Commodity and Derivatives Market

1 Commodity and Derivatives Market (As per the Revised Syllabus 2016 - 17 of Mumbai University for , Semester V). Pawan Jhabak , ( finance ). Ex. Vice Principal, Rustomjee Business School, Dahisar (West), Mumbai 68. ISO 9001:2008 CERTIFIED. Author No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher. First Edition : 2016. Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd., Ramdoot , Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004. Phone: 022-23860170/23863863, Fax: 022-23877178. E-mail: Website: Branch Offices : New Delhi : Pooja Apartments , 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi - 110 002.

2 Phon e: 011-23270392, 23278631; Fax: 011-23256286. Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018. Phone: 0712-2738731, 3296733; Telefax: 0712-2721216. Bengaluru : Plot No. 91-33, 2nd Main Road Seshadripuram, Behind Nataraja Theatre, Bengaluru-560020. Phone: 08041138821, 9379847017, 9379847005. Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad - 500 027. Phone: 040-27560041, 27550139. Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017. Mobile: 9380460419. Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333;. Mobile: 09370579333. Lucknow : House No 731, Shekhupura Colony, Near Convent School, Aliganj, Lucknow - 226 022.

3 Phone: 0522-4012353; Mobile: 09307501549. Ahmedabad : 114, SHAIL , 1st Floor, Opp. Madhu Sudan House, Road, Navrang Pura, Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847. Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi 682011. Phone: 0484-2378012, 2378016 Mobile: 09387122121. Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha). Phone: 0674-2532129, Mobile: 09338746007. Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010, Phone: 033-32449649, Mobile: 7439040301. DTP by : Nilima Jadhav Printed at : Rose Fine Art, Mumbai. On behalf of HPH. ACKNOWLEDGEMENT. I have benefited from scores of books and hundreds of articles. As it is impossible to list all of them, the overall reference book is mentioned: Prasanna Chandra, IAPM, Tata McGraw Hill, 2008.

4 The Economist Pocket World in Figures, 2010. I would like to express my gratitude to: Students for providing the stimulus for writing this book. Deepak Kap, my support staff and staff of Himalaya Publishing House Pvt. Ltd. My grandmother Jhamkudevi, wife Bharati and daughter Param. Pawan Jhabak Ex. Vice Principal Rustomjee Business School PREFACE. Genius is the ability to reduce the complicated to the simple. Albert Einstien I earnestly hope that the book will make complicated subject Commodity and Derivatives Market simple to understand and score high marks in exams. I look forward for constructive suggestion from the readers and teachers. I am thankful to one and all who have contributed directly or indirectly to make new edition possible. This book is user-friendly and different. As one goes through the book, one will feel the difference, and this will help to master Portfolio Management in an enjoyable manner, with lifetime utility.

5 The book covers University' prescribed syllabus with practical dimension !! Let's Learn !! Best wishes!! Million thanks. Author Pawan V. Jhabak Visiting Faculty Amity Business School. Lala Lajpatrai College. Ex. Visiting Faculty Vivekanand Education Society. Rajiv Gandhi Institute of Technology. Somaiya. Narsee Monjee College. Usha Pravin Gandhi. Bhavan's College (Andheri). Rizvi College. Somaiya. Akbar Peerbhoy. Bhurani College. Poddar College etc. Ex. Vice Principal Rustomjee Business School. SYLLABUS. Commodity and Derivatives Market BACHELOR OF MANAGEMENT STUDIES PROGRAMME AT SEMESTER V WITH EFFECT. FROM THE ACADEMIC YEAR 2016-2017. [60 Lectures: 3 Credit]. MODULES AT A GLANCE. Sr. Modules No. of No. Lectures 1 Introduction to Commodities Market and Derivatives Market 15. 2 Futures and Hedging 15.

6 3 Options and Option Pricing Models 15. 4 Trading, Clearing and Settlement in Derivatives Market and Types of Risk 15. Total 60. OBJECTIVES. Sr. Objectives No. 1 To understand the concepts related to Commodities and Derivatives Market 2 To study the various aspects related to options and futures 3 To acquaint learners with the trading, clearing and settlement mechanism in Derivatives Market . Unit Name of the Topic No. of No. Lectures Unit 1 Introduction to Commodities Market and Derivatives Market (15). (a) Introduction to Commodities Market Meaning, History and Origin, Types of Commodities Traded, Structures of Commodities Market in India, Participants in Commodities Market , Trading in Commodities in India (Cash and Derivative Segment), Commodity Exchange in India and Abroad, Reasons for Investing in Commodities.

