Futures Report Final Niam

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/274899807
Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in

Essential Commodities
Technical Report · February 2010

DOI: 10.13140/RG.2.1.3814.3521
CITATIONS READS
0 2,031
1 author:
Purushottam Sharma
ICAR-National Institute of Agricultural Economics and Policy Research
68 PUBLICATIONS 382 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Evaluation of package of practices of improved soybean production technologies and economic feasibility of soybean growers View project
Soybean Market intelligence View project
All content following this page was uploaded by Purushottam Sharma on 14 April 2015.
The user has requested enhancement of the downloaded file.

NIAM Research Report
Impact Analysis of Commodity Futures on

Spot Prices, and Risk Management in
Dr. Purushottam Sharma
CCS National Institute of Agricultural Marketing

(Ministry of Agriculture, Govt. of India)
Bambala, Near Pratap Nagar Sec-8, Kota Road
Jaipur- 302033, Rajasthan
National Institute of Agricultural Marketing (NIAM) has been established by
the Ministry of Agriculture, Govt. of India as an autonomous body with the
prime mandate such as training, consultancy, research, education and policy
support. Training is imparted to higher and middle level executives of the
state agricultural marketing board, Directorate and line departments.
Consultancy is carried out for setting up of markets and various market
infrastructures as well. Action oriented research is conducted by NIAM to
give solutions for specific problems in the field of agricultural marketing.
With a view to making agricultural marketing research a more effective
instrument for making agricultural marketing system of the country a
effective system of rural and agricultural change and strengthening the policy
making and planning machinery, the institute undertakes and sponsors
research in agricultural marketing relating to the problems of regional and
national importance.
NIAM is also engaged in training young human resource through its
prestigious education programme called Post Graduate Diploma in Agri
Business Management. These apart, NIAM is supporting Ministry of
Agriculture in policy formulation and various assignments given time to
time.
Dr. Purushottam Sharma


Published
February, 2010
Published by
Anurag Bhatnagar, IAS
Director General
Printed at
Contents
S. No. Chapters Page
List of Tables
List of Figures
Foreword
Acknowledgement
Executive Summary
1 Introduction 4-7
1.1 Economic Rationale of Futures Markets 6-7
1.2 Objectives 7
2 Development and Growth of Commodity Futures in India 8-11
2.1 Origin of Commodity Futures in India 8-9
2.2 Structure of Commodity Futures in India 9
2.3 Growth of Commodity Futures in India 9-11
3 Data and Methodology 12-17
3.1 Selection of Crops 12
3.2 Selection of Sample 12-13
3.3 Analytical methods 13-17
3.3.1 Pre-and Post futures spot volatility Analysis 13-16
3.3.2 Futures Trading Activity and Spot Price Volatility 16-17
4 Volatility in Spot Prices and Commodity Futures 18-38
4.1 Seasonal volatility of commodity prices 21-23
4.2 Impact of Futures on Volatility 23-36
4.3 Impact of Trading Activity on Volatility 36-38
5 Performance of Commodity Futures Markets 39-47
5.1 Risk Management 39-44
5.2 Convergence of Spot and Futures 45-47
6 Physical Delivery Procedure on Commodity Exchanges 48-59
6.1 Delivery Procedure 48-55
6.1.1 Tender Period Margin 50
6.1.2 Delivery Period Margin 50
6.1.3 Pay in and pay out of funds and commodities 51
6.1.4 Weighment at the time of delivery 51-52
6.1.5 Sampling and Analysis at the Time of Delivery 52-53
6.1.6 Delivery Related Charges 53
6.1.7 Payment by Exchange to the Tenderer 54-55
6.2 Taking Physical Delivery 55-56
6.2.1 Remat of warehouse receipt 56
6.3 In Case of Cash Settlement 57
6.4 Delivery and Settlement Procedure: At A Glance 57
6.5 The mandatory requirements for physical delivery and 57-59
farmers’ participation
7 Knowledge and Perception of Farmers and Traders Regarding 60-79
Futures
7.1 Knowledge and Perceptions of Farmers on Commodity 60-73
Futures
7.1.1 Socio-economic conditions of Farmers 60-61
7.1.2 Cropping pattern of selected wheat farmers 62-63
7.1.3 Awareness regarding commodity futures 63-64
7.1.4 Crop Area Allocation Decision 64-65
7.1.5 Farmers Information Seeking Behaviour and Source of Price 65-66
Information
7.1.6 Risk Management through Retaining Produce for future sale 67
7.1.7 Crop Sales Storage for future sale 67-70
7.1.8 Benefits of Storage 70-72
7.1.9 Farmers inability to manage risk through Commodity Futures 72-73
7.2 Perceptions of Wheat Traders and Processors 73-79
7.2.1 Characteristics of Traders and Processors 73-74
7.2.2 Exchanges Traders and Processors Trade on 75
7.2.3 Knowledge on Commodity Futures 75-76
7.2.4 Who influences decision 76-77
7.2.5 Impact of futures on Trade 77-78
7.2.6 Perception regarding commodity futures 78-79
8 Conclusions and Recommendations 80-92
9 References 92-95
Tables
Table Name of Table Page No.

No.
2.1 Commodity Group-wise Value of Trade
4.1 Volatility in Wheat and Maize Prices (in % CV)
4.2 Volatility in Wheat Prices at Bareilly Market (in % CV)
4.3 Volatility in Wheat Prices at Shahjahanpur Market (in % CV)
4.4 Volatility in Maize Prices at Davangere Market (in % CV)
4.5 Descriptive statistics of Wheat Bareilly Monthly SD of Spot Price
Returns
4.6 Descriptive statistics of Wheat Shahjahanpur Monthly SD of Spot
Price Returns
4.7 Descriptive statistics of Maize Davangere Monthly SD of Spot
Price Returns
4.8 Estimates of GARCH (1,1) model with Futures and Ban Dummy
for Wheat Bareilly
4.9 GARCH (1,1) estimates before and after futures Wheat Bareilly
4.10 Estimates of GARCH (1,1) model with Futures and Ban Dummy
for Wheat Shahjahanpur
4.11 GARCH (1,1) estimates before and after futures Wheat
Shahjahanpur
4.12 Estimates of GARCH (1,1) model with Futures Dummy for Maize
Davangere
4.13 GARCH (1,1) estimates before and after futures Maize Davangere
4.14 Granger Casualty Test for Wheat with lag 8
4.15 Granger Casualty Test for Maize
5.1 Ratio of standard deviation futures to standard deviation spot
prices for Wheat
5.2 Ratio of standard deviation futures to standard deviation spot
prices for Maize
5.3 Ratio of standard deviation of basis to standard deviation of spot
of Wheat
5.4 Ratio of SD basis to SD spot Maize
5.5 Spot and Futures Prices of Wheat
5.6 Spot and Futures Prices of Maize
6.1 Complete Schedule of Settlement/ Delivery
7.1.1 Socio-economic conditions of selected Wheat growing farmers in
Hardoi
7.1.2 Socio-economic conditions of selected maize growing farmers in
Davangere
7.1.3 Cropping intensity of wheat farmers of Hardoi
7.1.4 Cropping pattern of selected farmers in Davangere
7.1.5 Factors for deciding crop area allocation by farmers
7.1.6 Factors for deciding crop area allocation by farmers
7.1.7 Wheat farmers’ response (% farmers) on source of price
information
7.1.8 Maize farmers’ response (% farmers) on source of price
information
7.1.9 Proportion of Farmers stored wheat for Sale in Future time
7.1.10 Proportion of Farmers stored Maize for Sale in Future time
7.1.11 Duration of Wheat storage by Selected Farmers in Hardoi
7.1.12 Duration of Maize storage by Selected Farmers in Davangere
7.1.13 Factors determining Decision to store wheat by farmers for future
sale
7.1.14 Factors determining decision to store maize by farmers for future
sale
7.1.15 Factor determining when to market from storage decision
7.1.16 Factor determining when to market from storage decision
7.1.17 Increased price realized due to storage of Wheat in Hardoi
7.1.18 Increased price realized due to storage of Maize in Davangere
7.2.1 Wheat traders and processors take position on exchanges as
7.2.2 Maize traders and processors take position on exchanges as
7.2.3 Wheat traders trade on Exchanges
7.2.4 Maize traders trade on Exchanges
7.2.5 Knowledge of Wheat traders regarding commodity futures
7.2.6 Knowledge of Maize traders regarding commodity futures
7.2.7 Who influences decision of Wheat traders for Commodity futures
7.2.8 Who influences decision of Maize traders for Commodity futures
7.2.9 Wheat traders’ response on impact of commodity futures trading
7.2.10 Maize traders’ response on impact of commodity futures trading
7.2.11 Perceptions of wheat traders on commodity futures
7.2.12 Perceptions of Maize traders on commodity futures
Figures
Fig. Name of Figure Page No
No.
2.1 Value of Trade on Commodity Futures
4.1 Volatility plot for wheat Bareilly
4.2 Volatility plot for wheat Shahjahanpur
4.3 Volatility plot for maize Davangere
Foreword
The spurt in market prices of agricultural commodities is continually proving a tough task
for the policy makers and leaders of the country. The economic role of futures trading is
providing platform for risk management, price discovery and stabilization of market
prices of underlying commodities. Futures trading in agricultural commodities and its
impact on market prices is on the high priority for the policy makers. There are contrary
views on the issue; according to one school of thought, the inflationary rise in prices of
essential commodities is caused by the excess speculation in commodity futures trade,
while others are of the opinion that with the introduction of futures trading help in
stabilizing market prices.
With this provocation the study was undertaken to understand the impact of introduction
of futures trading on spot market prices of selected essential commodities. Besides
addressing the basic issue of impact of commodity futures on spot market prices, the
scope of the study was enlarged to look into the possibilities of increasing the reach of
futures trading by understanding the level of awareness among different stakeholders and
the benefits to them through the instrument and understanding the physical delivery
mechanism and its problems. The study made use of time series data on daily basis
collected from markets and primary data collected through interviewing stakeholders like
farmers, traders, processors, etc. The study has used innovative methodologies and
analytical techniques to analyse the impact of commodity futures on market prices.
We hope that this analytical study assessing the impact of commodity futures trading on
market prices alongwith the issues in physical delivery of commodity on exchange
platform and the perceived benefits and role for different stakeholders, shall further
strengthen the informed decision making process while deliberating future direction for
policies and planning in the country’s commodity futures sector.
Anurag Bhatnagar, IAS

Director General
NIAM
Acknowledgement
Sh. Anurag Bhatnagar, IAS, Director General, National Institute of Agricultural

Marketing (NIAM), Jaipur is the spirit behind this effort who not only motivated me to
do this but encouraged me throughout with lot of peace and counseling. He is the real
inspiration encouraging me to take up the study right at the time and funded from
institute for the study. The author is greatly indebted to him for his constant
encouragement and guidance throughout the study, and for sparing his valuable time for
going through the research report and offering critical comments to improve the quality
of contents and presentation.
The author is greatly indebted to the farmers, traders, processors and other stakeholders
of the commodity futures for sharing their views and information, without which the
study could not be completed successfully and with meaning conclusions. The effort of
the field investigators is immense in bringing out the facts in right perspective, author is
highly thankful to all of them.
Dr. Sattram Singh and Dr. K. C. Gummagolmath, Assistant Directors has always been
supportive to me and helped greatly in conducting research and writing report with the
critical comments for improving the manuscript. Their cooperation and contribution is
thankfully acknowledged.
Sh. Sanjay Kaul, CEO NCMSL, Mumbai and Dr. V. Shunmugam, Chief Economist,
MCX, Mumbai, contributed much in the shaping of this report as an external referee
offering several critical comments and valuable suggestions. The author record his deep
sense of gratitude for insightful comments and suggestions on the report.
The usual disclaimer namely for any errors and omissions the author remains responsible
appears here also.
Executive Summary
In any agriculture-dominated economy, like India, the farmers face not only yield risk but
price risk as well. Commodity futures and derivatives have a crucial role to play in the
price risk management process, especially in agriculture. Commodity derivatives and
futures are instruments to achieve price discovery and price risk management. After
withdrawal of prohibition on futures trading in 2003, the volume of futures trade
increased exponentially in agricultural commodities till 2005-06 but the trade in Bullion
and other metals over took it in 2006-07. Overall, non-agricultural commodities have
been dominating the futures markets in India.
There was a significant upsurge in prices of some of the agri-commodities from the
middle of 2006 to the first quarter of 2007, though the contribution of agricultural
commodities, particularly ‘food grains’, in WPI inflation was small due to relatively low
weight. This spurt in prices of essential commodities and increasing inflation was,
according to one school of thought, caused by the excess speculation in commodity
futures trade and had become an issue of concern for the government as well as people.
In response to the public outcry against futures markets and their perceived role in
causing inflationary trends in the prices of essential commodities, on January 23, 2007,
the FMC, at the suggestion of the GoI, de-listed two commodities - urad and tur, both
pulses from trading on futures exchanges out of concern about rising food prices which
was perceived as caused by speculation in the futures markets. Later, on February 27,
2007, FMC limited the trading in wheat and rice futures to squaring off until the
expiration of running contracts, for similar reasons. Hence it is felt imperative to study
the working of futures markets in agro-commodities, particularly essential commodities
with the specific objectives of knowing the impact of commodity futures on spot price
volatility, to understand the problems in physical delivery procedure and farmers and
traders views on commodity futures trading.
Two crops viz.; wheat and maize have been selected for the study. Wheat being the major
staple food crop and futures for wheat has been banned. Maize is also a cereal crop for
which futures trade is continuous. Secondary as well as primary data were used to fulfill
the objectives of the study. Daily prices of Wheat from Bareilly, Shahjahanpur and
Hardoi markets and for maize from Davangere and Bangalore markets were collected
from January 2000 to December 2008. Futures prices and trading volume and open
interest data were collected from the website of NCDEX.
For collection of primary data, largest producing states and districts, one for each
commodity, were selected for Wheat (Hardoi in Uttar Pradesh) and Maize (Davangere in
Karnataka). From the district selected four villages for wheat and three villages for
maize, in consultation with district agriculture officer and mandi officials, were selected
for the study from the largest producing taluka/block. About 15% of the total crop
growing farmers were selected randomly from the list prepared for crop growers in each
village. To fulfill the objectives of the study, annualized volatility in market prices of
wheat and maize was analysed (seasonal as well as before and after futures trading) from
the return series of mandi prices.
To know the impact of introduction of futures on the volatility of spot prices, a measure
of volatility was so constructed and regress it on a proxy variable (to account for macro-
economic factors) and a dummy variable (to account for the impact of futures trading).
Monthly volatility measure has been constructed as standard deviation of daily spot
returns. This volatility series was constructed for wheat at Bareilly and Sahjahanpur
market and for maize at Davangere market.
To know the effect of futures trading activity on the volatility of commodity prices, the
Granger causality test was conducted by running the regressions on the wheat and maize
futures trading data collected from NCDEX. This test will help determine if there is a bi-
directional impact flowing from one to other prices and vice versa. Apart from prices, the
test is also used for understanding the relationship between volumes and prices of wheat
and maize.
The annualized volatility was observed to be higher for the pre futures period for wheat
where it was upto 26% during 2003 in Shahjahanpur and 27% for the year 2001 at
Bareilly. Volatility of Wheat before futures period was 49% at Shahjahanpur and Bareilly
markets, which has declined to 31% and 33% during the post futures period, respectively.
But at Hardoi market volatility in wheat prices was 15% in pre-futures period which has
increased to 31% in the post futures period.
In case of maize, annualized volatility was observed to be increased in the post futures
period at Davangere and Bangalore markets. This was mainly because of the higher day-
to-day variation in arrival grades of maize in the APMC markets and prices in the market
were not reported separately for different specified grades. Thus, the annualized volatility
analysis gave the mixed results for the two selected commodities.
The volatility in wheat prices at Bareilly market was higher during pre-futures period.
Monthly pattern shows higher volatility during harvesting months and in the October
month. Post futures monthly volatility in wheat prices observed to be higher during pre-
harvest and harvest months particularly in the year 2006. Monthly volatility in wheat
prices at Shahjahanpur indicates that wheat prices in March and April months were
fluctuating higher during pre-futures which have reduced during post futures but during
post futures volatility in wheat prices in the lean months has increased compared to pre-
futures period. Monthly volatility pattern in Maize prices at Davangere market suggests
that during pre-futures period the volatility in maize prices was higher in pre-harvest and
harvest months which also continued during post futures period. Also the volatility
during lean months has increased marginally during the post- futures period.
Impact of Futures on Volatility

