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Knowledge Center

In order to avail lucrative returns on your investments, SMC empowers you with the knowledge of stock trading and investment. Our knowledge bank is divided into different modules that explain investment related concepts, terms, strategies, & practices, such that you will be able to trade in the market in a better manner.

Algo Trading

Algo systems provides best example of how technology has changed the whole trading business. Algo trading is now one of the most discussed topics within financial industry has entwined with rise in technology and availability of computation power. It actually helped markets to become more efficient.

Algorithmic Trading

Algorithmic trading can be described as any type of computer-assisted trading activity which automates the timing, submission and management of orders
There are two elements of an algorithmic trading strategy:

  1. The decision of when to trade , (pre-trade analytics)
  2. The decision of how to trade (execution procedure)

The decision of when to trade is based on continuous calculation of analytics and trigger points. For example, a moving average crossover algorithm that calculates two moving averages on real time basis and when they cross one another. It then makes the decision to buy or sell, depending on which average is higher.

The decision of “how to trade or order execution” is part of the strategy includes calculation of quantity needs to trade and order type selection for sending orders in the market. For example, once an opportunity is identified by strategy to buy or sell, the order execution part of strategy will decide the quantity, type of order (market, limit etc.) and slicing procedures.

Benefits with rise of Algo trading

  1. Increases Liquidity and volumes in markets
  2. Better risk management
  3. Narrowing spreads
  4. Improved market efficiency
  5. lowering the latency and cost of trading

How Algo systems can benefits

  1. Save Time - Algo-systems can trade 24/7 that removes human constraints where traders can only trade during certain hours effectively. Now traders do not have to spend time over analyzing charts to identify the trades, which save lots of time.
  2. Minimize Emotions & Preserve Discipline - Algo trading systems minimize emotions throughout the trading process as all rules are predefined and there is no ambiguity. The trade execution is performed automatically; discipline is preserved even in volatile markets
  3. Ability to Backtest - Algo systems provides facility of back testing of the trading strategy on historical data. This can give us valuable information about possible risk and expected returns before putting any real trade.
  4. Trading complex strategies - Algo system allows traders to trade in complex strategies like high frequency trading, market making, statistical arbitrage, pair trading etc, which are not possible to do manually because of multiple trading instruments or need of microsecond execution.
  5. Diversify Trading - The Algo system allows users to scan trading opportunities across a range of markets, generate orders and monitor trades automatically. This helps traders to diversify the risk and enhance return by trading in multiple markets and multiple asset classes. Algo also facilitates traders to trade in multiple accounts and multiple strategies simultaneously.

Conclusion

Algo trading provides many advantages to its users, which is going to push more and more traders to use algo platforms & strategies. But it has some disadvantages too like the algo systems assumes that past market behavior will prevail in future, which is not always the case, and thus a strategy that was very profitable in past is not necessarily be profitable in same extend.

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knowledge

“The Art Of Cutting Your Losses”

“Why people lose money in the stock market”
Many people believe that the stock market is a money making machine which can turn them into millionaires over a short period of time.Far from it, on the contrary lots of people have bitter experience with stock
market as they have lost money while buying and selling due to adopting undisciplined trading. One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." But many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.

However, no one will deliberately buy a stock they believe will go down in price and be worth less than what they paid for it. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out from the crowd and show you how to identify when you should make your move.

Here we are discussing five ways of undisciplined trading which lead to losses which every investor try to avoid.

Trading during the first half-hour of the session:

The first half-hour of trading day is mainly full of emotion, hangover of previous day trading, and affected by overnight movement in the global markets. Also in this period market encourage the fake traders to take positions which may be opposite to the real trend. Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.

Ignoring the phase of market:

Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. Trading without knowing the mood of market is like a “blind man walking with the help of a stick”. It is important to know what phase the market is in -- whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy should buy at support and sell at resistance.

Trading in Stress:

Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress. Traders need to keep a high degree of emotional balance to trade successfully.

Failing to treat every trade as just normal trade:

Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times beyond their normal level. This can lead to a heavy drawdown as such situations do not work in favors. Every trade is just normal trade and only normal profits should be expected every time. Supernormal profits are a bonus it comes very rarely. It can occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.

Over-eagerness in booking profits:

Undisciplined traders are likely to book profit too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market. Traders should not be over-eager to book profits till the market is acting right. If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. The ideal mix should consist of small profits, small losses and big profits.

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knowledge

Basics of Derivatives

What is rollover and how does it take place? What are costs involved in rollover?

Rollover means closing out the position in the current-month futures contract and taking a fresh position in the

futures contracts.

For instance, if you have a long position (buy) in February Reliance futures, you can roll it over by closing it out with a short in feb series position and simultaneously taking a new long position in the March contract.

Rollover of contracts is used only with futures. This is because a position in the futures market can be taken without a significant outlay upfront. Options cannot be rolled over as for every contract you pay a premium that is retained by the option seller.

In futures, only margins have to be forked out and if the spot price moves in line with your expectation, this sum would be returned to you when you close out the position.

For instance, assume there is a 20 per cent margin. You have a long position in the February contract. When you roll it over by taking a short position on the February contract and simultaneously, a long position on the March contract, the margin requirement would remain unchanged. Option contracts cannot be rolled in this manner. You exercise an option if it is in the money; if it were out-of-money, it would expire worthless. You take fresh positions in the March options, which would involve an outflow by way of premium.

Why securities come in ban period? What are the options available to a trader for securities in ban period?

NSE normally prescribes the market wide-open position limit for all the futures contracts this information is being updated by the exchange on trading terminals time to time during market hours.

If once stock comes into the ban period then market is not allowed to take any further position in the stock except previous position can be squared off, if however anybody trades in the following stock then he is liable to pay the penalty as imposed by the exchange. if a stock is trading in a ban period then market is also not allowed to add position in the option segment. Normally a stock enters in ban period when the market wide position limit reaches 100% of the prescribed limit. The trader is not allowed to take fresh position and can only square off his positions.

How does the following indicator help in derivative trading?

Before investing into a derivative market the investor should pay attention to the following factors:

Trend of underlying Asset: -If the underlying asset is in up trend that will help bullish trader and if the stock is in down trend then that will be favorable for a bearish trader, hence overall trend of underlying asset is directly linked with the profitability of market participants.

Open interest: Increase in OI & increase in price indicates bullishness, Increase in OI decrease in price indicates bearishness, Decrease in OI increase in price denotes short covering & a decline in both price and open interest Indicates liquidation. However this is one of the tools for predicting the stocks movements but one should Use above tool in conjunction with other indicators.

Cost of carry: A derivative trader should also watch future prices if it is trading at a premium or discount to its spot price. Positive cost of carry indicates bullish sentiments in the market whereas negative cost of carry indicates bearish uncertainty in the market.

Put/Call Ratio: The Put/Call ratio is a popular sentiment indicator. These types of indicators attempt to gauge the prevailing level of bullishness or bearishness in the market. When the Put/Call Ratio is high (meaning more puts are being traded than calls) it means that the sentiment is bearish. The Put/Call ratio moves lower as the level of buying Puts moves lower in relation to the buying of Calls indicating that the level of optimism of the options buyers is moving up. Typically, sentiment indicators are used as contrarian tools. In other words, when market participants are most bullish (means put call ratio is quite low), the likelihood of a downside reversal is greatest. And when investors become overly bearish, (Put call ratio is quite high) a market rally may be on the horizon.

What are the various margins applicable in future contract?

1) Initial Margin: The basic aim of Initial margin is to cover the largest potential loss in one day. Both buyer and seller have to deposit margins. The initial margin is deposited before the opening of the day of the Futures transaction. Normally this margin is calculated on the basis of variance observed in daily price of the underlying (say the index) over a specified historical period .The margin is kept in a way that it covers price movements more than 99% of the time. This technique is also called value at risk (or VAR). Based on the volatility of market indices in India, the initial margin is expected to be around 8-10%.

2) Exposure Margin: All daily losses must be met by depositing of further collateral - known as variation margin/Exposure margin, which is required by the close of business, the following day. Any profits on the contract are credited to the client’s variation margin account/Exposure margin account.

3) Mark to Market: This is an arrangement whereby the profits or losses on the position are settled each day. This enables the exchange to keep appropriate margin so that it is not so low that it increases chances of defaults to an unacceptable level (by collecting MTM losses) and is not so high that it increases the cost of transactions to an unreasonable level (by giving MTM profits).

What is the meaning of the terms trading volume and open interest? How do they differ from each other?

The trading volume in a futures contract on a given day is the number of contracts that were traded on that particular underlying asset, during the course of the day. The open interest at any point in time is the total number of outstanding contracts at that point in time. It is thus a measure of the number of open positions at any instant in time. Since every long position must be matched by a corresponding short position, open interest may be measured either as the number of open long positions at a point in time, or equivalently, as the number of open short positions at the same point in time.

What are European and American Options?

American style and European style options differ in several ways. American style options can be exercised at any time. Therefore, the writers of this option are clear that early assignment of the option is possible. The examples of American style options are all stock options like Reliance, Powergrid, NTPC, etc….

European style options can be exercised on the last day of expiration. Most options on individual stocks are on American style. In such cases, the exercise is automatic on the expiration day and the voluntary before the expiration day provided they are in the money. The examples of European style option are NIFTY, CNXIT, BANKNIFTY, JUNIOR, and CNX100.

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Beating emotion- Ways to minimize emotion within trading

It happened many times that after series of losses or series of wins, traders becomes extremely anxious or over confidence and ignore their trading rules, which bring emotions in trading and lead to self destruction of their trading.
Such conditions are part of every novice trader’s life.

These are main reasons for emotional trading

  1. No clear trading rules.

  2. Rules are not back tested on past data for their reliability, hence not trusting on them.

  3. Not following the Rules

  4.  No discipline in position sizing

  5. No Clear trading plan

  6. Fear & greed

Emotional trading can be avoided with

Planning: A great trader will differentiate himself from a good trader with his understanding and forecasting of the market. He never rushes into a trade just because he sees spikes either on upside or downside. He knows what he is going to do before he initiates the trade and has all of his various strategies worked out for all the different scenarios that can happen to that trade. Therefore always plan your steps before initiating it.

Customization: The thumb rule of trading is not to follow the crowd and develop one’s own unique trading style. After establishing a set of parameters for trading, one should write those rules down and follow them while ignoring the crowd mentality. The trick is writing the parameters down and then sticking to those rules.

