1. ARBITRAGE
In arbitrage, combinations of matching deals are
struck that capitalize upon the imbalance, the
profit being the difference between the market
prices. An arbitrageur would typically buy a
particular commodity at a lower price on one
exchange and sell it on another where it fetches
them a higher price. This creates a natural hedge
and therefore the risk is low.

2. Reasons for economic and commodity
cycles and their relationship
• Economic cycles refer to the cyclicality in an
economy, as exhibited in an economic
expansion and economic contraction and are
generally divided into a
recession, trough, expansion, and peak.

3. Different reasons can be attributed to
the formation of economic cycles:
• Supply shocks due to a disturbance in production
resulting from factors including natural
disasters, climate changes, fluctuations in prices
of raw material, technological advances, etc;
• Demand variation resulting from economic
(consumption) needs including monetary easing
and exchange policy;
• Demand from the private sector, including
changes in consumer spending and preference of
private investments

4. Commodity arbitrage and spread
trading
• Step1: An investor buys a gold futures contract listed on Multi-
Commodity Exchange (MCX), a national commodity exchange that
offers investors access to various commodities. This contract is
supposed to mature in 5JUNE 2012 and is available at Rs 28000 per
10 grams.
• Step2: At the same the investor enters into a contract to sell gold in
AUGUST on the National Commodity and Derivatives
Exchange, another national commodity exchange in India. The price
in this case for a similar quantity of gold is Rs 28050, which is higher
that the amount on the MCX.
• Step 3: On JUNE 1, it is seen that the rates for the gold contracts on
both the exchanges have moved On the MCX the Gold JUNE
contract became Rs 27,900, losing Rs 100 per 10 gms. And on the
NCDEX, the price for the Gold AUGUST contract has gained by Rs
150 to become Rs 27,900
• Step 4: Now the arbitrageur will sell the contract on MCX and lose
Rs 100. At the same time he will liquidate the Gold AUGUST
contract and gain Rs150. Totally, the investor will stand to gain Rs 50
from this transaction.

5. Different strategies to trade
commodity :
• The Cash-and-Carry Arbitrage: This is the easiest form of arbitrage, where
the investor has to buy the commodity in the spot market, and sell it in
the futures market. This is largely successful in gold and silver, and is also
popular among various agricultural commodities.
• Calendar Spread: This is done between futures contracts. The investor
buys the near month contract (ex: October gold) when prices are low, and
sells in the forward month contract (December gold) when prices rise, or
sell the positions in the near months, and purchase the forward months
contracts.
• This trading is popular in gold, copper, silver, crude oil, natural
gas, chana, urad, jeera, and chilli. Spread between commodities with high
correlation: Here, examples are gold and silver, gold and crude etc.
• Inter-exchange arbitrage: This is popular among liquid commodities like
gold and silver, where the arbitrage can take place between the Indian
exchanges and the foreign exchanges, where contract specifications are
similar.
• Trading calls: Here, the trading is largely dependent on the direction of the
trade. A good mix of commodities and disciplined trading will ensure that
the investor makes money on the commodity markets.

6. CRUDE SPREAD
• US PX= $93
• INDIA PX = 5050
• USD/INR= 54.60
• SO, US PX* USD/INR – INDIA PX = SPREAD
• 93*54.60-5050=27.8
• WE BUY 10LOTS IN INDIA(MCX) AND SELL 1
LOT IN US (NYMEX) TO MAKE A SPREAD.

7. NYMEX CONTRACT DESCRIPTION
• Light Sweet Crude Oil (Physical) futures are an
outright crude oil contract between a buyer and
seller. The contracts also serve as a key
international pricing benchmark, and:
• Offer excellent liquidity and price transparency
• Provide the world's most liquid forum for crude
oil trading
• Are the world's largest-volume futures contract
on a physical commodity
• Serve the diverse needs of the physical market

8. Things to know:
• Unit of trading is 1,000 barrels
• Delivery point is Cushing, Oklahoma, which is also
accessible to the international spot markets via
pipelines
• Delivery provided for several grades of domestic
and internationally traded foreign crudes
• Six types of options: American style, calendar
spread, crack spreads, average price, European
style and daily

9. Choice of Options
Six different option types are
available for light sweet crude oil:
American, European, calendar
spread, crack spread, average price
and daily

10. Options
• . American options are different from European style options in that
they can be exercised at any time, while the latter can only be
exercised at expiration
• Calendar spreads for light sweet crude involve two "legs" that expire
on different dates: in a calendar spread call option, the spread option
allows you to take a long position on (buy) the first expiring light sweet
crude futures and take a short position in the second expiring light
sweet crude futures in the spread
• Crack spreads refer to a spread specific to the oil industry where the
purchase of crude futures is offset by selling the refined products of
crude, such as gasoline; this allows refiners to hedge against price
fluctuations
• Average Priced Options are over–the-counter (OTC) contracts with a
payoff based on the average price of the underlying asset over a
specified amount of time. The time frame, in which the average price is
derived, is determined when the options contract is created. For
example, settlement values are derived from the difference between
the strike price and the average price of the underlying asset on the
selected dates over the life of the options contract.

