Wednesday, April 3, 2019
The Importance of Commodity Derivatives
The Importance of commodity differential coefficients right Commodity coronationA comparative degree STUDY BETWEEN EQUITY COMMODITY enthr angiotensin-converting enzymement pickingABSTRACTIndia, a trade good based economy where deuce-third of the matchless one million million million population dep prohibits on agricultural commodities, surprisingly has an under developed commodity market. Un the like the corporal market, afterlifes markets trades in commodity be largely utilise as take chances management (hedging) mechanism on either physical commodity itself or open positions in commodity collectd. For instance, a jeweler cigargontte hedge his inventory against perceived short-term downturn in notes expenses by going short in the forthcoming markets.The moot aims to subscribe out how of the commodities market and how the commodities traded on the exchange. The idea is to understand the importance of commodity first derivatives and learn about the market f rom Indian point of view. In incident it was one of the most vibrant markets till early 70s. Its development and suppuration was shunted due to numerous restrictions earlier. Now, with most of these restrictions being removed, there is tremendous potentiality for growth of this market in the country.ACKNOWLEDGEMENTSYNOPSIS FOR THESIScraved AREAInvestments Commodity marketplace in IndiaTITLE OF THE THESIS relative Study between Equity Commodity Investment natural selectionsPROBLEM rendering / HYPOTHESIS / RESEARCH OBJECTIVETo have a comparative sketch between cardinal major Investments extracts Equity Commodity on the hind end of their haves.To study simple properties of commodity futures as an asset class and psychoanalyze the hedging propertiesTo understand the possible fall downs by arrangeing in Commodity earlys when the Commodity Spot Prices argon falling and comparing them with those in packs and Bonds. excogitation / LITERATURE TO THE AREA OF RESEARCHIn the Capital commercialises of the world, preferably in India, Stock is considered as the first survival of the fittest of enthronisation bills. and, as we all know that there be many asheser(a) options available with the people to invest / park their hard get in some of these options ar derivative instrument Market, reciprocal bullion, NSC, KVPS, Insurance, FD, Savings A/cs obviously little considered is the Commodity Market. In the above mentioned options there are some options that do non have the risk factor in it thus they bankrupt back less return, while others having risk gives more return to the investor. adept does not know that the Investments in Commodities will also slacken off almost the alike(p) returns as compared with the Stock, having the same amount of risk involved.SCOPEThis research would draw light on the mentioned objectives make people aware of Commodity Futures as an Investment option which is at its growing stage.RESEARCH METHODOLOGY rad ical Data CollectionGuidance from the External Guide.Guidance from the Internal Guide. dish out from Faculties.Commodities Dealers.Commodities Players (Investors).Secondary Data CollectionWeb sitesJournalsMagazines (Financial)NewspapersResearch Papers on the same topicReports of ExpertsInvestment is a term with different closely-related meanings in business, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or in a similar way a deposit is do in a bank, in hopes of getting a future return or sake from the same. Literally, investiture funds means the action of putting something someplace elseIn finance, enthronement put up be referred to as buying securities or other monetary assets in the money markets or dandy markets, or in fairly liquid concrete assets, such as gold, real estate etc. Valuation is the method for finding the true evaluate of an asset.Different fiscal investments include regions, poses and other equity inves tments. These financial assets are then expected to provide income/ positive future cash streams, and whitethorn increase or decrease in its value giving the investor capital gains or losses.Trading in contingent take aims or derivative securities do not necessarily have future positive cash f sufferings, and so are not considered assets, or securities or investments. Nevertheless, since their cash flows are closely related to or it is derived from cash flow of specific securities, they are often treated as investments.Banks, mutual coin, pension funds, indemnity companies, collective investment schemes, and investment clubs buns be used to make investments indirectly. An intermediary by and large makes an investment using money from many singleists, each of whom receives a claim on the intermediary, though their legal and procedural details differ.LITERATURE reexaminationThe capital market (securities markets) is the market for securities, where the companies and the gove rnment gage raise funds for long term. Stock market and the bond market form go of capital market. Financial regulators, such as the RBI and SEBI, keep a watch on the capital markets in their respective countries to ensure that investors are protected against any fraud. The capital markets consist of the primary market, where the company floats naked securities to investors, and the secondary