Anticipate your losses and not your profits: To gain control over emotions and to gain discipline in trading, take each position as a losing position. That is instead of counting the market to market gains; always count the loss that may incur if the stops are hit. The emotions are now geared to have accepted losses on existing trading positions. So when the losses do happen, it will change neither the trader’s life nor the trading bias. If they do hit profits, there is an immediate uplift in trader’s spirits which can be quite welcome at times.

Know your risk tolerance. To avoid higher risk at the time of trading one should never trade without stop losses. Traders should apply proper stop losses based on solid support levels for that stock as properly placed stop losses do work. They protect us from the occasional trade which may goes against us.

Treat your trading as a Business: Treat trading like a full time career. Even when it is part time, it must be respected as a full time career with all the attention it requires. Accurate records of every transaction should be made. That way it can be compared to current patterns as professionals never stop learning.

Get rid of Overtrading: Limited trading always yield better results because if money is made 9 times out of 10 trades then may be that one single trade left could results in big loss due to which all profit might vanish. Quality should be maintained instead of quantity.

Be Self-Reliant and take responsibility for your trades: When a trader lacks self-confidence, then he might run around trying to find someone else to make decisions. A person must take responsibility for its own actions Professional traders make their own choices and their own decisions. They select one or two websites they use for fundamental analysis and are comfortable and confident with every trade they enter and remain calm even when the occasional trade goes against them.

Conclusion: Emotions are worst enemy of a trader. It keeps away from actual realty which leads to big losses. The above suggestions provide a direction to keep emotion out of trading.

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Benefit of Option Trading

Trading is primarily divided into two broad category based on time horizon are short term trading and long term trading.

Long term trading includes buying of shares for holding for capital gain purpose, whereas short term trading for direction momentum moves. Future & option are main instruments for trading in both side of market (ie up or down), but options provide more flexibility to traders in comparison with futures and have lots of benefits which are mention below.

Hedging

Option can be used for reducing the risk and use as hedging tool. Investors can hedge their portfolio by buying put option if market or stock is likely to fall. Buying put option is like a buying insurance, which will payoff in case of fall in price of stocks.

Limited risk for buyer

Shareholder and future buyer have (theoretical) unlimited risk on their holding whereas option buyer risk is limited to the premium paid.

Leverage

One of the biggest charms of option trading which attracts traders is the leverage. The amount fund required is very less in option buying in comparison with future trading. At same time buying option provide better Risk management because maximum amount of loss is premium paid in buy of option.

Income

There are lot of strategies which are used in option as income strategy like cover call strategy in which selling the out of money call of holding share. These option strategies can be adopt for regular income as they provide limited risk and regular return. The yield return can be increase on slow moving or low beta stock where is low upside movement is expected.

Index Trading

Indexes are not tradable; normally trading in Index is possible by buying index future. Option trading provides alternate ways of trading in index, with better risk management.

No Need to Always Be Bullish or Bearish

While trading in Future or stock, we expect markets to go higher or lower, but option strategies allows us to trade any market scenario, which means trader can create bullish scenario strategies ie buying call, cover call etc, bearish strategies ie buying put, bear put spread etc and strategies for range bound and volatile market like straddle and strangle etc.

Manage Risk according to trader need

Option trading provides customize way of managing risk. Traders can create strategies according to his view about in market and amount of money he is ready risk on. Like aggressive trader can trade his positive view by buying call option whereas a risk adverse trade can trade his positive view buy creating bull call spread which has less risk in comparison with buying naked call.

Volatility trading- Using option strategies like straddle, strangle and calendar, traders can trade his view on volatility i.e. volatility increase or volatility decrease which is not possible with future or equity instruments.

Conclusion- Option trading provides traders tailor made unique product, in which he has full freedom to use it for hedging or speculation and create strategies for every market scenarios with keep risk under his belt.

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Diamond futures, ready to compete to bullions

The Indian Commodity Exchange (ICEX) launched the world's first diamond futures contracts to provide exporters with a hedging tool.

At the launch, the first diamond contract for delivery in November was traded at Rs 3,279/cent and followed by contracts with monthly settlements. One cent is the one-hundredth of a carat (ct). 50 cents and 30 cents contracts will be introduced after making the initial contract successful. The contract has the facility to trade in one cent that can be accumulated over a period of time up to 1 ct and make it deliverable like systematic investment plan (SIP). Until the time of delivery, the trade quantity would continue to remain in an electronic account of the trader. The price displayed/traded includes delivery and transaction charges. The 1-carat contract for expiry in November, December and January will have delivery centre at Surat. Currently ICEX has over 103 registered members and around 4,000 registered clients.

ICEX has been polling polished diamond prices for over 8-9 months for the settlement of the contract. Polling prices from the physical market would be used as a benchmark for the settlement of the contract. Price variation would be Re 1 with an initial margin of 5 per cent on value at risk (VAR) basis. ICEX will offer HVS2 quality diamond certified by the International Institute of Diamond Grading & Research (IIDGR), a De Beers group company, and vaulting services will be offered by Malca Amit. It is a compulsory delivery contract. Hence, any attempt of price manipulation is associated with the fear of delivery. Thus, there is no any risk of price manipulation by any trader or group of traders.

GLOBAL SCENARIO OF DIAMOND

Major Diamond mines are in Botswana, Zimbabwe, Namibia, South Africa, Angola, Russia, Canada and Australia. Major cutting and Polishing countries of Diamonds are Belgium, Israel, USA, India and China. Important centres of diamond cutting and trading are Surat (India), Antwerp (Belgium), London (UK), New York (USA), Tel Aviv (Israel), Amsterdam (Netherlands). More than 50% of the world’s production of rough, polished and industrial diamond passes through Antwerp. USA, Japan, China, Gulf region and India constitute approximately 70% of Diamond Jewellery sales.

INDIAN SCENARIO OF DIAMOND

Production or mining of rough diamond in India is negligible. But India is the world’s largest cutting and polishing centre for diamonds where 14 out of every 15 rough diamonds in the world are polished. Surat is the major centre for cutting, polishing and processing of rough diamonds. It contributes more than 85% of diamonds trading in India.

India is the world's third largest diamond consumer with 8% market share. India ranks first with 16.7 % market share in total export of diamond. India exports 95 per cent of total imported rough diamond the world’s diamonds, as per statistics from the Gems and Jewellery Export promotion Council (GJEPC).India imports rough diamond worth $19 billion and exports polished valued $24 billion annually. India caters to over 90 per cent of the world's polishing market for rough diamonds.

PRICE DRIVING FACTORS

  1. Stocks accumulating in the pipeline.
  2. Diamond jewellery market growth in China and India.
  3. Consumer preference trends
  4. Diamond jewellery share in total jewellery consumption – Usage of diamonds on special occasions such as in engagement and wedding jewellery
  5. GDP growth for developed markets
  6. Availability of the current mines
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E-Gold, Better option for small investors

India for long has been the largest consumer of gold in the world as Indians love to buy gold. But since last few years because of the steep increase in the price of the yellow metal, it is getting further out of reach of the common man.
E-gold is a unique investment product, which provides an opportunity for small investors to invest in gold in smaller denominations of 1 gram and multiple thereof in demat form. The product is designed to cater the millions of small investors across the country. So its trading is similar in functionality to the cash segment in equities. Trading in E-Gold has been on since 17th March 2010. E-Gold units can be bought and sold through the exchange (NSEL) just like shares. This product is equally suitable for retail investors of equity market and house hold.

Better option than an ETF: E-series product is a unique concept for commodities trading with transparent pricing, seamless trading, easy entry and exit, no holding cost and uniform pricing across the country. This makes it better product than an ETF. So it is being emerge as a potential substitute to the ETFs. one unit equivalent to 1 gram of gold which makes gold affordable once more, for the masses. Liquidity, i.e. any time buying and selling of commodity is possible with hassle free low cost transaction in physical commodity. There is no risk of commodity custody/theft. The clearing and settlement pay-in and pay-out are based on T+2 cycles.

Requirements for E-Gold

To buy E-Gold units, the individual needs to open a demat account with one of the impaneled Depository Participants (DP). Retail individual can place buy and sell orders for e-gold units with their broker through phone or through the internet (broker’s website).

Physical delivery of Gold

In case the demat unit holder is interested to take physical delivery of Gold bar/coin, against his E-GOLD units, he can surrender such units to the Exchange and get physical delivery, at any point of time at his discretion subject to the specified conditions. The physical delivery of his e-gold units are available in multiples of 8 grams, 10 grams, 100 grams and 1 kg. The exchange has delivery centres at Ahmedabad, Delhi and Mumbai.

For ensuring physical delivery of gold bar/ coin, NSEL will issue instruction to the Authorized Dealer specifying the denominations of Gold bars/ coins required as well as the relevant delivery location from where the investor intends to lift delivery.

Charges

The Exchange shall levy the turnover charges of Rs. 20 per lakh of turnover to both buyer and seller member on monthly basis. This shall be applicable on all executed transactions. Storage charges will be computed based on the holding in the respective accounts on the last Saturday of every month. The charges per month per unit of E-GOLD will be 60 paise only. For conversion of e-gold into physical gold as per the current rates, VAT will be 1 % of the value of goods. In case physical delivery takes place in Mumbai, octroi @ 0.1 % of the value of delivery will also be applicable.

Trading Parameters

Trading period

Monday To Friday (except Exchange specified holidays)

Trading session

10:00 AM to 11:30 PM

Trading unit

1 unit of E-GOLD, which is equivalent to 1 gram of Gold

Price Quote/Base Value

Per 1 gram Gold of 995 purity

Tick size

10 paisa per unit

Daily Price Range

5 %

Maximum order size

10000 units

Initial Margin

5%

Delivery Margin

10%

Special Margin

In case of additional volatility, a special margin of such percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for the same trading day.
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Economic indicators, the measures for economic health

Every week there are dozens of economic surveys and indicators released which are most closely watched by the investment world. An economic indicator simply shows how well the economy is doing and how well the economy will do in the future.

Economic indicators have a huge impact on the financial and commodity market. Therefore, all investors analyze and interpret all the information according to their importance. If a set of economic indicators suggest that the economy is going to do better or worse in the future than they had previously expected, they may decide to change their investing strategy.

Economic indicators can be classified into three categories:

Leading indicators

Leading indicators are believed to change in advance of changes in the economy. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future. Interest rate, index of consumer expectations, building permits, weekly jobless claims, and the money supply are other leading indicators.

