stock markets, bond
markets and currency markets cover those concerns separately and in more depth. On
focus of this article is the relationship between simple commodity money and the more
complex instruments offered in the commodity markets.
Commodity market is an important constituent of the financial markets of any country. it
is the market where a wide range of products precious metals, base metals, crude oil,
energy and soft commodities like oil, coffee etc. are traded. It is important to develop a
vibrant, active and liquid commodity market. This would help investors hedge their
commodity risk, take speculative positions in commodities and exploit arbitrage
opportunities in the market.

evolution in India:
Bombay cotton trade association ltd set up in 1875 was organized futures market.
Bombay cotton exchange ltd. was established in 1893 following the widespread
discontent amongst leading cotton mill owners and merchants over functioning of
Bombay cotton trade association.
Leading commodity markets of India

The government has allowed national commodity exchanges, similar to the BSE
& NSE to come up and let them deal in commodity derivatives in an electronic
trading environment.
 Multi commodity exchange (MCX) located at Mumbai
 National commodity and derivatives exchange ltd (NCDEX) located at
Mumbai
 National board of trade (NBOT) located at Indore
 National multi commodity exchange (NMCE) located at Ahmedabad

FUTURE CONTRACT:

In finance, a futures contract is a standardized contract, traded on a futures exchange,

to buy or sell a certain underlying instrument at a certain date in the future, at a
pre-set price. The future date is called the delivery date or final settlement date. The
pre-set price is called the futures price. The price of the underlying asset on the
delivery date is called the settlement price. The settlement price, normally, converges
towards the futures price on the delivery date.

BASIC FEATURES OF FUTURE CONTRACT:

1.Standardization:

Futures contracts ensure their liquidity by being highly standardized, usually by

specifying:

• The underlying. This can be anything from a barrel of sweet crude oil to a short
term interest rate.
• The type of settlement, either cash settlement or physical settlement.
• The amount and units of the underlying asset per contract. This can be the
notional amount of bonds, a fixed number of barrels of oil, units of foreign
 currency, the notional amount of the deposit over which the short term interest
rate is traded, etc.
• The currency in which the futures contract is quoted.
• The delivery month.
• The last trading date.
• Other details such as the tick, the minimum permissible price fluctuation.

2.Margin:

Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a credit
risk to the exchange, who always acts as counterparty. To minimize this risk, the
exchange demands that contract owners post a form of collateral, commonly known as

Margin requirements are waived or reduced in some cases for hedgers who have physical
ownership of the covered commodity or spread traders who have offsetting contracts
balancing the position.

Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as
determined by historical price changes, which is not likely to be exceeded on a usual
day's trading. It may be 5% or 10% of total contract price.

Mark to market Margin: Because a series of adverse price changes may exhaust the
initial margin, a further margin, usually called variation or maintenance margin, is
required by the exchange. This is calculated by the futures contract, i.e. agreeing on a
price at the end of each day, called the "settlement" or mark-to-market price of the
contract.

To understand the original practice, consider that a futures trader, when taking a position,
deposits money with the exchange, called a "margin". This is intended to protect the
exchange against loss. At the end of every trading day, the contract is marked to its
present market value. If the trader is on the winning side of a deal, his contract has
increased in value that day, and the exchange pays this profit into his account. On the
other hand, if he is on the losing side, the exchange will debit his account. If he cannot
pay, then the margin is used as the collateral from which the loss is paid.

3.Settlement

Settlement is the act of consummating the contract, and can be done in one of two ways,
as specified per type of futures contract:

• 'Physical delivery' - the amount specified of the underlying asset of the contract
is delivered by the seller of the contract to the exchange, and by the exchange to
the buyers of the contract. Physical delivery is common with commodities and
bonds. In practice, it occurs only on a minority of contracts. Most are cancelled
out by purchasing a covering position - that is, buying a contract to cancel out an
earlier sale (covering a short), or selling a contract to liquidate an earlier purchase
(covering a long). The Nymex crude futures contract uses this method of
settlement upon expiration.
• Cash settlement - a cash payment is made based on the underlying reference rate,
such as a short term interest rate index such as Euribor, or the closing value of a
stock market index. A futures contract might also opt to settle against an index
based on trade in a related spot market.
• Expiry is the time when the final prices of the future are determined. For many
equity index and interest rate futures contracts (as well as for most equity
options), this happens on the Last Thrusday of certain trading month. On this day
the t+2 futures contract becomes the t forward contract. For example, for most

Pricing of future contract

Futures

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the
forward price) must be the same as the cost (including interest) of buying and storing the
asset. In other words, the rational forward price represents the expected future value of
the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying
asset, the value of the future/forward, , will be found by discounting the present

value at time to maturity by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and
convenience yields; see futures contract pricing.

Any deviation from this equality allows for arbitrage as follows.

• In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the
spot market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives the
agreed forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells the underlying today (on the
spot market); he invests the proceeds.
2. On the delivery date, he cashes in the matured investment, which has appreciated
at the risk free rate.
3. He then receives the underlying and pays the agreed forward price using the
matured investment. [If he was short the underlying, he returns it now.]
4. The difference between the two amounts is the arbitrage profit.
Benefits to industry from future trading:
 Hedging the price risk associated with future contractual commitments.
 Spaced out purchases possible rather than large cash purchased and its
storage.
 Efficient price discovery prevents seasonal price volatility
 Greater flexibility, certainty and transparency in procuring commodities
would aid bank lending.
 Facilitate informal lending
 Hedged position of producers and processors would reduce the risk of
default faced by banks.
 Lending for agriculture sector would go up with greater transparency in
pricing and storage.
 Commodity exchanges to act as distribution network to retail agri-finance
from bank to rural households.
 Providing trading limit finance to traders in commodities exchanges.

Meaning of commodities exchanges:

The terms “commodities” and “futures” are often used to describe commodity
trading or futures trading. You can think of them as generic terms to describe the
markets. It is similar to the way “stocks” and “equities” are used when investors
talk about the stock market. To be more specific, this is what they really mean:
Commodities are the actual physical goods like corn, soybeans, gold, crude oil,
etc. Futures are contracts of commodities that are traded at a futures exchange like
the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond
just commodities; now there are futures contracts on financial markets like the
S&P 500, t-notes, currencies and many others.
How do Futures Work?

Futures are standardized contracts among buyers and sellers of commodities that specify
the amount of a commodity, grade / quality and delivery location. Commodity trading
with futures contracts takes place at a futures exchange and, like the stock market, is
entirely anonymous.