The preliminary analysis was conducted on the mandi by the descriptive analysis and
unconditional volatility on the price data collected from Bareilly and Shahjahanpur for
wheat and from Davangere for maize, the monthly SD of daily return series of this data
was modeled as GARCH (1,1) to know the impact of futures introduction on the series.
The purpose of this study is to empirically investigate the effect of introduction of futures
trading on the market price volatility of wheat and maize. The main hypothesis that the
volatility of the spot market has not changed after the introduction of futures is
investigated along with others such as change in news transmission speed and change in
persistence of volatility shocks.
The main finding of this investigation is that there has not been any significant change in
the spot price volatility after the introduction of futures trading for both market prices in
case of wheat and maize, implying thereby that there in no impact of introduction of
futures trading in wheat and maize. However, the coefficient for the after futures ban in
wheat period was found significant and negative in case of Bareilly, suggesting that the
volatility there is marginal reduction in volatility after ban in futures.
To examine if the nature of volatility remains same after the introduction of futures in
wheat and maize and after delisting of wheat futures, the sample is divided into pre-
futures, post-futures and after futures ban and then run the GARCH process for each
period. From the results of analysis indicated that there is no significant change in the
nature of volatility in three sub-periods for wheat at Shahjahanpur and two sub-periods
for maize at Davangere, suggesting that introduction of futures in wheat does have
neither stabilizing nor destabilizing effect on wheat and maize, and therefore, did not
contributed to the increase in the market efficiency of the spot markets.
But in case of Bareilly market the nature of volatility has changed after the introduction
of futures trading. Thus, pre-futures the effect of information was persistent over time,
i.e. a shock to today’s volatility due to some information that arrived in the market today,
has an effect on tomorrow’s volatility and the volatility for days to come. After futures
contracts started trading the persistence has disappeared. Thus, any shock to volatility
today has no effect on tomorrow’s volatility or on volatility in the futures. This might
suggest the increase in market efficiency after futures, since all information is
incorporated into prices immediately.
In order to check the parameter stability in the regression models of pre-, post-futures and
futures ban, assuming constant error variance, Chow test for structural change signifies
that the regression coefficients statistically does not differ for three sub periods, thus
suggesting that there is no any structural change in the nature of volatility in all three
price series.
Impact of Trading Activity on Volatility

The results of the Granger causality test suggested that volume of wheat trade in futures
had a significant causal impact on open interest and vice versa, both volume and open
interest on futures had significant causal impact on spot price volatility and not vice
versa, futures prices had significant causal impact on spot prices and vice versa. It is
evident from the results of the Granger causality test for maize that futures prices had a
significant causal impact on spot prices of maize and vice versa, volume had a significant
causal impact on futures prices and vice versa, and volume had a significant causal
impact on spot price volatility and not vice versa. Thus, volatility in futures prices does
have a causal effect on the volatility in spot prices of wheat and maize. Further, the
futures trading activity has a significant causal effect in spot prices of wheat and maize.
Performance of Commodity Futures

To understand the performance of commodity futures, ratio of standard deviation of
futures to spot price and ratio of standard deviation of basis to spot was calculated. The
results indicated that the futures and spot price variability is substantially different for
Wheat and Maize. The results suggests that the futures price variability is substantially
less than the cash price variability in some of the contracts of wheat, indicating inefficient
utilization of information if we assume cash markets are efficient. The month-wise
analysis indicates that there may be the increased speculative activity in the delivery
month in few contracts or prices not incorporation current information efficiently.
For maize futures, the ratios are either higher than 1.25 or lower than 0.75 for most of the
contracts analysed indicating that the futures prices do not utilize information efficiently
as their cash markets. The ratio turned out to be greater than 1.25 in the expiry/ delivery
month contracts for more 50 per cent of the contracts indicating that futures price
volatility was higher compared to the spot prices, and less than 0.75 for about one fifth of
the contracts indicating increased speculative activity in the delivery month or prices not
incorporation current information efficiently.
Basis and spot price risks are assessed by computing their standard deviation for each
month and for every contract. In case of wheat futures at NCDEX, the ratios shows that
there were very few contracts with less than 0.5 ratios and in most of the contracts the
ratio was worked out to be more than 1.0 implying thereby that variation in basis was
higher than the spot price variation leaving meager chance to hedgers to manage risk.
Thus, futures contracts in wheat does not provide hedge opportunity. In case of maize,
the ratios worked out were less than 0.5 for most of the cases indicating that the volatility
in basis is less that the volatility in prices and these results suggests that the hedger find
futures useful to manage business risk. Thus futures contracts of maize provide perfect
hedge opportunity to minimize their risk through hedging activity.
The mandatory requirements for physical delivery and farmers’ participation
- The participants giving delivery are required to be registered with sales tax
- The participants giving delivery are required to be registered with the respective
local mandi and mandi tax paid receipt /certificate is required to be handed
over/transferred to the next buying member/client along with other settlement
related documents like invoice/s.
- Requirement for opening of client account: proof of identity, proof of address,
proof of bank account, proof of demat account, proof of sales tax registration,
copy of PAN card (Mandatory), copy of latest income tax return and information
about last three years income and investment. Farmers as a participant of
commodity futures trading can’t even open an account with the broker members
as list of documents required for opening of accounts with brokers may not be
available with farmers like PAN number, registration of sales tax, copy on income
tax return, etc.
The response regarding delivery of commodities on or from commodity exchange
designated warehouses revealed that no any wheat and maize trader and processor taken
physical delivery as well as no one tendered for physical delivery. The reasons cited for
not taking or making physical delivery were the problem of delivery location, problem of
assaying in the district place, complex procedure of taking or tendering physical delivery,
time consuming process of taking or making physical delivery, etc. Some of the traders
in group discussion revealed the common problems they encounter with in physical
delivery are:
- Delay in giving physical delivery- this even may take 15 to 20 days after the date
of contract expiry. According to contract specifications and exchanged delivery
guidelines, there is no compensation in case of such late deliveries, and the
participants has to bear the loss, if any, to them in terms of difference on the price
at contract expiry at which physical delivery was settled and the change in spot
prices during those 15 to 20 days.
- Inferior quality of the delivered commodity- is another type of problem few of the
traders face in the physical delivery and also not compensated for the lower
quality in terms of charging discounted price. They further revealed that due to
this reason we do not go for physical delivery of commodities instead prefers to
settle in cash.
Farmers Awareness and Decision Making

From the observations of the study it can be inferred that, in case of wheat farmers only 2
farmers out of 241 total sampled farmers in Hardoi district of Uttar Pradesh have only
heard about commodity futures. They do not know further about the commodity futures
and its direct or indirect benefits they can derive. In case of maize, only 4 farmers out of
251 total selected farmers from Davangere district of Karnataka were aware about
commodity futures.
While deciding on the area to be put to cultivation of different crops (crop selection and
area allocation decision), all category of farmers consider previous years price of the crop
in mind along with the factors like price of related crop and resource availability with
them. The maize farmers in Davangere district considers previous year’s price of the crop
as a major factor to decide the area allocation at the time of sowing maize. The other
factors farmers consider at the time of deciding on area allocation under different crops
were price of the related crop, resource availability with them and labour availability.
Since most of the farmers were not aware on direct and indirect use of commodity futures
in their farming business, they do not consider futures price of harvest period contract at
the time of making decision on area allocation to a particular crop during sowing of the
crop.
Farmers Information Seeking Behaviour and Source of Price Information

As regards price information source, wheat farmers in the study area bank mainly upon
traders (83% farmers reported sourcing price information from traders) followed by
fellow farmers (43%), news paper (38%) and television/radio (37%). Very few farmers
take price information from mandi, implying that for farmers in the study area traders
were easily accessible and trusted source for getting information related to commodity
prices. Major source for getting price information for maize farmers in Davangere district
were traders in the market (57% of the total farmers responded seeking price information
from traders), followed by fellow farmers (36%), news papers (28%), and radio/television
(26%).
Risk Management through Retaining Produce for future sale

The sales deferring behaviour of wheat farmers in Hardoi district revealed that one-fourth
of the total farmers store their produce of wheat for taking benefit of higher prices. About
76% farmers of medium category were highest to store their produce for future sale
followed by Semi-medium farmers (48%) and marginal and small farmers (10%). For
storing the produce no any farmer availed credit or pledge loan. If benefits of
warehousing receipt and pledge loan scheme be transferred through greater awareness
among targeted farmers, more farmers can get benefit of higher prices in the lean season.
In case on maize, about 45% farmers defer the sale of maize at the time of harvest to gain
higher prices in the future point of time. Majority of large and medium farmers defer sale
of maize for future period and store maize in their homes/godowns, while only a quarter
of marginal and small farmers store maize for managing price risk and taking benefit of
higher prices in the market during lean season.
The farmers stored their wheat for seven to eight months period after the harvest to take
the maximum benefit of the increased market prices during the lean season. That means
they sale their wheat in the months of November-December months. Maize farmers in
Davangere deferred sales for about 3-6 months and store the produce. The farmers sold
their produce at the time of high prevailing prices in the market after 3-4 months of
storage.
Decision factors for deferring sales of wheat produce and storing it for sale in future point
of time when prices in the market are high are previous years price of the crop during
lean season and expectation of high price in future point of time through own analysis. It
is obvious that with the negligible awareness about commodity futures, farmers does not
consider futures price while deciding on deferring sale and storing wheat for sale in
future. Prices of maize realized by farmers in the previous year and own analysis of
expected price in the future point of time were the major factors based on those farmers
decided to defer sale and put the produce to store to minimize price risk and gain from
higher prices.
Money requirement for meeting different obligations by farmers was the major factor that
decides the time of sale of stored wheat by farmers in Hardoi followed by the prevailing
high price in the market during lean season. Farmers under medium farm size group were
the majority of farmers who stored wheat for sale in future and they decide to sale stored
wheat when prices in the market were high during lean season. The time of sale of stored
maize with the selected farmers in Davangere district of Karnataka was decided by the
prevailing price in the market. More than 90% farmers who stored maize for future sale
responded that they decide time of sale on the basis of prevailing high price in the
market. About 70% responded the need of money for meeting different family
obligations as a factor in deciding the time of sale of stored maize.
The farmers, who had stored wheat, gained Rs. 46.5 per quintal benefit in terms of higher
price than the harvest period price. Semi-medium farmers got highest benefit of Rs. 64.5
per quintal followed by Medium (Rs. 49.5/qt.) and marginal & small farmers (Rs. 38/qt.).
The risk management by maize farmers through deferring sales of maize produce and
selling it after 3-5 months paid on an average Rs. 31 per quintal to the selected farmers as
increased price realization compared to the prices in the harvest period. Since most of the
wheat and maize farmers were not aware about the commodity futures trading and role of
futures price as an indicative spot price for future date, they did not consider take use
futures price indication at the time of sale of their produce in the market.
Farmers’ inability to manage risk through Commodity Futures

The major factors that hinder the farmers to take active part in commodity futures and
benefit directly through hedging were:
- most of the farmers were unaware on commodity futures concept and thus unable
to benefit from this market instrument;
- the average total production of wheat and maize per farmers is well below the lot
size on commodity futures and leaving home requirement aside, the marketable
surplus with them did not quality the lot size, hindering them to take part in
commodity futures; the cash requirement to fulfill the margin requirement is
about Rs 10,000 to 15,000 they have to deposit at the time of entry in the market,
maintain mark-to-market margin and tender period & Delivery period margin
which was 2-3 times higher than normal margin requirement is so high that they
need finance;
- The delivery centres were also limited to few locations and that too far away from
their locations leading increased cost of delivering commodities in physical to
exchanges;The fear of non-compliance of commodity quality to the contract
specifications at the time of assaying leading to major loss to farmers;
Perceptions of Wheat Traders and Processors

About 31 traders and 5 processors of wheat were selected for the study on their
perceptions and use of commodity futures in their business. Ten traders from Bareilly and
Shahjahanpur APMC markets and 11 traders from Hardoi market were selected for the
study. Out of total 34 traders and processors trade on commodity futures, 15% trade on
NCDEX exchange platform, 24% trade on MCX, and 62% trade on both the national
level commodity exchanges. All the traders trade in wheat and other commodities in
which these traders trade were Guar, Mentha oil, Pulses, Silver, Gold and Crude. Out of
25 maize traders and processors selected in davangere market who trade in commodity
futures, 68% trade on NCDEX exchange platform and 32% trade both in NCDEX and
MCX exchange platform. Maize traders in Davangere trade mainly in maize, paddy, and
sunflower in mandi and in futures they trade mainly in Maize, Guar, Chilli, gold, silver,
etc.
Knowledge of Traders on Commodity Futures