Lagging indicators

Lagging indicators that usually change after the economy as a whole does. These indicators take a few quarters after the economy change. The unemployment rate is a lagging indicator that tends to increase two or three quarters after the economy starts to improve. Profit earned by a business and improved customer satisfaction is a lagging indicator. But these are of minimal use as predictive tools.

Coincident indicators

Coincident indicators provide information about the current state of the economy. These indicators simply move at approximately the same time the economy does. The Gross Domestic Product, Industrial production, personal income, non-agricultural payroll and retail sales are the coincident economic indicators.

We have summarized some of the major indicators from above three categories that are important to investors as they determine the trends of stock market and commodity market.

Gross Domestic Product (GDP) 

The most important indicator GDP is the widest measure of the state and pace of the economy. The GDP is the aggregated monetary value of all the goods and services produced within the geographic boundaries of a country during the period measured, regardless of the producer's nationality.

Industrial production: Industrial production figures are based on the monthly raw volume of goods produced by industrial firms such as factories, mines and electric utilities.

Consumer Price Index (CPI)

The CPI shows the cost paid by consumers for goods and services so it is the most widely used measure of inflation. The CPI measures the change in the cost of a bundle of consumer goods and services, ranging from foods and energy to expensive consumer goods. The prices are measured by taking a sample of prices at different stores.

The Producer Price Index (PPI)

The PPI measures the price of goods at the wholesale level. It shows how much the producers are receiving for the goods. Crude, intermediate, and finished are three types of goods measured by the PPI.

Retail Sales

The Retail Sales Index measures goods sold within the retail industry, from huge chains to small local stores. It demonstrates the spending pattern of consumers.

Purchasing Management index (PMI)

It provide an excellent picture of the state of manufacturing which includes Production level, New orders, Inventories, Supply, employment level and carryover stock.

Employment Cost Index (ECI) 

The ECI measures the cost of labor including wages, benefits, and bonuses. This is another important measure of inflation because as wages increase, the added cost is often passed to consumers in the form of higher prices.

Housing start: A housing start is beginning of the foundation of the home.

Leading indicators for economy:

S&P 500 stock Index: The S&P 500 is considered a leading indicator because changes in stock prices reflect investor's expectations for the future of the economy and interest rates. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization in US market. It is used as a measure of the nation's stock of capital, as well as a gauge of future business and consumer confidence levels.

Unemployment rate: The unemployment rate is very important and measures the number of people looking for work as a percentage of the total labor force. When unemployment rates are high, however, consumers have less money to spend, which negatively affects retail stores, GDP, housing markets, and stocks, to name a few. Government debt can also increase via stimulus spending and assistance programs, such as unemployment benefits and food stamps.

Money supply: Money supply is the entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include M1, M2 and M3, cash, coins, credit cards, interest rate, bond yield and balances held in checking and savings accounts.

Durable goods orders: Durable goods orders measures consumer spending on long-term purchases, products that are expected to last more than three years. Durable Goods are typically sensitive to economic changes. It is intended to offer a gauge of the future of the manufacturing industry and is thought to provide insight into the future for the manufacturing industry.

Personal Income and consumption: Personal Income measures the pre-tax income households receive from employment, investments, and transfer payments. As wages and salaries make up the majority of Personal Income. Personal Consumption is a comprehensive measure of GDP. The figure is still useful in gauging the purchasing ability of consumers, though, as rising Personal Income allows for strong consumers spending. Such spending drives output growth and fuels the economy. The government often encourage to more and more spending as spending helps the economy to recover.

Housing Market Index: An index of more than 300 home building companies measuring demand for the construction of new homes. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes.

This report provides a gauge of not only the demand for housing, but the economic momentum. Once a home is sold, it generates revenues for the realtor and the builder. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase.

Building permits: Building permits offer foresight into future real estate supply levels. A high volume indicates the construction industry will be active, which forecasts more jobs and, again, an increase in GDP. But just like with inventory levels, if more houses are built than consumers are willing to buy, it takes away from the builder’s bottom line. To compensate, housing prices are likely to decline, which, in turn, devalues the entire real estate market and not just “new” homes.

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E-COPPER, alternative portfolio against ETFs

In order to promote participation of commodities investors further into retail investment, in view of growing demand for a cash segment in commodities from retail investors and overwhelming response to e-Gold and e-Silver, National Spot Exchange Limited (NSEL) have launched e-copper contracts under

its electronic spot trading E-series products portfolio. “E-COPPER” contract is available for trading on NEST platform from Tuesday, the 16th November 2010.

E-series products is targeted to the retail investors, who prefer investing in smaller quantities of commodities. Earlier NSEL has E-gold and E-silver in its E-series kitty. NSEL plans to have 20 e-Series products by end-2011.

E-series products is a unique concept for commodities trading with transparent pricing, seamless trading, easy entry and exit, no holding cost and uniform pricing across the country. This makes it better product than an ETF. So it is being seen as a potential substitute to the ETFs. Moreover, other than gold, there are no ETFs available for any other commodity. This restricts retail investors from entering into the commodities market.

e-Series products are backed by physical delivery and are stored in the Exchange’s secured warehouses/vaults while trading takes place in demat form. An investor can trade in these investment products after opening a demat account with any of NSEL’s empanelled DPs.

NSEL’s managing director & CEO, Anjani Sinha, “Launching e-Copper next was a natural choice as base metals are also treated as investment assets in most advanced nations and invariably form a part of retail and HNI portfolios.”

According to the circular released by NSEL, Investors can trade and invest in one trading unit of e-copper and multiples thereof. One unit of e-Copper is equivalent to one kilogram of copper. The clearing and settlement pay-in and pay-out are based on T+2 settlement cycles. Physical delivery of copper is possible in the form of Grade 1 Copper Cathode.

On the first day of its launch on November 17, 2010, e-Copper opened at Rs466.70 per kilogram. It hit an intra-day high of Rs466.90 and eventually closed at Rs452.10. e-Copper recorded a total traded volume of 15,30,012 kilogram valued at Rs70.40-crore.

Trading Parameters

Trading period

Monday To Friday (except Exchange specified holidays)

Trading session

10:00 AM to 11:30 PM

Trading unit

1 unit of E-COPPER, which is equivalent to 1 kilogram of Copper

Price Quote/Base Value

Per 1 Kilo gram Copper

Tick size

0.05 per 1 kilogram/unit

Daily Price Range

Maximum order size

5 %

50000 units

Initial Margin

5%

Delivery Margin

10%

Special Margin

In case of additional volatility, a special margin of such percentage, as deemed fit, will be imposed immediately on both buy and sale side in respect of all outstanding position, which will remain in force for the same trading day.

In case the demat unit holder is interested to take physical delivery oCopper, against his E-COPPER units, he can surrender such units to the Exchange and get physical delivery, at any point of time at his discretion subject to the specified conditions.

For ensuring physical delivery of Copper, NSEL will issue instruction to the Authorized Dealer specifying the denominations of Copper required as well as the relevant delivery location from where the investor intends to lift delivery. On delivery of Copper to the unit holder, the Exchange shall transfer the demat units received from the unit holder to the account of the authorized dealer.

Copper cathode is 99.97% copper in sheets of dimensions: 96 cm x 95 cm x 1 cm, with a mass of about 100 kg. It is a true commodity, deliverable to the metal exchanges in New York, London and Shanghai.

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European & American Style of options.

An American style options are those contracts which are exercised by the buyer on or before the expiration date, i.e. anytime between the day of purchase of the option and the day of its expiry.

The European kinds of options are those contracts, which are exercised by the buyer on the expiration day only and not anytime before that.

In India, Index Options are European style of options whereas Individual Stock Options are American style of Options.

Distinguish between options and futures.

The significant differences between Futures and Options are as follows:

  1. Futures are contracts to buy or sell specified quantity of the underlying assets at a price agreed upon by the buyer & seller, on or before a specified time. Both the buyer and seller are obligated to buy/sell the underlying asset. This contract cannot be reversed at the option of any of the parties. In case of Options, the holder (buyer) of the option holds the right to exercise the option (although he is under no obligation to do so).

  2. Futures Contracts have symmetric risk profile for both the buyer as well as the seller, whereas options have asymmetric risk profile. This, in simple terms, means that the risk of a buyer of a futures contract is similar to that of one holding a stock in the spot market. However, in case of options, the option holder's risk is limited to the premium paid by him. The Option Writer/ Seller’s risk is unlimited.

  3. In case of Futures, the profit profile is linear the profit (or loss) increases or decreases in a straight line. In case of Options, for a buyer the profits may be unlimited. For a seller or writer of an option, profits are limited to the premium he has received from the buyer.

What are, 'At the Money', 'In the Money' & 'Out of the money' Options?

At the money:

An option is said to be 'at-the-money', when the option's strike price is equal to the price of underlying asset/Stock. This is true for both puts and calls.

In case of call options: A call option is said to be in-the-money when the strike/exercise price of the option is less than the underlying asset’s price. For example, a stock, ABC call option with strike of 3500 is 'in-the-money', when the spot ABC is at 3800. The exercise of this option leads to a positive money flow to the holder of the option.

On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of ABC call option, if the ABC falls to 3300, the call option no longer has positive exercise value. Naturally, the call holder will not exercise the option to buy ABC at 3500 when the current price is at 3300. The option, in this case, expires worthless.

For Pall options :- stock price 3000

Strike Price


Remarks

2800

Deep in the money

Strike Price < Spot Price of underlying asset

2900

In the money

Strike Price < Spot Price of underlying asset

3000

At the money

Strike Price = Spot Price of underlying asset

3100

Out of the money

Strike Price > Spot Price of underlying asset

3200

Out of the money

Strike Price > Spot Price of underlying asset

3300

Deep out of the money

Strike Price > Spot Price of underlying asset

In case of put options: A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, an ABC put at strike of 4000 is in-the-money when spot ABC is at 3800. When this is the case, the put option has value because the put holder can sell ABC at 4400, an amount greater than the current market price of ABC of 3800.

Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. In the above example, the buyer of ABC put option won't exercise the option when the spot ABC is at 4500. The put no longer has positive exercise value. Options are said to be deep in-the-money (or deep out-of-the-money) if the exercise price is at significant variance with the underlying asset price.

