Article
ISSN: 2348-3784
Emerging Commodity Exchanges in
Globalized Economy
S. RajamohanandG. Hudson Arul Vethamanikam
Digital Object Identifier: 10.23837/tbr/2017/v5/n1/149496
Abstract
This research paper focuses on future trading of gold performance in MCX and discusses the evolution and
performances of commodity market.
Keywords:Commodity,Commodity markets,Emerging commodityexchange,Demand ofGold
1.
Introduction
A fall in the value of a currency is predictable from movements of gold price. Commodity prices are also
compared with that of gold prices. Gold price started increasing in 2011 and in 2013 it grew by another
15 percent. Ranson (2005) found that global commodity prices also respond to economic growth in the
short run. But these price changes are infrequently sustained over the time. Demand and supply,
existing inventories are not able to explicate the long-run behavior of prices in the commodity. Over the
long term, commodity prices are part of a general movement in the prices of tangible assets including
commercial real estate, precious metals and collectibles. All these prices are driven predominantly by
the changing values of the US. There is a common faith that the price of commodities tends to move in
unity. They are influenced by common macroeconomic factors such as Oil and gold price, inflation and
exchange rates, interest rate and so on. These are the two strategic commodities which have received
much attention in recent. Crude oil is the world’s most commonly traded commodity and its price is the
most volatile in the commodity market. Gold is considered as a leader in the bullion market of precious
metals as increases. It is price seem to lead to parallel movements in the price of other precious metals
onthecommoditymarket (Hammoudeh,2008).
Soytas (2009) in his research paper concentrated on the gold performance of commodity markets in
national as well as international commodity markets. According to his study, gold is also an investment
of assets and commonly known as a “safe haven” to avoid the increasing risk in financial markets. Using
gold is one of risk management tools in hedging and diversifying commodity portfolios. Investors are
investing the money in both advanced and emerging markets often switch between oil and gold to
diversifytheir portfolios.
2. ReviewofLiterature
Lakshmi, Visalakshmi and Padmavathy (2017) has explored the nexus between spot returns and futures
contracts for crude oil and gold. The study examines whether future trading volume react faster to news
and help to predict in spot returns. The researcher founded the effect in the Indian context using data
from the Multi Commodity Exchange (MCX) of India from January 2005 to May 2012. The Vector
Autoregressive
model
(VAR),
Granger
causality
Wald
test,
variance
decomposition
and
impulse
response function are applied to the data collected. The results exhibited that for both crude oil and gold
Dr. S. Rajamohan, Professor, Alagappa Institute of Management, Alagappa University, Karaikudi, Tamilnadu, India.
Email: srajamohan1988@gmail.com, Phone: +91 9994590559
(Corresponding Author)
G.
Hudson
Arul
Vethamanikam,
UGC-MANF-senior
research
fellow,
Alagappa
Institute
of
Management,
Alagappa University, Tamilnadu, India Email: g.hudson55@gmail.com, Phone: +91 9787969692
2
Emerging Commodity Exchanges in Globalized Economy
is influenced by its own past than the past spot returns. Further, bidirectional causality runs from gold
spot returns to gold futures trading volume. Contrarily, we do not have sufficient evidence to support
that crude futures trading volume aid in the forecast of crude spot returns in India. Overall, the finding
implies that gold futures trading volume react faster to information and help to predict the gold spot
returns thancrude oilinthe Indiancommodity markets.
Bansal and Kaur (2017) denoted that global commodity markets have gone through a long journey. In
India, the emergence and augmentation of the organized commodity derivative market is relatively a
recent phenomenon. Since its inception in June 2000, derivative exchanges have exhibited exponential
growth in terms of volume and value of trade. The setting up of the three exchanges was the turning
point in the history of commodity market of India. Hence, the study is undertaken to analyze the trends
and progress of the national commodity exchanges of India and comparing the value of the trade of the
selected non-agricultural commodities. Data for the commodities under study covers period from the
year 2004-2005 till the year 2014-2015. The study is based on the secondary data related to exchanges
suchasMCX,NCDEXandNMCE.
Dhole (2014) investigated that the antiquity of a commodity futures market in India epoch back to the
ancient times cited in Kautialya’s Arthasastra. It has been commodity heard in Indian markets for
centuries, seems to be coined in 320 BC, referred in Forward Contracts (Regulation) Act, 1952. They
found the markets have made enormous advancement in terms of technology, transparency and the
trading activity. It has happened after the Government protection was removed from a number of
commodities and market forces were allowed to play their role. Rational Government policies and the
plinth of effective laws have benefited in many ways like credit accessibility, improved product quality,
predictable pricing, Import-export competitiveness,and price risk managementand price discovery.
3.