Out of the total traders and processors trade on commodity futures, responded that all
know about commodity futures, only 44% were aware about the benefits of commodity
futures, 38% know about the role of commodity futures in their business, only 12% know
on how to participate in commodity futures, only 1 trader knows hedging and physical
delivery procedure and contract specifications, and only 12% were aware about margin
and cost of hedging.
Almost all the maize traders and processors in Davangere responded that they know
about commodity futures and their benefits to them and the economy. About 96% traders
and processors responded that they know the role of commodity futures trading in their
business and about 85% know about the procedure of participating in commodity futures
trading. About 93% traders and processors were aware about hedging mechanism on
commodity futures but only 33% know about the physical delivery procedure of
commodities on exchange platform and only 30% were aware about margin system and
cost of hedging. Seventy per cent of the traders were aware on contract specifications of
commodities traded on exchange platform.
Most of the wheat traders and processors responded that their position in commodity
futures was mainly based on advice from broker operator and specialists’ opinion. Only
one trader responded that his decision to take position in commodity futures was based
only on own analysis of supply and demand condition of the commodity they trade in. A
quarter of maize traders and processors taken position in commodity futures based on
own analysis of demand and supply condition of the commodity. About two-third traders
take position based on advice either from broker operator or specialist opinion.
Impact of futures on Trade

On the question of impact of commodity futures with Wheat traders in Hardoi, Bareilly
and Shahjahanpur markets of Uttar Pradesh, most of them responded that there was no
any effect of introduction of commodity futures on their turnover, cost of trade, profit
earning out of their business and price risk management. A quarter of wheat traders
responded that the price risk after ban of futures trading in wheat has increased. On the
other hand, most of the maize traders and processors responded that turnover of their
trade had increased after the introduction of futures trading in maize, 85% responded that
the cost of trade had reduced, 81% responded that profit have increased and 96% traders
and processors had responded that their price risk have reduced after introduction of
commodity futures in maize.
Perception regarding commodity futures

The perception of most of the wheat traders and processors was positive on commodity
futures trading as about 50% traders responded that the futures trading is an instrument of
better price discovery, price risk management and futures prices help in better bargaining.
But still half of the traders and processors selected does not know much about these
aspects or were negative on these aspects of commodity futures requiring thorough
understanding of the concepts and process. Thus, thorough training of this important
segment of stakeholders of commodity futures is required.
On the perception of maize traders and processors, more than 70% responded that the
commodity futures is an instrument of better price discovery, price risk management, it
disseminates real time price information and thus help in better bargaining at the time of
buying/ selling of commodities. Commodity futures is transparent and trusted trading
platform was responded positive by more than 90% traders.
designated warehouses revealed that no any trader processor taken physical delivery as
well as no one tendered for physical delivery. The reasons cited for not taking or making
physical delivery were the problem of delivery location, problem of assaying in the
district place, complex procedure of taking or making physical delivery, time consuming
process of taking or making physical delivery, etc.
Recommendations:
- Exchanges and clearing houses should ensure the timely delivery of the
commodity and in case of delay in the delivery, buyers should be compensated
upto the date of delivery instead of paying a pert from the penalty amount charged
from seller on the basis of E+5, in case of loss to the buyer participant.
- Exchanges and clearing houses should also ensure delivery of commodity
satisfying the quality as per the contract specifications else compensate through
charging discounted price commensurate with the difference in quality instead of
exact entry price.
- Since awareness regarding commodity futures among farming community as well
as among traders and processors is very limited. Thorough training on project
basis for farmers and traders on the use and role of commodity futures prices is
required. This will boost up the direct and indirect use of commodity futures in
farming as well as trading business and risk minimization.
- Since most the farmers in the country are small and marginal and semi-medium
farmers having minimum marketable surplus, intermediary organizations may be
promoted who would assume the role of aggregator and hedge the farmers stock
on futures on behalf of farmers. These organizations should be given thorough
training on all aspects of commodity futures and agricultural marketing and
should have legal status for taking positions on behalf of farmers in commodity
futures.
- Introduction of smaller trading lots in all the major food grains items may ensure
mass participation by the farmers leading to in the increased stability in the
futures as well as in physical market. With the introduction of small trading lots
the participation of genuine participants and farmers as hedgers can be increased
in futures trading which would lead to better price discovery.
Chapter 1
Introduction
Majority of farmers’ in India faces two types of risks in their farming business. First, the
productivity risk caused by weather uncertainties, pests and disease infestation,
technology, inputs, etc. Second, the market risk arising out of price fluctuations in the
market, and inefficient and long marketing chain. Before initiating economic
liberalization policies in 1991, the states and central government were intervening almost
every stage of marketing of agricultural commodities. The process of withdrawal of
government intervention initiated along with the liberalization of the economy has been
accelerated with the implementation of Agreement of Agriculture under World Trade
Organisation. With the globalization and liberalization of agricultural trade and
marketing, international boundaries are wide open for trade of agricultural commodities.
Prices of agricultural commodities are determined increasingly by market forces and with
the influence of international demand and supply conditions of a commodity leading to
volatile prices in the domestic market. This has increased the price risk for farmers and
other various stakeholders playing in the domestic market. To help manage price risk,
government has been encouraging commodity futures.
In India, commodity derivatives trading has a long history of more than a century from
now but was government was more often used interventions as agricultural commodities,
in which most of the contracts traded, are price sensitive in nature. The government
decision to allow the setting up of modern national commodity exchanges helped revive
the futures markets after nearly 40 years. The government has permitted futures trade in
more than 100 commodities under various groups including agricultural commodities,
metals and energy products.
A key aspect of the process of strengthening agricultural markets is the question of

obtaining efficient derivative market for commodities. If derivative markets function
adequately, some of the policy goals regarding price volatility of agricultural
commodities can be addressed in a market oriented manner. The National Agriculture
Policy (2000) has articulated this reasoning well and the ban on futures trading was lifted
for all commodities in April 2003. Domestic entities facing price risk abroad are
permitted to utilize foreign derivative markets to address their price risk management
need.
The hedging and price discovery functions of future markets promote more efficient
production planning, storage, marketing, and rationalization of transaction costs & better
margins for producers (Gilbert, 1985; Varangis and Larson 1996; Morgan, 1999; World
Bank 1999). There have been efforts to open up futures trading in commodities since the
inception of economic reforms in India in 1991, and the increased emphasis in National
Agricultural Policy, 2000. The real respite for the derivatives markets in commodities
came on April 1, 2003 the Government of India issued a notification rescinding all
previous notifications which prohibited futures trading in a large number of commodities
in the country. This was followed by another notification in May 2003 revoking the
prohibition on non-transferable specific delivery forward contract.
With this, three national level multi-commodity exchanges started functioning nationwide
and commodity futures trade in the country grown many-fold. But four commodities
(wheat, rice, urad and tur) were de-listed for futures trading towards the end of financial
year 2006-07. This de-listing has been held responsible in many circles for the recent
general downturn in futures trading in agricultural commodities. Thus, futures trade in
agricultural commodities witnessed many acceleration and deceleration phases and were
continuously been blamed for cash market distortions and increasing price volatility in
the country.
Agricultural commodity futures can potentially play a crucial role in the price risk-
management process, especially in an economy such as India’s. The two main economic
roles of agricultural futures markets are hedging price risk, and providing a price-
discovery mechanism. At the time of planting or sowing, farmers are not able to foresee
the prices that would prevail at the time of harvest. By providing a mechanism for the
discovery of prices in the future, futures markets can facilitate production, processing,
storage and marketing decisions. It helps farmers, traders, processors and exporters by
improving price discovery in their forward planning decisions and facilitates assessment
of financial/credit requirements.
1.1 Economic Rationale for the Futures Market:
Commodity futures markets play an important role in deciding on the inventory decisions
in the spot market. The futures market is the nerve centre for collection and dissemination
of information about the agents’ expectations of spot prices at future date. Thus,
commodity futures trading performs the price discovery function which enables the
participants of spot market to make rational choices about inventory management. This
results in reduction in volatility of spot prices. The expected spot prices for a future date
as discovered by commodity futures trading on the basis of information collected by
many stake holders results in many benefits for optimal decision making and resource
allocation such as (i) Price Discovery–which is determined in this competitive market on
the basis of estimated, current and future, supply and demand. However, efficiency of
price discovery depends on the continuous flow of information and transparency
(UNCTAD 2007).
Price discovery in futures market guides producers to make decisions on the timing of
trade and farmers in making cropping decisions etc. Overall, price discovery reduces the
so-called “cobweb effect” of inter-seasonal price fluctuations. (i) Risk Reduction–futures
markets allow market participants such as farmers, traders, processors etc to hedge their
risk against price volatility by offering trade in commodity futures. The price discovery in
futures markets, which facilitates in stabilizing prices of commodities, can potentially
offset losses or price risk by hedging (Morgan, 2000). Hedging can bring greater
certainty over the planting cycle, confidence to invest, adjust cropping patterns, diversify
risk profile and opt for higher-risk but higher-revenue crops. (ii) Risk Sharing – future
commodity markets allows for risk sharing among various market participants. Thus,
overall, future markets promote more efficient production planning, storage, marketing
and better margins for producers by providing a mechanism for risk management and
price discovery (Gilbert, 1985; Varangis and Larson 1996; Morgan 1999; World Bank,
1999).
There was a significant upsurge in prices of some of the agri-commodities from the
middle of 2006 to the first quarter of 2007, though the contribution of agricultural
commodities, particularly ‘food grains’, in WPI inflation was small due to relatively low
weight. This spurt in prices of essential commodities and increasing inflation was,
according to one school of thought, caused by the excess speculation in commodity
futures trade and had become an issue of concern for the government as well as people.
In response to the public outcry against futures markets and their perceived role in
causing inflationary trends in the prices of essential commodities, on January 23, 2007,
the FMC, at the suggestion of the GoI, de-listed two commodities - urad and tur, both
pulses from trading on futures exchanges out of concern about rising food prices which
was perceived as caused by speculation in the futures markets. Later, on February 27,
2007, FMC limited the trading in wheat and rice futures to squaring off until the
expiration of running contracts, for similar reasons. Hence it is felt imperative to study
the working of futures markets in agro-commodities, particularly essential commodities
in some detail with the following specific objectives.
1.2 Objectives:
1. To analyse changes in spot price volatility (pre and post futures period) for
selected essential commodities;
2. To study the delivery procedure for selected essential commodities and suggest
simplification of physical delivery; and
3. To take the perception of farmers on role and benefits of commodity futures to
them.
Chapter 2
Development and Growth of Futures Markets in India
India is blessed with varied agro-climatic differences and thus, able to produces wide
variety of agricultural commodities. The country is one of the top producers of many
agricultural commodities and a major consumer also. Given the importance of
commodity production and consumption in India, it is necessary to develop the
commodity markets with proper regulatory mechanism for efficiency and optimal
resource allocation. This chapter presents a review of growth and performance of
commodity markets in India.
2.1 Origin of Commodity market:
The organized commodity futures market in India had started as early as in the nineteenth
century when the Bombay Cotton Trade association started futures trading with cotton
futures contracts in 1875 followed by derivatives trading in oilseeds in Bombay during
1900, raw jute and jute goods in Calcutta in 1912, wheat in Hapur (1913) and bullion in
Bombay (1920). However, many feared that derivatives fuelled unnecessary speculation
and the Government of Bombay prohibited options business in cotton in 1939. Further,
forward trading was prohibited in oilseeds and some other commodities including food-
grains, spices, vegetable oils, sugar and cloth in 1943.
After the independence, the Indian constitution listed the subject of “Stock Exchanges
and Futures Markets” under the union list and a legislation called Forward Contract
(Regulation) Act 1952 was enacted, on the basis of recommendations of the Shroff
Committee providing legal framework for organized forward trading. Consequent upon
the introduction of FCR Act, commodity options and cash settlement of commodity
futures were banned. The first organized future trading was by the India Pepper and
Spices Trade Association (IPSTA) in Cochin in 1957. However, futures trade was
prohibited in most of the commodities thereafter. In the mid 1960s, due to the war in
1965 and natural calamities, there was a shortage in commodities. As a result, in order to
have control on price movement of many agricultural and essential commodities, futures
trading was banned in 1966 in most commodities except pepper and turmeric. Futures
trading in castorseed was suspended in 1977.
Since then both the Dantawala Committee (1966) and the Khusro Committee (1980) have
recommended the revival of futures trading in agricultural commodities. After the 1991
reforms, the Government set up a Committee in 1993 headed by Dr. K.N. Kabra to
examine the role of futures trading. The committee recommended that futures trading in
17 commodities be permitted. Further, National Agricultural Policy (2000) and the expert
committee on strengthening and developing Agricultural Marketing (2001, Guru
Committee) supported commodity futures trading. In February 2003, the government
revoked the ban and accepted most of these recommendations allowing futures trading in
54 commodities in bullion and agricultural sectors. Responding positively to the
favourable policy changes, several Nation-wide Multi-Commodity Exchanges (NMCEs)
were up since 2002, using modern practices such as electronic trading and clearing. The
Forward Markets Commission (FMC) regulates these exchanges.
2.2 Structure of Commodity Market in India:
Trading in commodity market takes place in two distinct forms such as the Over-The-
Counter (OTC), which is basically spot market and the exchange-based market. Further,
as in equities, there exists the spot where participation is restricted to people who are
involved with that commodity, such as the farmer, processor, wholesaler, etc. and the
derivatives segments where trading takes place through the exchange-based markets like
equity derivatives.
At present, there are 23 exchanges operating in India and carrying out futures trading
activities in as many as 146 commodity items. As per the recommendation of the FMC,
the Government of India recognized the National Multi-Commodity Exchange (NMCE),
Ahmedabad; Multi Commodity Exchange (MCX) and National Commodity and
Derivative Exchange (NCDEX), Mumbai, as nation-wide multi-commodity exchanges.
NMCE commenced in November 2002 and MCX in November 2003 and NCDEX in
December 2003.
2.3 Growth of Commodity Futures Market:
The commodity futures trade activity gained pace after the introduction on national level
multi commodity exchanges in the country. The volume of trade has increased
significantly since 2004-05 to reach Rs. 52.48 lakh crore in 2008-09. The maximum
growth in value of trade was registered 343.4% in the year 2004-05 over previous year
and 276.7% following year. But after this peak, the rate of growth had started
decelerating mainly due to strong base and ban of some of the commodities on futures
trading in the year 2007.
There are more then 3000 members registered with the exchanges. More than 20,000
terminals spread over more than 800 towns/cities of the country provide access to the
trading platforms (EC, 2008). Gold, silver and petroleum crude recorded the highest
turnover in MCX; while in NCDEX, soya oil, guar seed and soyabean was dominant; in
NMCE, pepper, rubber and raw jute were the most actively traded commodities. Though
in India, agricultural products dominate the commodity sectors, trading in non-
agricultural commodities has been dominating particularly, from 2006-07 onwards.
Table-2.1: Commodity Group-wise Value of Trade