For Put Options:- stock Price = 3000

 

Strike Price


Remarks

2800

Deep out the money

Strike Price < Spot Price of underlying asset

2900

Out of the money

Strike Price < Spot Price of underlying asset

3000

At the money

Strike Price = Spot Price of underlying asset

3100

In the money

Strike Price > Spot Price of underlying asset

3200

In the money

Strike Price > Spot Price of underlying asset

3300

Deep in of the money

Strike Price > Spot Price of underlying asset

 

CALL OPTION

PUT OPTION

In-the-money

Strike price < Spot price of underlying asset

Strike price > Spot price of underlying asset

At-the-money

Strike price = Spot price of underlying asset

Strike price = Spot price of underlying asset

Out-of-the-money

Strike price > Spot price of underlying asset

Strike price < Spot price of underlying asset

What are Covered & Naked Calls?

A call option position (Buy/Sell) that is covered by an opposite position (Sell/Buy) in the underlying instrument (individual stocks or a basket of index stocks) is called a covered call. Writing covered calls involves writing call options when the shares that might have to be delivered (if option holder exercises his right to buy), are already owned. E.g. A writer writes a call on ABC and at the same time holds shares of ABC so that if the call is exercised by the buyer, he can deliver the stock.

Covered calls are far less risky than naked calls (where there is no opposite position in the underlying), since the worst that can happen is that the investor is required to sell shares already owned at below their market value. When a physical delivery uncovered/ naked call is assigned an exercise, the writer will have to purchase the underlying asset to meet his call obligation and his loss will be the excess of the purchase price over the exercise price of the call. The premium received on the writing, of course, to some extent mitigates this loss.

What is Intrinsic Value of an option?

The intrinsic value of an option is defined as the amount by which an option is in-the-money.

For a call option: Intrinsic Value = Spot Price - Strike Price
For a put option: Intrinsic Value = Strike Price - Spot Price

As an evident, only an option that has an intrinsic value is exercised.
The intrinsic value of an option must be a positive number or 0. It can't be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. For a put option, the strike price must be greater than the underlying asset price for it to have intrinsic value.

What is Time Value with reference to Options?

Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. The time value also reflects the interest cost of an option position. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value too, cannot be negative.

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For superior Results, know the quarterly earnings

If you are an investor or shareholder or trader you must be eager to know what's happening in the stock, whose shares you should hold and how it has been performing. There are lots of things, but one of the fundamental way to find out is to gaze at the quarterly figures released by the companies.
In the quarterly earnings, there are several useful numbers for the public to recognize the company's financial health. These are shaped in a predefined layout that a company has to hold on to. In India, It is mandatory for every listed company to show quarterly earnings to the Securities and Exchange Board of India (SEBI), regulator for the securities market.

It is observed that from the investment point of view, there is significant
connection between company’s stock returns and quarterly earnings announcement. Moreover during the earnings announcement, it has been observed that stock prices of the company momentarily increase/decrease and volatility increases. Quarterly earnings are early indicator of the company's growth towards its predictable yearly profit targets.

Most of investors just only looks at the net profit figure in the quarterly numbers; net profit may not give you the right picture at a given point. Investors must not look only at the net profit figures but also other details like sales expansion, debt formation, whether the net profit growth is due to any one time gain or reduce in spending. It is not simple to examine numbers like an expert would do, but still a laymen can go beyond the net profit numbers to try and determine what's happening in the companies.

There are some other parameters other than net profit such as sales, expenditure, operating income and Earnings per Share (EPS) that helps you to find improved understanding of the company’s financials.

Read /listen to the conference call

The conference call is an exclusive information resource of the company which is not offered through any other channel. The conference call is to gauge the thinking methodology of the management and the path of the business.

It focusses on every future direction or any major announcements, such as dividend changes or stock buyback. In addition, thing in or out one-time stuff, such as special tax items, disposal of businesses and any new accounting treatment. Things in or out one-time items are done to regularize the EPS to prior guidance and consensus estimates.

APPLE TO APPLE

Single quarter earnings will not tell you much, so you as an investor must evaluate it with the prior periods to measure the way the business is taking. Shareholders should compare the quarterly numbers with previous quarter numbers or corresponding quarter last year.

CONFRONTING SUDDEN FALLS

It is not compulsory that a stock price of the company will fall after an unexpected fall in the quarterly earnings, rather it is a matter of street outlook. If the street is expecting a loss and real loss is lesser than predictable, and then the stock price of the company will eventually move up.

From time to time, as the price of company stock falls, long-term investors takes benefit from short-term negative sentiments by taking long positions. But, if the long-term outlook is bad for the company, then both short and long-term investors must exit.

Conclusion: It is observed that the investors do not take buy or sell judgment on the basis of quarterly earnings only. Additionally, Investor must check the company on yearly basis and take other fundamentals of companies into consideration.

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Futures market: No stock limits for regulated warehouses

The Union government has decided to exempt commodities kept in warehouses registered by the Warehousing Development and Regulatory Authority for the futures markets from stock limits fixed under the Essential Commodities Act.

The commodities market regulator, Forward Markets Commission, has sent a communication to all exchanges in this regard. The move is a big relaxation for commodity futures market players. Several essential commodities such as pulses, potatoes, edible oils, wheat and sugar are traded on futures exchanges. Governments invariably invoke the stock limits on some of these, depending upon the price and crop situations. Stock limits make the hedging of price risks related to these commodities difficult on the exchange platform. Many traders were not hedging big quantities due to stock limits issue. Now this step will encourage genuine volumes in essential items in the commodity exchanges.

According to FMC, However, exempting commodities from such limits if these are stored in WDRA-registered places will be subject to the condition that these warehouses publish the information of stocks available with them on a real-time basis.

This facility will be available only to those who trade on futures exchanges and having stored the commodity in a regulated warehouse. Other traders' stock in regulated warehouses will not get this exemption.

The logic for giving an exemption is that even if the stock exceeds the prescribed limit, that can be hedged on the exchange and this information will be in the public domain. So, secret hoarding will not be possible.


There were earlier cases where a futures exchange was permitting stock and position limits which turned out to be higher than the stock limits prescribed for the commodity. Such cases were found on sugar in Maharashtra and chana in Rajasthan. Civil supply department officials had objected and the issue was resolved with the help of the respective exchanges. The new rule will obviate the need for this.

The move first got in-principle approval of the ministry of finance in August this year. Commodity futures regulated by the FMC comes under this regulation. Then economic affairs secretary Arvind Mayaram recommended the ministry of consumer affairs to provide such exemptions and on October 17, this was notified to the ministry of finance.

With this reform, the government has resolved discrepancy between the two central laws-Essential Commodities (EC) Act and Forward Contracts Regulation Act (FCRA). 

Essential Commodities Act allows state governments to set stock holding limits for licensed dealers of commodities. This was conflicting with FCRA Act which permits a holder of a commodity futures position to give or take delivery of essential items in excess of prescribed stock limits under the Essential Commodities Act. 

Exchanges have certified the warehouses within 100 kms radius of delivery centres depending on the feasibility and requirements, in respect of all commodities.

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Gold loan, the hassle free process to receive cash

The term ‘gold loan’ refers to loan by pledging your gold jewellary ornaments/Coins/bars/Exchange traded funds ETFs/ SBI gold certificates etc as collataral.

It’s the most convenient way to receive cash in no time from any NBFC/Bank with minimal documentation & processing time. Loan availed can be put to any use. 
Loan amount eligibility is evaluated basis on the Gold value. Banks usually fund 70-80% of the gold market value & on repayment of the loan, gold deposits are returned back to the customer. People in urgent need of money prefer to tap non-banking finance companies like Muthoot and Manappuram who turn out loans in double quick time with little or no paperwork. People are taking loans against gold to pay hospital bills, bear wedding expenses and education bills.

Rate of interest for Gold loan

This loan comes much cheaper than personal loan as it’s a secured product & rate of interest ranges between 11.5-24% per annum. Rate of interest is decided on two factors:

  1. Risk criteria : What % of market value of Gold you are availing loan if its 90% of the Gold market value then interest charged will be higher & vice a versa for lower loan amount as compared to gold value) &

  2. Customer relationship with the bank /NBFC

Features of Gold Loan:

  1. Fastest loan disbursal

  2. Most convenient way to arrange funds

  3. Low Documentation

  4. No pre-payment charges

  5. No loan amount cap (you can receive as low as 10,000)

Process for availing Gold Loan : It’s a four step process. Complete process usually takes 30-45 minutes.

  1. Loan Valuation: Banks /NBFC carry out valuation of Gold & decide on the loan amount eligibility.

  2. Documentation: Usually banks/NBFC takes photo id and we can pledge the gold and walk away with the loan within an hour.

  3. Signing of Agreement: Terms & condition of the loan are signed by the loan applicant.

  4. Loan Disbursement: Cheque is handed over to the customer over the counter after signing agreement at same time. 

“Loan in 5 minutes,” slogan at the website and advertisement of Muthoot Finance has become very popular. Muthoot Finance is India’s largest gold loan company with over 3,000 branches. Banks/NBFCs don’t rush to auction it in case of default and give the customers the maximum period of 18 months as they know gold has a lot of sentimental and emotional value

The development of gold loan business

Industry studies reveal that between 2002 and 2010, the gold loan business posted a compounded annual growth rate of 35-40 per cent. On the back of 36 per cent jump in gold prices, the business boomed in 2010 and is estimated to have doubled in size to Rs 75,000 crore in 2011.

However, The exact growth rate and total business could not be assessed correctly as there is no data about the involvement of local moneylenders and unlicensed firms, which are lending gold loans at three times higher rate than the organized sector.

WHAT PROMPTED THE RUSH?

Asset quality:  Unlike other securities, gold does not depreciate fast. Compared to other advances, credit quality of these loans is one of the best.

Margin: These loans carry a higher interest margin compared to other secured advances like mortgage and car loans.

Priority sector: Many banks have been struggling to meet priority sector targets. Since these loans come under priority sector advances, these offer an opportunity to meet targets.

Demand: Strong demand for gold loans, both in urban and rural centres. In rural branches, it is one of the most popular loan products.

Cross sale: Banks expect gold loans to provide an opportunity to cross-sale other products and services to customers who have borrowed against the yellow metal.

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Gold Monetization Scheme

The Gold Monetisation Scheme, an ambitious initiative launched by Prime Minister Narendra Modi, aims to bring an estimated 22,000 tonnes of gold lying idle with households, religious institutions and others into the financial system in return for a regular interest payout and the market-linked appreciation value.

The new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal account. Banks/other dealers would also be able to monetise this gold. Markets regulator Sebi today allowed gold exchange-traded funds (ETFs) to invest up to 20 per cent of their assets in the government's ambitious Gold Monetisation Scheme.

