Underdeveloped Spot Markets and Futures Trading: The Soya Oil Exchange in India

35 Pages Posted: 13 Feb 2007

See all articles by Bharat Ramaswami

Bharat Ramaswami

Indian Statistical Institute

jatinder bir singh

University of Delhi - SGGS College of Commerce

Date Written: December 19, 2007

Abstract

The limited presence of futures exchanges in developing countries where commodity markets fall short of the ideal underscore the importance of understanding the relation between spot and futures markets. The paper examines the exceptional success of the soya oil contract at the National Board of Trade (NBOT) in India. The paper asks whether the NBOT contract exhibits the fundamental features of mature futures markets in terms of its use by hedgers. If the market offers arbitrage opportunities to hedgers and if such activity is significant, then the activities of commercial firms should affect the returns to their hedging portfolio, i.e., change in basis. This insight is developed into an examination of the impact of soya oil imports on the basis. Despite the lack of key market institutions such as certified warehouses and centralized spot prices, the NBOT contract compares well with mature exchanges. Soya oil imports exercise a significant impact on the basis and provide enough short-term volatility to make the contract attractive to both hedgers and speculators.

Keywords: Basis, Hedging, Futures Markets, Spot Markets, Soya Oil

Suggested Citation

Ramaswami, Bharat and singh, jatinder bir, Underdeveloped Spot Markets and Futures Trading: The Soya Oil Exchange in India (December 19, 2007). 10th Capital Markets Conference, Indian Institute of Capital Markets. Available at SSRN: https://ssrn.com/abstract=962835 or http://dx.doi.org/10.2139/ssrn.962835

Bharat Ramaswami (Contact Author)

Indian Statistical Institute ( email )

7 S. J. S. Sansanwal Marg
New Delhi, 110016
India
91 11 6514594 (Phone)
91 11 6856779 (Fax)

Jatinder bir Singh

University of Delhi - SGGS College of Commerce ( email )

Kirti Nagar
Delhi, DE New Delhi
India

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