For example: the buyer might be an end-user like Kellogg’s. They need to buy corn to
make cereal. The seller would most likely be a farmer, who needs to sell his corn crop.
They create a contract of December Corn futures at the current market price. A contract
of corn at the CBOT consists of 5,000 bushels. Therefore, the farmer would have to
deliver 5,000 bushels of corn to Kellogg’s in December at a designated location.

Making Money in Futures

A speculator is someone who invests in a business with the goal of turning a profit. In the
case of commodities, speculators are traders who try to buy futures low and sell them
high to make money. The reason why speculators can do so with futures is that traders
aren’t required to hold the futures contracts for the duration of the contract; they can buy
or sell anytime they want. So, to use the Kellogg’s example above, a speculator could buy
the corn contract from the farmer at a certain price, then wait for the price of corn to go
up before selling the contract to Kellogg’s, even if the contract won’t come due for
another couple of months, turning a profit in the process.

Players Involved in Commodities Trading

There are three different types of players in the commodity markets:

Commercials:

The entities involved in the production, processing or merchandising of a

commodity. For example, both the corn farmer and Kellogg’s from the example
 above are commercials. Commercials account for most of the trading in commodity
markets.

Large Speculators:

A group of investors that pool their money together to reduce risk and increase gain.
Like mutual funds in the stock market, large speculators have money managers that
make investment decisions for the investors as a whole.

Small Speculators:

Individual commodity traders who trade on their own accounts or through a

commodity broker. Both small and large speculators are known for their ability to
shake up the commodities market.

How to Start Trading Commodities

In order to trade commodities, you should educate yourself on the futures contract
specifications for each commodity and of course learn about trading strategies.
Commodities have the same premise as any other investment – you want to buy low and
sell high. The difference with commodities is that they are highly leveraged and they
trade in contract sizes instead of shares. Remember that you can buy and sell positions
whenever the markets are open, so rest assured that you don’t have to take delivery of a
truckload of soybeans.

What Does Commodity Futures Contract Mean?

An agreement to buy or sell a set amount of a commodity at a predetermined price and
date. Buyers use these to avoid the risks associated with the price fluctuations of the
product or raw material, while sellers try to lock in a price for their products. Like in all
financial markets, others use such contracts to gamble on price movements.
INDIAN COMMODITY EXCHANGES MARKET SHARES:

INDIAN COMMODITY EXCHANGES

MARKET SHARES

Other
regional NMCE
exchanges,
NMCE, 4%
3% Other regional
NCDEX,
exchanges
34%
MCX, 59% NCDEX

MCX

Source:MCX
 GOLD
Gold is the oldest precious metal known to man. Therefore, it is a timely subject for
several reasons. It is the opinion of the more objective market experts that the traditional
investment vehicle of stocks and bonds are in the areas of their all time highs may be due
to for a severe correction.

To fully appreciate why 8000 years of experience say “gold is forever”, we should
review why the world reveres what Engand most famous economist, John Maynard
Keynes, has cynically called the “barbarous relic”.

How to Trade Gold Futures in India

The price of gold depends on a host of factors, which makes it very difficult to predict. In
a fashion similar to shares, gold is an asset class by itself. In fact, in many villages and
small towns of India, gold is preferred to bank deposits as a savings and investment
instrument.

Till a year ago, to gain from price volatility, one would have to hoard and trade in gold
physically. Not any more, however. With the commodity futures market operating in full
swing, one has the option of not physically stocking gold to gain from its price
movements.

Let us see how trading in futures is better than the option of hoarding gold. Firstly, there
are several costs associated with the process of physically stocking gold. The costs
include the cost of the gold itself, the cost of carrying, cost of physical storage, finance
cost and last, but not the least, the safety element.

While futures might have some advantages, there is also a danger of losing big as your
risks are also magnified and hence, one must tread carefully in this area.

In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of
Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going
price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross
profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at
Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the
cost of storage in a bank and transaction costs, including sales taxes.

Now, let’s see what the same Rs 6 lakh can achieve in a futures market, assuming the
same sequence of prices. In Indian exchanges, currently, futures contracts up to four
months are available. Let’s assume that three-month gold futures are trading at a little
over the spot price, with the market expecting gold prices to remain stable over the next
three-month period. Let this price be Rs 6050.

Since a futures contract is an obligation to buy or sell a specific quantity of the

commodity, one does not have to pay for the entire value of the commodity. Buying
futures obligates one to take delivery of the underlying commodity at a particular date in
the future. This is also known as taking a long position.

To trade in gold futures, one has to go to a brokerage house and open a trading account.
A trading account involves keeping an initial deposit of Rs 50,000 to Rs 1 lakh. Part of
the money accounts for the margin money, which is required by the exchange when one
enters trading.
For a high amount, however, the deposit amount is usually waived by the brokerage
house. The whole investment is then generally treated as margin money. For commodity
futures, there is usually a lot size or the minimum volume of the commodity of which one
has to buy a futures contract.

INDIAN GOLD MARKET:

 Gold is valued in India as a saving and investment vehicle and is the second
preferred investment after bank deposits.
 India is the world’s largest consumer of gold in jewellery as investment.
 In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewelers and exports. At present 13 banks are active in import of gold.
 The gold hoarding tendency is well ingrained in Indian society.
 Domestic consumption is dictated by monsoon, harvest and marriage season.
 Indian jewellery off take is sensitive to price increases and even more so to
volatility.
 In the cities gold is facing competition from the stock market and a wide range of
consumer goods.
 Facilities for refining, assaying, making them into standard bars in India, as
compared to the rest of the world, are insignificant, both qualitatively and
quantitatively.

METHOD OF INVESTING IN GOLD:

• Bullion
• Coins
• Gold certificates
• Gold accounts
• Gold shares
FORTNIGHT GOLD FUCTUATIONS VALUES FROM JAN
TO DEC 2009 AND 2010
 CRUDE OIL
• Crude oil is a mixture of hydrocarbons that exists in a liquid phase in
natural underground reservoirs. Oil and gas account for about 60 per cent of the
total world's primary energy consumption.
• Almost all industries including agriculture are dependent on oil in one way
or other. Oil & lubricants, transportation, petrochemicals, pesticides and
insecticides, paints, perfumes, etc. are largely and directly affected by the oil
prices.
• Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate
fuel oil, residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax,
petroleum coke, asphalt and other products are obtained from the processing of
crude and other hydrocarbon compounds.
• The prices of crude are highly volatile. High oil prices lead to inflation
that in turn increases input costs; reduces non-oil demand and lower investment in
net oil importing countries.

