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EPW
vol xlIX no 52
1 Introduction
vol xlIX no 52
EPW
...(2)
...(3)
EPW
vol xlIX no 52
48
2
1.6
1.2
0.8
14-Mar-06
15-May-06
15-Jul-06
15-Sep-06
15-Nov-06
15-Jan-07
15-Mar-07
15-May-07
14-Jul-07
14-Sep-07
15-Nov-07
15-Jan-08
15-Mar-08
15-May-08
15-Jul-08
15-Sep-08
15-Nov-08
13-Jan-09
14-Mar-09
15-May-09
15-Jul-09
15-Sep-09
14-Nov-09
15-Jan-10
15-Mar-10
15-May-10
15-Jul-10
15-Sep-10
15-Nov-10
15-Jan-11
15-Mar-11
14-May-11
15-Jul-11
15-Sep-11
15-Nov-11
14-Jan-12
15-Mar-12
15-May-12
14-Jul-12
15-Sep-12
15-Nov-12
0.4
S(T)/F(t,T)
8
6
4
2
20-Sep-04
19-Nov-04
20-Jan-05
18-Mar-05
20-May-05
20-Jul-05
20-Sep-05
18-Nov-05
20-Jan-06
20-Mar-06
19-May-06
20-Jul-06
20-Sep-06
20-Nov-06
19-Jan-07
20-Mar-07
18-May-07
20-Jul-07
20-Sep-07
20-Nov-07
18-Jan-08
17-Apr-08
20-Jun-08
19-Sep-08
20-Jan-09
20-Apr-09
19-Jun-09
20-Aug-09
20-Oct-09
18-Dec-09
19-Feb-10
20-Apr-10
18-Jun-10
20-Aug-10
20-Oct-10
20-Dec-10
18-Feb-11
20-Apr-11
20-Jun-11
19-Aug-11
20-Oct-11
20-Dec-11
17-Feb-12
28-Mar-12
28-Mar-12
8
6
4
2
18-Jun-04
20-Aug-04
20-Oct-04
20-Dec-04
18-Feb-05
20-Apr-05
20-Jun-05
18-Aug-05
20-Oct-05
20-Dec-05
20-Feb-06
20-Apr-06
20-Jun-06
18-Aug-06
17-Oct-06
20-Dec-06
20-Feb-07
20-Apr-07
20-Jun-07
20-Aug-07
19-Oct-07
20-Dec-07
20-Mar-08
20-May-08
18-Jul-08
20-Nov-08
20-Mar-09
20-May-09
20-Jul-09
18-Sep-09
20-Nov-09
20-Jan-10
19-Mar-10
20-May-10
20-Jul-10
20-Sep-10
19-Nov-10
20-Jan-11
18-Mar-11
20-May-11
20-Jul-11
20-Sep-11
18-Nov-11
20-Jan-12
20-Mar-12
28-Mar-12
28-Mar-12
Figure 1(d): The Futures Price Bias in Mentha Oil Market (NCDEX)
S(T)/F(t,T)
2
1.5
1
31-Jan-11
31-Mar-11
30-Nov-10
30-Jun-10
30-Sep-10
30-Apr-10
26-Feb-10
31-Dec-09
20-Jul-09
18-Sep-09
20-Feb-09
20-Oct-08
19-Dec-08
20-Jun-08
20-Aug-08
17-Apr-08
20-Feb-08
19-Oct-07
20-Dec-07
20-Jun-07
20-Aug-07
20-Apr-07
20-Feb-07
17-Oct-06
20-Dec-06
20-Jun-06
18-Aug-06
20-Apr-06
20-Feb-06
20-Dec-05
20-Oct-05
0.5
Figure 1(e): The Futures Price Bias in Mentha Oil Market (MCX)
S(T)/F(t,T)
2.25
1.75
1.25
0.75
30-Jun-05
31-Aug-05
31-Oct-05
31-Dec-05
28-Feb-06
29-Apr-06
30-Jun-06
31-Aug-06
31-Oct-06
30-Dec-06
28-Feb-07
30-Apr-07
30-Jun-07
31-Aug-07
31-Oct-07
31-Dec-07
29-Feb-08
30-Apr-08
30-Jun-08
30-Aug-08
31-Oct-08
31-Dec-08
28-Feb-09
29-Apr-09
30-Jun-09
31-Aug-09
31-Oct-09
31-Dec-09
26-Feb-10
30-Apr-10
30-Jun-10
31-Aug-10
30-Oct-10
31-Dec-10
28-Feb-11
30-Apr-11
30-Jun-11
30-Aug-11
31-Oct-11
31-Dec-11
29-Feb-12
30-Apr-12
30-Jun-12
31-Aug-12
31-Oct-12
31-Dec-12
0.25
S(T)/F(t,T)
vol xlIX no 52
EPW
2
1.5
1
18-Aug-06
20-Sep-06
17-Oct-06
20-Nov-06
20-Mar-07
20-Apr-07
18-May-07
20-Jun-07
20-Jul-07
20-Aug-07
20-Sep-07
20-Mar-08
17-Apr-08
9-May-08
9-May-08
9-May-08
9-May-08
20-Mar-09
20-Apr-09
20-May-09
19-Jun-09
20-Jul-09
20-Aug-09
18-Sep-09