Objective

The objectives of the Gold Monetization scheme are:

  1. To mobilize the gold held by households and institutions in the country.

  2. To provide a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks.

  3. To be able to reduce reliance on import of gold over time to meet the domestic demand.

Collection, Purity Verification and Deposit of Gold

The gold can be deposited even in the jewellery form, but it gets melted and the value is determined after testing its purity. Purity Testing Centre will issue the purity certificate of deposited gold to the customer. Out of the 331 Assaying and Hallmarking Centres spread across various parts of the country, is allowed to act as Collection and Purity Testing 1 Centres for purity of gold for the purpose of this scheme. The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams.

Gold Savings Account: The bank will open a ‘Gold Savings Account’ for the customer and credit the ‘quantity’ of gold into the customer’s account. The customer will produces the certificate of gold deposited at the Purity Testing Centre and simultaneously, the Purity Verification Centre will also inform the bank about the deposit made.

Interest payment by banks: The bank will pay an interest to the customer which will be payable after 30/60 days of opening of the Gold Savings Account. The amount of interest will be decided by the banks. Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on maturity he has a credit of 101 gms.

Redemption: The depositor can choose an option to get back the gold at a later date in the equivalent of '995 fineness gold or Indian rupees' as they desire, but not in the same form.

Tenure: The tenure of the deposit will be minimum 1 year and with a roll out in multiples of one year. Like a fixed deposit, breaking of lock-in period will be allowed.

Tax Exemption: Capital Gains Tax, Wealth tax and Income Tax exemptions will also be available to the customers in the GMS after due examination.

Utilization of Deposited Gold

The draft gold monetization scheme also provides for incentives to the banks. The banks may be permitted to deposit the mobilised gold as part of their CRR/SLR requirements with RBI. They may sell the gold to generate foreign currency. The foreign currency thus generated can then be used for onward lending to exporters or importers. Bank may convert mobilised gold into coins for onward sale to their customers and can be used for lending to jewelers.

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GST, “One Country One Tax

The GST is expected to bring many benefits to the economy. These are higher GDP growth, lower inflation, buoyant tax collections, wider coverage and less tax evasion, and, most importantly, a truly common economic market across the country.

The overarching goals of the new tax regime are to ensure that the inflationary impact is minimal, government revenue is protected, and the new tax system explicitly appears to be pro-poor. After having fixed the rates of the goods and services tax (GST) on almost all commodities and services, the GST Council is trying to ensure that any tax reduction will be passed on to consumers when the new indirect tax regime comes into force on 1 July. The benefits of GST ahead of its actual implementation is looking reality as the Auto manufacturer Ford India is giving discounts of up to Rs 30,000 on its compact SUV to pass on the advantages of new tax rates under GST, to be implemented in July.

The key features of the GST

  1. GST moves the tax system from production to consumption.

  2. It covers the gross domestic product (GDP) more comprehensively. Because the tax base is now a much wider set of transactions. According to IMF the GST would help raise India’s medium-term growth to above eight per cent.

  3. The per capita tax incidence will be lower.

  4. GST eliminates a major bane of cascading, i.e. having to pay tax on tax. It will thus increase efficiency of taxation.

  5. Inflation will remain low as GST rates on essential goods such as food grain, household consumer items and essential services have been either exempt or kept lower.

  6. One of the key features of Indian GST is 'matching'. This means correlating the tax paid by the suppliers with tax credit claimed by its customers.

  7. GST has interlocking incentives for compliance, because your tax incidence, and refund, depends on production of proof of tax paid by your supplier.

  8. No one person in the chain can evade tax because it hurts either his vendor or customer.

  9. In that respect, the GST’s interlocked incentives look similar to Grameen Bank’s joint liability lending in microfinance.

  10. Micro loans are given without any collateral, but if one person defaults, the entire group is blacklisted. This ensures an almost 100% repayment rate.

  11. The entire GST process – starting from registration to filing returns and payment of GST tax – is online. Startups do not have to run around to tax offices to get various registrations under excise, VAT, service tax.

  12. GST also has an optional scheme of lower taxes for small businesses with turnover between Rs. 20 to 50 lakhs. This will bring respite from tax burdens to many small businesses.

  13. The GST law has anti-profiteering provision on the lines of many international GST laws, to check the potential price rises owing to malpractices. However Lack of details on the anti-profiteering rules and mechanism is a big area of concern.

  14. On services GST with 5-tier rate has been levied based upon the nature of the consumption. For instance, air travel, cab services are proposed to be taxed at 5% while, luxury hotels, race events are proposed to be taxed at 28%.

  15. GST will give a big fillip to domestic manufacturing and the Make in India programme as it will equalise the tax treatment for both imports and domestic products.

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Hedge Fund in the commodity derivatives market

In a move to deepen the market and step up liquidity, the Securities and Exchange Board of India (Sebi) has decided to allow Category-III Alternative Investment Funds (AIFs) to participate in the commodity derivatives market.

The Sebi board finalised norms in this regard. Category-III AIFs, also known as hedge funds, become the first category of institutional investors allowed in commodity derivatives. Category III AIFs are those that employ diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives.

At present, institutional participants are not allowed to participate in the commodity derivatives market in India. Consequently, the commodity derivatives markets lack the desired liquidity and depth for efficient price discovery and price risk management, Sebi said in a circular.

Highlights of decision

  1. Hedge funds have been allowed to participate in all commodity derivative products being traded on the commodity derivatives exchanges as ‘clients’. All rules, including position limits, applicable to clients will apply to them.

  2. Initially only a few large domestic investment banks and/or private equity-promoted funds would enter this space.

  3. In a circular issued by the Sebi, hedge funds should not invest more than 10% of the investable funds in one underlying commodity. This limit is also applicable to these funds in equity derivatives.

  4. Hedge funds are allowed to leverage or borrow funds subject to consent from investors in the fund and subject to a maximum limit as specified by the Sebi from time to time.

  5. They have to take the consent of existing investors for participating in commodity derivatives; those who don’t agree are to be given an exit option.

  6. Commodity exchanges have been asked by the Sebi to amend their relevant rules to permit this.

  7. Category-III AIFs may also be set up by foreign investors. Hence, the Sebi has in a way opened the commodity derivatives market for investors from abroad, too.

  8. The significant participation of Hedge Fund in the commodity derivatives market will not only provide access to a fast-growing asset class to the investor community but also to unlock the potential this asset class holds.

  9. The presence of AIFs will spur the infusion of research-based information, capital, innovation and new trading strategies in India’s commodity markets, improving the quality of price discovery, lending it a degree of depth and vibrancy which matches the global standards.

  10. Sebi is also considering allowing mutual funds in commodity derivatives.

A hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk. Commodities often rise during inflationary economic environments. This causes the prices of raw materials such as precious metals and natural resources to go up. However, when commodity prices suffer, hedge funds in the sector generally perform poorly. Although hedge funds seek to profit during bullish and bearish markets, many hedge funds generally have long biases.

National Commodity & Derivatives Exchange spokesperson said, “Participation in commodity futures and options would boost overall market participation, depth and liquidity. Hedgers would also be benefited.” This is important for commodity options to bring liquidity and risk taking.

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Hedging Price Risk: Gold

Hedging is the process of reducing or controlling risk. It involves taking equal and opposite positions in two different markets (such as physical and futures market), with the objective of reducing or limiting risks associated with price change.

It is a two-step process where a gain or loss in the physical position due to changes in price will be offset by changes in the value on the futures platform, thereby reducing or limiting risks associated with unpredictable changes in prices. In the international arena, hedging in gold futures takes place on a number of exchanges, the major ones being Chicago Mercantile Exchange (CME), Multi Commodity Exchange of India Ltd (MCX), Tokyo Commodity Exchange’ (TOCOM) and Shanghai Futures Exchange(SHFE).

Gold, the most sought-after of all precious metals, is acquired throughout the world. As an investment vehicle, gold is typically viewed as a financial asset that maintains its value and purchasing power during inflationary periods. However, globalization has increased volatility across asset classes which can be dealt with using various risk management instruments.

PRICE RISK MANAGEMENT: GOLD

Risk management techniques are of critical importance for participants, such as mining companies, processors, companies dealing in gold and gold products, jewelers and even governments which rely on the proceeds of bullion consumption and trade. India, the world’s largest market for gold jewellery and a key driver of global gold demand needs such financial instruments like futures to get its bullion industry protected from price risk. The role of commodity futures in risk management consists of anticipating price movement and shaping resource allocations and achieving these ends can be met through hedging.

IMPORTANCE OF HEDGING

Critical for stabilizing incomes of corporations and individuals, reducing risks may not always improve earnings, but failure to manage risk will have direct repercussion on the risk-bearer’s long-term income. To gain the most from hedging, it is essential to identify and understand the objectives behind hedging. A good hedging practice, hence, encompasses efforts on the part of companies to get a clear picture of their risk profile and benefit from hedging techniques.

PARTICIPANT HEDGERS

Corporations, Mining companies, Market intermediaries, Merchandisers, Jewellers and designers, Importers and exporters are major participant for gold hedging.

FACTS ON HEDGING

  • Hedging can shield the revenue stream, the profitability, and the balance sheet against adverse price movements.

  • Hedging can maximize shareholder value.

  • Under International Financial Reporting Standards (IFRS), beneficial options arise in effective hedges.

  • Common avoidable mistake is to book profits on the hedge while leaving the physical leg open to risk.

  • Hedging provides differentiation to companies in a highly competitive environment.

  • Hedging also significantly lowers distress costs in adverse circumstances confronting a company.

REGULATORY BOOSTS FOR HEDGERS

  1. Income tax exemptions for hedging.

  2. Hedgers are no longer forced to undertake physical delivery of commodities to prove that their transactions are for hedging and not speculation.

  3. Limit on open position as against hedging: This enables hedgers to take positions over and above prescribed position limits on approval by the exchange and thus can hedge to a great extent of their exposure in the physical market.

  4. Early pay-in benefit. If a hedger makes an early pay-in of commodity, he is exempted from paying all applicable margins.

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India's gold imports, on tune of GST fear

According to World Gold Council (WGC), India's gold imports will likely drop in the second-half of the year from the first six months after jewellers rushed to stock up ahead of new taxes introduced on July

It is a two-step process where a gain or loss in the physical position due to changes in price will be offset by changes in the value on the futures platform, thereby reducing or limiting risks associated with unpredictable changes in prices. In the international arena, hedging in gold futures takes place on a number of exchanges, the major ones being Chicago Mercantile Exchange (CME), Multi Commodity Exchange of India Ltd (MCX), Tokyo Commodity Exchange’ (TOCOM) and Shanghai Futures Exchange(SHFE).

