Professional Documents
Culture Documents
On
By
Dr. T. V. N. Rao
The Research is based on an article written by MARK J. POWERS titled Does Futures
Trading Reduce Price Fluctuations in the Cash Markets?
Commodities are not only essential to life, they are absolutely necessary for
quality of life. Every person in the world eats. Billions of dollars of agricultural products
are traded daily on the world’s commodity exchanges: everything from soybeans, to rice,
to corn and wheat, to beef, pork, cocoa, coffee, sugar and orange juice. This is how
commodity exchanges began. In the middle of the nineteenth century in the USA,
businessmen started to organize market forums to make the buying and selling of
agricultural commodities easier. Farmers and grain merchants met in central
marketplaces to set quality and quantity standards and establish rules of business. Over
1600 exchanges sprang up, mostly at major railheads, inland water ports and seaports.
The basic unit of exchange in the futures markets is the futures contract. Each
contract is for a set quantity of some commodity or financial asset, and can only be traded
in multiples of that amount. A futures contract is a legally binding agreement providing
for the delivery of various commodities or financial entities at a specific date in the
future. When you buy or sell a futures contract, you are not actually signing a written
piece of paper drawn up by a lawyer you are entering into a contractual obligation which
can be met in one of two ways. The first is by making or taking delivery of the actual
commodity. This is the exception, not the rule however, as less than 2 per cent of all
futures contracts are met by actual delivery. The other way to meet your obligation the
method you most likely will use is by offset: Very simply, offset is making the opposite,
or offsetting sale or purchase of the same number of contracts bought or sold sometime
prior to the expiration date of the contract. This can be easily done because futures
contracts are standardized. Every contract on a particular exchange for a specific
commodity is identical. The specifications are different for each commodity, but the
contract in each market is the same. In other words, every soybean contract traded on the
Chicago board of Trade is for 5000 bushels. Every gold contract traded on the New York
Mercantile is for 100 troy ounces. Each contract listed on an exchange calls for a specific
grade and quality. For example the silver contract is for 5000 troy ounces of 99.99 per
cent pure. Therefore the buyers and sellers know exactly what they are trading. Every
contract is completely interchangeable. The only negotiable feature of a futures contract
is price. The size of the contract determines its value. To determine how much you will
make or lose on a particular price movement of a specific commodity, you will need to
know the following
The contract size
How the price is quoted
The minimum price fluctuations
The value of the minimum price fluctuations
When the possibility of “speculative bubbles” is excluded and the price follows a
unique path, the question remains as to whether the quality of price forecasts by rational
agents improves with the introduction of a futures market. Futures trading have been
viewed to serve for a better distribution of commodities over time, leading to a reduction
in their amplitude and frequency of price fluctuations. Since futures traders, in their
capacity as speculators, usually take a ‘long position’ when the spot price is expected to
be higher than the delivery contract price and a “short position’ when price expectations
are lower, futures activities are considered to improve the intertemporal allocation of
commodities and therefore stabilize prices. This hypothetical view might appear
consistent with economists, institutions but empirical studies on price stabilizing effects
of futures trading have revealed mixed results.
Indian markets have recently thrown open a new avenue for retail investors and
traders to participate: commodity derivatives. For those who want to diversify their
portfolio beyond shares, bonds and real estate, commodities is the best option. With the
setting up of three multi-commodity exchanges in the country, retail investors can now
trade in commodities futures without having physical stocks.
Commodities actually offer immense potential to become a separate asset class for
market savvy investors, arbitrageurs and speculators. Retail investors who claim to
understand the equity markets may find commodities an unfavourable market. In fact the
On the other hand global equity markets faced a sell-off in March 2007, with
rising risk aversion triggered by a sharp spike in the Japanese yen, pulling all the global
indices down quite substantially (Investors would borrow in low interest-bearing yen to
invest in risky but high return emerging markets).
Though most of the major equity markets have recovered from the recent slump
and hit fresh highs afterwards, the Indian markets lagged behind on continuous monetary
In such a scenario, the thriving commodity futures market which was launched
three-and-a half years ago, provides an excellent opportunity for retail investors to
allocate part of their funds.
