...differentiate commodity futures from stocks, bonds and other conventional assets. The article also explains in details the mechanics of investment in commodity futures and providing data on its historical returns in comparisons with other assets classes. The articles also elaborated the effects of inflation to commodity futures. Citation Gary Gorton & K. Geert Rouwenhorst (June 2000). Facts and Fantasies About Commodity Futures retrieved from: http://www.nber.org/papers/w10595 Introduction This review critically reviews the article ‘Facts and Fantasies About Commodity Futures which was retrieved from http://www.nber.org/papers/w10595. The review will firstly summarize the article. Secondly, it will briefly analyze the effectiveness of the article’s structure, investigating how the information is set out and whether the reader can access it efficiently. Thirdly, the review will critique the article, evaluating its accuracy, currency, relevance, objectivity and stability. The review will also judge the article’s accessibility and credibility. Overall the article was well written, clear and relevant. Brief Summary This articles was written to study simple properties of commodity futures as an asset class. Apart from explaining the mechanics of investment in commodity futures, the article explained the degree of relationship between spot and futures in term of return and risk. The article also elaborated in detail the different behavior between commodity futures...
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...POLICY RESEARCH WORKING PAPER 1667 Dealing with Commodity Price Uncertainty Plantos Varangis Dont Larson Market liberalization has increased the appeal of commodity derivative instruments (such as futures, options, swaps, and commodity-linked notes)as a means of managing price uncertainty. many In emerging countries both government and the private sector are increasinglyusing these instruments. The World Bank International Economics Department Commodity Policy and Analysis Unit October 1996 POLICYRESEARCH WORKINGPAPER1667 Summary findings Liberalization in commodity markets has brought profound changes in the way price risks are allocated and managed in commodity subsectors. Price risks are increasingly allocated to private traders and farmers rather than absorbed by the government. The success of market reform depends on the ability of the emerging private sector to make full use of the available range of modern commodity marketing, price risk management (such as futures, options, swaps, commodity bonds, and so on), and financing instruments. Because farmers do not generally have direct access to these instruments, interinediaries must be developed. Larger private traders and banks are in the best position to become these intermediaries. Preconditions needed for accessing modern commodity marketing, price risk management, and financing instruments are: * Creating an appropriate legal, regulatory, and institutional framework. * Reducing government...
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...India, a country with a population of over one billion, has an economy based on agriculture, precious metals and base metals. Thus, trading in commodities provides lucrative market opportunities for a wider section of participants of diverse interests like investors, arbitragers, hedgers, traders, manufacturers, planters, exporters and importers. But surprisingly it has an under developed commodity market. The commodity market in India is in very nascent stage of growth. It taps only .4% of the markets. Hence shows huge scope of growth in future. This projects aims to throw light upon into this potential market. To brief about the evolution of commodity markets there is a look into the past giving the overview of the commodity market in India. Various commodities exchanges MCX AND NCDEX work for developing commodity market in India. Major reforms have been initiated in commodity futures markets in India in the last few years along with the analysis about the present scenario of commodity market in India. These efficient risk management tools insulate buyers and sellers from unexpected changes in future price movements. Understanding role the participants of future markets - hedgers, speculators and arbitragers. The second phase of the project deals with the Energy sector of the commodity exchange viz. Crude oil and its determinants in particular for in depth analysis. It includes fundamental analysis for crude oil. How the behavior of crude oil price has significant impacts...