(Rs. Lakh Crores)
Commodity 2002- 2003- 2004- 2005-06 2006- 2007- 2008-
Groups 03 04 05 07 08 09
Agriculture 3.90 11.92 13.17 9.41 6.27
Agri as % of
68.2 55.3 35.8 23.1 11.9
total
Growth in Agri
205.6 10.5 -28.5 -33.4
(%)
Total 0.67 1.29 5.72 21.55 36.77 40.65 52.48
Growth in total
92.8 92.5 343.4 276.7 70.6 10.6 29.1
(%)
The growth in the value of agricultural commodities is negative from the year 2007-08
and similarly total share of agricultural commodities is declining due mainly to the ban of
futures trading in wheat, rice, tur, and urad. The trading volumes of non-agricultural
commodities have shot up almost twice that of agricultural commodities. Overall, the
Indian commodity market has shown tremendous growth in terms of both value and the
number of commodities traded in the last five years.
Fig- 2.1 Value of Trade on Commodity Futures
60
50
40
Rs Lakh Crores
30
20
10
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Futures contracts are available for major agricultural commodities, metals and energy.
Although agricultural commodities led the initial increase in the value of trade, and
constituted the largest proportion of the total value of trade till 2005-06 (55.32%), this
place was taken over by bullion and metals in 2006-07. This was partly due to the
stringent regulations, like margins and open interest limits, imposed on agriculture
commodities and the dampening of sentiments due to suspension of trade in few
commodities. Futures market growth in 2006-07 appears to have bypassed agriculture
commodities.
Chapter 3
Data and Methodology
Both primary as well as secondary data were used to fulfill the objectives of the study.
Primary data were collected with administering schedule prepared for the specific
purpose and the pre-tested. The data were collected from farmers, traders, millers/
processors, etc.
Secondary data for analyzing impact of futures on spot prices is collected from different
sources. Daily prices of wheat from 2000 till 2008 were collected from the records of
Agricultural Produce Market Committee of Bareilly, Shahjahanpur and Hardoi in Uttar
Pradesh and for maize from Davangere in Karnataka. Futures prices of wheat and maize
have been collected from website of National Commodities and Derivatives Exchange,
Mumbai.
For collection of primary data, to know the farmers and other stakeholders perceptions
regarding commodity futures, farmers and other stakeholders were selected as per below.
3.1 Selection of crops
For the purpose of study, two cereals crops viz.; Wheat and Maize were selected. Wheat
being the major staple food crop and futures for wheat has been banned. Maize is also a
cereal crop for which futures trade is continuous.
3.2 Selection of Sample
One highest producing state under each selected crop and largest producing district from
selected state has been selected for the study. Thus, Hardoi district of Uttar Pradesh for
Wheat and Davangere district of Karnataka for Maize crop has been selected for the
study.
From the selected district, largest producing taluka/ block have been selected and four
villages were selected in consultation with mandi official and district agriculture officer.
From selected villages, a list of selected crop growing farmers was prepared and 15% of
total farmers have been drawn randomly for the study. Thus, Barkhera (59 farmers
selected), Ahirori (60 farmers selected), Bakshapur (59 farmers selected) and Bawan (61
farmers selected) villages were selected from Hardoi district for the study. Telagi (94
farmers selected), Kanchikere (70 farmers selected) and Arasikere (87 farmers selected)
villages were selected in Davangere for Maize. Thus, total sample of 241 farmers for
wheat in Hardoi district and 251 farmers for Maize in Davangere were selected for the
purpose of primary data collection.
A total sample of 31 traders and 6 processors was selected randomly from the three
markets, i.e. Hardoi, Bareilly and Shahjahanpur for wheat. Since Bareilly and
Shahjahanpur were the delivery centres of wheat for NCDEX, traders and processors
from these districts were collected for the study. In case of maize, a total of 24 traders
and 2 processors were selected randomly from Davangere of Karnataka.
3.3 Analytical methods:

To fulfill the objectives of the study, volatility in market prices of wheat and maize was
analysed from the return series of mandi prices as follows;
The daily continuously compounded returns are calculated as:
Rt = log(Pt/Pt-1)
Where, Rt is the daily return, Log stands for the natural logarithm, Pt is the price on day t
and Pt-1 is the closing value on day t-1.
Firstly, we have tried to analyse the annualized volatility in market prices of Wheat at
Bareilly, Shgahjahanpur and Hardoi markets of Uttar Pradesh and for maize at Davangere
and Bangalore markets of Karnataka as per the following formula;
Vt = sqrt (no. of days traded)* SD (Rt)
Where, sqrt is the square root

SD is the standard deviation, and
Rt is the return series calculated as per above formula.
3.3.1 Pre-and Post futures spot volatility Analysis
To assess the impact of introduction of futures in commodities on the underlying spot
prices, daily market prices of selected commodities was collected from selected markets
from highest producing state. Wheat being the major food crop of the country, for which
futures was started during June, 2004 and again wheat has been delisted from futures
trading from March, 2007. Maize, another important cereal crop for which future trading
is continuing after introduction in February, 2005. Bareilly and Shahjahanpur markets of
Uttar Pradesh for wheat and Davangere market of Karnataka for maize were selected for
the purpose of price analysis. All these selected market places are/were designated
physical delivery centres for commodity exchanges, thus the markets were directly linked
to futures markets in commodities selected. Daily market prices from January 2000 to
2008 for wheat from Bareilly, for the period March 2000 to December 2008 from
Shahjahanpur, and for the period January 2002 to December 2008 for maize from
Davangere were collected from the official records of respective APMCs.
The earlier studies concerning the change in volatility in spot prices of commodities after
the introduction of futures trading either simply compared pre-period volatility with post-
period (Prasad and Singh 2007, Shunmugam and Singh, 2006, Kaul) or employed
conventional regression analysis including a dummy variable for futures introduction and
testing for its statistical significance (Lingareddy and Nath, 2008, Singh, 2000).
The ordinary regression model assumes that the errors have the same variance throughout
the sample, and that is called homoscedasticity model. If the error variance is not
constant, the data are said to be heteroscedastic. Since ordinary least-squares regression
assumes constant error variance, heteroscedasticity causes the OLS estimates to be
inefficient. Models that take into account the changing variance can make more efficient
use of the data. There are several approaches to dealing with heteroscedasticity. If the
error variance at different times is known, weighted regression is a good method. If, as is
usually the case, the error variance is unknown and must be estimated from the data, one
can model the changing error variance. In the past, studies of volatility have used
constructed volatility measures like estimated standard deviations, rolling standard
deviations, etc, to discern the effect of futures introduction. These studies implicitly
assume that price changes in spot markets are serially uncorrelated and homoscedastic.
However, findings of heteroskedasticity in stock returns are well documented Fama
(1965), Bollerslev (1986). Thus the observed differences in variances from models
assuming homoscedasticity may simply be due to the effect of return dependence and not
necessarily due to futures introduction. The GARCH model assumes conditional
heteroscedasticity, with homoscedastic unconditional error variance. That is, the model
assumes that the changes in variance are a function of the realizations of preceding errors
and that these changes represent temporary and random departures from a constant
unconditional variance. The advantage of a GARCH model is that it captures the
tendency in financial data for volatility clustering. It therefore enables us to make the
connection between information and volatility explicit, since any change in the rate of
information arrival to the market will change the volatility in the market. Thus, unless
information remains constant, which is hardly the case, volatility must be time varying,
even on a daily basis. A model with errors that follow a GARCH (p,q) process is
represented as follows:
Yt  a0  a1Yt 1   t ,  t | t 1 ~ N (0, ht ) …. (1a)
p q
ht  a0   ai  t2i    j ht  j …. (1b)
i 1 j 1
where Equation 1a is the conditional mean equation and 1b is the conditional variance
equation. In studying the links between information, cash market volatility and
derivatives trading, two issues are interesting. First, how the initial introduction of
derivative contracts impact cash market volatility. Second, whether the existence of
futures trading affects daily volatility in the cash market. To address the first issue, we
introduce a dummy variable into the conditional variance equation. Equation (1) thus
becomes:
Yt  a0  a1Yt 1   t ,  t | t 1 ~ N (0, ht ) …. (2a)

p q
ht  a0   ai  t2i    j ht  j   1 DF   2 DFB …. (2b)
i 1 j 1
where εt, the error term, is the real-value discrete time stochastic process, ψt is the
information set of all information through time t-1, ht is the conditional volatility which
is given as the variance at time t, α0 is a constant, α1 is a coefficient that relates to the
squared residuals to the current volatility, and βj is a coefficient that relates current
volatility to the last period’s volatility. In equation 2b, squared lagged errors, ε2t-1, stand
for the ARCH effects, lagged variance, ht-1, stands for GARCH effect. DF is a dummy
variable taking the value of 0 before futures introduction and 1 after, and DFB is the
dummy variable taking value of 0 before and 1 after futures ban for wheat. In case of
Maize only one dummy, DF, have been used. If the coefficient on the Dummy is
statistically significant then the introduction of futures or futures ban has an impact on the
spot market volatility. To address the second issue, we divide the sample into the pre-
futures and post- futures sub-sample and a GARCH model is estimated separately for
each sub-sample. This allows us to compare the nature of volatility before and after the
onset of futures trading.
3.3.2 Futures Trading Activity and Spot Price Volatility

The analysis of commodity futures trading activity and spot price volatility can provide
insights into the effect of volume and open interest on the spot price volatility.
Economists have argued that futures trading have an impact on price expectations by
altering the flow of information into the market, which is based on two propositions.
First, futures trading attracts additional information into the market due to their appealing
characteristics of hedging and speculation. Second, transaction costs are lower because
futures trading is more centralized, thereby enabling traders to trade and communicate
their information effectively. With these issues in mind, they postulate that there is a
relation between information, expected prices and spot price volatility and define
information content as knowledge regarding random disturbances having an impact on
demand on the real economy.
The relationship between spot price volatility and trading activity is studied. Both open
interest and volume were used to measure the trading activity. Volume gives the measure
of speculative activity and open interest is a measure of hedging positions and can be
treated as market depth. Volatility is measured as the daily return series of spot prices for
maize and wheat commodity futures traded on NCDEX, and the conditional variance
based on Generalised Autoregressive Conditional Heteroskedasticity (GARCH). We use
the vector autoregressive (VAR) system to determine the relationship between volatility
and volume and use Granger tests to determine whether there is any causality. We use the
impulse response function in the VAR system to study the impact of shock to one
variable in the system to on the conditional forecast of the other variable.
Return series of daily futures and spot prices, volume and open interest is worked out for
Wheat and Maize traded on NCDEX. GARCH (1,1) is used to measure the volatility on
the return Rt. It has been shown that GARCH (1,1) is the appropriate model to determine
conditional variance of futures prices.
To analyse the effect of futures trading activity on the volatility of prices, the Granger
causality test was conducted by running the regressions on the wheat and maize futures
trading data collected from NCDEX as
p p
Vol t   ot   jVol t  j    j TAt  j  et ---- (2a)
j 1 j 1
p p
TAt  ao t   a j TAt  j    jVol t  j   t ---- (2b)
j 1 j 1
Where, p is a suitably chosen positive integer and is determined using Akaike

Information Criteria (AIC), aj‘s and bj‘s, j = 0, 1, …, p are constants; and et and  t are
usual disturbance terms with zero means and finite variances. The null hypothesis that
Volt does not Granger-cause TAt is not accepted if the bj’s, j>0 in equation (2a) are
jointly and significantly different from zero using a standard joint test (for example, an F-
test). Similarly, TAt Granger-causes Volt if the aj’s, j>0 coefficients in equation (2b) are
jointly different from zero [Nath, 2003, Nath and Lingareddy, 2008].This test will help
determine if there is a bi-directional impact flowing from one to other prices and vice
versa. Apart from prices, the test is also used for understanding the relationship between
volumes and prices of wheat and maize.
Chapter-4
Volatility in Spot Prices and Commodity Futures
The essential role of the commodity futures trade is to bring about stability in the
physical markets of commodities by reducing spot price volatility. An important concern
of any regulatory authority is the effect a futures market has on an existing spot market.
Whether futures market activity affects the cash prices has long been debated and
analyzed by the economists. There are two distinct views about the effect of futures on
the underlying spot market volatility. A futures market is linked to the underlying spot
market by arbitrage. It has often been claimed that futures trading destabilizes the
associated spot market by increasing spot price volatility. The derivative markets increase
volatility in the spot market particularly in the development phase due to highly
leveraged trading and speculative participants in the futures market and increased
information availability. This school of thought believe that speculation is inherently
unstable because of the herd tendency, selling at falling prices, and buying at rising
prices, thereby increasing the amplitude of volatility of spot prices.
Others have argued to the contrary stating that futures trading stabilizes price and thus
decreases spot price volatility. Witherspoon (1993) shows that the effect of futures
market on spot market volatility depends on whether the futures or spot market is
dominant in terms of price discovery. If price discovery by futures market exceeds a
critical threshold level, then spot market autocorrelation and long term volatility
increases. On the other hand, if price discovery by futures is not excessive, it leads to
lower long term volatility, enhanced liquidity and increased efficiency.
Derivatives increase market liquidity by bringing more investors to the spot market. This
results in a less volatile spot market unless derivatives attract mainly uninformed
speculators who destabilize the market. The introduction of futures market improves risk
sharing but lowers the informativeness of price resulting in destabilization and welfare
reduction. The advent of new speculators into the market increases liquidity but makes
the spot price noisier and reduces net social welfare if the new speculators are less
informed than traders existing in the market (Stein, 1987). Futures trading reduces the
cost of entry of small traders into the financial market. Futures trading increases spot
price volatility if increased liquidity causes spot price to reflect new information more
quickly. In this case, a rise in spot price volatility increases net social welfare (Kamara,
Miller and Siegel, 1992). Futures trading enhances both the incentive and means for
speculation. The speculative trade associated with futures trading has been accused of
destabilizing the underlying spot market inducing price volatility. Theoretical discussion
regarding influence of speculative activity in futures on primary market does not find a
consensus of opinion. Harris (1989) suggests that an increase in well informed
speculative trade brought to the market by futures trading has two opposite effects on
volatility – destabilizing and stabilizing.
The impact of futures trading on spot prices has been studied in terms of volatilities of
market prices during the period before and after the introduction of futures trading by
taking the mandi prices of selected markets for Wheat and Mize and the results are
presented below;
Table 4.1 shows the annual volatility of wheat at Shahjahanpur, Bareilly and Hardoi
markets and for Maize at Davangere and Bangalore markets, and volatility before and
after introduction of commodity futures. The results of analysis shows that the annualized
volatility was observed to be higher during the pre futures period for wheat where it was
upto 26% during 2003 in Shahjahanpur and 27% for the year 2001 at Bareilly. Volatility
of Wheat before futures period was 49% at Shahjahanpur and Bareilly markets, which
has declined to 31% and 33% during the post futures period, respectively. But at Hardoi
market volatility in wheat prices was 15% in pre-futures period which has increased to
31% in the post futures period. The daily price data at Hardoi market were not available
from June 2001 to August 2003.
Table-4.1: Volatility in Wheat and Maize Prices (in % CV)