What’s behind the price explosion? First, there has been lack of investment in the
production of energy, industrial metal and other commodities in the 1990s. Oil
companies were loath to repeat the cycle of enthusiastic expansion of capacity leading to
overproduction, which pulled down prices. Industrial metals producers harboured similar
sentiments. Second, political turmoil and military action in the Middle East, Nigeria,
Russia, Venezuela and other major petroleum producers added a substantial risk premium
to oil prices. Third the global economic growth led by American consumers also
powered robust demand for commodities. The housing boom in the US and many other
countries hyped demand for lumber, copper, gypsum, plastics and many other similar
commodities. Fourth and foremost the excess liquidity sloshing around the world, the
Hedge funds, pension funds and other institutional investors have poured money
into commodities directly and through investment pools. Thus, with supply limitations
and strong demand from commodity users and investors, inventories of many
commodities are quite low relative to production an demand. This is true of copper and
zinc, and generally for agricultural products specially corn and wheat, which scaled up
decades highs in the last year.
The prices of essential food articles like wheat, pulses and edible oils hardened
sharply in the spot market in FY 2007. This rise was reflected in the futures market as
well, with a generous increase in the volume of business, indicating increased
participation by market players. Apart from the notable exception of sugar, whose spot
prices drifted lower during the year on supply glut, all pulses, grains, spices, edible oils
and oilseeds as well as other soft commodities went up at a sharp pace.
As a result futures also rose on very good buying support. Bulk of the gains in the
essential commodities segment stemmed from the poor growth of agriculture in FY 2007.
The spices complex beat the commodity street. Spices majors jeera and pepper rocked
the markets with astounding gains of 118% and 84.47% respectively, in FY 2007, Chana
gained 26.41% and refined soy oil 22%. While the supply crunch pushed up food grains
higher spices were boosted by a combination of stagnant output and excellent overseas
demand. Exports of spices crossed Rs.3000 crore in April-February 2006-07 for the first
time and surpassed the target both in volume and value set for the current fiscal. Total
exports of spices have been estimated at 3.11 lakh tones valued at Rs 3020 as against 2-92
lakh tones worth Rs.2100.40 crore in April-February 2005-06. Thus exports have shown
an increase of 6% in quantity and 44% in value . If this trend persists the spices complex
is bound to be the out performer amongst the agri commodities in FY 2008 as well.
However oilseeds production has dipped quite alarmingly. The country imports
50% of its edible oil requirement. In such a scenario, a staggering drop of 17% in
estimated oilseeds production points towards a sustained rise in prices of edible oils in the
coming months. The best measure to evaluate the consolidated performance of prices of
agri commodities on the futures market is the Ncdex Futexagri. The index shot up quite
strongly in first half of FY 2007 and topped a high of 1,726.01 in the last week of
November 2006. The barometer eased afterwards as the kharif (April-September) output
arrived in the domestic markets, easing the spot prices of major agri commodities, before
peaking up early 20007 as a poor edible oilseeds crop pushed up the index.
Strong gains in the entire spices complex also played a part in the recent rally
which saw the index close at 1,625.01 on 31 March 2007 – recording a significant jump
of 20% over the last year. Though the agriculture sector grew by 6% in FY 2007,
recording a stable output of foodgrains and keeping prices relatively comfortable, the
plight of agriculture worsened in FY 2008 with incessant rains in various states like
Maharashtra, Andhra Pradesh and Gujarat affecting the kharif output to major extent.
Futures started soaring well advance of the actual produce from kharif season arriving in
the market. The whole price index started shooting up from the first week of December
and rose well above 6.50% in January 2007, prompting the government to announce a
surprise ban on futures trading in tur and urad. The markets were pinned down further as
the government announced a ban on the introduction of new futures contracts in wheat
and rice. This ban has confused genuine hedgers as they are not clear whether a
commodity on which they need to hedge will last till its expiry period. Therefore, traders
are not coming forward to hedge their risk entirely.
Outlook: The outlook for major commodities in the domestic and global markets remains
bullish. The recent spurt in the metals and energy prices is an indication that the
Although the first recorded instance of futures trading occurred with rice in 17th
Century Japan, there is some evidence that there may also have been rice futures traded in
China as long as 6,000 years ago.
In the United States, futures trading started in the grain markets in the middle of
the 19th Century. The Chicago Board of Trade was established in 1848. In the 1870s and
1880s the New York Coffee, Cotton and Produce Exchanges were born. Today there are
ten commodity exchanges in the United States. The largest are the Chicago Board of
Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New
York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange.
