Does Derivative Trading Facilitate Price Discovery and Risk Management?

The IUP Journal of Applied Finance, Vol. 23, No. 4, October 2017, pp. 18-31

Posted: 10 Aug 2018

See all articles by Mehak Thakral

Mehak Thakral

Kurukshetra University

Ramesh Chander

Kurukshetra University

Date Written: October 26, 2017

Abstract

As it is quite obvious that agriculture is a seasonal industry, risk is at all times inbuilt in the trading of commodities. Trading of commodity futures assists in price discovery and management of risk, which as a result reduces the unpredictability in the price of the fundamental commodity. In this paper, an endeavor has been made to scrutinize the relationship between price discovery and prevarication efficiency of commodity futures for five agricultural commodities chosen from diverse categories. The outcomes stated in this paper are essentially projected to catch the attention of policy makers for policy making and the hedgers to invent prevarication tactics. This paper intends to recognize whether futures prices facilitate determination of spot prices or vice versa. The mandatory data for this study was collected from the National Commodity and Derivatives Exchange (NCDEX) of India. The study derived implications using Augmented Dickey Fuller test, Granger Causality test, Johansen cointegration test and estimating the variance of the hedged and unhedged portfolio. The results of the study convincingly point out that futures prices do serve the function of price discovery proficiently for spot prices. The outcomes of the study disclose that commodity futures exchange provides a proficient hedge against the risk emerging from unpredictable prices of chosen commodities.

Suggested Citation

Thakral, Mehak and Chander, Ramesh, Does Derivative Trading Facilitate Price Discovery and Risk Management? (October 26, 2017). The IUP Journal of Applied Finance, Vol. 23, No. 4, October 2017, pp. 18-31, Available at SSRN: https://ssrn.com/abstract=3220294

Mehak Thakral (Contact Author)

Kurukshetra University ( email )

Kurukshetra University
kurukshetra (Haryana), Haryana 136119
India

Ramesh Chander

Kurukshetra University ( email )

Kurukshetra University
kurukshetra (Haryana), Haryana 136119
India

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