Q9. How to strengthen and functioning of the international Financial system?

CASE -2, Page 6

 Short-termism -
 Increase transparency by increasing the disclosure requirements for structured financial
products, and strengthening the reporting requirements for the unregulated institutions.
 Reduce the pro-cyclicality of the financial system,

Q10. Contango?

Consider an example where the cash price for corn is $3.90 per bushel in the
physical market. If the December futures price for corn is at $4.00 per bushel and
the farmer sells futures on it, the basis is 10 cents under (the difference between
the physical price and the futures price for corn). The term under refers to the
fact that the cash price is below the futures price at the time of
the hedge transaction.
When the basis is under, it means that the market is normal or in contango—
there is no supply shortage. When the basis is over (the cash price is above the
futures price) it means that the market is a premium market or is in
backwardation—there is a supply shortage.
When the farmer employs a hedging strategy such as the one described, he
exchanges price risk for basis risk. Basis risk is the risk that the differential
between the cash price and the futures price diverges from one and other.
Therefore, the farmer still has risk on his crop, not outright price risk but basis
risk.