Worldwide there are major futures trading exchanges in over twenty countries including
The biggest increase in futures trading activity occurred in the 1970s when futures on
financial instruments started trading in Chicago. Foreign currencies such as the Swiss
Franc and the Japanese Yen were first. Also popular were interest rate instruments such
as United States Treasury Bonds and T-Bills. In the 1980s futures began trading on stock
market indexes such as the S&P 500.
The various exchanges are constantly looking for new products on which to trade
futures. Very few of the new markets they try survive and grow into viable trading
vehicles. Some examples of less than successful markets attempted in recent years are
Tiger Shrimp and Cheddar Cheese.
The futures contract, as we know it today, evolved as farmers (sellers) and dealers
(buyers) began to commit to future exchanges of grain for cash. For instance, the farmer
would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end
of June. The bargain suited both parties. The farmer knew how much he would be paid
for his wheat, and the dealer knew his costs in advance. The two parties may have
exchanged a written contract to this effect and even a small amount of money
representing a "guarantee."
Such contracts became common and were even used as collateral for bank loans.
They also began to change hands before the delivery date. If the dealer decided he didn't
want the wheat, he would sell the contract to someone who did. Or, the farmer who didn't
want to deliver his wheat might pass his obligation on to another farmer the price would
go up and down depending on what was happening in the wheat market. If bad weather
had come, the people who had contracted to sell wheat would hold more valuable
contracts because the supply would be lower; if the harvest were bigger than expected,
the seller's contract would become less valuable. It wasn't long before people who had no
The ancient system of oral agreement between farmer and buyer which is the
prototype of Future Trading gradually became contracts. Later the buyer began to make
some advance payment for the surety of the contracts. When contracts became a normal
practice, they were assigned the value of the commodities themselves. Also these
contracts began to be sold and bought just as the commodities. Humans ever since they
began farming searched for ways to face the vagaries of weather. With the arrival of
market systems, their challenge increased. They now needed to ensure just price for their
product. Indian farming faced with droughts, floods and natural calamities has always
been a bet on the nature. When the farmer wins the bet and comes to the market the
supply is more than the actual demand. That pushes the price down shattering the farmer.
Futures trading should be seen as an idea originated from framers search to face the
challenges of unpredictable weather and fluctuating market prices. It must have originated
from the execution of a prior to harvest agreement made between the farmer (who
promises to sell the harvest at a definite price) and one who needs the grain (who agrees
to buy it at that price)
In India it started in an organized manner in 1875 at Mumbai for cotton by
Bombay Cotton Trade Association. It then began to spread. Certain mill owners
unhappy with the working of their association began a new association in 1893, called the
Bombay Cotton Exchange Limited. It conducted Futures Trading for cotton. In 1890 a
Gujarati merchant Mandali started the Futures Trade of oil seeds. They also did futures
trading for cotton and peanuts. Although futures trading worked in Punjab and Uttar
Pradesh earlier too the Chambers of Commerce, Hampur which came into being in 1931
was the first one to get noticed. Soon after wheat futures market started in various places
in Punjab like Amritsar, Moga, Ludhiana, Jalandhar, Fasilka, Dhuri, Baamala and
Bhatinda and in Uttar Pradesh at Muzzafarnagar, Chandahusi, Meerut, Charanput, Hatras,
Ghaziabad, bareili etc. In due time futures market started for pepper, turmeric, potato,
sugar and jaggery. When the Indian constitution was framed share market and futures
market were put in the union list. So the regulation of futures markets is with the central
government. According to the Futures Contracts Regulation Act, a three-leveled
regulatory system came into existence, Central Food and Public Distribution Ministry,
Futures Market Commission (FMC) and the associations that are recommended by the
Almost everything you see around is made of what market considers commodity.
A commodity could be an article a product or material that is bought and sold. It could be
an article a product or material that is bought and sold. It could be any kind of movable
property, except actionable claims, money and securities. Commodity trade forms the
backbone of world economy. The Indian commodity market is estimated to be around
Rs.11 million and forms almost 50 percent of the Indian GDP. It deals with agricultural
commodities such as rice, wheat, groundnut, tea, coffee, jute, rubber, spices and cotton.
Besides precious metals such as gold and silver the commodity market also deals with
base metals like iron and Aluminium and energy commodities such as crude oil and coal.
Carry Forward Position: The situation in which a client does not square off his
open positions on that day and carries it to the next day is known as the Carry Forward
Position. Cash Commodity: The actual physical commodity as distinguished from the
futures contract based on the physical commodity.