Wheat Maize
Year Shahjahanpur Bareilly Hardoi Davangere Bangalore
2000 22 24 28 NA NA
2001 23 27 27 NA NA
2002 25 21 NA 39 25
2003 26 20 7 34 45
2004 9 17 15 49 26
2005 16 16 15 24 12
2006 25 27 25 47 101
2007 14 15 16 60 45
2008 9 12 13 28 42
Before futures 49 49 15 72 58
After futures 31 33 31 84 118
After Ban 15 19 19 - -
Overall 60 62 39 111 132
In case of maize, annualized volatility was observed to be increased in the post futures
period at Davangere and Bangalore markets. This was mainly because of the higher day-
to-day variation in arrival grades of maize in the APMC markets and prices in the market
were not reported separately for different specified grades. Thus, the annualized volatility
analysis gave the mixed results for the two selected commodities.
Kamara (1982) found that the introduction of commodity futures trading generally
reduced or at least did not increase cash price volatility. The study compared cash market
volatility before and after the introduction of futures trading; thus, implicitly focused on
the paradigm of introducing futures trading. Singh (2000) investigated the Hessian cash
(spot) price variability before and after the introduction of futures trading (1988-97).
Results of a multiplicative dummy variable model indicated that the futures market has
reduced the price volatility in the Hessian cash market.
Whereas, Dasgupta (2004) reported that there was a co-movement among futures prices,
production decisions and inventory decisions. The results showed that the futures price
elasticity of inventory is inversely related to the carrying cost. Therefore, an unnecessary
hoarding will increase the carrying cost, leading to a lower responsiveness of inventory to
futures prices. This paper also determines the effect of expected production shocks on the
futures price elasticity of supply.
Sahi (2006) studied the impact of introducing futures contracts on the volatility of the
underlying commodity in India. Empirical results suggest that the nature of volatility has
not changed with the introduction of futures trading in wheat, turmeric, sugar, cotton, raw
jute and soy oil. However, a weak destabilizing effect was found from futures to spot in
the case of wheat and raw jute. Further, results of Granger causality tests indicated that
the unexpected increase in futures activity in terms of increases in volumes and open
interest has led to an increase in cash price volatility in all the commodities listed. The
study has confirmed the conception of the destabilizing effect of futures trading on
agricultural commodity prices.
Thus, recent studies have shown mixed results indicating that futures trading has either
driven up or brought down volatilities in spot prices depending on the commodities and
underlying market conditions.
4.1 Seasonal volatility of commodity prices

The annual volatility measure is an aggregative one and does not reflect the movement of
prices across the months. The true utility of futures market is to reduce intra-seasonal
fluctuations in commodity prices. In order to examine the seasonal price volatility,
month-wise coefficient of variation of daily market prices was calculated and the results
were presented in tables 4.2 to 4.5. The results of the analysis indicated that the volatility
in wheat prices at Bareilly market was higher during pre-futures period and particularly
in the year 2001 and 2002. Monthly pattern shows higher volatility during harvesting
months and in the October month. Post futures monthly volatility in wheat prices
observed to be higher during pre-harvest and harvest months particularly in the year 2006
(table-4.2).
Table-4.2: Volatility in Wheat Prices at Bareilly Market (in % CV)

Months 2000 2001 2002 2003 2004 2005 2006 2007 2008
January 4.2 5.8 3.1 5.5 4.2 4.4 5.2 3.4 4.2
February 4.3 7.4 3.4 5.7 3.4 2.8 14.3 4.3 3.8
March 2.4 7.1 4.5 5.8 8.5 3.5 6.6 3.9 4.6
April 0.2 12.7 8.9 9.3 9.1 7.5 17.2 5.7 4.7
May 3.8 11.0 7.8 3.9 2.2 3.1 7.1 3.6 2.6
June 3.9 5.7 4.2 3.5 3.1 4.5 5.0 4.7 2.3
July 9.5 5.7 5.6 4.0 4.1 5.8 4.1 3.6 3.0
August 7.4 5.3 3.7 4.3 4.8 3.3 4.5 4.4 2.7
September 5.8 8.8 2.8 4.3 4.7 3.6 3.2 5.6 3.3
October 3.4 11.7 12.4 6.3 3.8 3.3 5.5 3.6 3.7
November 4.8 3.8 4.2 8.8 3.2 5.4 2.9 4.9 3.3
December 4.9 4.9 4.7 5.0 4.2 3.4 3.9 4.6 2.8
Monthly volatility in wheat prices at Shahjahanpur indicates that wheat prices during
March and April months were fluctuating higher during pre-futures which have reduced
during post futures but during post futures volatility in wheat prices in the lean months
has increased compared to pre-futures period (table-4.3).
Table- 4.3: Volatility in Wheat Prices at Shahjahanpur Market (in % CV)

Months 2000 2001 2002 2003 2004 2005 2006 2007 2008
January 7 5 8 3 2 10 6 3
February 6 6 9 1 1 8 3 3
March 14 9 4 10 3 7 16 8 4
April 4 7 17 11 5 9 9 2 2
May 4 5 7 7 1 4 4 2 1
June 4 7 7 7 1 3 1 3 0
July 5 4 5 6 2 5 2 4 1
August 6 5 7 5 3 3 7 3 2
September 5 5 5 6 2 3 4 2 3
October 5 8 6 8 2 2 2 2 3
November 9 9 5 9 1 3 2 3 4
December 9 6 5 3 2 6 2 2 3
Monthly volatility pattern in Maize prices at Davangere market suggests that during pre-
futures period the volatility in maize prices was higher in pre-harvest and harvest months
which also continued during post futures period. Also the volatility during lean months
has increased marginally during the post- futures period (table-4.4)
Table-4.4: Volatility in Maize Prices at Davangere Market (in % CV)

Months 2002 2003 2004 2005 2006 2007 2008
January 4 6 4 6 3 6 3
February 5 6 5 4 6 17 3
March 5 3 6 6 3 6 4
April 6 3 5 3 12 6 3
May 7 4 5 3 10 13 4
June 9 5 2 4 15 6 11
July 11 5 9 5 2 8 18
August 17 13 45 17 21 31 8
September 28 25 16 9 30 27 9
October 10 14 7 6 17 12 5
November 5 7 3 5 8 36 10
December 5 4 4 1 6 2 3
Since the commodity futures trade in the country is still to mature and is playing
important role in the use of real time information and strengthening the price discovery
process. This may be correlated with the volatility dynamics and change in prices of
selected commodities. Almost majority of the print and electronic media has started
providing market intelligence, right from the fundamentals like crop sowing and
condition, output expectations of crops, commodity exports and imports, demand
scenario, weather conditions which affects commodity demand and supply scenario. This
has increased the information availability to the market participants. This has
strengthened the price discovery mechanism as on commodity futures market participants
are expected to offer/ask the price based on their analysis from the information available
regarding the expected spot price for the future date. This is revealed from the volatility
analysis that during the initial periods of commodity futures in the country price volatility
has increased.
4.2 Impact of Futures on Volatility
The effect of futures trading on price in the associated spot market remains an important
but unresolved issue. One of the recurring arguments made against futures markets is that
they give rise to greater price volatility in the underlying spot market (Antoniou & Foster,
1992 and Antoniou & Fill, 1995). The debate about speculators and the impact of futures
market on spot price variability suggests that increased volatility is undesirable.
However, this fails to recognize the link between information and volatility [Antoniou &
Fill, 1995]. The variance of price change is equal to the rate or variance of information
flow. The implication is that volatility of the asset price will increase as rate of
information flow increases [Ross, 1989]. There is little theory regarding the impact of
futures trading on spot market volatility. It is not clear whether futures trading will affect
volatility in the underlying spot market in a positive or negative manner. It is an empirical
question as to the impact of futures market on the associated spot market [Antoniou &
Foster, 1992].
Daily market prices for wheat (Bareilly and Shahjahanpur, from 1st January 2000 to 31st
December 2008) and Maize (Davangere, 1st January 2002 to 31st December 2008) were
collected and from the market price series daily continuously compounded return series
has been worked out as
Rt = log(Pt/Pt-1)
Where, Rt is the return series, Pt is the price on day t, and Pt-1 is the price on day t-1.
Standard Deviation from the daily return series has been worked out and used for
analysis. The descriptive statistics of the monthly SD of returns for Wheat at Bareilly and
Shahjahanpur markets of Uttar Pradesh for the pre- and post-futures and after futures ban
and the entire period are given in table-4.5 and 4.6 below.
Table-4.5: Descriptive statistics of Wheat Bareilly Monthly SD of Spot Price Returns

Entire Period Pre Fut Post Fut Fut Ban
Mean 1.035 1.140 1.026 0.778
Median 0.900 0.980 0.830 0.750
Maximum 3.520 2.540 3.520 1.160
Minimum 0.030 0.030 0.600 0.460
Std. Dev. 0.533 0.536 0.621 0.201
Skewness 2.005 0.834 2.905 0.289
Kurtosis 8.111 3.222 11.243 2.183
Jarque-Bera 189.931 6.371 139.8659 0.876
Probability 0.000 0.041 0.000000 0.645
Observations 108 54 33 21
The preliminary results from the descriptive statistics suggests that monthly average
deviation in the wheat price return series have been more than 100% for pre- and post-
futures period and for entire period at Bareilly market and around 100% for Shahjahanpur
market, but it is about 78% for Bareilly market and around 49% for Shahjahanpur market
for the period after ban in wheat futures. Besides that, the standard deviation of the series
was around same for pre-futures period and entire period, it has marginally increased
during the post-futures period and decreased after the ban of futures trading in wheat at
Bareilly as well as at Shahjahanpur market, suggesting that introduction of futures trading
in wheat may have led to marginal increase in volatility and ban of futures may have led
to reduction in wheat price volatility at both the markets. However, a concluding decision
concerning the change in volatility can not be made without further analysis of the data
with an appropriate model.
The pre- and post-futures period and entire period for both the markets shows the
evidence of fat tails as can be seen from the kurtosis exceeding 3 and evidence of positive
skewness, i.e. that the right tail is extreme. But the distribution of data series after futures
ban seems towards normal as evident from the lower kurtosis and skewness towards zero,
though slightly right tailed for Bareilly market and left skewed for Shahjahanpur market.
The Jerque-Bera test of normality can not be rejected at 5% level except for after futures
period time series for both the markets. All these results suggest that the behaviour of
return series may have changed after the ban in futures of wheat.
Table-4.6: Descriptive statistics of Wheat Shahjahanpur Monthly SD of Spot Price

Returns
Entire Period Pre Fut Post Fut Fut Ban
Mean 0.998 1.259 0.909 0.488
Median 0.905 1.200 0.580 0.490
Maximum 3.260 3.260 3.180 0.840
Minimum 0.060 0.170 0.140 0.060
Std. Dev. 0.644 0.587 0.703 0.203
Skewness 1.115 0.968 1.348 -0.439
Kurtosis 4.522 5.108 4.491 2.803
Jarque-Bera 32.197 17.749 13.048 0.711
Probability 0.000 0.00014 0.0015 0.7008
Observations 106 52 33 21
The descriptive statistics of the monthly SD of returns for Maize at Davangere market for
the pre- and post-futures ban and the entire period are given in table-4.7 below.
Table-4.7: Descriptive statistics of Maize Davangere Monthly SD of Spot Price Returns