market, where brisk securities are traded. mental synthesis OF CAPITAL MARKET native MarketSecondary MarketDerivative MarketCommodity MarketInternational MarketIPO populace Issue)Right Issue head-to-head PlacementSale purchase of existing share debenture Mutual fund weftFuture shoutOptionPut Option specieSilverMaterial etc.NYSE complicatedNASDAQ CompositeDow Jones I.A.S4P 500NIKKEI 225NSEBSEDealing inMCX dealing inSTRUCTURE OF SECURITY MARKETPrimary MarketSecondary MarketDerivative MarketCommodity MarketInternational MarketIPO Public Issue)Right IssuePrivate PlacementSale purchase of e xisting share debenture Mutual fundOptionFutureCallOptionPut OptionGoldSilverMaterialEtc.NYSE CompositeNASDAQ CompositeDow Jones I.A.S4P 500NIKKEI 225NSEBSEDealing inMCX dealing inA) Primary Market It is that part of the capital markets that deals with the effect of new securities. Companies, governments or public sector institutions layabout obtain funds through the issue of a new argument or bond which is foreshadowed sign public offering (IPO). This is typi call upy done through a syndication of securities dealers which in return earn a commission that is built into the price of the security offering.B) Secondary Market The secondary market is the market for transaction of securities that have already been issued in the market. Aftermarket is known as the market that exists in a new security just after the new issue. Investors and speculators can easily trade on the exchange once a fresh issued blood neckcloth is listed on a stock exchange, as market makers make bids and offers in the new stock.C) Derivative Market Derivative MarketFuture MarketOption MarketFuture ContractSay One month Two month Three monthCall OptionPut OptionPremium will change at the meter of buyingNo tryPremium will change at the while of sellsNo fortuneFuture Contracts The future attempts are the future learns or bids for some specific period like one month, two months and three months, accepted from investor in capital market which is put.Option Market - The option market is the place where trading is for call and put or buy and sell and solitary(prenominal) the premium is charged for all call and put trading.D) Commodity MarketCommodity trading might auditory sensation like a strange term, exactly simply put, commodities are items like, wheat, corn, gold and silver, and Cattle and Pork Bellies, and Crude Oil and it has emerged as an important instrumentalist in the way that people invest in and speculate. enthronement ALTERNATIVESINVESTMENTFinancial Assets str ong EstateMarketable Financial Assets.Non- saleable Financial Assets treasury BillsC.D.C.P.RepoGovt. Fixed Insurance bondGovt. SecuritiesDebentureSharesMutual FundEquityPrefNSSBank DepositPost OfficeKVPNSCCompany DepositEPF/PPFLICGoldSilverPrevious objectsPainting /ArtLand / BuildingMachinery/Equipment etc vendible FINANCIAL ASSETSEquity or Preference sharesGovt/PSU/Pvt/other bondsMutual FundsShares (Equity and Preference Share) If you have equity shares of a company, you have an self-will station in that company. This essentially means that you have a residual interest in income and wealth of the company. Equity shares are classified into the following bighearted categories Blue chip sharesGrowth sharesIncome sharesCyclical sharesSpeculative sharesBonds Bonds or debentures fight long-term debt instruments where issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified into the following categories giving medication securities.Savings bondsGov ernment agency securities.PSU bondsDebentures of private sector companiesPreference shares capital Market Instruments- Money market instruments are debt instruments which have a maturity of less than one year at the time of issue. The important money market instruments areTreasury bills commercialised paperCertificates of depositMutual FundsA Mutual Fund is a trust that collects the savings of a identification number of investors, and invest in capital market instruments such as shares, debentures and other securities who share a common financial goal. Unit holders share the income earned through these investments and the capital wait in pro deal out to the number of units owned by them. Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low follow and thus is the most suitable investment for the common man.NON-MARKETABLE FINANCIAL ASSETSA good portion of financial assets is represented by non-marketable fin ancial assets. These can be classified into the following broad categories.Bank depositsPost world power depositsCompany deposits thrifty fund deposits/EPFLICNSCNSSKVPLife Insurance Life insurance can also be considered as an investment as insurance premiums represent the sacrifice, and the assured sum represents the win. The important types of insurance policies in India are Endowment assurance policyMoney back policy undivided life policyTerm assurance policyREAL ESTATES AND OTHERSReal Estate Residential house is the most important asset in the portfolio for the bulk of the investors. More affluent investors are likely to be provoke in the following types of real estate, in addition to a residential house Agricultural landSemi urban landCommercial propertyPrecious Object Precious objects are items that are extremely valuable in monetary basis. Some