Cash Settlement: A method of settling future contracts whereby the seller pays the
buyer the cash value of the commodity traded according to a procedure specified in the
contract.
Clearing: The procedure through which the clearing house or association becomes the
buyer to each seller of a futures contract and the seller to each buyer and assumes
responsibility for protecting buyers and sellers from financial loss by assuring
performance on each contract.
Day Trader: A speculator who will normally initiate and offset a position within a
single trading session.
Delivery: The tender and receipt of an actual commodity or warehouse receipt or other
negotiable instrument covering such commodity in settlement of a futures contract.
Delivery Period: The interval between the time when the warehouse receipt is given
to the exchange by the seller and the time incurred by the buyer in getting this warehouse
receipt is known as delivery period.
Derivative: A financial instrument traded on or off the exchange the price of which is
directly dependent upon the value of one or more underlying securities, equity indices,
debt instruments, or any agreed upon pricing index or arrangement.
Hedging: The practice of offsetting the price risk inherent in any cash market position
by taking the opposite position in the futures market. Hedgers use the market to protect
their businesses from adverse price changes.
Long: One who has bought futures contracts or owns a cash commodity.
Open Interest: The sum of all long or short futures contracts in one delivery month or
one market that have been entered into and not yet liquidated by an offsetting transaction
or fulfilled by delivery.
Price Discovery: The process of determining the price level of a commodity based on
supply and demand factors.
Price Limit: The maximum advance or decline from the previous day's settlement
price permitted for a futures contract in one trading session.
Short: One who has sold futures contracts or the cash commodity.
Speculator: One who tries to profit from buying and selling future contracts by
anticipating future price movements.
Spot: Usually refers to a cash market price for a physical commodity that is available
for immediate delivery.
Squaring: The practice by which the goods sold in the market are bought back before
the term ends to meet the cycle or the practice that the bought goods are sold before the
term ends to settle the deal is called squaring. Here price or commodity is not exchanged,
but only profit or loss.
Tick: The smallest allowable increment of price movement for a contract. Also referred
to as Minimum Price Fluctuation.
Trade Account: To trade in the Futures market the client has to register himself and
open an account with the broking organization known as trading account.
Trading Lot: Each commodity should be sold and bought in the Futures market at a
specific quantity. These quantities are called trading lots fixed by the exchanges. For
rubber and pepper it is 1 ton, while it is 1 quintal for cardamom.
Warehouse Receipt: When the commodity sold in the Futures market is taken to the
warehouse, the client receives a legal document from the warehouse known as warehouse
receipt. This document has a trade value.
An organized futures market confines trades to those who are its members. This
limitation has definite advantages. Each member has a proprietary interest in the survival
of the exchange and in the value of his membership. He wants the other members to be
reliable. Members who trust each other can trade more quickly at a lower cost. Members
may also trade as agents of nonmembers. They are liable to the exchange for faithfully
carrying out the terms of these trades. Exchange members will therefore accept accounts
only from those in whom they have confidence. All of these considerations enable the
exchange to operate on a larger scale, which increases liquidity.
The clearing house of the exchange also has a vital part in this process. A
member who buys futures contracts obtains liabilities of the clearing house that are offset
by the sales of futures contracts which constitute the assets of the clearing house. In
terms of the quantities of futures contracts bought and sold, the assets and liabilities of the
clearing house are always equal. The clearing house is to its members as a bank is to its
depositors and debtors. The backing of the clearing house behind the futures contracts
traded on the exchange enhances the fungibility of the contract. It enables the transition
from trading in forward contracts, where the identity of the parties involved is necessary
information to judge the safety and reliability of the contract, to trading in futures
contracts whose validity depends on the faith and credit of the organized exchange itself
and not on the individual parties to a transaction.
The analogy between money and futures contracts is even closer than the
preceding argument implies. Just as the total liability of a bank is limited by the size of
its reserves, so too the total liabilities of the clearing house of an organized exchange is
limited by the total amount of the commodity that may be delivered to settle futures
commitments that are still outstanding during the month the futures contracts mature.