Categories of Crude oil

• West Texas Intermediate (WTI) crude oil is of very high quality. Its API
gravity is 39.6 degrees (making it a "light" crude oil), and it contains only about
0.24 percent of sulphur (making a "sweet" crude oil). WTI is generally priced at
about a $2-4 per-barrel premium to OPEC Basket price and about $1-2 per barrel
 premium to Brent, although on a daily basis the pricing relationships between
these can very greatly.
• Brent Crude Oil stands as a benchmark for Europe.
• India is very much reliant on oil from the Middle East (High Sulphur). The
OPEC has identified China & India as their main buyers of oil in Asia for several
years to come.

Crude Oil Units (average gravity)

• 1 US barrel = 42 US gallons.
• 1 US barrel = 158.98 liters.
• 1 tonne = 7.33 barrels.
• 1 short ton = 6.65 barrels.

Note: barrels per tonne vary from origin to origin.

Source: crude survey

Global Scenario

• Oil accounts for 40 per cent of the world's total energy demand.
• The world consumes about 76 million bbl/day of oil.
• United States (20 million bbl/d), followed by China (5.6 million bbl/d) and
Japan (5.4 million bbl/d) are the top oil consuming countries.
• Balance recoverable reserve was estimated at about 142.7 billion tones (in
2002), of which OPEC was 112 billion tones. .

Indian Scenario

• India ranks among the top 10 largest oil-consuming countries.

 • Oil accounts for about 30 per cent of India's total energy consumption.
The country's total oil consumption is about 2.2 million barrels per day. India
imports about 70 per cent of its total oil consumption and it makes no exports.
• India faces a large supply deficit, as domestic oil production is unlikely to
keep pace with demand. India's rough production was only 0.8 million barrels per
day.
• The oil reserves of the country (about 5.4 billion barrels) are located
primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and
Cauvery basins.
• Balance recoverable reserve was about 733 million tones (in 2003) of
which offshore was 394 million tones and on shore was 339 million tones.
• India had a total of 2.1 million barrels per day in refining capacity.
• Government has permitted foreign participation in oil exploration, an
activity restricted earlier to state owned entities.
• Indian government in 2002 officially ended the Administered Pricing
Mechanism (APM). Now crude price is having a high correlation with the
international market price. As on date, even the prices of crude bi-products are
allowed to vary +/- 10% keeping in line with international crude price, subject to
certain government laid down norms/ formulae.
• Disinvestment/restructuring of public sector units and complete
deregulation of Indian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil

Particulars Rates
Basic Customs Duty 10%
Cess Rs.1800 per metric tonne
NCCD* Rs.50 per metric tonne
Education cess 2%
Octroi 3%
War fedge Rs.57 per metric tonne
Market Influencing Factors

• OPEC output and supply.

• Terrorism, Weather/storms, War and any other unforeseen geopolitical
factors that causes supply disruptions.
• Global demand particularly from emerging nations.
• Dollar fluctuations.
• Refinery fires & funds buying.

Exchanges dealing in crude futures

• The New York Mercantile Exchange (NYMEX).

• The International Petroleum Exchange of London (IPE).
• The Tokyo Commodity Exchange (TOCOM).

Impact of Crude Price Hike on the Indian Companies

Crude at USD 100 per barrel is going to have an adverse impact on marketing companies,
especially if you look at the product price under recoveries which are going on.
Petroleum has an under recovery of nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per
cylinder, and kerosene Rs 21. So, that is a huge under recovery burden which the industry
is carrying as of now. This includes marketing, which has to be shared equally between
marketing companies, upstream companies, and the government.

At the beginning of the year, the government has approved nearly Rs 24,000 crore in oil
bonds. They have issued Rs 12,000 crore for Q1 and Q2, and the remaining has to be
issued to oil marketing companies. In the first half of the year, when oil bonds were
issued to companies, oil-marketing companies took the biggest hit in terms of sharing of
subsidy while the burden for upstream companies was much lower. It is likely that in the
second half of the year, the burden may shift to upstream companies. This means
companies like ONGC and Oil India might be hit because of this additional burden which
they might have to take because of crude going to USD 100 per barrel.

The Indian crude basket is trading at USD 92.29 per barrel, which is its all-time high.
This is the highest since November 26, when the Indian basket was trading at USD 92.13
per barrel.

The average for FY08 comes to around USD 74.58 per barrel. Compared to FY07, the
average was around USD 62.46 per barrel. This is an about USD 12 increase in the Indian
basket of crude. So, that impact which will be there.
The subsidy burden will be shared in FY08 was estimated at around Rs 54,900 crore.
That is expected to touch nearly Rs 60,000 crore. Upstream companies were bearing a
burden of nearly Rs 18,000 crore. This burden is expected to go over Rs 20,000 crore.
According to ONGC’s Chairman, the company expects their burden to go over Rs 20,000
crore in FY08. This basically means that ONGC will have to bear a major chunk of that
burden for upstream companies.

With international crude prices within touching distance of $100 per barrel, the
Government is basically left with two choices – either revise domestic retail prices of
petrol and diesel or look for a fresh package to compensate the state-owned oil marketing
companies (OMCs), which could be in the form of an enhanced bonds issue along with a
possible readjustments of duties on petroleum products.

CRUDE OIL VALUE FROM JAN 2007 TO DEC 2009 AND 2010

Last 3 years
 US DOLLAR (CURRUNCY FUTURE)

This is a future contract in which currencies are used as underlying assets. In

India, Currency Future was introduced in 2008. The Combination for dealing was
decided USDINR. It is traded in MCX,NSE & BSE. Now due to its success RBI is
thinking for introducing three more pairs.
There are a number of factors which effect the trading of currency future in Indian Stock
Market:

BENEFITS TO INDUSTRY FROM FUTURE TRADING:

 Hedging the price risk associated with future contractual commitments.

