scholarly journals Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.

2020 ◽  
Vol 9 (SI) ◽  
pp. 79-89
Author(s):  
Sanjay Mansabdar ◽  
Hussain C Yaganti
Keyword(s):  
Contract Design ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Agricultural Commodity ◽  
Futures Contract ◽  
Hedging Effectiveness ◽  
Several Variables ◽  
Agricultural Futures ◽  
Delivery Options ◽  
The Impact

Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets for the delivery options granted to the seller by virtue of contract design.  These cash markets are generally heterogenous. This paper studies the impact of heterogeneity of the underlying cash markets in different locations on the hedging effectiveness of the associated futures contract. The hedging effectiveness of cottonseed oilcake and soybean futures is regressed against several variables that represent heterogeneity of the underlying cash markets using ridge regression. We find that in general, the greater the heterogeneity, the poorer the hedging effectiveness of the contract. This paper is unique in that it provides a framework for guidance for contract designers at exchanges and regulators who will find this research useful in optimizing delivery specifications for agricultural futures contracts.  This is especially important given the declining volumes in Indian agricultural commodity futures.

The impact of embedded location options on price discovery of agricultural futures contracts – the evidence from the Chana contract

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sanjay Mansabdar ◽  
Hussain C. Yaganti ◽  
Sankarshan Basu
Keyword(s):  
Price Discovery ◽  
Time Series Data ◽  
Futures Contracts ◽  
Series Data ◽  
Futures Prices ◽  
Content Type ◽  
Futures Contract ◽  
Agricultural Futures ◽  
Embedded Options ◽  
The Impact

Purpose Embedded options can create asymmetries in information impounded by cash and futures markets, causing errors in price discovery estimation. This paper aims to investigate the impact of embedded location options on measures of price discovery. Design/methodology/approach Various price discovery metrics are computed using observed futures prices that contain embedded location options and cash prices for Chana. Prices of a futures contract that contains no options using observed futures prices and estimates of location option value are synthesized. The price discovery measures are recomputed using synthetic option-adjusted futures contract prices and cash prices, and changes in these measures are attributed to the impact of the embedded location option. Findings If the presence of the location option is ignored, futures appear to dominate price discovery. Once the location option is adjusted for, cash markets are found to dominate price discovery. Research limitations/implications The lack of complete time-series data from the exchange for multiple commodities allows only limited empirical evidence for generalizing conclusions. Practical implications This paper highlights that regulators, exchanges and policymakers in India need to revisit delivery specifications of agricultural commodity futures contracts to enhance their utility from a price discovery perspective. Originality/value This work shows that ignoring the presence of embedded options can cause significant errors in price discovery assessment of agricultural futures contracts, particularly in heterogenous cash markets.

EFFECTIVE CROSS HEDGING: EVIDENCE FROM PHYSICAL CRUDE PALM OIL AND ITS INTER-RELATED AGRICULTURAL FUTURES CONTRACTS

2018 ◽  
Vol 17 (2) ◽  
pp. 123
Author(s):  
Noryati Ahmad ◽  
Ahmad Danial Zainudin ◽  
Fahmi Abdul Rahim ◽  
Catherine S F Ho
Keyword(s):  
Palm Oil ◽  
Futures Contracts ◽  
Crude Palm Oil ◽  
Oil Futures ◽  
Futures Contract ◽  
Agricultural Futures ◽  
Cross Hedging ◽  
Optimal Hedge ◽  
Excessive Speculation ◽  
Chicago Board Of Trade

Since its establishment, Crude Palm Oil futures contract (FCPO) has been used to directly hedge its physical crude palm oil (CPO). However, due to the excessive speculation activities on crude palm oil futures market, it has been said to be no longer an effective hedging tool to mitigate the price risk of its underlying physical market. This triggers the need for market players to find possible alternatives to ensure that the hedging role can be executed effectively. Thus this investigation attempts to examine whether other inter-related grains and oil seed futures contracts could serve as effective cross-hedging mechanisms for the CPO. Weekly data of inter-related futures contracts from Chicago Board of Trade (CBOT) and Dalian Commodity Exchange (DCE) are employed to cross hedge the physical crude palm oil prices. The study starts from 2006 until 2016. Empirical results indicate that FCPO is still the best futures contract for hedging purposes while Chicago Soybean (CBOTBO) provides second best alternative if cross-hedging is considered. Keywords: Crude palm oil, Crude palm oil futures, Cross Hedging, Optimal Hedge Ratio, Effective Hedging

The impact of order imbalance on returns, liquidity, and volatility in agricultural commodity markets

2018 ◽  
Vol 78 (5) ◽  
pp. 571-591 ◽  
Author(s):  
Steffen Volkenand ◽  
Guenther Filler ◽  
Martin Odening
Keyword(s):  
Trading Volume ◽  
High Speed ◽  
Price Volatility ◽  
Agricultural Commodity ◽  
Content Type ◽  
Order Imbalance ◽  
New Information ◽  
Agricultural Futures ◽  
Best Offer ◽  
The Impact

PurposeThe purpose of this paper is to investigate and compare the impact of order imbalance on returns, liquidity and price volatility in agricultural futures markets on an intraday basis. The authors examine whether order imbalance is more powerful to explain variations in asset prices compared to other indicators of trading activity, particularly trading volume.Design/methodology/approachUsing Chicago Mercantile Exchange best bid best offer data, the impact of order imbalance is analyzed via regression analyses. The analyses are carried out for corn, wheat, soy, live cattle and lean hogs in March 2008 and March 2016.FindingsResults confirm the positive relation between order imbalance and returns as well as between order imbalance and price volatility as suggested by market microstructure models. Order imbalance, however, does not generally outperform trading volume as an explanatory variable.Practical implicationsFor some contracts, returns can be predicted using lagged order imbalance. This offers the opportunity to derive profitable trading strategies.Originality/valueThis paper is one of the first attempts to explore the relationship between order imbalance and returns, liquidity and volatility for agricultural commodity futures on an intraday basis, accounting for the increased trading volume and for the high speed at which new information enters the market in an electronic trading environment.

