International Financial Management (FIN444)
Section – 04 | Summer 2023
Assignment 2
Submitted to:
Mirza M. Ferdous (MzF)
Senior Lecturer
Department of Accounting & Finance
Submitted by:
Name ID
Abu Nazam Md Uzayer 1912011630
Amir Hossain 2012644030
Sadman Bin Ibrahim 2021776030
Ahsan Habib 2031297630
Contents
Overview of Commodities Trading Platform ............................................................................................... 3
Commodities Trading Platform in South East Asia ...................................................................................... 4
Introduction of Derivatives Market by Bashundhara Group: ....................................................................... 5
Benefits of Commodities Trading Platform .................................................................................................. 6
Challenges of Commodities Trading Platform ............................................................................................. 7
Conclusion .................................................................................................................................................... 8
Reference: ..................................................................................................................................................... 9
Overview of Commodities Trading Platform
Derivatives started with the most basic commodity in the world which is the agricultural
commodity. Even today if a derivative market starts in any country it starts with commodities,
particularly agricultural commodities. Bangladesh is on the verge of a derivative market.
Bashundhara Group has acquired 25% of the Chittagong Stock Exchange so that they can establish
a commodities trading platform.
The concept of a derivative market started in the 19th century when farmers used to gather in major
city centers of a country at least once a year to sell whatever agricultural goods they produced and
they used to buy raw materials that were required for production in the upcoming year such as
fertilizers, seeds, etc. Like this farmer used to gather in New York every year from all parts of the
USA and sell their production and the money they used to make, with that they used to buy raw
materials for next year's production. After a few years, another demographic came into this market
who were neither producers nor major consumers, they used to come into the market to see whether
there was any arbitrage opportunity on which they could capitalize. This demographic was known
as the first speculator. The first speculator observed that there is a third factor that is if a commodity
price is high in a particular year, the next year the price of that commodity decreases. People used
to produce that commodity in high amounts hoping to make more profit in the upcoming year but
due to excess supply, the price decreased in the following year. But the farmers faced uncertainties
because they were not this observant, so the speculators approached the farmers with their
speculations, and offered to sell them contracts. The contract was whatever the price will be of a
commodity next year, when the market will start the speculators will buy a specific amount of
commodity at a specific rate. No matter what price the farmer gets from the market. The benefits
for the farmer are that they can minimize the risk regarding a fall in price and the benefit of the
speculator is that the speculator knows the pattern and the rate is offered on the speculation of
price so even if the speculator is wrong they are buying many types of commodities so some will
bring loss and others will bring profit so it will be a net positive. The contract's price has to be paid
by the farmer during the settlement date. So this is how the derivative market started, a contract is
signed at time 0 with no money, and it goes all the way to time N when finally, the transaction is
made. In the derivative market, everything is purchased and sold through contracts.
Commodities Trading Platform in South East Asia
There are many successful commodity trading platforms in South East Asia. Some of them are
MCX, SMX, VME
The Multi Commodity Exchange of India (MCX): MXC was established in 2003, and It is
maintained under the direction of the Exchange Board of India (SEBI), MXC was established in
2003.MCX is the biggest commodity derivatives exchange in India in terms of volume. It provides
a transparent marketplace where buyers and sellers may engage, facilitating price discovery, and
offers a broad range of contracts in energy, metals, and agricultural commodities. This guarantees
competitive and equitable prices. A range of risk management instruments, including futures and
options contracts, are also provided by MCX. Farmers, producers, and consumers might utilize
these strategies as a hedge against price volatility. Furthermore, MCX draws capital from a diverse
array of stakeholders, encompassing institutional, retail, and overseas investors. This investment
supports the growth of the Indian commodities industry, creates jobs, fosters economic expansion,
and enhances the standard of living for farmers and other producers.