Gold, the most sought-after of all precious metals, is acquired throughout the world. As an investment vehicle, gold is typically viewed as a financial asset that maintains its value and purchasing power during inflationary periods. However, globalization has increased volatility across asset classes which can be dealt with using various risk management instruments.

PRICE RISK MANAGEMENT: GOLD

Risk management techniques are of critical importance for participants, such as mining companies, processors, companies dealing in gold and gold products, jewelers and even governments which rely on the proceeds of bullion consumption and trade. India, the world’s largest market for gold jewellery and a key driver of global gold demand needs such financial instruments like futures to get its bullion industry protected from price risk. The role of commodity futures in risk management consists of anticipating price movement and shaping resource allocations and achieving these ends can be met through hedging.

IMPORTANCE OF HEDGING

Critical for stabilizing incomes of corporations and individuals, reducing risks may not always improve earnings, but failure to manage risk will have direct repercussion on the risk-bearer’s long-term income. To gain the most from hedging, it is essential to identify and understand the objectives behind hedging. A good hedging practice, hence, encompasses efforts on the part of companies to get a clear picture of their risk profile and benefit from hedging techniques.

PARTICIPANT HEDGERS

Corporations, Mining companies, Market intermediaries, Merchandisers, Jewellers and designers, Importers and exporters are major participant for gold hedging.

FACTS ON HEDGING

  1. Hedging can shield the revenue stream, the profitability, and the balance sheet against adverse price movements.

  2. Hedging can maximize shareholder value.

  3. Under International Financial Reporting Standards (IFRS), beneficial options arise in effective hedges.

  4. Common avoidable mistake is to book profits on the hedge while leaving the physical leg open to risk.

  5. Hedging provides differentiation to companies in a highly competitive environment.

  6. Hedging also significantly lowers distress costs in adverse circumstances confronting a company.

REGULATORY BOOSTS FOR HEDGERS

  1. Income tax exemptions for hedging.

  2. Hedgers are no longer forced to undertake physical delivery of commodities to prove that their transactions are for hedging and not speculation.

  3. Limit on open position as against hedging: This enables hedgers to take positions over and above prescribed position limits on approval by the exchange and thus can hedge to a great extent of their exposure in the physical market.

  4. Early pay-in benefit. If a hedger makes an early pay-in of commodity, he is exempted from paying all applicable margins.

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National Agriculture Market

NAM is envisaged as a pan-India electronic trading portal which seeks to network the existing APMC and other market yards to create a unified national market for agricultural commodities. NAM is a “virtual” market but it has a physical market (mandi) at the back end.

NAM is not a parallel marketing structure but rather a device to create a national network of physical mandis which can be accessed online. It seeks to leverage the physical infrastructure of the mandis through an online trading portal, enabling buyers situated even outside the State to participate in trading at the local level.

Ministry of Agriculture & Farmers’ Welfare, Govt. of India has appointed Small Farmers’ Agribusiness Consortium (SFAC) as the Lead Implementing Agency of NAM. SFAC will operate and maintain the NAM platform with the help of a Strategic partner selected for the purpose.

States interested to integrate their mandis with NAM platform are required to carry out following reforms in their APMC Act.

a) Specific provision for electronic trading.

b) Single trading licenses valid for trading in all mandis of the State.

c) Single point levy of transaction fee.

Benefits of NAM

NAM is envisaged as a win-win solution for all stakeholders. For the farmers, NAM promises more options for sale at his nearest mandi. For the local trader in the mandi, NAM offers the opportunity to access a larger national market for secondary trading. Bulk buyers, processors, exporters etc. benefit from being able to participate directly in trading at the local mandi level through the NAM platform, thereby reducing their intermediation costs. The gradual integration of all the major mandis in the States into NAM will ensure common procedures for issue of licenses, levy of fee and movement of produce. In the near future we can expect significant benefits through higher returns to farmers, lower transaction costs to buyers and stable prices and availability of products on reasonable prices to consumers. The NAM will also facilitate the emergence of integrated value chains in major agricultural commodities across the country and help to promote scientific storage and movement of agri commodities.

Current Status

So far, Ministry of Agriculture, Cooperation & Farmers’ Welfare, GOI has accorded in principle approval to the proposals of 12 States /UTs for integration of 365 mandis with e-NAM namely Himachal Pradesh (19 mandis) Haryana (54 mandis), Chandigarh (1) mandi, Rajasthan (25 mandis), Gujarat (40 mandis), Maharashtra (30 mandis), Madhya Pradesh (50 mandis), Chhattisgarh (5 mandis), Andhra Pradesh(12 mandis), Telangana (44 mandis), Jharkhand (19 mandis), and Uttar Pradesh (66 mandis).

Pilot trading of 24 Commodities namely Apples, Potato Onion, Green Peas, Mahua Flower, Arhar whole (Red Gram), Moong Whole (green gram), Masoor whole (lentil), Urad whole (black gram), Wheat, Maize, Chana whole, Bajra, Barley, Jowar, Paddy, Castor Seed, Mustard Seed, Soya bean, Ground nut, Cotton, Cumin, Red Chillies and Turmeric has been launched on 14th April, 2016 in 21 mandis across 8 States. Currently over 200 mandis in the country has been integrated with NAM.

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New Crop Insurance Scheme – Pradhan Mantri Fasal Bima Yojana – The freedom to farmers

On 13th January, 2016, the Govt. has launched a new crop insurance policy named pradhan mantri fasal bima yojana-a path breaking scheme for farmers’ welfare. This yojna will help in easing of the burden of premiums on farmers who take loans for their cultivation.

OBJECTIVES:

  1. To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases.

  2. To stabilise the income of farmers to ensure their continuance in farming.

  3. To encourage farmers to adopt innovative and modern agricultural practices.

  4. To ensure flow of credit to the agriculture sector.

The highlights of this scheme are as under:

  1. The premium rates to be paid by the farmers have been brought down substantially so as to enable more farmers avail insurance cover against crop loss on account of natural calamities.

  2. The new Crop Insurance Scheme is in line with One Nation – One Scheme theme.  It incorporates the best features of all previous schemes and at the same time, all previous shortcomings/weaknesses have been removed.

  3. Localized risks and also included post harvest losses have taken into account to ensure no farmer is alone in times of distress.

  4. The Union cabinet has also decided to make the settlement process of the insurance claim, fast and easy so that the farmers do not have to face any trouble regarding the crop insurance plan.

  5. There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%.

  6. The balance premium will be paid equally by the Centre and the respective state governments to provide full insured amount to the farmers against crop loss on account of natural calamities.

  7. There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government.

  8. Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This capping has now been removed and farmers will get claim against full sum insured without any reduction.

  9. The Centre, till date, has a bill of Rs 3,100 crore on account of its share of the premium for the 23 per cent crops that are currently insured in the country. Once 30 per cent of the crop comes under insurance cover, the Centre’s financial liability is estimated to go up to Rs 5,700 crore. This financial liability is expected to touch a whopping Rs 8,800 crore once the target of bringing 50 per cent crop under insurance is achieved in three years.

  10. The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments.

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News

News plays a very significant role in affecting stock prices. Investors, be it a long-term or a short term, it is important to review the news headlines periodically so that one can decode the news and quickly grasp whether it will affect the stocks in anyway.

Positive news tends to have a positive effect on stock markets and vice versa. Good earnings reports, increased corporate governance, merger and acquisitions, as well as positive overall economic and political indicators, move the market higher.

There are several chat rooms, websites, and forums providing information financial markets, it is very important to analyze the news that will affect the stocks in anyway. In most of the cases, estimates, predictions and opinions of investors can best be described as merely rumors and not necessarily as objective and reliable information analyzed by experts. Rumors are only speculative and unreliable; however, their effect on stock prices and on abnormal returns is often large. On the contrary, if rumors swirling around a stock aren't proven true, investors may respond in surprising ways. One needs to do analyses of the news and do little research. If the surprise is a good one, stock prices can be driven upward and vice versa. It could be seen that the peer group of companies from the same industry move in tandem with each other because market conditions generally affect the companies in the same industry the same way. But sometime the stock price of a company gets benefit from a piece of bad news for its competitor, if the companies are competing for the same market. The impact of new information on a stock depends on how unexpected the news is. This is because the market is always building future expectations into price and the markets tend to ignore all the other contrary key indicators when the perception is biased in one way.

To conclude, News has always been the first source of investment information. Since current market prices already incorporate all that is obvious, the next piece of news is random in terms of whether it is good or bad than the market expects, and the market adjusts almost instantly to that news. From tracking investment portfolio to keeping up with the latest news and updates on favourite stocks, one has to do research; research is analyses of news. While analyzing stock, it is quite likely that some new factor may emerge and this may be detrimental to the company's profits, so be very cautious and always remain updated to earn good returns.

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OPEC deal on historic production cut, merrymaking for oil traders

On 30th November 2016 in Vienna, the Organization of the Petroleum Exporting Countries reached a deal to reduce their oil production by 1.2 million barrels per day, first oil output reduction since 2008, in order to raise global prices.

This is the first coordinated action of Opec with non-OPEC member Russia in 15 years.

OPEC nations currently produce 33.7 million barrels of oil per day, total. Under the deal, they’ll bring that down to 32.5 million barrels per day, with Saudi Arabia, Iraq, UAE, and Kuwait making the largest cuts.

Why OPEC is trying to cut back on oil production

For the past two years, as oil prices have been plummeting worldwide, OPEC unable to react as the cartel's most important member, Saudi Arabia, refused to cut output in 2014 when prices first began sliding, and was hoping that price crash would drive large swaths of the US fracking industry — with its higher production costs — out of business. The fracking boom in places like North Dakota and Texas was a big reason for the oversupplied oil market.

But over the past two years, US production has fallen from 9.6 million barrels per day down to 8.6 million barrels per day amid the price crash. Nearly $1 trillion in oil investment worldwide has dried up. Meanwhile, Saudi Arabia has been hurt badly by the price crash. The country has already drained through more than $100 billion worth of foreign exchange reserves and has been forced to cut social services and government salaries due to lower oil revenues. So the Saudis finally decided to shift their stance.

But the deal was never easy to reach. OPEC constantly faces a big coordination problem due to different interests. Saudi Arabia doesn’t want to go it alone on cuts and lose too much market share. Iran is trying to attract new investment to rebuild its sanctions-ravaged industry and is worried that too steep a cut might scare off investors. Iraq argued it needs oil revenue to fight off ISIS.