19-Mar-10
20-Apr-10
20-May-10
18-Jun-10
20-Jul-10
20-Aug-10
20-Sep-10
18-Mar-11
20-Apr-11
20-May-11
20-Jun-11
20-Jul-11
19-Aug-11
20-Sep-11
20-Mar-12
20-Apr-12
18-May-12
20-Jun-12
20-Jul-12
17-Aug-12
21-Sep-12
0.5
2
1.6
1.2
0.8
15-Apr-06
15-May-06
15-Jun-06
15-Jul-06
14-Aug-06
15-Sep-06
14-Oct-06
15-Mar-07
15-Jun-07
14-Jul-07
14-Aug-07
14-Sep-07
15-Oct-07
15-Mar-08
15-Apr-08
7-May-08
7-May-08
7-May-08
14-Mar-09
15-Jun-09
15-Jul-09
14-Aug-09
15-Sep-09
15-Oct-09
15-Jun-10
15-Jul-10
14-Aug-10
15-Sep-10
15-Oct-10
15-Mar-11
15-Apr-11
14-May-11
15-Jun-11
15-Jul-11
12-Aug-11
15-Sep-11
15-Oct-11
15-Mar-12
13-Apr-12
15-May-12
15-Jun-12
14-Jul-12
14-Aug-12
15-Sep-12
15-Oct-12
0.4
Cardamom
Guar gum
Guar seed
Mentha oil
Mentha oil NCDEX contracts
Mentha oil MCX contracts
Pepper
Potato
Potato NCDEX contracts
Potato MCX contracts
D-W
R2
0.007
(0.13)
0.34
(1.54)
0.36
(1.42)
0.04
(1.95)*
0.03
(0.73)
0.05
(1.80)
0.17
(2.69)*
0.02
(0.27)
0.09
(0.72)
-0.01
(-0.18)
0.70
(3.33)*
-0.90
(-1.73)
-1.13
(-2.51)*
0.25
(1.41)
0.15
(0.44)
0.30
(1.51)
-0.94
(-2.64)*
0.96
(10.42)*
0.85
(7.99)*
1.10
(5.64)*
2.08
0.71
2.02
0.89
1.84
0.87
2.14
0.51
1.82
0.31
1.85
0.63
1.89
0.67
1.66
0.74
1.75
0.79
1.79
0.64
H 0: b ^
=1
Test Value
-0.30
(-1.46)
-1.90
(-3.65)*
-2.13
(-4.73)*
-0.75
(-4.27)*
-0.85
(-2.57)*
-0.70
(-3.60)*
-1.94
(-5.47)*
-0.04
(-0.41)
-0.15
(-1.39)
0.09
(0.51)
^ = 0, ^
H0 :
=1
F-statistic,
P-value
1.14
0.15
7.22
0.00
11.57
0.00
14.05
0.00
3.65
0.03
11.88
0.00
14.98
0.00
0.10
0.90
1.05
0.36
0.13
(0.88)
The equation estimated using the OLS method is st+k St = + (t,t+k St) + et+k.
Values in parentheses represent t-statistics of the respective parameter estimates;
* Indicates the level of significance at 5%; D-W stands for Durbin-Watson statistic; all
regressions are corrected for serial correlation.
5 Risk Mitigation
EPW
vol xlIX no 52
Statistical
Measures
Markets
Guar Seed
Mentha
Oil
Pepper
Potato
Stdev
Spot
273.75 16,972.00 5,042.70 231.46 3,256.80 254.90
Futures 122.69
257.07 123.52 104.57 809.33 142.70
Futures-spot ratio**
0.45
0.015
0.025
0.45
0.25
0.56
CV
Spot
7.69
3.14
3.19 10.67
1.56
2.02
Futures
2.50
0.86
0.76 -2.98
0.68
1.48
Ratio of relative
price variation***
0.33
0.27
0.24 -0.28
0.43
0.73
Test of equal variance
F-statistic 4.98 4,358.50 1,666.60
4.90
16.19
3.19
p-value
0.00
0.00
0.00
0.00
0.00
0.00
The spot price change at levels in this context is defined as (St+k St) and futures premium
as (Ft,t+k St), with t and t+k as they are defined in equation (2); Stdev and CV stand for
standard deviation and coefficient of variation respectively; ** is the ratio of standard
deviation of futures price premium and spot price change; *** is the ratio of the coefficient
of variation of futures premium and spot price change.