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...Commodity Exchange Market in Bangladesh Prepared by Kamal Uddin Department of Banking &Insurance Faculty of Business Studies, University of Dhaka Outline Rationale Define Commodity & Commodity Exchange Market How Commodity Exchange Market Works? Necessity of Commodity Exchange Market in our Economy Requirement for a Commodity Exchange Market What Bangladesh Doing? Recommendation Rationale: Price Volatility in Our Economy Reason Behind Price Volatility • Intermediaries between producers & end-consumers. • Syndication. • Absence of a proper market system. To remove this barrier a proper market system is required where buyer and seller will have the regular & updated information of market, they will have direct access to market for buying and selling their desired products. This can be done by establishing a Commodity Exchange Market Define Commodity and Commodity Exchange • A Commodity is a product which has a commercial value. It can be produced, bought, sold and consumed. • A commodities exchange is an exchange, just like any Stock Exchange where various commodities and derivatives products are traded. Most Commodity Exchanges across the world trade in agricultural products and other raw materials • To be traded on an Exchange must meet certain specification regarding self life, quality standard, demand and supply and some more. Functionalities Spot or Cash • Direct buy and sales • Usually for immediate consumption • Immediate delivery &...
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...25% | Construction | 25% | Packaging | 17% | Electrical | 12% | Machinery & equipment | 10% | Consumer durables | 6% | Other | 6% | Every metal traded on the LME must conform to strict specifications regarding quality, lot size and shape. Each LME tradeable contract is likewise governed by rules covering (but not limited to) prompt dates, settlement terms, traded and cleared currencies and minimum tick size. Contract specifications Law / Regulation English Law, with regulation by the LME and the Financial Conduct Authority (FCA). This is a summary of the contract specifications. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from foreign futures and options customers from trading on the LME. * Physical Quality | Primary aluminium with impurities no greater than...
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...Commodity Derivatives Market in India: Development, Regulation and Future Prospects Introduction The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually nonexistent, except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well, seems to be set to touch $5 Trillion in a few years. Chequred History The history of organized commodity derivatives in India goes back to the nineteenth century when the Cotton Trade Association started futures trading in 1875, barely about a decade after the commodity derivatives started in Chicago. Over time the derivatives market developed in several other commodities in India. Following cotton, derivatives trading started in oilseeds in Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in Bullion in Bombay (1920). However, many feared that derivatives fuelled unnecessary speculation in essential commodities, and were detrimental to the healthy functioning of the markets for the underlying commodities...
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...The Indian commodity futures volumes have grown 5.5 times from Rs.20.53 trillion in 2005-06 to Rs.112.52 trillion in 2010-11. Currently, the average monthly volume on the Indian commodity exchanges is Rs.6 trillion. MCX leads the industry, followed by NCDEX. MCX is not only number one in India but has achieved some global milestones too. It was the largest exchange in silver (in terms of number of futures contracts traded in 2010), number two in gold, copper and natural gas and number three in crude oil. When we say India is the largest exchange in silver, it is a great achievement for the Multi Commodity Exchange. Talking about agricultural commodities, the Indian commodities market has futures contracts of commodities such as black pepper, cumin seed, mentha oil and many more which are internationally traded but only listed in India; internationally traders tend to consider these as benchmark rates. Though it is at a nascent stage, the volumes in the Indian commodities market have a different story to tell. From Rs.20 trillion, the volumes have reached Rs.112.52 trillion in FY10-11. When we see this kind of a spurt in volumes, we must remember that it has primarily been a futures market, without Options. Foreign institutional investors, domestic institutions, banks and insurance companies are not allowed to trade on the Indian commodity bourses and a majority of volumes come from jobbers, arbitrageurs, retail traders and small scale enterprises and corporates (for hedging)...
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...Why commodity markets were started The first recorded instance of futures trading occurred with rice in 17th Century Japan. There is some evidence that there may also have been rice futures traded in China as long as 6,000 years ago. Futures’ trading is a natural outgrowth of the problems of maintaining a year-round supply of seasonal products like agricultural crops. In Japan, merchants stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as "rice tickets." Eventually, such rice tickets became accepted as a kind of general commercial currency. Rules came into being to standardize the trading in rice tickets. These rules were similar to the current rules of American futures trading. In the United States, futures trading started in the grain markets in the middle of the 19th Century. The Chicago Board of Trade was established in 1848. In the 1870s and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Today there are ten commodity exchanges in the United States. The largest are the Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, France, Singapore, Japan, Australia and New Zealand. The products traded range from agricultural staples like Corn and...