 Spaced out purchases possible rather than large cash purchased and its
storage.
 Efficient price discovery prevents seasonal price volatility
 Greater flexibility, certainty and transparency in procuring commodities
would aid bank lending.
 Facilitate informal lending
 Hedged position of producers and processors would reduce the risk of
default faced by banks.
 Lending for agriculture sector would go up with greater transparency in
pricing and storage.
 Commodity exchanges to act as distribution network to retail agri-finance
from bank to rural households.
 Providing trading limit finance to traders in commodities exchanges.
STATUS CHECK ON CURRENCY FUTURES IN INDIA:

As of now, the combined average daily turnover of the currency futures contracts in all
the three exchanges increased from USD 1.1 billion in March 2009 to 2.5 billion in
September 2009 – which means a growth of more than 125 per cent in just six months
period. These developments are very good from the market point of view. More volumes
result in better price discovery and more opportunities for traders, investors, genuine
hedgers, speculators and arbitrageurs.
(It may be noted that the volumes, no. of contracts, o/s open interest and other figures
given in the following pages pertain to only currency futures as relate to USD-INR
currency pair. Till January 18, 2010; only trading of currency futures in the US Dollar-
Indian Rupee pair on three recognized stock exchanges were allowed by Reserve Bank of
India.)

TOTAL TRADED VALUE-ALL EXCHANGES (RS IN CRORE)

200000
184813
180000

160000
143348
140000
124900
120000

99464
100000

77244
80000
63963
60000
45805 48404

40000
31140

17429
20000
5763
291
0
Aug.08 Sept.08 Oct.08 Nov.08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May.09 Jun.09 Jul.09

Table 1: Traded volumes on all exchanges for USD-INR pair (Data: SEBI)
As can be seen from the above table, the trading volumes on these exchange traded
currency futures have risen tremendously in the last one year. Let us take note of the
volume increase between December 2008 and July 2009. The volumes have surged by
four times during that period from Rs. 0.46 lac cr. to about Rs. 1.85 lac cr. The
cumulative volume between August 2008 and July 2009 works out to Rs 8.50 lakh crore
(Latest data available is up to July 2009).
During FY 2008-09, total traded volume was only Rs 869 crore on BSE; practically this
exchange is out of the currency futures market. In the last six months of the current
financial year, there are practically no volumes on BSE.

MONEY SUPPLY

In economics, money supply or money stock, is the total amount of money available in

an economy at a particular point in time. There are several ways to define "money," but

standard measures usually include currency in circulation and demand deposits.

Money supply data are recorded and published, usually by the government or the central

bank of the country. Public and private-sector analysts have long monitored changes in

money supply because of its possible effects on the price level, inflation and thbusiness

cycle[ That relation between money and prices is historically associated with the quantity
theory of money.

There is strong empirical evidence of a direct relation between long-term price inflation

and money-supply growth. These underlie the current reliance on monetary policy as a

means of controlling inflation. This causal chain is however contentious, with some

heterodox economists arguing that the money supply is endogenous and that the sources

of inflation must be found in the distributional structure of the economy.

 TYPE OF MONEY
M0: In some countries, such as the United Kingdom, M0 includes bank reserves,

so M0 is referred to as the monetary base, or narrow money

MB: is referred to as the monetary base or total currency. This is the base from

which other forms of money (like checking deposits, listed below) are created and

is traditionally the most liquid measure of the money supply.

M1: Bank reserves are not included in M1.

M2: represents money and "close substitutes" for money. M2 is a broader

classification of money than M1. Economists use M2 when looking to quantify

the amount of money in circulation and trying to explain different economic

monetary conditions. M2 is a key economic indicator used to forecast inflation

M3: Since 2006, M3 is no longer published or revealed to the public by the US

central bank. However, there are still estimates produced by various private

institutions.

MZM: Money with zero maturity. It measures the supply of financial assets redeemable
at par on demand.
 Objectives of study

Primary objective:

To know the impact of money supply on fluctuations of gold, crude prices and us doller

Secondary objectives:

 To know the volatility in crude oil, us doller and gold

 To know the contribution of commodity future in total commodity market.

 To understand the importance of commodity future derivatives market in India

  To know the relationship between gold, crude oil and us doller

Theoretical Framework

Constructs of study
TO STUDY THE IMPACT OF MONEY SUPPLY ON COMMODITY FUTURES
GOLD, CRUDE AND US DOLLER VOLATILITY

Dependent variables:

 Fluctuation in gold trade

 Fluctuation in crude oil
 Fluctuation in US dollar

Independent variables

Money supply

Intervening variable

Market volatility
 Literature Survey & Review

TEXT BOOKS:
• Gupta S.L., “Financial Derivatives,” Prentice Hall Of India, New
Delhi,2007,pp.3-27
From this book I will be able to learn about the basic concept of Derivatives.
Academicians claim that derivatives offer certain economic benefits such as risk sharing,
efficient allocation of capital, information gathering and price discovery. And yet, there
are widely held apprehensions about their potential to destabilize their financial markets.
Indeed the losses suffered in the past by even some of the well managed companies
indicate the statement that derivative trading is risky. This article juxtaposes the
economic benefits along with the inherent risks of derivative products and cautions that
they must be traded with care to maximize benefits and mitigate risks.
• Taylor Francesca “Mastering Derivatives Market” Pearson Power, An imprint of
Pearson Education
From this book I came to know about the history of oil commodity future.
• Hull John C., “Options, Future & Other Derivatives,” Prentice Hall Of India,
New Delhi,pp.469-479

From this book I will be able to learn about Volatility in Future Market In India. This
article investigates the changes in volatility in the commodity Market after the
introduction of derivatives. There is strong evidence of a reduction in the volatility of the
underlying shares after the introduction of derivatives. This is largely attributable to a
reduced persistence in the previous day's volatility. However, the intraday unconditional
volatility of the equity index increases. This contradiction is explained by an increased
correlation between the prices of its constituent shares caused by arbitrage transactions in
the cash market.

• Alan C.Shapiro “Multinational Financial Management”.

