Risk Transfer Through Commodity Derivatives: A Study of Soyabean Oil

21 Pages Posted: 9 Jan 2011  

Ram Pratap Sinha

Government College of Engineering and Leather Technology, Kolkata

Ashis Bhuniya

affiliation not provided to SSRN

Date Written: January 7, 2011

Abstract

Prices of commodities are determined by the market forces of demand and supply and susceptible to changes due to changes in market forces. The change in market forces within a short period leads to sharp change in prices leading to price volatility. Price risk is the potential for a future price to deviate from the expected value. In ancient times various techniques and tools like arbitrage strategy were adopted by the trader to reduce this risk. The basic arbitrage strategy, buying/selling the cash asset while selling/buying a future contract was practiced in grain trade by Jews during ancient times. This was the past form of present day future contract. Now techniques and tools of financial engineering are applied to that old idea by extension of future trading to commodity or a financial instrument. Though future trading of commodities commenced during British India, it was banned during post independence era in the year 1955. After its reintroduction in the year 2003, the aggregate turnover of commodity exchanges reached to Rs. 7090456 crores, witnessing a spectacular growth of 40% in the year 2008-09. The present study on Soybean futures expiring on April 2010, worked out the hedge ratio based on JSE and HKM methodology. The study shows that hedging effectiveness improves in cross hedging and composite hedging.

Keywords: Commodity Derivatives, Arbitrage, Hedging

JEL Classification: G13

Suggested Citation

Sinha, Ram Pratap and Bhuniya, Ashis, Risk Transfer Through Commodity Derivatives: A Study of Soyabean Oil (January 7, 2011). Available at SSRN: https://ssrn.com/abstract=1736406 or http://dx.doi.org/10.2139/ssrn.1736406

Ram Pratap Sinha (Contact Author)

Government College of Engineering and Leather Technology, Kolkata ( email )

Salt Lake, Kolkata, West Bengal 700098
India
919932640161 (Phone)

Ashis Bhuniya

affiliation not provided to SSRN ( email )

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