The details of OPEC’s deal to cut production: OPEC’s deal to cut production is divided up among members like so:

Agreed crude oil production adjustment and levels(in mbpd)

Member country

Current production level

Production cut

Effective production

from January 2017

Algeria

1.089

-0.050

1.039

Angola

1.753

-0.080

1.673

Ecuador

0.548

-0.026

0.522

Gabon

0.202

-0.009

0.193

Iran

3.975

0.090

3.797

Iraq

4.561

-0.210

4.351

Kuwait

2.838

-0.131

2.707

Qatar

0.648

-0.030

0.618

Saudi Arabia

10.544

-0.486

10.058

UAE

3.013

-0.139

2.874

Venezuela

2.067

-0.095

1.972

Saudi Arabia will “big hit" with cut about 486,000 barrels per day. Libya and Nigeria will be exempted, as their output has been hurt by unrest and violence. Iran was allowed to boost production slightly from its October level. Non-OPEC producers had agreed to reduce output by a further 0.6 million bpd, of which Russia would contribute some 0.3 million.

Now all of its members would benefit from higher global prices, but there’s still the risk that countries could fail to follow through. This is an agreement to cap production levels, not export levels. Russia will gradually cut output in the first half of 2017. And, most importantly, if prices now go up, many fracking companies in North Dakota and Texas could start drilling again and may supply more crude and driving the market back down. U.S. crude production has risen by over 3 percent this year to 8.7 million bpd, as its drillers have aggressively slashed costs.

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Option Volatility

Many beginning options traders never quite understand the serious implications that volatility can have for the options strategies they are considering.

This tutorial is a practical guide to understanding options volatility for the average option trader. This series provides all the essential elements for a solid understanding of both the risks and potential rewards related to option volatility that await the trader who is willing and able to put them to good use.

Option Volatility: Why Is It Important?

Volatility changes can have a potential impact - good or bad - on any options trade you are preparing to implement. In addition to this so-called Vega risk/reward, this part of the options volatility tutorial will teach you about the relationship between historical volatility (also known as statistical, or SV) and implied volatility (IV),

Perhaps the most practical aspect of a volatility perspective on options strategies and option prices is the opportunity it affords to determine relative valuation of options. Due to the nature of markets, options may often price in events that are expected. Therefore, when looking at option prices and considering certain strategies, knowing whether options are "expensive" or "cheap" can provide very useful information about whether you should be selling options or buying them.

We are going to look at what is meant by historical volatility and implied volatility, which is then used to determine whether options are expensive (meaning are they trading at prices high relative to past levels) or cheap. Also, we'll look at the question of whether options are overvalued or undervalued, which pertains to theoretical prices versus market prices and how historical and implied volatility are incorporated into the story.

Another important use of volatility analysis is in the selection of strategies. Every option strategy has an associated Greek value known as Vega, or position Vega. Therefore, as implied volatility levels change, there will be an impact on the strategy performance. Positive Vega strategies (like long puts, back spreads and long strangles/straddles) do best when implied volatility levels rise. Negative Vega strategies (like short options, ratio spreads and short strangles/ straddles) do best when implied volatility is falling. Clearly, knowing where implied volatility levels are and where they are likely to go once in a trade can make all the difference in the outcome of strategy.

Finally, we'll look at uses of options volatility in relation to vertical and horizontal skews, where the implied volatility levels of each strike are compared in the same expiration month (vertical) and across different months (horizontal). This is followed by a look using implied volatility as a predictor of the future direction of stocks and stock indexes. Implied volatility can be used as a predictor of price from two angles: as a contrarian, when implied volatility has moved too far - high or low - or as a sign of potentially explosive price moves when implied volatility is extremely high for no apparent reason. Typically, the latter occurs when there is a pending unknown or even known event but it is not clear which way the stock will move. All that the extremely high-implied volatility tells you is that something big is in the offing.

Option Volatility: Historical Volatility

Volatility is both an input to valuation models (statistical/historical) and an output (implied). Just why this is so will become clearer once the difference between both volatility types is understood. Historical volatility is a measure of the volatility of the underlying stock or futures contract. It is known volatility, because it is based on actual, recent price changes of the underlying.

Historical volatility can be thought of as the speed (rate of change) of the underlying stock price. Like a car speeding along at 75 mph (rate of change per hour), a stock or futures contract moves at a speed that is measured as a rate too, but a rate of change per year. The higher the historical volatility, the more movement the stock has experienced and, therefore, theoretically, the more it can move in the future, although this does not provide insight into either direction or trend. While there are different ways to calculate historical volatility (different parameter settings just like with any technical indicator) the basic idea underlying different calculations is fundamentally the same.

Historical volatility essentially is a way to tell how far the stock or future might move in the future based on how fast it has been moving in the recent past. Thinking in terms of a car traveling at 75 mph again, we know that in one year, this car will have traveled a distance of 657,000 miles (75 x 24 hours x 365 days = 657,000). But the catch here is that the rate of change of 75 mph may not stay the same, and it doesn't tell us much about the direction of car (it could be going back and forth, not just in one direction, meaning it could end up where it began). This is true for stocks or futures as well. But the calculation clearly depends on recent speeds, which means percentage price changes on a daily basis. If these speeds are increasing, historical volatility will generally be greater.

Calculating Historical Volatility
By walking through a calculation of historical volatility, the above description should become more tangible. Historical volatility is a quantifiable number based on past changes in the price of the stock or futures contract. It can be calculated simply by taking the past prices, in this example 10 days are used, and price changes (from close to close), and then taking an average of those price changes in percentage terms. Once we have an average percentage price change over 10 days, we can subtract the daily percentage price changes from this average change to derive deviations from the daily average change for the 10-day period.

Date

ABC Close

%Change

7/3/2007

106.58

-

7/5/2007

108.05

1.38

7/6/2007

109.03

0.91

7/9/2007

108.97

-0.06

7/10/2007

108.63

-0.31

7/11/2007

109.1

0.43

7/12/2007

109.28

0.16

7/13/2007

108.6

-0.62

7/16/2007

109.66

0.98

7/17/2008

110.77

1.01

7/18/2007

111.08

0.28

Figure 1: ABC closing prices and daily percent price changes. 

As you can see in Figure 1, the middle column contains daily closing prices for ABC between July 3 and July 18, 2007. The right-hand column contains the daily price changes (calculated by subtracting today's price from yesterday's closing price and dividing by yesterday's closing price). This is the raw material for computing historical volatility.

The data from Figure 1 is then used to compute the standard deviation of daily price changes, which can be done easily in an Excel spreadsheet using the STDEV function. Using the ABC price data for the calculation, Figure 2 presents current 10-day historical volatility for ABC - let's suppose it's 10.29%. The number is an annualized figure that is derived by multiplying the standard deviation calculation of .645 (computed from the daily percent price changes found in Figure 1) by 15.937 (the square root of 254 trading days in a year). The standard convention is to annualize historical volatility (and implied volatility); it's an easy task using the square root function in an Excel spreadsheet.

Standard Deviation

Statistical Volatility

0.645

15.937

10.29%


Figure 2: ABC statistical volatility using prices presented in Figure 1

One additional thing to keep in mind is that while we are talking about the speed of the underlying, it is interpreted as an expected 10.29% up or down potential move at current price changes over the next 254 trading days.

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Risk Management

Risk control is a vital part of successful trading. Effective risk management requires not only the cautious monitoring of risk exposure, but a strategy to minimize losses as well. Understanding how to control risk exposure allows the trader, to continue trading even when the unavoidable losses occur.

While every trade involves a degree of risk, some general principles of risk management, if applied, reduce the potential for loss. A few of the generally accepted rules for controlling risk are noted below and are applicable to anyone who has ever traded or ever considered trading.

  1. DO YOUR RESEARCH: Doing your research before taking any trade is a must as there is no substitute. Before you put your money at risk, you should have a solid, logical and well-thought-out reason that why you would buy something that someone else wants to sell.

  2. DIVERSIFICATION: Portfolio risk is reduced through diversification. Don't bet everything on one trade. Also, before you enter a trade, be sure that you have adequate capital to cover an unexpected loss.

  3. LIMIT YOUR LOSSES: Predetermined stop orders limit your risk exposure and will cut your losses in fast-moving markets. Make a commitment to get out if your game plan does not work out. Price stop points are available to protect you.

  4. FOLLOW TREND: It’s a famous saying in financial markets that “TREND IS YOUR FRIEND”. You will be less likely to incur a loss if you are following the market trend. The direction of the market does not matter as long as you are positioned for the trend that occurs.

  5. DON'T OVERTRADE: Reduce your risk exposure by cutting down on the number of trades you make and keeping your bets small. Be selective about the risks you take. Restrict your trades to the ones that are the most attractive. This forces you to do your homework and reduces impulsive and emotional trades. Because there will be fewer trades, you will have to be much more patient.

  6. IF IN DOUBT, GET OUT: Personal doubts indicate that something is wrong with your game plan. Get out of the market quickly if:

    1. The market is behaving irrationally

    2. You are unsure about a position

    3. You don't know what to do

    4. You can't sleep at night.

Before you put your money at risk, you should be reasonably confident about what you are doing and reasonably confident that you will be successful. Risk management basically involves four essential steps:

  1. Fully understanding the risks of the trade

  2. Eliminating unnecessary risks where possible

  3. Being selective about which risks to take

  4. Acting quickly to reduce risk exposure if the market moves against you.

According to many seasoned traders, the key secret to controlling risk is the ability to cut losses before they lead to ruin.

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Sebi expands position limit base for farm commodity futures

In latest move, expanding the horizon for traders in agri commodity futures, market regulator The Securities and Exchange Board of India (SEBI) has expanded position limits across all spectrums at the client, member and exchange levels. With this move Sebi is trying reduce price fluctuations.

According to a circular released by Sebi on July 25, the current numerical value of overall client level position limits for agricultural commodity derivatives is inadequate and not in consonance with the deliverable supply of commodities. After due consultation with various stakeholders on the basis of CDAC (Commodity Derivatives Advisory Committee), the regulator has divided the client-level position limit for agri commodities in three broad category -- sensitive, broad and narrow.

Sensitive commodities: According to the regulator, sensitive commodities are prone to frequent government / external intervention in the form of stock limits, import/export restrictions or any other trade-related barriers. Such commodities have had frequent cases of price manipulation during the past five years of derivatives trading. Hence, clients under this category are allowed to have a position limit of 0.25 per cent of deliverable supply (an average of last five years' average output and import).