scholarly journals Impact Of Financial Crisis On Hedging Effectiveness Of Futures Contracts: Evidence From The National Stock Exchange Of India

2015 ◽  
Vol 10 (2) ◽  
pp. 69-88 ◽  
Author(s):  
Kapil Gupta ◽  
Mandeep Kaur
Keyword(s):  
Financial Crisis ◽  
Stock Exchange ◽  
Moving Average ◽  
Futures Contracts ◽  
Conditional Heteroskedasticity ◽  
Vector Autoregressive ◽  
Hedging Effectiveness ◽  
Autoregressive Conditional Heteroskedasticity ◽  
The 2008 Financial Crisis ◽  
The Impact

Abstract The present study examines the impact of the 2008 financial crisis on the hedging effectiveness of three index futures contracts traded on the National Stock Exchange of India for near, next and far month contracts over the sample period of January 2000 – June 2014. The hedge ratios were calculated using eight methods; Naive hedging, Ederington’s Model, Autoregressive Integrated Moving Average, Vector Autoregressive, Vector Error Correction Methodology, Generalized Autoregressive Conditional Heteroskedasticity, Exponential Generalized Autoregressive Conditional Heteroscedasticity and Threshold Generalized Autoregressive Conditional Heteroskedasticity. The study finds an improvement in hedging effectiveness during the post-crisis period, which implies that during the high-volatility period hedging effectiveness also improves. It was also found that near month futures contracts are a more effective tool for hedging as compared to next and far month contracts, which imply that liquidity is a more important determinant of hedging effectiveness than hedge horizons. The study also finds that a time-invariant hedge ratio is more efficient than time-variant hedging. Therefore, knowledge of sophisticated econometrical tools does not help to improve hedge effectiveness.

scholarly journals Risk Transmission between Chinese and U.S. Agricultural Commodity Futures Markets—A CoVaR Approach

2019 ◽  
Vol 11 (1) ◽  
pp. 239 ◽  
Author(s):  
Yangmin Ke ◽  
Chongguang Li ◽  
Andrew M. McKenzie ◽  
Ping Liu
Keyword(s):  
Value At Risk ◽  
Futures Markets ◽  
Price Discovery ◽  
Commodity Futures ◽  
Conditional Value At Risk ◽  
Chinese Government ◽  
Agricultural Commodity ◽  
Futures Exchanges ◽  
Commodity Futures Markets ◽  
Agricultural Futures

Commodity futures markets play an important role, through risk management and price discovery, in helping firms make sustainable production and marketing decisions. An important related issue is how pricing signals between futures exchanges impact traders’ risk. We address this issue by shedding light on risk transmission between the most mature (U.S.) and the fastest growing (Chinese) commodity futures markets. Gaining greater insight of risk transmission between these key markets is vitally important to firms engaged in the efficient and sustainable trade of commodities needed to feed the world. We examine the risk transmission between Chinese and U.S. agricultural futures markets for soybean, corn, and sugar with a Copula based conditional value at risk (CoVaR) approach. We find significant upside, and to a lesser extent downside risk transmission, between Chinese and U.S. markets. We confirm the dominant pricing role of U.S. agricultural futures markets while acknowledging the increasing price discovery role performed by Chinese markets. Our results highlight that soybean markets exhibit greater risk transmission than sugar and corn markets. We argue that our findings may be explained by Chinese government policy intervention, and by the large role played by U.S. firms in the underlying cash commodity markets–both in terms of production and trade.

scholarly journals Adaptive market efficiency of agricultural commodity futures contracts

2015 ◽  
Vol 60 (2) ◽  
pp. 389-401 ◽  
Author(s):  
Semei Coronado Ramírez ◽  
Pedro Luis Celso Arellano ◽  
Omar Rojas
Keyword(s):  
Market Efficiency ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Agricultural Commodity

scholarly journals INVESTIGATING THE IMPACT OF HEDGE HORIZON UPON HEDGING EFFECTIVENESS: EVIDENCE FROM NATIONAL STOCK EXCHANGE OF INDIA

2019 ◽  
Vol 18 (2) ◽  
pp. 131
Author(s):  
MANDEEP KAUR ◽  
KAPIL GUPTA
Keyword(s):  
Variance Reduction ◽  
Direct Relationship ◽  
Stock Exchange ◽  
Futures Market ◽  
Futures Contracts ◽  
Risk Averse ◽  
Risk Return ◽  
Hedging Effectiveness ◽  
The Impact ◽  
Reduction Approach

Present study attempts to investigate the impact of hedge horizon upon hedging effectiveness in Indian equity futures market by comparing hedging performance of near, next and far month futures contracts of NIFTY50 index and its 17 composite stocks. Hedging effectiveness has been measured using two approaches, namely, Variance Reduction approach and Risk-Return approach. The study finds that near month futures contracts are most effective when hedge effectiveness is measured using variance reduction approach, whereas, on the other hand, far month futures contracts are found to be most effective using risk-return approach. These results imply that for highly risk-averse investors (concerned with only minimization of risk), near month futures contracts enable effective hedging, whereas for less risk-averse investors (concerned with risk as well as return), far month futures contracts offer superior hedge effectiveness. The study also finds that coefficient of correlation between spot and futures returns is a significant factor affecting variance reduction of returns and bears direct relationship with it.

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