Edition-4th, 2002, printice hall of India private limited New Delhi.
Page -478-492: tell about the commodity market and their dealing and
about the benefits of the future commodity trading. Apart from this it
also tell about the flexibility certainty, hedging the price risk associated
with future contractual commitments, trading limits to traders in
commodity exchanges, hedged position of producers and processors
and reduction of the default risk faced by banks.
• Brookes Robert, “Derivatives & Risk Management Basics,”
Cengage Learn India, Delhi,pp.474-506
This book will tell me about the role of different risks involved in derivative markets.
There are various risk such as Credit Risk & Interest Rate Risk in Indian Market & The
ways How can it be Measured.
• Miller W Thomas, “Derivatives,” Z. A Printers, Delhi,pp.87-112
This book contains a lot of information regarding Derivatives but the best part I found is
the mechanism of future pricing in Derivative market, what various factors effect the
pricing of the future derivatives.
• Miller W Thomas, “Derivatives,” Z. A Printers, Delhi,pp.144-151
This book will be able to tell about Different types of Derivatives. the role of currency
future derivatives , when it was introduced & How does the Price Fluctuations occurs &
How does price fluctuations effect the contracts of future derivative market.
• A.Dubofsky David, “ Derivative valuation And Risk Management” Newyork
Oxford University Press 2003
This book will help me to learn about the forward price and commodity and also help me
to know about the “convenience yield”
WEBSITES:
• http://ncdex.com/

This will enable me to learn me about the Recent Trend in Commodity market
• http://ncdex.com/product/Precious_Metals.aspx?comm=GLD

This will enable me to know about the gold trend in commodity market

• http://mcx.com/result.php
This will enable me to know about the different behaviour of different commodity

• https://www.kitcomm.com/archive/index.php?t-38609.htm

This will know about the trend of trade in to the commodity market

• http://goldprice.org/

This .will enable to know the gold price fluctuations

• http://nymex.com/

This will enable me to know the crude oil trend and the sport price of crude oil

• http//www.currencyfutureinindiastatuschequeafteroneyear.vrk100-27102009.htm
This will enable me to learn me about the status after one of introducing USDINR
currency future in India..
• http//www.bseindia.com/cds/faqs.asp
This will help me to learn about Trading of currency future on bse & it’s turnover.
JOURNALS:
• The Journal Of Finance, June 09,Vol.64
“Oil Future Price in Production Economy With Investment Constraints ” By Kogan
Leonid, Livdan Dmitry,Yaron Amir
This study says that there is relationship between the volatility of future price and the
slope of the forward curve has v-shape.
• Finance India , Dec.07, Vol. XXI, No. 4
“ Does The Introduction Of Derivatives Affect The Underlying Return Volatility?” By
Wejda Ochi
In this Study, an empirical analysis of the relation between the future market & the Euro
spot market is presented. Two aspects of this relation has been analysed , the effect can
be on volatility due to introduction of of derivatives in india & interaction between level
of exchange on the futures market & variability on the returns.
• Finance India , Sept..07, Vol. XXI, No.4
“Effect if Derivative on Volatility – A Study in Context of Indian Stock Market” By
Srivastva Sandeep
This research paper says about the impact of the introduction of the derivative market in
to the Indian stock marker when it entered in to the Indian stock market and after the
coming what was the volatility occurs.
• Finance India, Sept..07, Vol. XXI, No. 3,pp.987-1002
“A Study Of Market Efficiency & Volatility In The Indian Stock Market, Forex Market
& Bullion Market” By Bikas Kumar Ghosh
This paper suggests that Forex, stock & Silver markets are efficient as compared to gold.
On the other hand, Forex Market, which is observed to possess lower degree of Market
Efficiency next after gold, is the highest volatile market.
• Global business review
“Efficiency and Future Trading – Price Nexus in Indian Commodity
Future Market” By Sahoo Parvakar

This study says about the efficiency and future trading price of
commodity market in the context of 5 commodity which include
 Gold, and Silver. It also give information about the origin of
commodity market and the structure of the commodity market.
Information about the relationship between the future market &
inflation also.

NEWSPAPERS:
• Business Standard, 12November, 2009

Research Methodology

Research methodology is a way to systematically solve the problem. It is a game plan for
conducting research. In this we describe various steps that are taken by the researcher,
“All progress is born of inquiry. Doubt is often better than overconfidence, for it
leads to inquiry and inquiry leads to invention.”
Research in a common parlance is a search for knowledge. Research is an art of scientific
and systematic investition. Thus research comprises defining and redefining problems,
formulating hypothesis or suggested solutions; collecting, organizing and evaluating data,
making deductions and reaching conclusions. Research methodology is the arrangement
of condition for collection and analysis of data in a manner that aims to combine
relevance to the research purpose with economy in procedure. Research Methodology is
the conceptual structure within which research is conducted. It constitutes the blueprint
for the collection measurement and analysis of the data.
Research methodology is a framework for the study and is used as a guide in collecting
and analyzing the data. It is a strategy specifying which approach will be used for
gathering and analyzing the data. it also includes time and cost budget since most studies
are done under these two constraints. The research methodology include over all research
design, the sampling procedure, the data collection method and analysis procedure.
Issues regarding research are:
 To gain familiarity with the phenomenon or to achieve new insight into it.
 To portray accurately the characteristics of a particular individual, situation or
group.
 To determine the frequency with which something occur.4
Significance of Research
 Research provides the basis for all government policies in our economic system.
 It has its special significance in solving various operational and planning issues of
business and industry.
 For professional in research methodology, research may mean a source of live
hood.

Research Design
This part contains relevant information pertaining to research design and methodology
used in the research project. The research design has been distinctive described to the
objective of the study.
There are three types of research design that are used frequently used by the various
researchers. These are:
 Exploratory research
 Descriptive research
 Causal research

Sources of Data
Data used in research can be of any form. It can be primary data or the secondary data.
Secondary data is one, which has already been collected or is made publicly available
in the past and the researcher has just made some modifications in the data according to
the requirement.
This research project consists the study of reasons and impact of rupee appreciation. In
this research project only secondary data has been used. This is collected from different
websites of the Internet, through magazines, newspapers and various journals.
THE RESEARCH PROCESS:

1
OBSERVATION
Broad area of
research interest
identified

4
3 5
THEORETICAL 7
PROBLEM FRAMEWORK 6
DATA
DEFINITION GENERATION SCIENTIFIC
COLLECTION,
Research OF RESEARCH
ANALYSIS AND
Problem HYPOTHESES DESIGN
Variables clearly INTERPRETATION
Delineated identified and
labelled

8
DEDUCTION
2 Hypotheses
PRELIMINARY substantiated?
DATA Research
GATHERING question
Interviewing answered?
Literature Survey NO Yes

11
10 Manager
9 ial
Report
Report decision
Presentat
writing making
ion
1. COLLECTION OF DATA:-
Both the primary & secondary data has been collected from the market & company. The
company provided the secondary data & primary data is collected through the medium of
face-to-face interaction & interview from various persons in the enterprise.

2. ORGANISATION OF DATA:
Data once collected the further processing is done, the data collected by me are carefully
done through in a useful & relevant manner &properly organized.