The Singapore Mercantile Exchange (SMX): Founded in 1994, the Singapore Mercantile
Exchange (SMX) is a worldwide commodities exchange that plays a significant role in expanding
the commodity market in Southeast Asia. The SMX, run by the Singapore Exchange (SGX), is
well-known for its effective trading systems, robust liquidity, and open pricing. It provides various
contracts in the energy, metals, and agricultural product industries. The SMX offers a platform for
price discovery and risk management, drawing in several regional players such as producers,
consumers, and traders. This helps to foster the growth of the Southeast Asian commodities
industry and accelerate economic expansion. The open market of the SMX encourages price
discovery and guarantees reasonable and competitive rates. Farmers, producers, and consumers
can utilize its risk management instruments, such as futures and options contracts, to protect
themselves from price volatility. Furthermore, the SMX draws capital from various sources,
including international, institutional, and individual investors, supporting the expansion of the
commodities industry in Southeast Asia and generating employment.
The Vietnam Mercantile Exchange (VME): The VME, established in 2009, is the largest and most
prosperous commodities exchange in Vietnam. It offers contracts in energy, metals, and
agricultural goods, including crude oil, natural gas, gold, silver, copper, zinc, lead, wheat, rice, and
soybeans. The VME has significantly influenced the growth of the Vietnamese commodities
market, providing a platform for price discovery and risk management for farmers, producers,
consumers, and investors. Institutional investors, hedgers, and individual investors from both local
and international markets have benefited from the VME's ability to draw many players. Through
three significant successes, the Vietnam Mercantile Exchange (VME) has advanced significantly
in the commodities market. First off, it has attracted a sizable number of players, which has
promoted improved trade relations and enhanced market liquidity. Second, it establishes VME as
a complete trading hub by offering a wide range of over 50 commodity contracts to meet the
demands of varied investors. Finally, investors have come to trust and believe in VME because of
its consistent dedication to fairness and transparency, made possible by an advanced trading
system. The VME is expected to grow and develop in the coming years. The Vietnamese
government is committed to supporting the development of the commodity market, and the private
sector is investing heavily
Introduction of Derivatives Market by Bashundhara Group:
Bashundhara Group is one of the largest conglomerate and manufacturing companies in
Bangladesh. The founder and chairman of this company is Ahmed Akbar Sobhan. The
conglomerate currently owns more than 50 major concerns located throughout Bangladesh. As per
the news, Bashundhara group aims to build a commodity exchange through the Chittagong Stock
Exchange (CSE).
The popularity of the derivatives market increased gradually over the years in several countries
worldwide, but Bangladesh lagged in this prospect. It is exciting news for Bangladesh that ABG
Ltd, a sister concern of the Bashundhara Group, will buy a 25% stake in the Chittagong Stock
Exchange and officially become a key strategic partner. A partnership deal was signed by the
CSE’s managing director Md Ghulam Faruque and by Sayem Sobhan who is the managing director
of ABG Ltd. As per the agreement ABG Ltd is expected to buy 25% or 15.86 crore shares at a
price of Tk.15 per share which in total is Tk.238 crore. The proposal of CSE to sell 25% of its
share to ABG Ltd. was approved by the Bangladesh Securities and Exchange Commission (BSEC)
on September 28, 2022. ABG Ltd. has already started to take initiatives to bring foreign exchange,
commodities and derivatives into the CSE. They are also collaborating with global capital market-
leading companies. ABG Ltd. claims they are in a joint venture with a USA-based organization
for the necessary technical support to manage a stock exchange. CSE chairman Asif Ibrahim says
that CSE is hopeful of launching the commodity exchange by mid-2024.
Benefits of Commodities Trading Platform
Bangladesh is a promising market for the development of commodity trading platforms. The
country's growing economy, underdeveloped financial markets, government support, growing
demand for commodities, and strategic location all provide opportunities for new entrants to the
market. There are several advantages to setting up a commodity trading platform in Bangladesh.
These include:
• Due to inflation, the rate at which the prices of goods and services increase over time. This can
destroy the purchasing power of money. By investing in commodities, investors can protect their
wealth against inflation.
• With a youthful and expanding population, Bangladesh has an economy that is expanding
quickly. This offers the commodities trading platforms access to a vast and expanding pool of
potential clients.
• The Bangladeshi government is supportive of the development of the financial markets, and it
has taken several steps to promote the growth of the commodity trading sector.
• Bangladesh is strategically located between India and China, two of the world's largest
economies. This gives commodity trading platforms in Bangladesh the potential to serve a large
regional market.
• There are currently no dedicated commodity exchanges in Bangladesh, which presents a first-
mover advantage to any company that sets up a commodity trading platform in the country.