7 (b) Introduction to Derivatives Market Meaning, History and Origin, Elements of a Derivative Contract, Factors Driving Growth of Derivatives Market , Types of Derivatives , Types of Underlying Assets, Participants in Derivatives Market , Advantages and Disadvantages of Trading in Derivatives Market , Current Volumes of Derivative Trade in India, Difference between Forwards and Futures. Unit 2 Futures and Hedging (15). (a) Futures Futures Contract Specification, Terminologies Concept of Convergence Relationship between Futures Price and Expected Spot Price, Basis and Basis Risk, Pricing of Futures Contract, Cost of Carry Model. (b) Hedging Speculation and Arbitrage using Futures, Long Hedge Short Hedge, Cash and Carry Arbitrage, Reverse Cash and Carry Arbitrage, Payoff Charts and Diagrams for Futures Contract, Perfect and Imperfect Hedge.

8 Unit 3 Options and Option Pricing Models (15). (a) Options: Options Contract Specifications, Terminologies, Call Option, Put Option, Difference between Futures and Options, Trading of Options, Valuation of Options Contract, Factors Affecting Option Premium, Payoff Charts and Diagrams for Option Contract, Basic Understanding of Option Strategies. (b) Options Pricing Models: Binomial Option Pricing Model, Black Scholes Option Pricing Model. Unit 4 Trading, Clearing and Settlement in Derivatives Market and (15). Types of Risk (a) Trading, Clearing and Settlement in Derivatives Market : Meaning and Concept, SEBI Guidelines, Trading Mechanism Types of Orders, Clearing Mechanism NSCCL its Objectives and Functions, Settlement Mechanism Types of Settlement. (b) Types of Risk: Value at Risk, Methods of Calculating VaR, Risk Management Measures, Types of Margins, SPAN Margin.

9 QUESTION PAPER PATTERN. ( Hours) [Total Marks: 75]. All questions are compulsory. Attempt any two (15). (a) Theory Commodities Market Chapter Marks (b) Theory Derivatives Market Chapter Marks (c) Theory Derivatives Marekt Chapter Marks Q. 2 Attempt any two (15). (a) Theory Futures Chapter Marks (b) Theory Hedging Chapter Marks (c) Sum Futures/Hedging Marks Q. 3 Attempt any two (15). (a) Theory Options Chapter Marks (b) Theory Options Pricing Models Chapter Marks (c) Sum Black-Scholes Marks Attempt any two (15). (a) Theory Tradings, Clearing and Settlement Marks (b) Theory Types of Risk Chapter Marks (c) Sum VAR/SPAN Marks Case Study/Numericals (15). CONTENTS. Unit 1. Introduction to Commodities Market and Derivative Market 1 (a) Introduction to Commodities Market 1 12. 1 (b) Introduction to Derivatives Market 13 21.

10 Unit 2. Futures and Hedging 2 (a) Futures 22 34. 2 (b) Hedging 35 41. Unit 3. Options and Option Pricing Models 3 (a) Options 42 79. 3 (b) Options Pricing Models 80 86. Unit 4. Trading, Clearing and Settlement in Derivatives Market and Types of Risk 4 (a) Trading, Clearing and Settlement in Derivatives Market 87 97. 4 (b) Types of Risk 98 105. Unit 1. Introduction to Commodities Market and Derivative Market Chapter 1. Introduction to Commodities Market Structure: Meaning/Introduction to Commodity Market History and Origin Types of Commodities Traded Types of Commodity Futures Markets Structure of Commodities Market in India Participants in Commodity Market Trading in Commodities in Cash Segment / Cash Commodities Trading in Commodities in India in Derivative Segment Commodity Exchanges in India and Abroad Reasons for investing in commodities Review Questions Meaning/Introduction to Commodity Market Unknown to us, the commodities that have always been a part of our day-to-day existence are also one of the finest investment avenues available.