3. PRESENTATION OF DATA:-
The data collection is of no use unless & until it is given in the presentable form. Thus
after proper organization the data is given in presentable form with the complete details,
with the help of bar diagram, pie carts etc.

4. ANALYSIS OF DATA:-

The data is carefully analyzed keeping in the consideration both the pros & cons for the
purpose of arriving at concrete conclusion.

5. INTERPRETATION OF DATA:-
After carefully analyzed the data, it has been aptly interpreted in order to give concrete
conclusion & proper recommendation.
 RESEARCH DESIGN:

Research design involves a series of rational decision making benefits at each point from
such sophisticated design to ensure accuracy, confidence and commensurate with large
investment of resources.

Purpose of study:

 Exploratory
 Descriptive
 Hypothesis testing

The purpose of my study is descriptive. A descriptive study is undertaken in order to

ascertain be able to describe the characteristics of variables of interest in a situation.
It is also hypothesis testing also. Because studies that engage in hypothesis testing usually
explain the nature of certain relationship or establish the difference among groups or
independence of the two or more factors in the situation.

Types of investigation:

Establishing
 Casual relationship
 Correlation
 Group differences, ranks etc.

Type of investigation in my study will be correlation. Because my main motive is to

check whether there is significant relationship between balance of payment(BOP) and
money supply (dependent variables) and crude prices, silver prices and gold prices
(independent variables). So investigation type will be correlation type

Extent of researcher interference in study:

 Minimal: studying events as they normally occurs

 Manipulation and/or control and/or simulation

The extent of research interference in my study will be minimal. I’ve to just collect and
analyze the data for findings. There will be no need for simulation tests etc.

Study setting:

 Contrived
 Non-contrived
This includes field study, field study and lab experiment.
My study is using the same natural environment/data.
Measurements and measures:

 Operational definition
 Items (measures)
 Scaling
 Categorization
 Coding

Measurements and measures for my study will be scaling that is interval scaling.

Units of analysis (population to be studied):

  Individuals
 Dyads
 Groups
 Organization
 Machines etc.

The units of analysis or the population that will be studied in my research will be
commodity prices and values of BOP as well as of money supply.

Sampling design:

It is a definite plan for obtaining a sample from sampling frame. It is determined before
collection of data.

Sampling size for my study will be of 24 fortnights. In other words sampling size will be
24 i.e. half monthly data of one year that is 2008.

Time horizon:

 One shot (cross sectional)

 Longitudinal

The time horizon for my study will be longitudinal. In this type of time horizon the data
is collected monthly, quarterly etc to find out the monthly, quarterly changes in ratios and
trend etc. I’ll collect data on fortnight basis to know the impact of fluctuations on the
BOP and money supply in last one year. So it will be longitudinal.
 DATA COLLECTION:

Secondary data:

It is the data, which has already collected by some organization for some purpose or
research study. The data for my study has been collected from various. Secondary data
means that data that are already available i.e. refers to data which has already been
collected and analyzed by someone else. The sources used in this case are-

1. Books
2. Journals
3. Magazines
4. Internet sources
5. Newspapers
Data collection method:

 Primary data
 Secondary data
 Interviewing
 Questionnaires
 Observations
 Unobtrusive methods.

Data analysis:

 Feel for data

 Goodness of data
 Hypothesis testing

For data analysis mostly the hypothesis testing will be used. By using spss software it
will be performed. Statistical tools will also be used. Analytical tools will also be used.

SAMPLING AND SAMPLING DESIGN

A sampling design is a definite plan for obtaining a sample from a given population.
While selecting a sampling design, one must ensure that the procedure causes a relatively
small sampling error and helps to control the bias in a better way.
The sampling procedure followed is as follows:
1. Identification of the Universe : The universe to be studied is finite and includes the
industries
2. Defining a Sampling unit : Here the sampling unit is an industrial unit (small,
medium or large) where the industrial units are classified as small, medium and large on
the basis of their annual turnover
3. Determining the size of the sample : Taking into consideration the size of the sample,
the population variance , cost involved and the requirements of efficiency, representative
ness , reliability, flexibility, and the parameters of interest in the research

4 .Sampling procedure:

The sampling design used is Probability Sampling (Simple Random Sampling

Without Replacement ).The use of this sampling design is due to the fact that it follows
the Principle of Statistical Regularity which states that if on an average, the sample
chosen is a random one, the sample will have the same composition and characteristics as
that of the universe. Moreover, with probability sampling, we can measure the errors of
estimation which brings out the superiority of random sampling design over the other
ones.
GARCH MODEL
The positive correlation between volumes and volatility found for most of the exchange
is unlikely to be a reflection of changes in the number of traders active in these markets.
These changes appear rather to have occurred in the last 2009, when banks increasingly
moved into emerging markets, and after the recession, when the sharp fall in turnover
was accompanied by a significant decline in the number of traders. A more plausible
explanation for the positive correlation between turnover and volatility is that both
variables are driven by the arrival of new information.
To test this hypothesis, I split volatility and trading volumes into expected and
unexpected components. I use estimates from a GARCH(1,1) model to describe expected
volatility. This model appears to fit the time series well. Ideally, volatility implied in
option prices could be used, since there is evidence that it outperforms GARCH models
in providing forecasts of future volatility.
However, future contracts for currencies of emerging market countries are not very
liquid.
The GARCH(1,1) model can be written as:
Following a practice common in the literature, the GARCH model is fitted on the entire
time series, thus yielding in sample forecasts.
where Rt is the return, its mean and ht its conditional variance at time t.
 Why use GARCH:

GARCH modeling builds on advances in the understanding and modeling volatility in

the last decade. It takes into consideration excess kurtosis (i.e. fat tail behavior) and

volatility clustering, two important characteristics of financial time series. It provides

accurate forecasts of variances and co-variances of asset return through its ability to

model time varying conditional variances. As a consequence you can apply GARCH

model to such diverse field such as risk management, portfolio management and asset

allocation, opinion pricing, foreign exchange and term structure of interest rates.

You can find highly significant GARCH effects in equity market not only for individual

stocks but for stock portfolio and equity future.

GARCH ON CRUDE OIL PRICES FROM JAN 2008 TO

DEC 2009

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-12-
10
time: 11:58
Included observations: 464
Convergence achieved after 31 iterations

Coefficie Std. z-
nt Error Statistic Prob.