• Bangladesh has a relatively low cost of doing business, which can help to reduce the startup costs
of the commodity trading platform.
• The Commodity platform can provide diversification benefits for investors. This is because the
prices of commodities are typically not correlated with the prices of other asset classes, such as
stocks and bonds. This means that by investing in commodities, the investors can reduce their
overall portfolio risk.
• Bangladesh has many skilled and educated workers, which can provide a valuable source of
employees for a commodity trading platform.
• The commodity trading platform can help to increase financial inclusion in Bangladesh by
providing access to financial marketplaces to a larger group of individuals.
• The commodity trading platform can generate additional tax revenue for the Bangladeshi
government.
• Finally, a commodity trading platform can help to promote economic development in Bangladesh
by facilitating trade and investment.
Overall, setting up a commodity trading platform in Bangladesh can have several positive benefits
for the country and its people.
Challenges of Commodities Trading Platform
• Bangladesh does not yet have a dedicated regulatory framework for commodity trading. This
means there is no apparent oversight of the commodity trading market, which can create risks for
investors.
• The commodity trading market in Bangladesh is relatively small and illiquid. Commodity
contracts can be challenging to purchase and sell, and the market may be unstable.
• The commodity trading market in Bangladesh lacks critical infrastructure, such as a central
clearing house and exchange-traded funds (ETFs). This can make it difficult to operate a
commodity trading platform and attract investors.
• There is a low level of awareness and participation in commodity trading among Bangladeshi
investors. This is due to several factors, including the lack of a regulatory framework, limited
market liquidity, and limited market infrastructure.
• The extreme volatility of commodity prices can make it difficult for traders to make profitable
decisions. In addition to variations in supply and demand, geopolitical and economic variables can
also cause prices to fluctuate dramatically. As a result, traders may find it difficult to control risk
and predict future prices.
• It makes profits and losses. This means that traders can make large profits with a relatively small
investment, but they also run the risk of losing a lot of money rapidly. High-leverage options carry
a higher level of risk in unstable markets where prices can swing significantly either way.
• Distance to markets, especially during rainy seasons, and the poor quality and restricted
availability of marketing services.
• The reliance of smallholder farmers on selling to intermediary traders or others below minimum
farm rate prices.
• Lastly, commodity trading is exposed to any macroeconomics where effects such as disaster or
any other factor can harm the price of commodities.
Conclusion
Derivative markets are commodities trading platforms. All derivative instruments are contracts
that give the right to buy or sell commodities in specific quantities at specific rates at specific
prices at some future point in time. There are 3 markets within the derivative market:
1) Forward market
2) Futures market
3) Options market
In these 3 markets, the same commodities can be transacted, except for the forward market which
is only for currencies. The contracts in these 3 markets are different from one another which is
why there are different derivative markets. In the forward market, currencies are exchanged using
forward contracts, also the forward market is the smallest derivative market because it is only
accessible to institutions. In the futures market commodities are traded using futures contracts and
in the options market commodities are traded using an options contract. The options market is the
largest derivative market because there is only one reason to participate in the market which is to
make speculative profit, because the contracts in the options market are very flexible. All in all, a
derivative market allows trading through derivative contracts which helps to hedge against the
future movement in prices of commodities and also allows it to make speculative profit.
Reference:
We strive to build a reliable and sustainable capital market.” (2022, November 1).
Www.kalerkantho.com. https://www.kalerkantho.com/english/online/share-
market/2022/11/30/43320
“Bashundhara offshoot becomes CSE's strategic partner”. (2023, November 4).
www.dhakatribune.com. https://www.dhakatribune.com/business/stock/279354/bashundhara-
offshoot-becomes-cse-s-strategic
CSE given green light to sell 25% stake to Bashundhara’s ABG. (2022, September 28). The
Business Standard. https://www.tbsnews.net/economy/stocks/bashundharas-abg-ltd-becomes-
strategic-partner-chittagong-stock-exchange-504806
Habib, A. (2023, October 27). CSE hopes to set up a commodity exchange within six months.
The Daily Star. https://www.thedailystar.net/business/economy/stock/news/cse-hopes-set-
commodity-exchange-within-six-months-3453661