49
Cardamom
Guar gum
Guar seed
Mentha oil
Pepper
Potato
10.84
1,361.4
272.82
29.95
417.48
32.82
4.76
3.23
6.47
2.07
40.32
-41.08
-50.0
-172.0
-151.35
-95.4
-1463.8
-65.8
51.6
7,770.0
1,619.3
112.0
671.85
134.45
0.45
1.80
1.59
0.50
0.62
0.37
345.68
20,077
5,895.8
384.10
10610
256.27
The price units are Rs per 1 kg for cardamom and mentha oil while they are Rs per 100 kg for
guar gum, guar seed, pepper, and potato; * measures the difference between the spot and
futures prices on maturity of contracts.
vol xlIX no 52
EPW
futures to risk-averse short hedgers, who are generally the producers. The larger the spot prices and basis at maturity with
higher variability, the greater the advantage for speculators in
futures markets. The guar gum and guar seed markets with
larger values of CV, 1.80 and 1.59 respectively, signify that they
are best suited to the interests of speculators, compared to
potato and cardamom futures with corresponding values of
0.37 and 0.45 respectively. Third, an abnormally higher standard deviation and high ratio of maximum and minimum values of the basis of guar gum and guar seed are indicative of
their excessive speculative orientation.
7 Speculation A Double-edged Sword
EPW
vol xlIX no 52
52
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11
12
13
14
15
16
vol xlIX no 52
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References
Agarwal, N, S Jain and Susan Thomas (2014):
Price Discovery and Hedging Effectiveness of
Commodity Derivatives Markets in India,
Technical Report, IGIDR, Mumbai.
Ali, Jabir and Kriti B Gupta (2011): Efficiency in
Agricultural Commodity Futures Markets in
India Evidence from Cointegration and
Causality Tests, Agricultural Finance Review,
71 (2), pp 162-78.
Arora, Sunita and Narendra Kumar (2013): Role of
Futures Market in Price Discovery, Decision,
40 (3), pp 165-79.
Berg, Ann E (2008): The HAFED Experience
Wheat Hedging on the NCDEX, Financial
Markets International, Mumbai.
Bose, Sushismita (2008): Commodity Futures Market
in India A Study of Trends in the National
Multi-Commodity Indices, ICRA Bulletin Money
and Finance, May, pp 125-58.
Dey, K and Debasish Maitra (2012): Price Discovery
in Indian Commodity Futures Market: An
Empirical Exercise, International Journal of
Trade and Global Markets, 5 (1), pp 68-87.
Elumalai, K, N Rangasamy and R K Sharma (2009):
Price Discovery in Indias Agricultural Commodity Futures Markets, Indian Journal of
Agricultural Economics, 64 (3), pp 315-23.
Government of India (1952): Forward Contracts
(Regulation) Act, 1952, Ministry of Consumer
Affairs, Food and Public Distribution, New
Delhi.
(2008): Report of the Expert Committee to
Study the Impact of Futures Trading on Agricultural Commodity Prices, Ministry of Consumer Affairs, Food and Public Distribution,
New Delhi.
(2010): Forward Contracts (Regulation)
Amendment Bill, Ministry of Consumer Affairs, Food and Public Distribution, New Delhi.
(2011): Forward Markets Commission: Annual
Report 2009-10, Mumbai.
(2013): Forward Markets Commission: Annual
Report 2012-13, Mumbai.
(2014): Report of the Committee to Suggest
Steps for Fulfilling the Objectives of Price-discovery and Risk Management of Commodity Derivatives Market, Ministry of Finance, New Delhi.
IIMB (2008): Impact of Futures Trading in Wheat,
Sugar, Pulses and Guar Seed on Farmers,
Study conducted by the Indian Institute of
Economic & Political Weekly
EPW
Appendix
The literature on futures markets in the Indian
context can be classified under four broad
themes. First, a large part of the literature is
constituted by studies on price discovery, market efficiency, and hedging effectiveness. They
include Naik and Jain (2002); Karande (2006);
Lokare (2007); IIMB (2008); Kumar and Pandey
(2008); Singh et al (2009); Elumalai et al (2009);
Ali and Gupta (2011); Dey and Maitra (2012);
Arora and Kumar (2013); Agarwal et al (2014).
These studies have primarily tested market
efficiency hypothesis and the lead-lag relationship between futures and spot markets using
continuous time series data on near month
futures and spot prices of different sets of commodities. They have carried out the standard
unit root test based on the Augmented DickeyFuller and/or Phillips-Perron methods, followed
by the test of cointegration and causality based
on the error correction model, to examine the
stable long-run equilibrium relationship between spot and futures prices. The results vary
across studies on market efficiency in transmitting information and spot price stability.
Second, the studies that have investigated
the information transmission and volatility
spillover between futures and spot markets in
India and between Indian and world markets
include Sahi (2006); Bose (2008); Kumar and
Pandey (2011a, 2011b); Sehgal et al (2012, 2013);
Srinivasan and Ibrahim (2011). A third set of
studies, including Raizada and Sahi (2006);
Abhijit Sen Committee (2008), and Nath and
Lingareddy (2008), have specifically examined
the effects of futures trade on inflation. Most
of them, including the Abhijit Sen Committee,
have failed to find any supporting evidence of
either reduced or increased volatility of spot
prices because of futures trading. Finally, studies on market microstructure and regulation,
including Nair (2011) and Sahadevan (2012),
have examined the present public-private partnership model of regulation in the principalagent model framework.
53