This total stock of the deliverable commodity stands to the total liability of the clearing
house as the reserves of the bank stand to its deposits which are its liabilities. However in
contrast to a bank there need not be fixed relation between the deliverable stock of the
commodity and the size of the outstanding commitments of futures contracts. It is always
possible to extinguish a futures commitment by an offsetting transaction before the
maturity date. This occurs at the then prevailing price of the futures contract and not at
the price of the original futures transaction. The very absence of a close tie between the
size of the outstanding futures commitments and the stock of deliverable supplies of the
commodity enhances the liquidity of the futures contract. It allows the size of the
outstanding commitment to adjust flexibly to the needs of the transactors and to depend
on the mutually agreeable terms they can arrange among themselves. There is a risk of a
price squeeze only during the delivery month of the contract. Such a squeeze resembles a
run on a bank. A run on a bank occurs when nearly all of the depositors withdraw their
deposits almost at once. The effect on the bank is almost the same as would be the effect
on the clearinghouse if all buyers of future contracts stood for delivery. The analogy is
imperfect because the clearinghouse itself has assets in the form of commitments from
those who owe it the commodity in the delivery month because they had previously sold
Farmers:
Traders:
Can be sure that the commodity is available when they require it.
Can calculate the price since it is predetermined and can arrange everything
according to that.
Can buy goods without agents.
Can buy them even while sitting in their office.
Can be assured the quality of the good.
Commodities can be purchased with only margin amount instead of giving the
whole price.
Policy Initiatives:
Firstly, Government of India, in early 2003, has given mandate to four entities to
set-up nation-wide multicommodity exchanges. Secondly, expansion of permitted list of
commodities under the Forward Contracts (Regulation) Act, 1952 (FC(R)A). This
effectively translated into futures trading in any commodities that can be identified.
Thirdly, 11 days restriction to complete a spot market transaction (ready delivery
contract) is being abolished. Fourthly, non-transferable specific delivery (NTSD)
contracts is removed from the purview of the FC(R).
The above four policy decisions have the potential to proliferate futures contracts
usage in India to manage price risk. National level exchanges would make availability of
futures contracts across the nation in the most cost-effective manner through technology
and at the same time would improve the risk management systems to improve and
maintain financial integrity of futures markets in the country. Expansion of list of
Forward contracting is an important activity for any economy to meet raw material
requirements, to facilitate storage as a profitable economic activity and also to manage
supply and demand risk; forward contracts give rise to price risk, so to the need of price
risk management. Futures markets and forward contracts compliment each other for
effective price discovery and pricing of forward contracts. Price risk in forward
contracts can be managed through futures contracts.
With the value of India’s commodity economy being around Rs.300,000 crore a year
potential for much greater volumes are evident with the expansion of list of commodities
and nationwide availability. Opening up of the world trade barriers would mean more
price risk to be managed. All these factors augur well for the future of futures.
Demutualization has gathered pace around the world and Indian commodity
exchanges are also looking into it. Existing single and regional commodity exchanges
have realised the possible threat that the national level exchange may pose on their future.
Given the experience of the regional stock exchanges in India, commodity exchanges are
becoming proactive to counter such a threat. Commodity exchanges may not face the
threat of extinction because of the following reasons.
Above reasons are possibilities; national level exchanges could woo the existing
commodity exchanges and their members to the national stream. Such exchanges and
members are of relevance to the Indian economy as a whole and for the success of
commodity futures in particular important aspect the regulator and exchanges should
address is the regulator cost. Unless the regulator cost is kept low, thriving parallel
markets will never join the mainstream exchanges.
Impact of WTO regime: India being a signatory to WTO may open up the
agricultural and other commodity markets more to the global competition. India’s
uniqueness as a major consumption market is an invitation to the world to explore the
Indian market. Indian producers and traders too would have the opportunity to explore
the global markets. Price risk management and quality consciousness are two important
factors to succeed in the global competition. Futures and other derivatives contracts have
significant role in price risk management.
Way ahead:
Conclusion: In each of the two-year periods considered in live beef, the random
fluctuations were significantly lower than in each of the two-year periods without futures
trading. Likewise for port bellies the analysis indicates that for similar years in the price
cycle the random fluctuations were significantly lower when there was futures trading
than when there was not.
During the time periods considered in this study the only major changes in
information flows for these commodities were those resulting from futures trading.
Therefore part of the reduction in the variance in the random element can be attributed to
the inception of futures trading in these commodities and the relationship between the
reductions in random price fluctuations and futures trading is explained in part by the
improvements in the information flows fostered by futures trading.
Methodology used:
Variance Analysis
The above citied articles and other articles reviewed during the process of
gathering information on the topic have helped in understanding the reasons why
fluctuations exist in certain markets whether it is due to pure speculative causes or
whether any other hidden elements are influencing the price of the commodities in the
market. Also the various methods of analysing the data using different statistical tools
was learnt and how these statistical tools help in interpreting the data.