5054.33 0.17999 0.8571

Omega 909.7603 3 6 56
3.20043 2.03E- 0.9999
alpha_1 6.5E-05 1 05 84
 3.25195 0.27811 0.7809
beta_1 0.904424 6 7 23

Log Likelihood -2625.31

3.36E-
Jarque Bera 43.62834 Prob 10
Ljung-Box 339.1585 Prob 0
INTERPRETATION
In the above graphs there could be seen high fluctuations in the daily settlement prices of
commodity future of gold in mcx & the same is represented by the value of Alpha &
Beta, the high fluctuations in the daily settlement prices represents & symbolises the
instability as well as the inefficiency, which is not a good symbol for the market
efficiency.
As the values in the table are much near than one which shows that it is not good for
Indian economy.

Verification of crude pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-17-
10
time: 15:11
Included observations: 45
Convergence achieved after 32 iterations

Coefficie Std. z-
nt Error Statistic Prob.
 685883. 1.44E- 0.99998
Omega 9.863551 2 05 9
239.497 0.99999
alpha_1 0.000287 4 1.2E-06 9
250.559 0.00397 0.99682
beta_1 0.996356 1 7 7

Log Likelihood -254.898

0.26268
Jarque Bera 2.673574 Prob 8
0.96765
Ljung-Box 0.001644 Prob 9

INTERPRETATION
the above graph shows that what the prediction has produce by the old data is true to see
the trend line of the new data of crude prices

GARCH ON GOLD PRICES FROM JAN 2008 TO DEC 2009

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-17-10
time: 15:02
Included observations: 503
Convergence achieved after 7 iterations
 Std. z-
Coefficient Error Statistic Prob.

omega 7623.36 9330265 0.000817 0.999348

alpha_1 0.023638 69.21263 0.000342 0.999728
beta_1 0.968659 69.98129 0.013842 0.988956

Log Likelihood -4137.95

Jarque Bera 37.95282 Prob 5.74E-09
Ljung-Box 0.15228 Prob 0.696366
INTERPRETATION
In the above graphs there could be seen high fluctuations in the daily settlement prices of
commodity future of gold in mcx & the same is represented by the value of Beta, the
high fluctuations in the daily settlement prices represents & symbolises the instability as
well as the inefficiency, which is not a good symbol for the market efficiency.
As the values in the table are much near than one which shows that there is high
speculation in the past time in gold.

Verification of GOLD pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-17-10
time: 15:05
Included observations: 51
Convergence achieved after 39 iterations

z-
Coefficient Std. Error Statistic Prob.

omega 450.0008 4.26E+08 1.06E-06 0.999999

alpha_1 3.95E-05 568.6453 6.94E-08 1
beta_1 0.997566 606.1444 0.001646 0.998687

Log Likelihood -422.439

Jarque Bera 1.706567 Prob 0.426014
Ljung-Box 6.18E-06 Prob 0.998016
INTERPRETATION
In the above graph the values alpha is low which indicats there is less risk in gold
trading.. Volatility of gold price shows that gold has been less fluctuative in the past year.
And according to the prediction of the above table.

GARCH ON DOLLAR PRICES FROM JAN 2008 TO DEC

2009

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-12-10
time: 12:05
Included observations: 516
Convergence achieved after 25 iterations

Std. z-
Coefficient Error Statistic Prob.

Omega 19.05934 32330.4 0.00059 0.99953

alpha_1 0.000639 15.3587 4.16E-05 0.999967
beta_1 0.962579 1.552985 0.619825 0.535373

Log Likelihood -2698.15

Jarque Bera 28913.36 Prob 0
Ljung-Box 15.41039 Prob 8.65E-05
INTERPRETATION
As we can see that in the above table value of alpha is very less which indicates that there
was less risk in the trade of dollar. Above table shows that there is less fluctuation in the
past two year of the price of dollar.
Verification of DOLLAR pridiction

GARCH(1,1) estimation of y

Method: ML - BFGS with analytical gradient

date: 03-17-10
time: 15:10
Included observations: 50
Convergence achieved after 17 iterations

Std. z-
Coefficient Error Statistic Prob.

omega 0.122977 5413649 2.27E-08 1

alpha_1 0.002256 4182.109 5.39E-07 1
beta_1 0.997005 3571.222 0.000279 0.999777

Log Likelihood -258.091

Jarque Bera 1.186283 Prob 0.552589
Ljung-Box 7.91E-06 Prob 0.997756

INTERPRETATION
In the above graph the values alpha is low which indicats there is less risk in gold
trading.. Volatility of gold price shows that dollar has been less fluctuative in the past
year.
 Statistical tools

Granger causality
Granger causality test is a technique for determining whether one time series is useful
in forecasting another Ordinarily, regressions reflect "mere" correlations, but Clive
Granger, who won a Nobel Prize in Economics, argued that there is an interpretation of a
set of tests as revealing something about causality.

A time series X is said to Granger-cause Y if it can be shown, usually through a series of

F-tests on lagged values of X (and with lagged values of Y also known), that those X
values provide statistically significant information about future values of Y.

The test works by first doing a regression of ΔY on lagged values of ΔY. Once the
appropriate lag interval for Y is proved significant (t-stat or p-value), subsequent
regressions for lagged levels of ΔX are performed and added to the regression provided
that they 1) are significant in and of themselves and 2) add explanatory power to the
model. This can be repeated for multiple ΔXs (with each ΔX being tested independently
of other ΔXs, but in conjunction with the proven lag level of ΔY). More than one lag level
of a variable can be included in the final regression model, provided it is statistically
significant and provides explanatory power.

The researcher is often looking for a clear story, such as X granger-causes Y but not the
other way around. In practice, however results are often hard-to-interpret. For instance no
variable granger-causes the other, or that each of the two variables granger-causes the

second.

Why we use granger

Granger casuality test is an statistical tool which use f-test to know the cause and effect
relation ship between the two time series. With the help of this test we can find the right
direction o f the study.

Granger casuality on crude oil and money supply

Pairwise Granger Causality Tests

Date: 04/04/10 Time: 10:54
Sample: 1 24
Lags: 2
Null Hypothesis: Obs F-Statistic Probability
RCRUDE does not Granger Cause 21 0.45517 0.64230
RMONEYSUPPLY
RMONEYSUPPLY does not Granger Cause 0.42835 0.65884
RCRUDE

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5%
so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude
that money supply has significant impact on trading of crude oil and vice-versa.
.