11. ADR
• An American depositary receipt (ADR) is a negotiable
security that represents the underlying securities of a non-
US company that trades in the US financial markets.
Individual shares of the securities of the foreign company
represented by an ADR are called American depositary
shares (ADSs).
• The stock of many non-US companies trades on US stock
exchanges through the use of ADRs. ADRs are
denominated, and pay dividends, in US dollars, and may be
traded like shares of stock of US-domiciled companies.
• The first ADR was introduced by J.P. Morgan in 1927 for the
British retailer Selfridges. There are currently four major
commercial banks that provide depositary bank services:
BNY Mellon, J.P. Morgan, Citi, and Deutsche Bank.

12. GDR
• A global depository receipt or global depositary
receipt (GDR) is a certificate issued by a depository
bank, which purchases shares of foreign companies
and deposits it on the account. GDRs represent
ownership of an underlying number of shares.
• Global depository receipts facilitate trade of
shares, and are commonly used to invest in companies
from developing or emerging markets.
• Prices of global depositary receipt are often close to
values of related shares, but they are traded and
settled independently of the underlying share.

13. HOW TO CALCULATE PREMIUMS AND
DISCOUNT
• FAIR PRICE = (LOCAL PX*RATIO)/CURRENCY
• PREMIUM/DISCOUNT = (FAIR PX/ADR PX)-1
• E.G. , LETS ASSUME THAT CHL , I.E.941 HKG CLOSED @77.75 IN THE LOCAL MKT
(HONGKONG) AND HKG DOLLAR IS TRADING @ 7.7671
AND THE ADR(US) PX FOR CHL IS 48.57
• SO, THE FAIR PX BECOMES 50.0508
AND THE DISCOUNT IS (50.0508/48.57)-1 = 3%
• THIS MEANS THAT THE ADR PX IS TRADING @ 3% DISCOUNT FROM THE LOCAL
MKT PX AND HENCE WE WILL BUY CHL IN US MKT.
• SIMILARLY WE WILL SEE ALL THE STOCKS AND TRADE THEM AS PER THEIR
PREMIUM OR DISCOUNT.
• WE BUY THE STOCKS TRADING AT DISCOUNT AND SELL THE STOCKS TRADING AT
PREMIUM

14. DIFFERENT LEVELS TO INITIATE A
TRADE
• AGGRESSIVE- WHEN MARKETS ARE NOT MOVING MUCH AND IN A
PARTICULAR RANGE WE TRADE ON THESE LEVELS
• FUNDAMENTAL- WHEN THERE IS GOOD MOVE IN THE MARKETS
AND STOCKS COME TO THERE FUNDAMENTAL LEVELS
• PASSIVE – WE MARKETS OR INDIVIDUAL STOCKS MOVE
TREMENDOUSLY DUE TO HIGH VOLATILITY OR SOME MAJOR
NEWS WE TRADE AT THESE LEVELS.
• THESE LEVELS ARE CALCULATED USING VARIOUS COMPLEX
CALCULATIONS WHICH INCLUDE IMPLIED VOLATILTY, STANDARD
DEVIATIONS, PROBABILITY AND STOCKS MOVEMENT FOR A
PARTICULAR PERIOD .

15. Major Factors That Affect Stock Price
in stock market globally
• Demand AND SUPPLY
One of the major factors affecting stock price is demand and supply. The trend of the stock market trading
directly affects the price. When people are buying more stocks, then the price of that particular stock
increases. On the other hand if people are selling more stocks, then the price of that stock falls. So, you
should be very careful when you decide to invest in the stock market.
• Market Cap
Never try to guess the worth of a company simply by comparing the price of the stock. You should always
keep in mind that it is not the stock but the market capitalization of the company that determines the
worth of the company. So market cap is another factor that affects stock price.
• News
When you get positive news about a company then it can increase the buying interest in the market. On
the other hand, when there is a negative press release, it can ruin the prospect of a stock. In this case you
should remember that news should not matter much but the overall performance of the company matters
more. So, news is another factor affecting stock price.
• Earning/Price Ratio
Another important factor affecting stock price is the earning/price ratio. This gives you a fair idea of a
company’s share price when it is compared to its earnings. The stock becomes undervalued if the price of
the share is much lower than the earnings of a company. But if this is the case, then it has the potential to
rise in the near future. The stock becomes overvalued if the price is much higher than the actual earning.