Another thing leant from the literature review is that one of the major advantages
of organizing futures exchanges is that the authority can influence the movement of spot
prices through futures intervention without causing fluctuations in commodity reserves
held by the intervention authority and hence without actually storing any commodity
reserves. An infinitely elastic spot-market intervention could, of course, fix the spot price
at an arbitrary level, but would induce changes in official commodity reserves.
Also that market information has a particularly important place among the factors that
determine what is offered for sale and what is demanded, and hence among the factors
that determine prices. As markets become more decentralized, information concerning
current and future demand and supply conditions must be carefully collected and
interpreted. Commodity future exchanges have been termed clearing centers for
information. Information relative to supplies, movements, withdrawals from storage,
purchases, current production, cash and futures prices and volume of futures trading, is
collected, collated and distributed by the exchange its members and the institutions such
as brokerage houses which serve the exchange. This information is used not only by
current and potential traders in futures, but it is also carefully evaluated by cash market
operators.
As such the literature review helped in understanding the market forces that determine
that demand and supply conditions in the market and how futures markets have helped in
this and to what extent they have influenced the prices of the commodities.
4.2 - Sampling technique: The sample size includes the following commodities and
the prices two years prior to introduction and after the introduction of futures was the
considered. The commodities are as follows:
Maize
Wheat
Castor
Gur
Turmeric
Soyabean
MAIZE
Maize is a cereal grain that was domesticated in Mesoamerica and then spread
throughout the American continents. It spread to the rest of the world after European
contact with the Americas in the late 15th century and early 16th century. Corn is a
shortened form of Indian corn i.e. the Indian grain. Maize is widely cultivated throughout
the world and a greater weight of maize is produced each year than any other grain.
While the United States produces almost half of the world’s harvest other top producing
Wheat:
Turmeric: Turmeric is a member of the ginger family. It’s also called tumeric or
kunyit insome Asian countries. Its dried roots are ground into a deep yellow spice
commonly used in curries and other South Asian cuisine. Its active ingredient is
curcumin and it has an earthy bitter peppery flavour.
Sangli a town in the southern part of the Indian state of Maharashtra, it is the largest and
most important trading centre for turmeric in Asia or perhaps in the entire world.
Tumeric powder is used extensively in Indian cuisine. Turmeric has found application in
canned beverages, baked products, dairy products, ice cream, yogurt, yellow cakes,
biscuits, popcorn-color, sweets, cake icings, cereals, sauces, gelatings, etc. It is
significant ingredient in most commercial curry prowders. Turnmeric is used to protect
food products from sunlight. Over-coloring such as in pickles, relishes and mustard, is
sometimes used to compensate for fading. In the Ayurvedic medicine, turmeric is
thought to have many medicinal properties and many in India use it as a readily available
antiseptic for cuts and burns. It is taken in some Asian countries as a dietary supplement
which allegedly helps with stomach problems and other ailments. Turmeric is currently
used in the formulation of some sunscreens. Turmeric paste is used by some Indian
women to keep them free of superfluous hair.
Castor Oil: It is a vegetable oil obtained from the castor bean. Castor oil and its
derivatives have applications in the manufacturing of soaps, lubricants, hydraulic and
brake fluids, paints, dyes coatings, inks, cold resistant plastics, waxes and polishes, nylon,
pharmaceuticals and perfumes. In internal combustion engines, castor oil is renowned for
Gur: Jaggery is the traditional unrefined sugar used in India. Though “jaggery’ is used
for the products of both sugarcane and the date palm tree, technically the word refers
solely to sugarcane sugar. The sugar made from the sap of the date palm is both more
prized and less available outside of the districts where it is made. Hence outside of these
areas, sugarcane jaggery is sometimes called “gur” to increase its market value. Jaggery
is considered by some to be a particularly wholesome sugar and, unlike refined sugar, it
retains more mineral salts. Moreover the process does not involve chemical agents.
Ayurvedic medicine considers jaggery to be beneficial in treating throat and lung
infections. Jaggery is used as an ingredient in both sweet and savory dishes across India
and Sri Lanka. Jaggery is also considered auspicious in many parts of India, and is eaten
raw before commencement of good work or any important new venture. Muzaffarnagar
district in Uttar Pradesh has the largest jaggery market in India.