Broad commodities: These are not sensitive in nature, but whose average deliverable supply for the last five years stood at one million tonne in quantitative term and at least Rs 5,000 crore in monetary terms. Commodities falling under this category would attract a client level position limit of one per cent of the deliverable supply.

Narrow category: This third type of commodities do not fall in other two categories. Such commodities would entail with a client level position limit of 0.5 per cent of the deliverable supply.

Earlier, Sebi followed the move of the Forward Markets Commission (FMC), and fixed position limits on numerical value depending upon the size of the individual commodity and traders' interest in it.

Now the regulator directed comexes to jointly classify agricultural commodities into these three broad categories. The regulator, however, allowed re-classification from 'narrow' to 'broad', provided the concerned commodity's average deliverable supply and monetary value thereof exceeds 5 per cent.

The regulator has directed comexes to revise the position limit and notify such details by July 31 every year by incorporating sources of data procured. For agricultural commodities, Sebi asked comexes to avail data from concerned ministries. For every year, the revised position limit data will become applicable for all running contracts with effect from September 1. For the current year, however, exchanges are advised to complete the exercise within 20 days and make the revised position limit applicable effective from October 1.

For member level, however, the position limit in agricultural commodities across all the contracts would be 10 times the numerical value of client level position limit or 15 per cent of the market wide open interest, whichever is higher. Also exchange wise position limit shall be capped at 50 per cent of the annual estimated production and import of the commodity. There will be no change in norms with regard to near month position limits, computation of open positions, monitoring of position limits or any other norms prescribed by Sebi earlier.

With regard to clubbing of position limits, Sebi has directed comexes to jointly formulate a uniform guideline and disclose the same to the market within 30 days.

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Silver Hedge future in NCDEX

After the huge success of Gold hedge and hedge 100 contracts, the leading commodity platform NCDEX has launched an another innovative Silver future contract from Febraury 19, 2014. Currently, April 2014 and June 2014 contracts are available for trading with modified contract specifications.

Its ticker symbol will be SILVRHEDGE.

SILVRHEDGE on NCDEX is a new way to discover the price of Silver in India. It is innovative and the right benchmark for the Indian market. The contract has been designed as an intention-matching product, where delivery occurs only when both buyer and seller agree in advance on the quantity and location.

Contract Specifications

Ticker Symbol

SSILVRHEDGE

Tick Size

Rs 1/-

Unit of trading

15 KG

Delivery unit

15 KG

Quotation/base value

Rs per 100 Grams of Silver with 999 fineness.

Position limits

Member level: Maximum of 300 MT or 15 % of Market Open position in the Commodity whichever is higher.

Client level: 60 MT

Quality specification

Not less than 999 fineness bearing a serial number and identifying stamp of a refiner approved by the Exchange.

Delivery center

Ahmedabad

Price band

The daily price fluctuation limit is (+/-) 4%. If the trade hits the prescribed daily price limit, the limit will be relaxed up to (+/-) 6% without any break/ cooling off period in the trade. In case the daily price limit of (+/-) 6% is also breached, then after a cooling off period of 15 minutes, the daily price limit will be further relaxed up to (+/-) 9%.

In case of price movement in International markets, which is more than the maximum daily price limit (currently 9%), the same may be further relaxed in steps of 3%.

Final Settlement price

The Final settlement price will be calculated on the expiry date based on Closing International price on the day of expiry at an RBI reference rate.

  1. Closing International price will be multiplied by 32.1507465 for calculating the equivalent of per Kg price from per ounce price. This is the price of 1 Kg of Silver in US$ of 999 purity.

  2. Price arrived after step 1 will be multiplied by an RBI reference rate on the day of expiry. This gives the price of 1 Kg Silver of 999 purity equivalent in INR.

  3. The price arrived after step 2 is divided by 10 to get the Silver price for 100 Gms of 999 purity equivalent.

  4. The price arrived after step 3 is rounded to the nearest rupee.

Maximum Order Size

750KG

Minimum Initial

Margin

5 %


Hence, by reflecting the true value of Silver and offering the perfect hedge, SILVRHEDGE provides an opportunity for investors to add Silver to their portfolio.

Domestic Silver prices have a high correlation with the international prices. But the price correlation is also impacted by the customs duty. So, the new NCDEX contract will short out the discrepancy created by the physical markets and provides a correct benchmark and allow wider participation in the Silver market.

SILVER HEDGE ON NCDEX

Value

Traded Contracts

19-Feb-14

5474

826

20-Feb-14

4531

688

21-Feb-14

1883

285

24-Feb-14

2384

358

25-Feb-14

3486

526

26-Feb-14

2624

400

27-Feb-14

609

94
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SPDR Gold Trust, Gaining investor’s faith

SPDR Gold Trust is one of the most popular ETFs in the world, offering exposure to an asset class that has become increasingly important to the asset allocation process.

It can be used in a number of different ways; some may establish short term positions as a way of hedging against equity market volatility, dollar weakness, or inflation. Some may also include gold exposure as part of a long-term investment strategy.

Holdings of the SPDR Gold Trust, the world’s largest exchange-traded product backed by the metal, was 947.38 ton on June 28, 2016 highest since July 2013. The fund’s value is more than $39.88 billion. Inflows into SPDR Gold Trust, the top gold ETF, since the beginning of the year have already surpassed outflows for the whole of 2015. The increase in assets so far is also the highest since 2010. SPDR Gold Trust, the largest gold ETF in the world, saw holdings rise by 11 per cent in the March quarter to 819 tonnes.

SPDR Gold Trust holdings have hit a record at 1,353.35 tonnes in December 10, 2012 since its inception. Nowadays it is the world's ninth-largest holder of gold after the United States, Germany, the International Monetary Fund, Italy, France, Russia, china and Switzerland. Billionaire John Paulson is the biggest investor in the fund.

FACTORS BEHIND RISING

The SPDR Gold Trust tracks the performance of the price of gold. Normally, when the price of gold goes up, the holding of trust also rises. The ETFs are a good indicator that money is definitely flowing into gold. Nowadays gold prices are on uptrend as Uncertainty about the Euro zone after Brexit as well as global economy and investor risk aversion have been a supporting the gold this year. Volatility in stock markets is stoking safe-haven demand, with bullion funds seeing fresh buying from investors. Uncertainty about hike of interest rate after FOMC meeting june and after Brexit are also supporting the gold investment and holding also.

Source: SPDR Gold Trust

About SPDR Gold Trust

SPDR Gold Trust is a largest gold ETF, originally listed on the New York Stock Exchange. It is one of the fastest growing ETFs in the US. Started in November of 2004 and traded on NYSE Arca since December 13, 2007, the Trust holds physical gold and from time to time, issues SPDR Gold Shares in Baskets, in exchange for deposits of gold. SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. A basket equals to a block of 100,000 Shares. It means the shares may be purchased from the trust only in one or more blocks of 100,000 Shares.

Many Investors See Gold as a Safe-Haven Investment

Gold is widely perceived as a safe-haven investment. Gold retains its value despite movements in the stock market. At the time of economic uncertainty, political unrest and high inflation gold offers investors an attractive opportunity to diversify their portfolios-potentially reducing overall portfolio risk and ultimately preserving portfolio wealth.

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Warehouse receipts: The hundi for agri trading

In order to provide a boost to the rural economy and the commodities market, the central government has taken a further step in making the implementation of The Warehousing (Development and Regulation) Act, 2007 more effective.

The act had come into force w.e.f 25th October, 2010. It is one of the crucial financial products for agri business. It facilitates farmers to avail easier bank loans by trading their warehouse receipts, also called hundis. The Government has also decided to constitute Warehousing Development and Regulatory Authority (WDRA) under the Act with effect from 26th October, 2010.

Facts about The Warehousing (Development and Regulation) Act:

  1. The Act was enacted by Parliament in September, 2007.

  2. Besides mandating the negotiability of warehouse receipt, it prescribes the form and manner of registration of warehouses and issue of Negotiable Warehouse Receipts including electronic format.

  3. The act prescribes establishment and structure of Warehousing Development and Regulatory Authority (WDRA), a regulatory body. The Authority shall consist of a Chairperson and not more than two members.

  4. The Regulatory Authority will register and accredit warehouses intending to issue negotiable warehouse receipts and put in place a system of quality certification and grading of commodities with a view to protecting the interests of holders of warehouse receipts against negligence, malpractices and fraud.

  5. The warehouse receipts will include information like the quantity of farmers’ crop or grains stored, the location of the warehouse, its grade, and the validity period of the receipt and market price of the produce at the time of storage.

  6. CWC runs about 482 warehouses in the country with a combined storage capacity of 10.4 million tonnes, and all the warehouses are expected to be separately registered with the Authority.

ADVANTAGES OF WAREHOUSE RECEIPT

  1. Encourage scientific warehousing of goods.

  2. Lower cost of financing as a result of reduced risk.

  3. Shorter and more efficient supply chain.

  4. Increased trade and finance in commodities. Higher return of farmers and better services to consumers.

  5. Assurance from insurance companies against risks of theft, pilferage, quality & quantity losses, etc.

  6. Faster disposal of insurance claims

  7. Financial institution Increased risk mitigation from negotiability of WR

  8. Assurance that goods of the quality & quantity as mentioned in the WR is stored in the warehouse and shall be delivered to the ‘holder in due course’.

BENEFITS TO FARMERS

  1. Easy availability of loans from banks against negotiable warehouse receipt.

  2. Real & effective recourse and instrument to avoid distress sale.

  3. Proper grading of the stock resulting in better understanding & increased realization of the value.

  4. Increased confidence due to well laid accountability & penalty clauses for all service providers.

  5. Quick & effective loss compensation & dispute settlements.

WAREHOUSE MAN

  1. Will be encouraged to benchmark their infrastructure & quality of services against the best in the world

  2. increased business opportunities from stake holders

IMPACT OF THE ACT ON AGRI BUSINESS

  1. Farmers would be encouraged to store their produce in registered warehouses.

  2. Grading and quality standards of agriculture commodities would be encouraged.

  3. Farmers will get better return of their produce.

  4. There will be demand for scientific warehouses in rural areas

  5. The losses in storage of agricultural produce would drastically be reduced

  6. Liquidity in rural areas would be enhanced.

  7. Better and transparent price discovery mechanism for farmers’ produce

  8. Short supply chain in agriculture commodities.

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