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...Chapter – I INTRODUCTION 1.Introduction of Project Work : Why Commodity Futures? ADVANTAGES OF FUTURES MARKET TO ITS VARIOUS PARTICIPANTS Stockiest / Jewelers / Farmers | | Traders, Jobbers & Arbitragers | * Can hedge their underlying * Get an extensive market * Can get loan against Warehouse Receipts | | Trading Opportunity | Investment Opportunity | Corporates | | Additional Advantage | * Can hedge by offsetting product exposure * Can hedge by parking only margin amount * Can buy goods without agents with Quality Assurance | | Spread Trading Opportunity | Arbitrage Opportunity | TABLE-1.1 Why Indian Commodity Exchange? India is essentially a commodity based economy constituting of Agriculture, Energy, Precious Metals and Base Metals. Couple of unique features / advantage seen in our exchanges, which is not seen elsewhere, are: 1. Timings: Our Trade timings are well matched with Global Market timings. 2. Number of commodities: Nowhere in the world more than 8 to 10 commodities are traded in a single exchange, but our exchanges are successfully managing over 40 commodities individually. Why Sharekhan? Superior & Consistant Research Performance of…. 1. Cutting Edge Analysis of Major Commodities 2. Relevent Analysis of Market News & Information 3. Sound Technical Analysis for Short Term Trends 4. Special Reports such as… * Hedge Solutions: To offset Product Exposure...
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...“N” Day Breakout Model on Commodity Market: An Empirical Investigation Zhenyi Yang 12/12/2012 1. Introduction There are various strategies to make profits on the commodity markets. The “N” day breakout model is one of the easiest model. However, it is a very effective model and used by many traders. The article uses the “N” day breakout model, combined with the “fixed fractional” risk management scheme, to study the return of the commodity market. The article also compares the different outcomes with different data manipulation method and the potential reasons behind the difference. 2. The “N” Day Break Out Model The N day break out model utilizes the method that the futures are longed at N day high and shorted at M day low. The rational explanation of the method is that the futures usually continue to rise after a breakout its long-term high. Also, the futures continue to fall after it breaks its short-term low. To simplify the problem, in this article, it chooses the 100 day high as the buying point and the 10 day low as the selling point. The period of study ranges from Dec 2002 to Dec 2012. Moreover, the article also studies the maximum profit one million account balance would make with this strategy with each commodity does not exceed 1% risk. 3. Data Manipulation Because the commodity future expires after one or two years, for a longer period time, the charts of different futures contracts needs to be connected. Some methods are continuous, which...
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...FAO COMMODITY AND TRADE POLICY RESEARCH WORKING PAPER No.22 Threshold cointegration in the sugarethanol-oil price system in Brazil: evidence from nonlinear vector error correction models George Rapsomanikis and David Hallam1 Commodities and Trade Division Food and Agriculture Organization of the United Nations September 2006 1 The authors are Economist and Chief in the Trade Policy Service, Commodities and Trade Division. FAO Commodity and Trade Policy Research Working Papers are published by the Commodities and Trade Division of the Food and Agriculture Organization of the United Nations (FAO). They are working documents and do not reflect the opinion of FAO or its member governments. Also available at http://www.fao.org/es/ESC/ Additional copies of this working paper can be obtained from Olwen.Gotts@fao.org The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes are authorized without any prior written permission from the copyright holders provided the source is fully acknowledged. Reproduction...