Time series
A time series is a sequence of data points, measured typically at successive times, spaced
at (often uniform) time intervals. Time series analysis comprises methods that attempt to
understand such time series, often either to understand the underlying theory of the data
points (where did they come from? what generated them?), or to make forecasts
(predictions). Time series prediction is the use of a model to predict future events based
on known past events: to predict future data points before they are measured. The
standard example is the opening price of a share of stock based on its past performance.
where μ is a constant, β the coefficient on a time trend and p the lag order of the
autoregressive process. Imposing the constraints μ = 0 and β = 0 corresponds to modeling
a random walk and using the constraint β = 0 corresponds to modeling a random walk
with a drift. By including lags of the order p the ADF formulation allows for higher-order
autoregressive processes. This means that the lag length p has to be determined when
applying the test. One possible approach is to test down from high orders and examine the
t-values on coefficients.
The unit root test is then carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. Once a value for the test statistic computed it can be compared to the
relevant critical value for the Dickey-Fuller Test. If the test statistic is less than the critical
value then the null hypothesis of γ = 0 is rejected and no unit root is present.
4.6 - Tools used for testing of hypothesis: The following statistical tools were
used to analyze the data:
1) Log Natural
2) Augmented Dickey Fuller Test (for stationarity)
3) Standard Deviation
4) F-Test
1) SPSS
2) E-VIEWS
3) EXCEL SPREADSHEET
Wheat: (Fig-2)
1000
900
800
Value BEFORE
700
600
1 53 105 157 209 261 313 365 417 469
27 79 131 183 235 287 339 391 443 495
Case Number
1300
1200
1100
1000
900
Value AFTER
800
700
1 53 105 157 209 261 313 365 417 469
27 79 131 183 235 287 339 391 443 495
Case Number
4000
3000
2000
Value BEFORE
1000
1 55 109 163 217 271 325 379 433 487
28 82 136 190 244 298 352 406 460 514
Case Number
3400
3200
3000
2800
2600
2400
Value AFTER
2200
2000
1800
1 55 109 163 217 271 325 379 433 487
28 82 136 190 244 298 352 406 460 514
Case Number
1600
1500
1400
1300
1200
Value BEFORE
1100
1000
900
1 59 117 175 233 291 349 407 465 523
30 88 146 204 262 320 378 436 494 552
Case Number
2000
1800
1600
1400
Value AFTER
1200
1000
1 59 117 175 233 291 349 407 465 523
30 88 146 204 262 320 378 436 494 552
Case Number
700
600
Value BEFORE
500
400
1 59 117 175 233 291 349 407 465 523
30 88 146 204 262 320 378 436 494 552
Case Number
900
800
700
600
Value AFTER
500
400
1 59 117 175 233 291 349 407 465 523
30 88 146 204 262 320 378 436 494 552
Case Number
1600
1400
1200
1000
Value BEFORE
800
600
400
1 61 121 181 241 301 361 421 481 541
31 91 151 211 271 331 391 451 511 571
Case Number
900
800
700
600
Value AFTER
500
400
1 61 121 181 241 301 361 421 481 541
31 91 151 211 271 331 391 451 511 571
Case Number
2200
2000
1800
1600
ValueBEFORE
1400
1200
1000
1 61 121 181 241 301 361 421 481 541
31 91 151 211 271 331 391 451 511 571
Case Number
420
400
380
360
340
320
FTER
300
alueA
280
V
260
1 61 121 181 241 301 361 421 481 541
31 91 151 211 271 331 391 451 511 571
Case Number
5.1 - Hypothesis:
Null Hypothesis (Ho)
The volatility before and after the introduction of futures is the same
Alternative hypothesis (H1)
The volatility after the introduction of futures is less
The price collected for the periods prior to and after introduction of futures had to be
subjected to a stationarity test for this purpose Log natural or the price and a first lag
difference was taken. The data thus obtained was tested for stationarity to see if the data
was stationary with the help of E-views software the Augmented Dickey Fuller test for
stationarity was conducted to test if the data is stationary or not. Following are the
results and conclusions that were obtained from the test:
5.3 - Augmented Dickey fuller test (Unit root testing) to test data for
stationarity:
Table: 1
Wheat Before Introduction of Futures: Unit root test at 1 lag & 1st Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
5% Critical -2.8681
Value
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Table- 2:
Turmeric Before Introduction of Futures: Unit root test at 1 lag and 1st Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Table 3: Maize Before Introduction of Futures: Unit root test at 1 lag and 1st
Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Table 4:
Soyabean Before Introduction of Futures: Unit root test at 1 lag and 1st Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Table 5: Gur Before Introduction of Futures: Unit root test at 1 lag and 1st
Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Table 6:
Castor Before Introduction of Futures: Unit root test at 1 lag and 1st Difference
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
Unit root test is carried out under the null hypothesis γ = 0 against the alternative
hypothesis of γ < 0. The value for the test statistic computed is compared to the relevant
critical value for the Dickey-Fuller Test. If the test statistic is less than the critical value
then the null hypothesis of γ = 0 is rejected and no unit root is present. However, in our
analysis the value of the test statistic is greater than the critical value for the Dickey Fuller
Test. Hence null hypothesis of γ = 0 is accepted and unit root is present.
