Financial Risk Quantification of Indian Agro-Commodities using Value At Risk (original) (raw)
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PRICE VOLATILITY OF AGRICULTURAL PRODUCTS IN FUTURES TRADING IN INDIA – A STATISTICAL ANALYSIS
Agriculture is the backbone of India with a sizeable population depend on it for employment and livelihood. Therefore, the effective functioning of markets of agricultural produce is important for cultivators, other producers, policy makers, etc. The markets are expected to realize a fair price for farmers, traders, which are often a serious issue due to seasonality, lack of storage facilities, yield differences across different geographical regions in our country. The abundance during harvest season, with damped price and differences in yield and quality, frequent government interference with administered prices on select commodities is resulting in a complex marketing environment for agricultural produce. This environment throws the farmers and traders to price uncertainty at every harvest season. Against this background, an attempt is made in this paper to provide a description on Indian commodities markets with a brief profile of agriculture commodities selected for detailed study is presented. Further, it also analysed the price volatility during the period of study. Finally, it came with suggestions for the providing a fair price for the agricultural products to the cultivators by way of regulating these futures markets.
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The aim of this study is to explore the feasibility of setting up a Commodities Futures Market in Iran. Specifications for the margin requirements, daily price movement limits, the length of expiration intervals, tick sizes and contract size of various potential future contracts are hereby examined. Saffron, pistachio and rice emerge as the three suitable Iranian agricultural commodities. A new computational method of Value at Risk (VaR) optimization model, using a nonparametric sampling approach, is employed to determine the daily margin requirements and daily price fluctuation limits. Expiration intervals are determined by the simulated daily future price with a minimum of volatility. The daily risk free interest rate and the minimum daily average trading value of a participant in the Tehran Stock Exchange (TSE) are used as benchmarks to determine the minimum tick size and contract size for each commodity. These contract specifications are the initially suggested quantities for setting up an agricultural futures market in Iran.
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The concept of commodity market is not new in India. The history of commodity market in India dates back to the ancient times, but the first organized market was established in 1875. However commodity market in India remained in a state of hibernation for four decades, which was market by suspicion on the benefits of futures trading. A Commodity Market has gained momentum since, its introduction in India and has played a major role in Indian financial markets. More importantly, Commodity Market is one of the important tools of hedging risk. A Commodity market broadly is an Agriculture market whose payoff structure is determined by the value of underlying commodities, exchange rate, oil price, and the like. So a Commodity market comprises of trade instruments which derive their value from some underlying variable assets like food grains such as wheat, rice pulses etc. All commodity markets are based on some " cash " products. Though the agricultural sector contributes significantly to the Indian economy, it faces several bottlenecks, one of those being the antiquated laws governing agricultural marketing and price discovery, leading to low price realization by Indian farmers. In India, six national level exchanges offer commodity derivatives contracts on commodities, with some having electronic spot commodity exchanges to facilitate spot trading of commodities. The present study is analysis into agricultural and non-agricultural commodities in Indian commodity markets.
HEDGING EFFICIENCY OF FUTURES MARKET ON CASH CROPS (JUTE) -AN INDIAN EXPERIENCE
Commodities have played a major role in shaping the international economy by affecting the lives and livelihoods of people. Particularly, in India Shortage of critical commodities sparked huge public outcry and social unrest. Price volatility which arises from bad weather irregular production and harvests as well as from swings in demand and supply is one of the key problems associated with commodity. Volatility evokes not only yield risk but also price risk for both producers and consumers of the commodity. To manage these price volatility derivative products i.e. commodity futures are being used by farmers, consumers, firms, exporters, importers etc. to reduce the price risk. Commodity derivative market particularly, commodity futures is recognized as one of the important instrument that has been devised to achieve price risk management. In this context, an attempt has been made in the paper to evaluate the hedging effectiveness of commodity derivative market in the management of price risk with reference to the raw jute derivative market in India. The study utilized daily futures price and spot price data of Raw Jute provided by National Multi Commodity Exchange (NMCE) during the period 2010-14. Trend of spot and future prices in raw jute was analyzed by using descriptive statistical measures. To analyses the hedging effectiveness of the raw jute futures contract minimum variance hedge ratio has been used. Empirical evidence suggests variation in spot and futures prices of raw jute are higher however, an equal trend is found between the variations of spot and futures prices. The results of this study are useful for various stakeholders’ of agricultural commodity markets such as producers, traders, commission agents, commodity exchange participants, regulators and policy makers.