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...Autarky: the equilibrium or maximizes its welfare when it produces and consumes has only one point in the absence of trade. Commodity or net barter terms of trade: The ratio between the prices of exports and imports is called the net barter terms of trade or as Viner puts it, "the commodity terms of trade." To express this symbolically: Community indifference curve: the various combination of two commodities that yield equal satisfaction to the community or nation Deindustrialization: The process of social and economic change which is due to the reduction in industrial capacity or the activities of a country's manufacturing and heavy industry. Equilibrium-relative commodity price in isolation: it is given by the slope of the tangent common to the nation`s production frontier and indifference curve at the autarky point of production and consumption. Equilibrium-relative commodity price with trade: is the common relative price in both nations at which trade is balanced General equilibrium model: the deals with only two nations, two commodities and two factors Incomplete specialization: Production of goods that compete with imports. Increasing opportunity costs: that the nation must give up more and more of one commodity to release just enough resources to produce each additional unit of another commodity Law of reciprocal demand: it explains how the barter rate, of exchange is determined between the two nations. Marginal rate of substitution (MRS): it is of x for y...
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...become big business. Some would argue that the commodification of information has led to a lack of security of personal information and others would argue that the commodification of information is necessary for us to continue growing as a society. This essay will discuss the meaning of information commodification and try to make sense from a utilitarian viewpoint as to whether this is a positive move in the right direction or if this move will cause more adverse effects in the long run. A commodity is a marketable item that is produced to satisfy wants or needs and specifically describes a class of goods that is supplied without qualitative differentiation across a market. Commodification is the transformation of goods and services as well as ideas or entities that normally may not be considered goods, into a commodity. Information refers to answers to questions from which knowledge and data can be derived and information requires a cognitive observer (Wikipedia). So information as a commodity is a gathering of usable data or information that has been transformed into a good that is sold in a market, and that is used to help consumers of the information make informed decisions. Those in the business sector do not like commodification due to the fact that it reduces profitability. Businesses pursue “branding” strategies and look for power and influence in...
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...this will be an important sector * (F) Technology Sector: Being a technology company, innovation and production techniques are important. Ravi’s personal rank order is : 1. Techniques of production, computers, IT, science, e-commerce (The Technology sector) 2. Customers, clients, potential users of products and services (The Market sector) 3. Competitors, industry size and competitiveness, related industries (The Industry sector). Technology Sector : Trends are - SDN (Software Defined Networking), commoditization of hardware (switches and routers), maturing market of networking, Virtualization and Cloud based services. Techniques of producing software – Agile versus Waterfall. Techniques of producing hardware – Commodity silicon versus custom ASICs. Outsourcing and off-shoring trend : New cutting edge design and development in US (Art). Work that is easily replicable or that can be scripted (Science), is given to cheaper Asian nations. Customers : Enterprise, Service Providers. New trend among Cisco’s clients : they are graduating to be consumers of IT services; there is a need for end to end architecture rather than specific point solutions. Related industries : IBM moved to services when faced with similar commoditization. Competitiors : Huawei commoditizing routers and switches, Riverbed, Juniper, HP. Dell, HP facing similar commoditization challenges. Next slide : The 2*2 matrix of Envt Complexity versus Stability . Position of Cisco is...
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...scarce. He does not deny that in its early stages of development, when IT resources were scare or rare, it was a strategic resource that companies could use to gain a competitive advantage. Carr goes on to explain that IT has become more affordable and thus is available for all companies to use. He claims that this makes IT less of a strategic resource and more a commodity. He compares IT’s transition from resource to commodity to that of the development of railway systems and electrical power. He references the fact that these now common commodities were once strategic resources that were used by companies to gain competitive advantages in the late 1800’s and early 1900’s. Carr goes on to explain that no companies base their business strategy on using electrical power and thus business now should transition away from basing strategy on IT. Carr continues with his argument that IT doesn’t matter by describing how the biggest risk with IT is overspending on unnecessary resources, creating a cost disadvantage. Carr outlines three key philosophies that companies should employ to properly manage IT as a commodity rather than a strategic resource. First, companies should reduce IT spending by differentiating necessary and unnecessary expenditures and acting only on those that are necessary. Second, companies should not operate on the leading edge of technology. Rather, they should hang back and invest in resources that are proven out....
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