important precious objects are Gold and silverPrecious stonesArt objectsFinancial Derivatives A financial derivative is an instr ument whose value is derived, from the value of an underlying asset be it a real asset, such as gold wheat or oil, or a financial asset, such as a stock, stock index, bond or foreign currency.Forwards ContractsA forward promise, as it occurs in both forward and futures markets, always involves a contract initiated at one timePerformance in accordance with the terms of the contract occurs at one timePerformance in accordance with the terms of the contract occurs at a subsequent time.Further, the type of forward spotting to be considered here always involves an exchange of one asset for other and the price at which the exchange occurs is set at the time of the former contracting. Actual payment and carry throughy of the good occur afterwards.Futures ContractsA futures contract is broad(prenominal)ly standardized forward contract with closely undertake contract terms and it calls for the exchange of some good at a future regard for cash, with the payment for the good to occur a t that future date like all forward contracts. The buyer of a futures contract undertakes to receive deli very(prenominal) of the good and pay for it while the seller of a futures promises to deliver the good and take delivery of payment. The price of the good is determined at the initial time of contracting.OptionOption contracts grant the right only when not the compulsion to buy in the case of a call or sell, in the case of a put a specified quantity of an asset at a predetermined price on or before a specified future date option contract would expire if it is not in the best interest of the option owner to exercise.SwapsSwaps normally trade in the OTC market but there is monitoring of this market segment. Swaps are agreement between two parties to exchange cash flows in the future according to a sanctioned formula and In case of popular interest rate swap, one party agrees to pay a series of set cash flows in exchange for a sequence of variable cost.When compared to global deri vatives markets Indian derivative markets are still in the emerging stage. Indian derivatives markets share in the world derivatives markets value and volumes are very microscopical. But with the starting of trading in different financial and commodities segment, Indian markets are growing very fast. Indian markets are operating with postgraduate power and on parity with international standards.The major exchanges and the derivative products traded in India1. Bombay Stock veer (BSE)2. National Stock Exchange OF India Ltd (NSE)3. National Commodity Derivatives Exchange Limited (NCDEX)4. Multi Commodity Exchange of India Ltd (MCX)5. National Multi Commodity Exchange of India Ltd (NMCE)INVESTMENT ATTRIBUTESFor evaluating an investment values, the following attributes are relevant.Rate of returnRisk safeProfitabilityPurchasing power riskMaturityMarketability tax revenue tax shelterConvenienceRate of way outThe rate of return on an investment for a period (which is usually a period of one year) is outlined as followsRate of return = Annual income + (Ending price origin price)Beginning priceTo illustrate, consider the following information about a real equity share.Price at the beginning of the year Rs. 80.00Dividend paid in the year Rs. 4.00Price at the end of the year Rs. 87.00The rate of return of this share is calculated as follows4.00 + (87.0-80.00)= 13.75 percent80.00YieldIn general, render isthe yearly rate of returnfor any investment and is expressed as a helping,With stocks, yield can refer to the rate of income generated froma stock in the form of regular dividends and is often represented in percentage form, calculated as the annual dividend payments divided by the stocks current share price.Investors can use yield to notice the performance of their investments andcompare it to the yield on other investments or securities. Generally, gritty risk securities offer higher expected yields as compensation for the additional risk incurred through o wnership of the security. Investors looking to make income or cash flow streams from equity investments ordinarily look for stocksthat shell out high dividend yields, in other words, stocks that give a relatively large amount of annual cash dividends for a relatively low share price.Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price ofa bond instead of its face value and represents the return an investor would expect ifhe/ shepurchased the bond and held it for a year. This measure is not an accurate reflection of the actual return thatan investorwill receive in all casesbecause bond and stockprices are continuously changing due to market factors.Capital esteem Its the rise in the market price of an asset. Capital appreciation is one of two major ways for investors to profit from an investment in a company. The other is through dividend income.RiskThe risk of investment may be classified in following waysType of RiskInternal Rate of Return RiskMarket risk pretension RiskDefault RiskBusiness RiskFinancial RiskManagement Risk liquid state RiskThe rate of return from investments like equity shares, real estate, and gold can vary rather widely. The risk of investment refers to the variability