Entire Period Pre Futures After Futures
Mean 2.205 2.082 2.295
Median 1.435 1.310 1.480
Maximum 11.60 11.60 7.640
Minimum 0.350 0.600 0.350
Std. Dev. 2.052 2.112 2.021
Skewness 2.146 2.948 1.456
Kurtosis 8.062 12.653 4.179
Jarque-Bera 154.149 197.25 19.339
Probability 0.000 0.000 0.00006
Observations 84 37 47
The preliminary results from the descriptive statistics for monthly SD of daily maize
price returns series suggests that monthly average deviation in the wheat price return
series was more than 200% for pre- and post-futures period and for entire period The
standard deviation of the series was around same for pre-futures period and entire period,
it has marginally decreased after the introduction of futures trading in maize, suggesting
that introduction of futures trading may have led to reduction in maize price volatility at
Davangere market. However, a concluding decision concerning the change in volatility
can not be made without further analysis of the data with an appropriate model. The pre-
and post-futures period and entire period shows the evidence of fat tails as can be seen
from the kurtosis exceeding 3 and evidence of positive skewness, i.e. that the right tail is
extreme. The Jerque-Bera test of normality can not be rejected at 5% level. All these
results suggest that the behaviour of return series may have changed after the ban in
futures of wheat.
Impact of Futures Introduction on Spot Prices
The impact of commodity futures contract introduction in the Indian commodity market
is examined using a univariate GARCH (1,1) model. The time series of monthly standard
deviation of daily returns on the mandi prices is modeled as a univariate GARCH
process. It is to be noted that any change in the market behaviour including volatility
would be a result of a mix of factors. The introduction of futures contracts may also have
a role in the volatility dynamics. However, we are interested in isolating the individual
effect of futures introduction on the spot market volatility. We want to control for the
market wide factors with potential to influence return/ volatility of wheat and maize spot
prices. The use of proxy variable, to capture the market wide fluctuations can yield better
estimates, should be the similar commodity and no futures contracts are traded for that
(Mallikarjunappa and Afsal, 2007, Shenbagaraman, 2003). Jowar whole price index
returns, for which no futures contracts are traded, have been used as proxy variable to
control the market wide factors. As such, it serves as a perfect control variable for us to
isolate market wide factors and thereby concentrate on the residual volatility in the mandi
prices as a direct result of the introduction of the futures contracts. We therefore
introduce the return on the Jowar wholesale price index as an additional independent
variable. The following conditional mean equation is estimated:
Rtwhp  a0  a1 Rtwhp1  a2 R jow,t 1  ut …..(3)
where Rt , is the monthly SD of daily return on the mandi price calculated as the first
difference of the log of the prices, Rt-1 is the lagged return, and Rjow,t-1 is the lagged return
on jowar WPI. The lagged Jowar WPI return is used as an independent variable to
remove the effects of market wide price movements on the volatility of the prices.
In GARCH, the residuals ut from Equation 3 are assumed to be distributed N (0,ht )
where the conditional volatility ht is given by the following equation:
ht  a0   1 t21   2 ht 1   3 DAFt   4 DFBAN t …. (4)
where ht is the conditional variance during time period t, ε2t-1 is the squared disturbance
term (residual) at lag 1 in the general condition mean model described in (3) and DAFt is
a dummy variable that takes on a value of zero before the futures were introduced and a
value of one after, and DFBANt is the dummy variable for futures ban. A significant
positive (negative) value for y3 would indicate that futures introduction increases
(decreases) the volatility of the underlying spot prices, and significant positive (negative)
value for y4 would indicate that ban in futures of wheat increases (decreases) the
volatility of the underlying spot prices. In case of maize, only DAFt dummy have been
used, since futures in maize is continuing after introduction. a0 is the ARCH constant and
y1 and y2 are ARCH and GARCH coefficients, respectively.
The second issue of our concern is to see if the nature of volatility has changed after the
introduction of futures trading in commodities. For this, we divide the sample period into
sub-periods – pre-futures and post-futures (maize) and after futures ban (wheat)- using
the cutoff dates and fit the GARCH model separately for each period. A formal test to
check the parameter stability in the models of two/three sub samples is also conducted.
This allows us to compare the nature of volatility before and after the futures introduction
and, after ban of futures in case of wheat.
Wheat Bareilly: The results of analysis in the form of coefficients of mean equation and
variance equation for Bareilly market are presented in tables 4.8 and 4.9 below.
Table-4.8: Estimates of GARCH (1,1) model with Futures and Ban Dummy for Wheat
Bareilly
Coefficient Prob.
a0 Intercept 0.331* 0.001
a1 Lagged RtWHPB 0.568* 0.000
a2 Rtjow 3.309 0.442
γ0 ARCH0 0.228** 0.038
γ1 ARCH(1) 0.499 0.115
γ2 GARCH (1) 0.219 0.417
γ3 DAF -0.061 0.291
γ4 DFBAN -0.201** 0.023
DW 2.438
2
Adj-R -0.113
*, **, and *** indicates statistical significance at 1%, 5% and 10%, respectively.
As explained earlier, in order to measure the impact of the introduction of futures trading
on wheat market prices, we introduce the dummy variable in the conditional variance
equation. A significant positive coefficient would indicate an increase in volatility, a
significant negative coefficient would indicate a decrease in volatility. The estimated
coefficient on the futures trading dummy variable, y3, is negative but not significantly
different from zero, implying that though there may have been a change in volatility, the
Bareilly wheat prices does not show any significant change in volatility after introducing
futures trading. Notably the coefficient for the futures ban in wheat dummy, y4, is
negative and significantly different from zero, suggesting that the ban in wheat futures
appears to have suppressing effect on the wheat market prices at Bareilly. The results are
consistent with the results presented in table 4.5. Since, just after the ban in futures of
wheat, other restrictions like stock holding limits for traders, ban on exports, eliminate
import duty, etc. were imposed and wheat was imported from Australia and other
countries, altering the supply situation and restricting the trade practices of wheat leading
to reduction in price fluctuation in the markets.
Interestingly, the coefficients of ARCH and GARCH effects, as given by the y1 and y2,
are significantly different from zero only for pre-futures period (table-4.9) and for post-
futures, after futures ban and for entire period, the coefficients turned out to be non-
significant, implying thereby that the recent news as well as the yesterday’s news has a
impact on price change only during pre-futures period, and not after futures introduction.
The results of the mean equation suggests that coefficient for previous period prices is
positive and significant for pre-futures, after futures ban and for entire period suggesting
that the lagged prices have positive significant effect on the volatility in current period
prices of wheat at Bareilly. Thus, it can be inferred from the results that introduction of
futures in wheat does not significantly affect the price level of wheat at Bareilly market.
To examine if the nature of volatility remains same after the introduction of futures and
ban in futures of wheat, we divide the sample in pre-futures, post-futures and futures ban
and then separately run the GARCH process for each period. Sensitivity of the previous
period prices still exists in pre-futures and after futures ban period. Before futures, both
ARCH and GARCH effect are statistically significant at 1% level suggesting that both
recent news and old news had a lingering impact on spot price volatility. Higher GARCH
coefficient in the pre-futures period shows that the prices respond to old news effectively.
If futures have a stabilizing effect on the spot then y1 should increase and y2 should
decrease post their introduction (Sahi, 2006). The analysis shows the same results
indicating stabilizing effect of introduction of commodity futures but not significant.
The insignificant coefficients of ARCH and GARCH effects for post-futures period
indicate that there is no effect of the recent shocks (news) as well as older news on the
price change. In short it can be concluded that the nature of volatility has changed after
the introduction of futures trading. Thus, during pre-futures the effect of information was
persistent over time, i.e. a shock to today’s volatility due to some information that arrived
in the market today, has an effect on tomorrow’s volatility and the volatility for days to
come. After futures contracts started trading the persistence has disappeared. Thus, any
shock to volatility today has no effect on tomorrow’s volatility or on volatility in the
futures. This might suggest the increase in market efficiency after futures, since all
information is incorporated into prices immediately.
Table-4.9: GARCH (1,1) estimates before and after futures Wheat Bareilly
Pre-Futures Post-Futures Futures Ban

a0 Intercept 0.819* 0.000 0.727*** 0.100 0.390* 0.001
a1 Rtjow -3.253 0.628 16.874 0.390 4.678 0.202
a2 Lagged 0.283*** 0.065 0.226 0.548 0.406* 0.007
RtWHPB
γ0 ARCH0 -0.057 0.838 0.126 0.319 0.005 0.843
γ1 GARCH (1) 1.081* 0.000 -0.114 0.913 -0.773 0.488
γ2 ARCH(1) -0.504* 0.002 0.3569 0.560 -0.064 0.960
DW 1.99 -0.15 -0.38
Adj- -0.08 2.03 1.92
R2
In order to check the parameter stability in the regression models of pre-, post-futures and
futures ban, assuming constant error variance, Chow test for structural change was
conducted. In this case a comparison is made between the regression coefficients of pre-,
post-futures and futures ban models under the null hypothesis that all model coefficients
are same. The Chow test statistics follows F distribution with degrees of freedom (k, T-
3k) where k is the number of parameters and T is the total number of observations in all
periods. The null hypothesis of parameter stability (i.e. no structural change) can not be
rejected if the computed F value in an application does not exceed the critical F value
with d.f.(k, T-3k) obtained from the F table at the chosen level of significance. The
computed value of F (4, 108) is 4.82, which is less than the table value of 5.66 at 5%
level of significance, and therefore null hypothesis of parameter stability can not be
rejected. This suggests that the regression coefficients do not differ statistically for three
sub periods.
Wheat Shahjahanpur: The results of GARCH (1,1) estimation for spot price returns
from Shahjahanpur market price data are presented in tables 4.10 and 4.11. The estimated
coefficients on the futures trading dummy and futures ban variables, y3 and y4, are not
statistically significant, implying that the wheat prices at Shahjahanpur does not show
any significant change in volatility after introducing futures trading and after futures ban
in wheat.
Interestingly, the coefficient of ARCH effect, as given by the y1, is non-significant and
the GARCH effect, as given by y2, which reflects the impact of ‘old news’ is significantly
different from zero at 10% level of significance, suggesting that it is picking up the
marginal impact of prior news on yesterday’s variance and as such indicated the level of
persistence on the information effect on volatility in wheat prices of Shahjahanpur
market. The results of the mean equation suggest that coefficient for lagged prices is
positive and significant suggesting that the lagged prices have positive significant effect
on the volatility in current period prices of wheat at Shahjahanpur. Thus, it can be
inferred from the results that introduction of futures in wheat does not significantly affect
the price level of wheat at Shahjahanpur market.
Table-4.10: Estimates of GARCH (1,1) model with Futures and Ban Dummy for Wheat
Shahjahanpur
Coefficient Prob.
a1 Lagged RtWHPS 0.653* 0.000
a2 Rtjow -0.055 0.994
γ0 ARCH0 0.262 0.894
γ1 ARCH(1) 0.150 0.510
γ2 GARCH (1) 0.551*** 0.097
γ3 DAF 0.061 0.325
γ4 DFBAN -0.101 0.183
DW 2.258
Adj- 0.157
R2
The nature of volatility is examined through, whether it remains same after the
introduction of futures and ban in futures of wheat, the sample is divided in pre-futures,
post-futures and futures ban sub-samples and then separately run the GARCH process for
each period. Sensitivity of the previous period prices still exists for all the periods. Only
ARCH effect coefficient was statistically significant at 5% level only for the pre-futures
period, suggesting the negative significant impact of recent news on the price changes.
The change in ARCH and GARCH coefficient in pre- and post-futures period indicates
that there was no much change in the coefficients over the period. From the results of
analysis it can be concluded that the nature of volatility has not changed after the
introduction of futures trading and ban in futures. Thus, futures trading does not
contributed to the increase in the market efficiency of the spot markets.
Table-4.11: GARCH (1,1) estimates before and after futures Wheat Shahjahanpur
Pre-Futures Post-Futures Futures Ban

