Financial Risk Management
Causality of Pepper Spot and Futures Prices at Indian Commodity Market

Article Details
Pub. Date : Dec, 2018
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM31812
Author Name : A N Vijayakumar
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 11

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Abstract

The futures contract plays an important role in price discovery and risk management. The contracts prices have an impact on spot prices and are also used for risk management by hedging. This paper reviews the casual relationship between black pepper spot and futures prices through regression and Granger causality technique. This study finds a unidirectional relationship between pepper futures prices and spot prices.


Description

In agrarian economies like India, farmers face various kinds of uncertainties and risks, including price risk. Agricultural commodity prices fluctuate with market forces of demand and supply at regular intervals. Price risk of commodities affects the economic interests of producers, traders, processors and other stakeholders, including government agencies like commodity boards. Derivatives exchange provides a platform to mitigate the price risk of underlying commodities through commodity derivative instruments, namely, commodity futures contract. Commodity futures contract provides a mechanism to hedge against risks arising out of adverse price movements in agricultural commodities. Futures are standardized contracts that are traded on exchange platform and assures settlement guarantee. The major function of futures markets is to transfer price risk and facilitate price discovery. Futures contract acts as a hedging instrument that provides an idea about the futures prices to market participants-producers and traders-about their decision on cultivation, harvesting and cost of procurement. Similarly, processors can lock-in prevailing prices to assure and plan their profit and other business activities. Futures contract through its function of price discovery helps the farmers, processors and consumers in decision making and planning their production process, storage, financing and marketing of commodities and finished goods. Derivatives market, therefore, is beneficial to stakeholders in ensuring liquidity, transparency and price dissemination.


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