The daily prices of the commodities collected for a two year period prior and after
the introduction of futures. Log naturals of the prices of the commodities was removed
subsequent to which a 1st difference of the log natural values was removed. Standard
Deviation month wise was removed of the 1st difference. Subsequent to which a Standard
Deviation of the monthly Standard Deviations was removed. Based on which an F-Test
was conducted to see if the values are significant or not.
Commodity F- Test
Castor 6.424702507
Turmeric 384.9394
Wheat 5.863431
Soya Bean 15.2345
Gur 3.697444
Maize 14.6149225
If the value of the F-Test is greater that 1 then the Alternative hypothesis is accepted and
the null hypothesis is rejected. If the value is greater than 1 it is significant and thus we
can say that the volatility after the introduction of futures is less.
Castor: The F-Test value of Castor is 6.424702507 which is greater than 1 as such we
can say that after the introduction of futures the volatility in the futures market for Castor
has decreased and thus the alternative hypothesis is accepted in the case of Castor.
Turmeric: The F-Test value of Turmeric is 384.9394 which is a very high value and
thus is significant as it is greater than 1 we can thus conclude that the volatility in the
futures market of Turmeric after the introduction of futures has decreased. Here
alternative hypothesis is accepted and null hypothesis is rejected.
Wheat: The F-Test value of Wheat is 5.863431 which is greater than 1 thus we can say
that after the introduction of futures the volatility in the market has decreased. Thus
alternative hypothesis is accepted and null hypothesis is rejected in the case of Wheat.
Soya bean – The F-Test value of Soyabean is 15.2345 which is a significant value as it
is greater than 1. Thus we can conclude by saying that the volatility in the Soya bean
market has decreased after the introduction of futures. Alternative hypothesis is accepted
and null hypothesis is rejected.
Gur – The F-Test value of Gur is 3.697444 which is a significant value as it is greater
than 1. Thus we can say the volatility in the futures market has reduced after the
introduction of futures. Alternative hypothesis is accepted and null hypothesis is rejected.
Thus from the study we can conclude that the introduction of futures has reduced the
volatility in the futures market and thus the introduction of futures has helped cause
speculation in the market and keep the prices of the commodities under check.
The study of the prices before and after the introduction of futures has thus revealed that
the prices have remained stable after the introduction of futures trading and have thus
helped stabalize the prices of the commodities. We can thus conclude that Futures
Markets has brought a lot of stability in the market as a result of which the price
fluctuations have been bought under check and that the government has been successful
in controlling the prices of essential commodities. Also the National Commodities and
Derivatives Exchange (NCDEX) and the Multi-Commodity Exchange of India (MCX)
have been instrumental in providing a common trading platform for traders. By providing
the relevant information about the market they have helped the market participants keep
abreast of the latest developments they have also prevented black marketing and hording
of essential commodities in the market. Thus we can conclude by saying that the Futures
Markets has come as boon to farmers and to the consumers as well.
6.4 – Suggestions:
In the research study done only a limited number of commodities have been studied. To
have a perfect picture about the implications of the futures markets a study on the metals
that are traded on the exchange and whether there have been significant price fluctuations
in the metals market needs to be studied. With the government suspending the trading in
some of the commodities and metals a study on why trading in these metals and
commodities was suspended and whether the futures market was a possible cause for this
can be studied. This should offer ample opportunities for such research in the years
immediately ahead.
Research Articles:
Books:
Capital Market
Online Database:
www.jstor.com
Websites:
www.ncdex.com
www.mcxindia.com
www.agmarket.com
Search Engines:
www.google.com