a0 Intercept 0.360* 0.000 0.440 0.239 0.169 0.244
a1 Rtjow -6.245*** 0.071 7.462 0.761 3.028 0.675
a2 Lag RtWHPB 0.615** 0.026 0.444*** 0.079 0.618** 0.011
γ0 ARCH0 -0.082** 0.032 0.227 0.554 0.016 0.524
γ1 GARCH (1) 0.673 0.284 0.698 0.712 0.829 0.200
γ2 ARCH(1) -0.070** 0.012 -0.262 0.943 0.033 0.949
DW 0.11 0.08 0.40
Adj- 2.41 1.94 1.3
R2
The Chow test for parameter stability was computed and the results indicates that the
rejected. This suggests that the regression coefficients do not differ statistically for three
sub periods.
Maize Davangere: The results of GARCH (1,1) analysis in the form of coefficients of
mean equation and variance equation for maize prices from Davangere market are
presented in tables 4.12 and 4.13 below.
Table-4.12: Estimates of GARCH (1,1) model with Futures Dummy for Maize
Davangere
Coefficient Prob.
a1 Lagged RtMZP 0.369** 0.039
a2 Rtjow 19.523 0.104
γ0 ARCH0 0.831* 0.001
γ1 GARCH (1) 0.548*** 0.099
γ2 ARCH(1) 0.342 0.390
γ3 DAF 0.880 0.195
DW 1.93
Adj-R2 -0.20
The results of the mean equation suggests that coefficient for previous period prices is
positive and statistically significant at 5% level of significance, suggesting that the lagged
prices have positive significant effect on the volatility in current period prices of maize at
Davangere market.
As explained earlier, in order to measure the impact of the introduction of futures trading
on maize market prices, we introduce the dummy variable in the conditional variance
equation. The estimated coefficient on the futures trading dummy variable, y3, is positive
but not significantly different from zero, implying that though there may have been a
change in volatility, the maize prices at Davangere market does not show any significant
change in volatility after introducing futures trading. Thus, it can be inferred from the
results that introduction of futures does not significantly affect the price level of maize at
Davangere market. Interestingly, the coefficients of ARCH and GARCH effects in the
variance equation, as given by the y1 and y2, also does not show any significant impact of
either recent news or the previous news on the volatility of maize prices at Davangere
market.
If the nature of volatility remains same after the introduction of futures in maize, to
examine this sample is divided in pre-futures, and post-futures and then separately run the
GARCH process for each period. Sensitivity of the previous period prices still exists in
pre-futures. Both ARCH and GARCH effect are not statistically significant for all the
periods, suggesting that there is no effect of the recent shocks (news) as well as older
news on the price change. Thus, it can be inferred that the nature of volatility has not
changed after the introduction of futures trading and ban in futures. From the analysis it
can be concluded that introduction of futures in maize does have neither stabilizing nor
destabilizing effect on market prices Davangere market and therefore, did not contributed
to the increase in the market efficiency of the spot markets.
Table-4.13: GARCH (1,1) estimates before and after futures Maize Davangere
Pre- Futures Post –Futures
a0 Intercept 0.590 0.112 1.278* 0.001
a1 Rtjow 19.203 0.168 -10.896 0.784
a2 Lagged RtWHPB 0.645* 0.001 0.232*** 0.062
γ0 ARCH0 0.408 0.361 -0.142 0.899
γ1 GARCH (1) 0.447 0.614 0.506 0.833
γ2 ARCH(1) 0.318 0.659 -0.215 0.716
DW 2.11 1.75
Adj-R2 -0.11 -0.18
The Chow test for parameter stability was computed and the results indicates that the
rejected. This suggests that the regression coefficients do not differ statistically for two
sub periods.
The results of GARCH (1,1) analysis for wheat prices from Bareilly and Shahjahanpur
markets and for maize from Davangere market are consistent from the results of the
previous studies by Kamara (1982), Sahi (2006) and Lingareddy and Nath (2008). Where
Kamara (1982) found that the introduction of commodity futures trading generally
reduced or at least did not increase cash price volatility. The study compared cash market
volatility before and after the introduction of futures trading; thus, implicitly focused on
the paradigm of introducing futures trading. Singh (2000) investigated the Hessian cash
(spot) price variability before and after the introduction of futures trading (1988-97).
Results of a multiplicative dummy variable model indicated that the futures market has
reduced the price volatility in the Hessian cash market.
On the other hand, the study by Nitesh (2005) reveals that futures trading in soya oil
futures was effective in reducing the seasonal price volatilities, but not the daily price
volatilities in India. Similarly, Sahi (2006) finds that the nature of volatility did not
change with the introduction of futures trading in wheat, turmeric, sugar, cotton, raw jute
and soya oil. Nevertheless, a weak destabilizing effect of futures on spot prices was found
in case of wheat and raw jute. Further, the results of granger causality tests indicated that
the unexpected increase in futures activity in terms of rise in volumes and open interest
caused an increase in the cash price volatilities in all the commodities listed. Nath and
Reddy (2007) find that futures activity leads to price volatilities in the case of urad dal
but not in the case of gram and wheat. Therefore, the study concludes that the belief that
futures trading contributes to rise in inflation (WPI) appears to have no merit in the
present context. A study by the Indian Institute of Management, Bangalore (IIMB) in
2008 explains that changes in fundamentals along with government policies were causing
higher post-futures price rise and the role of futures trading remained unclear.
Only those commodities in which future trading had attained reasonable volume were
chosen for study. These commodities are: gram, sugar, guarseed, wheat, urad and tur. The
first conclusion of this study is that all these crops, except sugar, witnessed higher price
increase in the post-exchange period compared to the pre-exchange period. However, as
the study notes, sugarcane prices are to a large extent controlled by government and sugar
prices play little role in determining the sugarcane prices, though they affect the payment
capacity of the sugar mills and the prices to be offered for the next year. In case of guar
grown mainly in the arid regions of Rajasthan, a normal monsoon gives a production that
would meet the demand of guar seed for two to three years. The price increase in the year
2005-06 followed low carry-over stocks and increased export demand. In case of wheat,
the high increase in prices after 2005 followed low production and low stock availability
with the government. Tur showed a sharp increase in prices during 2006 following low
stocks and production. Urad also showed continuous production decline 2004 onwards
and a rise in the prices.
EC (2008) while analyzing the impact of futures trading on commodity prices found that
out of 21 commodities, price volatility increased in 10 commodities, remained unchanged
in two, and declined in 9, after the introduction of futures trading. However, the
committee could not find any strong conclusion on whether introduction of futures trade
is associated with decrease or increase in spot price volatility. The committee concluded
that looking at price growth and price volatility of top ten agricultural commodities
consisting major future trade, it is not clear whether future trading contributes to price
rise or price volatility.
Sahi (2006) found that while the nature of spot price variability may not have changed
significantly with onset of futures trading, certain findings were consistent with
destabilizing effect of futures trading on agricultural commodity markets. For example,
unexpected increases in futures trading volumes were found to have a significant
unidirectional causal effect increasing spot price volatility in all these commodities
except raw cotton. Similarly, a causal effect was found from unexpected increase in open
interest to increased spot price volatility for all these commodities except raw cotton and
sugar.
Lokare (2007) reports basis risk exceeding price risk in majority of contracts for gur,
potato, rubber, cotton, mustard and wheat; and no commodity where all contracts had
lower basis risk than price risk. This is important since with Indian Commodity
Exchanges offering so many contracts that are not suited for hedging by holders of
physical commodities, not only are these contracts likely to be ineffective in being able to
transfer price risk between those holding commodities and others, the Exchanges
themselves are prone to being dominated more by purely speculative activity. Nath and
Lingareddy (2008) in their study reported that spot prices of urad and their volatilities
have posted significant increase during the period of futures trading.
Fig-4.1: Volatility plot for Wheat Bareilly
2
3
1
2
0
1
-1
01 02 03 04 05 06 07 08
Residual Actual Fitted
Fig-4.2: Volatility plot for Wheat Shahjahanpur
2
3
1
2
0
1
-1
-2
01 02 03 04 05 06 07 08
Fig-4.3: Volatility plot for Maize Davangere

15
10
5
10
0
5
-5
03 04 05 06 07 08
The estimation results were plotted at fig. 4.1 to 4.3 for checking our sample to see if
volatility clustering is existent. If there is volatility in return series we expect to see
periods of high (low) persistent volatility. As can be seen from the figures 4.1 to 4.3
above, the amplitude of returns appears to range bound for about 5% over time. The
clustering of high (low) volatility could not be established in pre- or post- futures time
periods.
4.3 Impact of Trading Activity on Volatility

To analyse the effect of futures trading activity on the volatility of prices, the Granger
causality test was conducted by running the regressions on the wheat and maize futures
trading data collected from NCDEX as
p p
Vol t   ot   jVol t  j    j TAt  j  et ---- (1a)
j 1 j 1
p p
TAt  ao t   a j TAt  j    jVol t  j   t ---- (1b)
j 1 j 1
Where, p is a suitably chosen positive integer and is determined using Akaike

Information Criteria (AIC), aj‘s and bj‘s, j = 0, 1, …, p are constants; and et and  t are
usual disturbance terms with zero means and finite variances. The null hypothesis that
Volt does not Granger-cause TAt is not accepted if the bj’s, j>0 in equation (1a) are
jointly and significantly different from zero using a standard joint test (for example, an F-
test). Similarly, TAt Granger-causes Volt if the aj’s, j>0 coefficients in equation (1b) are
jointly different from zero [Nath, 2003, Nath and Lingareddy, 2008].This test will help
determine if there is a bi-directional impact flowing from one to other prices and vice
versa. Apart from prices, the test is also used for understanding the relationship between
volumes and prices of wheat and maize.
Granger causality is a necessary condition for causality but not a sufficient condition.
Granger X causes Y if the past values of X can be used to predict Y more accurately than
simply using the past values of Y. In other words, if past values of X statistically improve
the prediction of Y, then it can be concluded that X Granger causes Y. The results of
Granger causality test are presented in tables 4.14 and 4.15. The results of the Granger
causality test suggested that volume of wheat trade in futures had a significant causal
impact on open interest and vice versa, both volume and open interest on futures had
significant causal impact on spot price volatility and not vice versa, futures prices had
significant causal impact on spot prices and vice versa.
Table- 4.14: Granger Casualty Test for Wheat with lag 8

Null Hypothesis: Obs F-Statistic Probability
RTTVOL does not Granger Cause RTTOI 844 2.46589** 0.01211
RTTOI does not Granger Cause RTTVOL 3.25975* 0.00115
RTWHCLS does not Granger Cause RTTOI 844 0.44269 0.89553
RTTOI does not Granger Cause RTWHCLS 0.32940 0.95485
RTWHSPOT does not Granger Cause RTTOI 844 1.53370 0.14150
RTTOI does not Granger Cause RTWHSPOT 2.67032* 0.00672
RTWHCLS does not Granger Cause RTTVOL 844 0.94407 0.47907
RTTVOL does not Granger Cause RTWHCLS 0.77969 0.62075
RTWHSPOT does not Granger Cause RTTVOL 844 1.64852 0.10741
RTTVOL does not Granger Cause RTWHSPOT 2.53598* 0.00991
RTWHSPOT does not Granger Cause 844 2.88887* 0.00353
RTWHCLS
RTWHCLS does not Granger Cause RTWHSPOT 11.1114* 5.4E-15
It is evident from the results of the Granger causality test for maize that futures prices had
a significant causal impact on spot prices of maize and vice versa, volume had a
significant causal impact on futures prices and vice versa, and volume had a significant
causal impact on spot price volatility and not vice versa (table 4.15).
Table-4.15: Granger Casualty Test for Maize

Null Hypothesis: Obs F-Statistic Probability
RTMZOI does not Granger Cause RTMZCLS 1284 0.72918 0.62615
RTMZCLS does not Granger Cause RTMZOI 1.23301 0.28643
RTMZSPOT does not Granger Cause RTMZCLS 1284 6.15078* 2.3E-06
RTMZCLS does not Granger Cause RTMZSPOT 12.0162* 3.7E-13
RTMZVOL does not Granger Cause RTMZCLS 1284 2.50318** 0.02061
RTMZCLS does not Granger Cause RTMZVOL 1.84547*** 0.08708
RTMZSPOT does not Granger Cause RTMZOI 1284 0.68271 0.66368
RTMZOI does not Granger Cause RTMZSPOT 0.46522 0.83438
RTMZVOL does not Granger Cause RTMZOI 1284 1.75716 0.10454
RTMZOI does not Granger Cause RTMZVOL 1.29145 0.25799
RTMZVOL does not Granger Cause 1284 1.99979*** 0.06284
RTMZSPOT
RTMZSPOT does not Granger Cause RTMZVOL 1.00295 0.42174
Thus, volatility in futures prices does have a causal effect on the volatility in spot prices
of wheat and maize. Further, the futures trading activity has a significant causal effect in
spot prices of wheat and maize (table- 4.15). The results are in conformity with the
results reported by Nath and Lingareddy (2008), where the results of the Granger
causality tests shows that futures trading activity in terms of volumes has a positive and
significant causal effect on the volatilities in spot prices of urad.
It can be summarized from the above analysis that the results do not find significant
evidence of impact on volatility in market prices of wheat and maize after the
introduction of futures trading. Though analysis indicated that the ban in wheat futures
suppressed the price volatility in wheat may be due to restriction on movement and
increased supply through imports. It was also evident that the futures trading activity i.e.,
volume of trade, has significant causal effect in spot prices of wheat and maize.
Chapter-5
Performance of Commodity Futures Markets
There are few empirical studies on the performance of Indian commodity derivatives
market. A study by Lokare (2007) finds that although Indian commodity market is yet to
achieve minimum critical liquidity in some commodities (sugar, pepper, gur and
groundnut), almost all the commodities show an evidence of co-integration between spot
and future prices revealing the right direction of achieving improved operational
efficiency, albeit, at a slower pace. Further, hedging proves to be an effective proposition
in respect of some commodities. However, in a few commodities, the volatility in the
future price has been substantially lower than the spot price indicating an inefficient
utilisation of information. Several commodities also appear to attract wide speculative
trading. One of the reasons for low volumes could be attributed to some of the measures
that FMC undertook in the recent period such as daily mark to market margining, time
stamping of trades, demutualisation for the new exchanges, etc., with a view to promote
market integrity and transparency. The exchanges have attributed subsequent fall in the
volume of trade to introduction of these measures (Kolamkar, 2003). Thomas (2003)
reports that major stumbling blocks in the development of derivatives market are the
fragmented physical/spot markets.
Supporting this view, Lokare (2007) suggests that national level derivative exchanges
cannot be founded on fragmented localized cash markets. Because of fragmentation,
prices of major commodities vary widely across Mandis. These differences arise because
of poor grading; differential rates of taxes and levies, and inadequacy of storage facilities
(Bhattacharya, 2007). Similarly, Raizada and Sahi (2007) found that commodity futures
market is not efficient in the short-run and social loss statistics also indicate poor price
discovery in the commodity market. Spot price leads the futures price determination and
the futures markets are not performing their main role of price discovery. There were also
doubts that the growth of commodity futures market volume has an impact on the
inflation level in India.
5.1 Risk Management