Objectives of theStudy
The investor’s revenue based invests the money due to commodities for framing the valuables
objectives suchasgiven below.
1.
Toanalysisfuture trading of goldperformanceinMCX.
2.
To evaluatetheperformanceand demand of commoditiesmarketsinthe worldwide.
3.
Tomeasurethedispersionanddescriptiveanalysisofcommodity marketsin world wide.
4.
Commodity Markets/Exchanges
A commodities exchange is an exchange where various commodities and derivatives products are
traded. Most commodity markets across the world trade in agricultural products and other raw
materials such as barley, wheat, sugar, maize, coffee, cotton, cocoa, pork bellies, milk products, oil,
metals, and so on and contracts based on them. These contracts can include spot, forwards, futures and
options on futures. Other sophisticated products may include interest rates, environmental instruments
andswaps.
Commodity exchanges usually trade futures contracts on commodities such as trading contracts to
receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his
corn. It will not be harvested for several months and guarantee the price. It protects the farmer from
price drops and the buyer from price rises. Speculators and investors also buy and sell the futures
contracts in an attempt to make a profit and provide liquidity to the system. However, due to the
financial leverage provided to traders by the exchange, commodity futures traders face a substantial
risk.
TSM Business Review, Vol. 5, No. 1, June 2017
Emerging Commodity Exchanges in Globalized Economy
3
Chicago Board of Trade (CBOT) is established in 1848, ranked as one of the oldest futures/options
trading exchange in the world. The exchange offers more than 50 different futures and option contracts
for investors stretching across a number of asset classes. As of 2007, the CBOT operates as a subsidiary
oftheCME group.
New York Mercantile Exchange (NYMEX) is the world’s largest physical commodity futures exchange,
offering exposure to a wide variety of products. The commodity exchange (COMEX) also operates as a
division of the NYMEX and is best known for offering exposure to various metals contracts. The two
divisions joined in later of 2006,and wereacquired bytheCME group in theyearof 2008.
London Metal Exchange (LME) is a major exchange that offers exposure to futures and options of a wide
variety of base metals and other commodity products. Some of the metals traded includes such as
aluminum, copper, tin, nickel, zinc, and lead. Though founded in 1877, the exchange can trace its roots
all the way back to 1571, when the royal exchange in London was opened with only trading copper at
thattime.
The Intercontinental Exchange (ICE) is a U.S. based company that operates futures and over-the-counter
contracts via internet marketplaces. The company was originally focused on energy contracts, but has
widened its scope by offering exposure to a number of commodities, including cocoa, cotton, sugar, iron
ore, natural gas and crude products. The platform is much more focused on just a select few
commoditiesand maybeagoodfitfortraderslookingto single out justone or twocommodities.
Multi Commodity Exchange (MCX) is a private commodity exchange located in Mumbai, India. The
company was founded in 2003 and ranks as one of the top 10 commodity exchanges in the world.
Traders can gain access to a number of the usual suspects like gold and silver. But also have the option
to trade a number of commodities focused on the Indian economy like pepper, cashew kernel, and
yellow peasand soon.
5.
ThePerformance ofCommodity Market inGlobal Market
Chicago
Mercantile
Exchange
(CME)
is
a
financial
and
commodity
derivatives
trading
platform
headquartered in Chicago. Originally founded in 1898 as the Chicago Butter and Egg Board, it has one of
the largest options and future line-up of any exchange in the world. The CME offers contracts of all
kinds, including agriculture, credit, economic events, equity index, Foreign Exchange, interest rates and
otherfutures/optionsinvestments.TheCME isownedandoperatedunder the CME Group.
Africa’s most active and vital commodity exchange is the South African Futures Exchange (SAFEX). It
was informally launched in 1987 and has evolved into one of the leading emerging markets. The
Johannesburg Securities Exchange acquired it. SAFEX only traded financial futures and gold futures for a
long time, but the creation of the Agricultural Markets Division (as of 2002, the Agricultural Derivatives
Division) led to the introduction of a range of agricultural futures contracts for commodities. Trade was
liberalized such as white, yellow maize, bread milling wheat and sunflower seeds. SAFEX traded 30
millionfuturesand option contractsin2001, makingitthe world’s14th largest exchange.
Mergers were also the result of regulatory pressure. This was the case, for illustration, in Japan and
particularly, China. In Japan, several exchange mergers took place, from 17 exchanges in September
1993, the number went to 8 in 1997. In the United Kingdom, LIFFE merged with the London Commodity
Exchange in September 1996 and now trades a range of soft commodity and agricultural contracts,
including futures and options on cocoa, robusta coffee, white sugar, grain and potatoes. In the United
States, NYMEX, the world’s premier energy futures exchange, merged in 1994 with COMEX, which
TSM Business Review, Vol. 5, No. 1, June 2017