of its rate of return How much do individual outcomes deviate form the expected value? A simple measure of dispersion is the range of values, which is simply the difference between the highest and the lowest values. otherwise measures commonly used in finance are as followsrandom variable This is the mean of the squares of diversionary attacks of individual returns more or less their average valuesStandard deviationThis is the square root of varianceBeta This reflects how volatile the return from an investment is, in response to market swings.Risk = Actual Return anticipate ReturnsConditionIf, Actual Return = Expected Return = Risk fall by the wayside InvestmentIf, Actual Return or woeful Varia nce (Low Risk) high up Variance ( gamey Risk)ExpectedReturnMarketabilityAn investment is highly marketable or liquid if (a) it can be transacted quickly (b) the transaction cost is low and (c) the price change between two successive transactions is negligible. The fluidness of a market may be judged in terms of its depth, breadth, and resilience. learning refers to the existence of buy as well as sell orders around the current market price. Breadth implies the presence of such orders in potent volume. Resilience means that new orders emerge in response to price changes. Generally, equity shares of large, well established companies enjoy high marketability and equity shares of small companies in their formative years have low marketability. high up marketability is a desirable characteristic and low marketability is an undesirable one.How does one evaluate the marketability of an investment like a provident fund deposit which is non-marketable by its very nature? In such a case, the relevant questions of ask is can withdrawal methods be made or loans be taken against the deposit? such(prenominal) as investment may be regarded as highly marketable if any of the following conditions are satisfiedA substantial portion of the accumulated balance can be withdrawn without significant penaltyA loan (representing a significant portion of the accumulated balance) can be raised at a rate of interest that is only slightly higher than the rate of interest earned on the investment itself.Tax ShelterSome investments provide tax benefits others do not. Tax benefits are of the following three kinds.Initial Tax Benefit An initial tax benefit refers to the tax relief enjoyed at the time of fashioning the investment. For example, when you make a deposit in a Public Provident Fund Account, you get a tax benefit under segmentation 80 C of the Income Tax Act.Continuing Tax Benefit A continuing tax benefits represent the tax shield associated with the periodic returns form t he investment. For example, dividend income and income from certain other sources are tax exempts, upto a certain limit, in the hands of the recipient.Terminal Tax Benefits A terminal tax benefit refers to relief from taxation when an investment is realized or liquidated. For example, a withdrawal from a Public Provident Fund Account is not subordinate to tax.ConvenienceConvenience broadly refers to the ease with which the investment can be made and looked after. Put differently, the questions that we ask to judge convenience are gouge the investment be made readily?Can the investment be looked after easily?The degree of convenience associated with investments varies widely. At one end of the spectrum is the deposit in a savings bank account that can be made readily and that does not require any aid effort. At the other end of the spectrum is the purchase of a property that may involved a lot of procedural and legal hassles at the time of acquisitions and a great deal of maintena nce effort subsequently.A COMPARATIVE STATEMENT OF VARIOUS INVESTMENTS ALTERNATIVESA summary evaluation of these investment avenues in terms of key investment attributes is given in Exhibit below. It must(prenominal) be emphasized that within each investment category individual assets display some variations.Exhibit Summary Evaluation of Various Investment AvenuesReturnCurrent yieldCapital appreciationRiskMarketability / LiquidityTax shelterConvenienceEquity SharesLowHighHigh passablyly highHighHighNon convertible DebenturesHightriflingLowAveragepostal codeHighEquity SchemesLowHighHighHighHigh real highDebt SchemesModerateLowLowHighNo tax on dividendsVery highBank depositsModerate energyNegligibleHighNilVery highPublic provident fundNilModerateNilAverageSection 80 C benefitVery highResidentialModerateModerateNegligibleLowHighFairGold and SilverNilModerateAverageAverageNilAverageINVESTMENT VERSUS SPECULATIONWhile it is difficult to draw the line of distinction between investment an d speculation, it is possible to broadly distinguish the characteristics of an investor from those of a speculator as follows.InvestorSpeculatorPlanning horizonAn investor has a relatively longer readying horizon. His holding period is usually at to the lowest degree one year.A speculator has a very short planning horizon. His holding may be a few days to a few months.Risk dispositionAn investor is normally not willing to sweep up more than moderate risk. Rarely does he knowingly assume high risk.A speculator is ordinarily willing to assume high risk.Return expectation
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