Granger casuality on gold and money supply

Pairwise Granger Causality Tests

Date: 04/04/10 Time: 10:59
Sample: 1 24
Lags: 2
Null Hypothesis: Obs F-Statistic Probability
RMONEYSUPPLY does not Granger Cause 21 0.24116 0.78852
RGOLD
RGOLD does not Granger Cause 2.95541 0.08085
RMONEYSUPPLY

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5%
so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude
that money supply has significant impact on trading of gold and vice-versa.

Granger casulity on usdollar and money supply

Pairwise Granger Causality Tests

Date: 04/04/10 Time: 11:02
Sample: 1 24
Lags: 2
Null Hypothesis: Obs F-Statistic Probability
RMONEYSUPPLY does not Granger Cause 21 3.48090 0.05558
RDOLLAR
RDOLLAR does not Granger Cause 0.27732 0.76138
RMONEYSUPPLY

INTERPRETATION
As the significant level is 5% and from the above table calculated value are more than 5%
so the null hypothesis is rejected and alternate hypothesis is accepted .so we can conclude
that money supply has significant impact on trading of us dollar and vice-versa.

Regression
Regression is the study of the nature of relationship between the variables so that one
may be able to predict the unknown value of one variable for a known value of another
value.
“It is the measure of average relationship between two or more variables”.

Types of regression analysis:-

Simple and multiple regression: - In case of simple regression, we study only two
variables i.e. one dependent and one independent. But in case of multiple regression we
take more than two variables i.e. one dependent and other independent.
Linear and Non-linear regression: - When one variable changes with another variable
in some fixed ratio, it is called as linear regression. But if this ratio is not constant, it is
known as Non-linear regression.
Partial and Total regression: - If from more than two va
riables only two variables are taken into consideration. It is called as partial regression.
But all variables are taken into consideration at a single slank. It is called as total
regression

Regression on money supply and crude oil

Model Summaryb

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson

1 .650a .422 .396 1945934.572 .928

a. Predictors: (Constant), moneysupply

b. Dependent Variable: crudeoil

INTERPRETATION:

From the above table as the value is R square is .422 hence we can conclude that
independent variable money supply explain 42.2% of the variation in dependent variable
crude oil.

Regression on money supply and gold

Model Summaryb

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson

1 .468a .228 -.016 4714080.156 .859

a. Predictors: (Constant), moneysupply

 Model Summaryb

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson

1 .468a .228 -.016 4714080.156 .859

b. Dependent Variable: gold

INTERPRETATION:

From the above table as the value is R square is .228 hence we can conclude that
independent variable money supply explain 22.8% of the variation in dependent variable
gold.
Regression on money supply and dollar

Model Summaryb

Adjusted R Std. Error of the

Model R R Square Square Estimate Durbin-Watson

1 .365a .133 .094 2074469.753 .775

a. Predictors: (Constant), moneysupply

b. Dependent Variable: dollar

INTERPRETATION:

From the above table as the value is R square is .133 hence we can conclude that
independent variable money supply explain 13.3% of the variation in dependent variable
dollar.

CO-RRELATION

The correlation analysis refers to the techniques used in meaning the closeness of
the relationship between the variables. These two variables are:-
1. Static
2. Dynamic
Thus whenever two variables are so related that a change in the value of one is
accompanied by a change in the value of other, in such a way that an increase or
decrease in one variable is accompanied by an increase or decrease in the other,
then the variable are said to be correlated.

DEFINITION
“Correlation is an analysis of the co-variation between two or more variables”
A. M. Tuttle
“The effect of correlation is to reduce the range of uncertainty of one’s prediction”
Tippett
TYPES OF CORRELATION
Correlation is classified in several different ways. Three of the most important ways are:-
  Positive and Negative Correlation: When two variable X and Y move in
same direction is Positive Correlation and when both variables move in
opposite direction that is Negative Correlation.
 Simple, Partial and Multiple Correlations: When we study the relationship
between two variables only that is Simple Correlation. When three or more
variables are taken but relationship between any two of the variable is studied,
assuming other variables as constant that is Partial Correlation and when we
study the relationship among three or more variables that is Multiple
Correlation.
 Linear and Curvi-Linear Correlation: when the ratio of change of two
variables X and Y remains constant throughout, then they are said to be Linear
Correlated and when the ratio of change between the two variables is not
constant but changing, then correlation is said to be Curvi-Linear.

DEGREE OF CORRELATION:-

Sr. No. Degree of Positive Negative

correlation
1 Perfect correlation +1 -1
2 High Degree of Between +.75 Between -.75 to-1
correlation to+1
3 Moderate Degree of Between +.25 Between -.25
Correlation to+.75 to-.75
4 Low Degree of Between 0 to+.25 Between 0 to-.25
Correlation
5 Absence of 0 0
Correlation

CORRELATION BETWEEN MONEY SUPPLY,CRUDE OIL,DOLLAR AND

GOLD
 Correlations

Moneysupply gold crudeoil dollar

Moneysupply Pearson Correlation 1 .468 .650 .365

Sig. (2-tailed) .433 .001 .079

N 24 24 24 24

Gold Pearson Correlation .468 1 -.010 -.055

Sig. (2-tailed) .433 .962 .800

N 24 24 24 24

Crudeoil Pearson Correlation .650 -.010 1 .274

Sig. (2-tailed) .001 .962 .196

N 24 24 24 24

Dollar Pearson Correlation .365 -.055 .274 1

Sig. (2-tailed) .079 .800 .196

N 24 24 24 24

INTERPRETATION:

From the above table as the pearson correlation between money supply and gold is 46.8%
,between money supply and crude oil is 65% and between money supply and dollar is
36.5% hence we can conclude that all the above mentioned variable are moderate
correlated.

Reliability
Reliability Analysis
Reliability analysis is an engineering discipline that applies various mathematical
techniques to the measurement and prediction of the reliability of components and
systems. The components under study may be mechanical, electronic, software, or other
types. "Systems" could include anything from computers to rail transit. Measurements
include failure rates, cumulative failures, and component lifetimes (time until failure). A
variety of techniques are employed, drawn mainly from probability, statistics, and the
theory of stochastic processes

Scale: ALL VARIABLES

Reliability Statistics

Cronbach's Alpha Based on

Cronbach's Alpha Standardized Items N of Items
.9 .939 3

INTERPRETATION
The reliability test is applied to test the reliability of the data.The value of Chronbach’s
Alpha comes out to be positive which indicates that the data is reliable and internally
consistent.