The month-wise ratio of standard deviations of futures prices and spot prices throws light
on the extent of volatility in the derivatives market. If markets are efficient, daily
variations in spot and futures prices are purely a result of new information available;
therefore, for storable commodities, the extent of variation in spot and futures should be
similar. If the cash market is efficient, the relative magnitude of variation in prices can
help assess whether the futures market is able to incorporate information efficiently. The
ratio of standard deviations of futures and spot prices on a monthly basis was analysed to
assess the futures market’s performance.
Given the competitive structure of the physical markets for agricultural commodities it is
assumed that these markets are discovering prices efficiently. It is also assumed that the
cost of carrying charges within a month is negligible. A ratio close to one indicates that
futures price is able to incorporate information efficiently. A ratio greater than one close
to the maturity period would indicate speculative activities. A ratio less than one may
indicate that information is not fully incorporated. The subjective cut-off of 0.75 and 1.25
were used as the lower and upper levels for the ratios as indicative of substantially
different variability of futures and cash prices. In the efficient markets, daily variations in
the spot and derivatives emanate purely from the new information that is arriving in the
market.
Tables 5.1 and 5.2 suggest that the futures and spot price variability is substantially
different for Wheat and Maize. The ratios for Wheat from March 2005 to April 2006
contracts were less than 0.75 suggesting that the futures price variability is substantially
less than the cash price variability. As mentioned earlier, this pattern is an indication of
inefficient utilization of information if we assume cash markets are efficient. In the
contracts of November 2004 to February 2005 and May 2006 to January 2007, the futures
price variability has been higher than the spot price variability. The month-wise analysis
shows that the ratios are greater than 1.25 for the April, May, June and September
months, while it is lower than 0.75 for November, January, February and March months.
The ratio was higher than 1.25 in the maturity months for 14 contracts and less than 0.75
for 9 contracts out of 32 contracts of wheat.
Table-5.1: Ratio of standard deviation futures to standard deviation spot prices for Wheat
Contract Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec % Contracts
> <
1.25 0.75
Sept, 04 1.25 1.24 2.51 33 0
Oct, 04 1.19 1.05 3.20 0.66 25 25
Nov, 04 2.10 1.41 3.16 0.88 0.55 60 20
Dec, 04 1.29 0.94 2.74 0.82 0.83 1.55 50 0
Jan, 05 1.28 2.59 0.82 0.67 2.20 60 20
Feb, 05 0.92 1.10 1.43 0.49 2.41 40 20
Mar, 05 1.18 0.62 2.41 1.91 2.63 60 20
Apr, 05 0.43 0.37 0.17 0.60 4.48 20 80
May, 05 0.58 0.30 0.12 1.58 0.75 20 60
Jun, 05 0.15 0.10 1.91 0.75 0.27 20 60
July, 05 0.07 1.91 0.71 0.43 1.37 40 60
Aug, 05 1.78 0.69 0.63 2.64 3.39 60 40
Sept, 05 0.58 0.80 2.24 3.49 1.10 40 20
Oct, 05 1.41 1.75 3.84 0.72 0.61 60 40
Nov, 05 1.77 3.58 0.87 0.49 0.41 40 40
Dec, 05 1.33 0.96 0.47 0.57 1.26 40 40
Jan, 06 0.79 0.37 0.44 0.57 0.80 0 60
Feb, 06 0.71 0.33 0.63 0.45 0.47 0 100
Mar, 06 0.34 0.74 1.30 0.59 0.56 20 80
Apr, 06 0.17 0.57 0.24 0.82 0.40 0 80
May, 06 0.09 0.56 0.13 1.09 0.47 0 80
Jun, 06 0.59 0.13 1.31 1.31 2.95 60 40
July, 06 0.08 1.40 1.47 4.14 1.06 60 20
Aug, 06 1.29 1.47 4.39 0.50 1.14 60 20
Sept, 06 1.37 1.47 4.39 0.52 0.85 1.80 67 17
Oct, 06 1.47 1.44 4.53 0.66 0.80 1.54 1.93 71 14
Nov, 06 1.46 1.46 4.63 0.93 0.70 1.48 1.23 0.95 50 13
Dec, 06 1.37 1.45 4.60 1.09 0.63 1.45 1.25 0.88 2.96 56 11
Jan, 07 5.73 0.39 1.39 1.25 0.68 1.62 50 33
Feb, 07 0.51 1.06 0.33 1.39 1.25 0.57 1.47 29 43
Mar, 07 0.44 0.46 2.08 1.80 0.66 0.63 0.72 29 71
Apr, 07 0.24 0.46 2.29 0.33 0.49 0.36 0.46 14 86
> 1.25(%) 14 0 33 73 54 67 47 38 71 12 6 60
< 0.75(%) 64 85 67 13 31 25 20 25 12 47 75 33
The ratio turned out to be greater than 1.25 in the expiry/ delivery month contracts for
more than one third of the contracts and less than 0.75 for about one third contracts
indicating increased speculative activity in the delivery month or prices not incorporation
current information efficiently.
For maize futures, the ratios are either higher than 1.25 or lower than 0.75 for most of the
contracts analysed indicating that the futures prices do not utilize information efficiently
as their cash markets (table 5.2). For the contracts, the ratios are higher than 1.25 shows
that the futures price variability was higher than the spot price variability and there may
be the higher amount of speculation in these contracts.
Table-5.2: Ratio of standard deviation futures to standard deviation spot prices for Maize
% contracts
Contract Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec > 1.25 <0.75
Feb, 05 1.54 2.82 100 0
Mar, 05 2.20 0.57 0.51 33 67
Apr, 05 2.21 0.52 0.37 2.21 50 50
May, 05 0.73 0.80 4.28 1.74 50 25
Jun, 05 1.54 3.97 2.06 0.39 75 25
July, 05 4.25 2.74 0.61 0.57 50 50
Aug, 05 5.71 0.55 0.40 1.13 25 50
Sept, 05 2.39 0.45 1.52 3.42 75 25
Oct, 05 0.65 1.20 1.75 0.65 25 50
Nov, 05 2.35 1.14 1.33 0.33 0.80 40 20
Dec, 05 1.34 0.44 0.47 1.93 50 50
Jan, 06 1.94 2.49 0.48 0.55 1.39 60 40
Feb, 06 4.43 0.69 1.33 0.53 1.38 60 40
Mar, 06 4.97 2.90 2.10 0.99 1.50 80 0
Apr, 06 5.29 2.91 0.93 1.18 2.37 60 0
May, 06 6.92 2.69 1.34 0.51 3.54 80 20
Jun, 06 2.91 1.74 0.53 9.08 0.56 60 40
July, 06 2.07 0.82 9.47 0.25 1.58 60 20
Aug, 06 9.99 0.33 1.55 1.64 75 25
Sept, 06 9.17 0.31 0.91 1.07 0.48 20 40
Oct, 06 0.37 0.62 0.48 0.17 3.96 20 80
Nov, 06 0.36 0.13 3.25 0.80 25 50
Dec, 06 4.87 0.21 3.24 0.65 1.97 60 40
Jan, 07 0.50 1.46 3.46 0.63 2.36 60 40
Feb, 07 0.87 0.57 5.83 0.58 2.35 40 40
Mar, 07 1.01 1.25 1.29 1.65 2.29 60 0
Apr, 07 1.15 1.42 1.42 6.32 6.29 80 0
May, 07 6.81 1.49 1.54 7.28 0.64 80 20
Jun, 07 3.40 1.51 4.95 0.65 0.74 60 40
July, 07 2.50 4.09 0.71 0.42 1.43 60 40
Aug, 07 4.51 0.77 0.35 1.45 0.91 40 20
Sept, 07 4.03 0.48 3.53 0.89 5.03 40 20
Oct, 07 1.18 2.38 0.51 6.77 1.54 60 20
Nov, 07 2.20 0.49 6.67 1.11 1.14 40 20
Dec, 07 0.84 7.21 1.56 1.57 1.57 80 0
Jan, 08 0.68 5.98 1.92 1.62 1.38 80 20
Feb, 08 1.80 2.96 3.62 1.35 1.38 100 0
Mar, 08 2.05 2.32 5.34 2.07 1.20 80 0
Apr, 08 2.34 3.28 6.73 5.84 0.88 80 0
May, 08 5.14 4.06 6.91 2.10 0.92 80 0
Jun, 08 5.48 6.60 2.16 0.81 0.75 60 0
July, 08 4.75 2.12 0.91 0.65 1.71 60 20
Aug, 08 1.28 1.03 0.70 0.76 0.55 20 40
Sept, 08 2.33 0.46 0.70 0.68 0.73 20 80
Oct, 08 0.42 0.72 0.77 0.69 2.47 20 60
Nov, 08 0.46 0.41 0.56 1.41 2.38 40 60
Dec, 08 0.65 0.57 2.09 0.71 3.09 40 60
Jan, 09 0.80 2.65 0.41 1.27 60 20
Feb, 09 1.10 0.54 1.63 60 20
Mar, 09 2.03 1.50 2.27 5.51 1.88 100 0
Apr, 09 2.32 1.35 1.46 0.43 1.57 80 20
> 1.25 77 73 81 74 58 5 42 11 55 70 35 77
< 0.75 9 23 10 16 16 84 42 42 40 20 45 9
The ratio turned out to be greater than 1.25 in the expiry/ delivery month contracts for
more 50 per cent of the contracts of maize indicating that futures price volatility was
higher compared to the spot prices, and less than 0.75 for about one fifth of the contracts
indicating increased speculative activity in the delivery month or prices not incorporation
current information efficiently.
Basis risk: An unhedged investor/producer faces price risk, while a hedged
investor/producer faces basis risk. When basis is predictable, that is the basis risk is low,
hedging can be used as an effective instrument of risk management. If the basis risk is as
large as the price risk, hedging does not reduce business risk. If the basis is close to zero
in the maturity month, that is, the futures price converges to the spot price, a hedger can
reduce his business risk by holding on to the contract until the maturity of the contract.
We have examined here the extent of basis risk as well as the maturity basis.
Basis and spot price risks are assessed by computing their standard deviation for each
month and for every contract. The ratio of basis risk to spot price risk each month is
presented in Tables 5.3 and 5.4. These ratios are categorised into three groups: greater
than 1, between 0.5 to 1, and less than 0.5. A ratio less than 0.5 would attract the hedger
to use the futures market. In case of wheat futures at NCDEX, the ratios shows that there
were very few contracts with less than 0.5 ratios and in most of the contracts the ratio was
worked out to be more than 1.0 implying thereby that variation in basis was higher than
the spot price variation leaving meager chance to hedgers to manage risk. Thus, futures
contracts in wheat does not provide hedge opportunity.
Table-5.3: Ratio of standard deviation of basis to standard deviation of spot of Wheat

% of times the ratio
was
Contra Sep 0.5 -
ct Jan Feb Mar Apr May Jun July Aug t Oct Nov Dec > 1.0 1.0 < 0.5
Sept, 0.5 1.6 2.3
04 6 2 0 67 33 0
0.5 1.4 2.3 0.9
Oct, 04 6 1 6 4 50 50 0
1.4 1.8 2.2 1.2 1.3
Nov, 04 9 2 8 7 9 100 0 0
0.7 1.1 1.8 1.2 1.6 0.8
Dec, 04 1 9 7 0 5 9 67 33 0
0.9 1.8 1.0 1.5 1.4
Jan, 05 8 0 9 4 2 80 20 0
0.7 1.6 1.7 1.3 1.6
Feb, 05 3 9 0 5 3 80 20 0
0.4 0.6 1.8 1.8 1.8
Mar, 05 8 0 6 3 4 60 20 20
0.8 0.7 0.9 1.0 4.7
Apr, 05 9 2 1 8 3 40 60 0
May, 1.3 0.8 0.9 1.3 0.3
05 7 2 4 8 5 40 40 20
0.9 1.0 1.6 0.3 0.9
Jun, 05 1 3 9 8 7 40 40 20
0.9 1.6 0.4 0.9 1.9
July, 05 9 7 0 4 4 40 40 20
2.0 0.4 0.7 2.1 2.9
Aug, 05 1 1 6 7 2 60 20 20
Sept, 0.6 0.7 1.6 3.2 1.5
05 2 4 3 1 1 60 40 0
1.5 1.0 3.5 1.2 0.7
Oct, 05 4 6 3 0 5 80 20 0
0.8 3.2 1.4 0.6 0.8
Nov, 05 8 5 4 8 0 40 60 0
1.5 1.6 0.7 1.1 2.1
Dec, 05 4 1 1 5 1 80 20 0
0.4 1.1 0.7 1.0 1.7
Jan, 06 3 8 6 9 4 60 20 20
0.4 0.8 0.7 0.9 1.2
Feb, 06 7 8 9 8 9 20 60 20
0.7 1.4 0.9 0.8 1.1
Mar, 06 6 3 0 0 4 40 60 0
0.8 1.3 0.9 0.6 0.9
Apr, 06 8 4 7 8 1 20 80 0
May, 0.9 1.3 0.9 0.4 0.7
06 5 3 6 9 6 20 60 20
1.3 0.9 0.6 1.6 3.6
Jun, 06 0 6 2 1 1 60 40 0
0.9 0.6 1.6 3.7 1.9
July, 06 5 7 2 6 6 60 40 0
0.4 1.5 4.0 1.1 0.3
Aug, 06 7 0 2 9 0 60 0 40
Sept, 0.5 1.4 4.0 1.1 0.2 2.2
06 5 2 0 0 8 0 67 17 17
0.5 1.3 4.0 0.7 0.3 1.7 1.1
Oct, 06 9 9 9 4 2 4 5 57 14 14
0.6 1.4 4.1 0.6 0.3 1.4 0.4 1.0
Nov, 06 5 3 5 0 9 7 0 9 50 25 25
0.5 1.5 4.0 0.6 0.4 1.3 0.4 0.9 2.1
Dec, 06 2 0 8 4 6 0 1 5 2 44 33 22
5.8 0.7 1.1 0.4 0.9 1.1
Jan, 07 9 1 6 1 6 2 50 33 17
1.0 0.5 0.8 1.6 0.3 0.9 1.0
Feb, 07 0 7 0 2 2 3 5 29 57 14
1.2 0.9 1.2 1.8 0.4 1.2 0.6
Mar, 07 1 0 9 4 7 1 4 57 29 14
1.1 1.0 1.8 0.8 0.6 0.7 0.8
Apr, 07 6 0 9 3 1 6 6 29 71 0
> 1.0 29 38 33 33 54 67 53 56 100 29 56 73
0.5-1.0 50 62 67 53 15 33 47 13 0 41 44 27
<0.5 21 0 0 13 31 0 0 31 0 29 0 0
In case of maize, the ratios worked out were less than 0.5 for most of the cases indicating
that the volatility in basis is less that the volatility in prices and these results suggests that
the hedger find futures useful to manage business risk. Thus futures contracts of maize
provide perfect hedge opportunity to minimize their risk through hedging activity.
Table-5.4: Ratio of SD basis to SD spot Maize

% of times the ratio
was
0.5
-
Contract Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec > 1.0 1.0 < 0.5
0.2 0.6
Feb, 05 7 1 0 50 50
0.2 0.1 0.1
Mar, 05 7 3 2 0 0 100
0.2 0.1 0.0 0.4
Apr, 05 9 4 8 0 0 0 100
0.5 0.1 0.5 0.7
May, 05 0 5 1 5 0 75 25
Jun, 05 0.5 0.4 0.6 0.0 0 50 50
9 7 1 7
0.6 0.5 0.0 0.0
July, 05 9 7 7 8 0 50 50
0.7 0.0 0.0
Aug, 05 5 5 4 0.19 0 25 75
0.2 0.0
Sept, 05 0 4 0.20 0.24 0 0 100
0.0
Oct, 05 4 0.19 0.22 0.04 0 0 100
0.2
Nov, 05 2 0.18 0.20 0.02 0.13 0 0 100
Dec, 05 0.18 0.02 0.03 0.47 0 0 100
0.4
Jan, 06 7 0.22 0.02 0.03 0.27 0 0 100
0.5 0.2
Feb, 06 3 7 0.11 0.03 0.27 0 20 80
0.5 0.4 0.5
Mar, 06 5 5 9 0.19 0.29 0 40 60
0.5 0.4 0.3 0.1
Apr, 06 5 5 6 7 0.71 0 40 60
0.9 0.4 0.2 0.0 0.5
May, 06 7 6 9 7 1 0 40 60
0.3 0.3 0.0 0.4 0.0
Jun, 06 3 3 5 0 5 0 0 100
0.3 0.0 0.4 0.0 0.1
July, 06 4 6 0 1 7 0 0 100
0.4 0.0 0.1
Aug, 06 2 1 3 0.08 0 0 100
0.3 0.0 0.1
Sept, 06 9 1 4 0.06 0.01 0 0 100
0.0 0.0
Oct, 06 2 5 0.01 0.004 0.11 0 0 100
Nov, 06 0.01 0.002 0.11 0.05 0 0 100
Dec, 06 0.11 0.003 0.11 0.03 0.24 0 0 100
0.0
Jan, 07 2 0.12 0.11 0.03 0.23 0 0 100
0.0 0.0
Feb, 07 4 5 0.19 0.02 0.23 0 0 100
0.0 0.0 0.1
Mar, 07 4 7 2 0.13 0.23 0 0 100
0.0 0.0 0.1 0.2
Apr, 07 4 8 0 9 0.59 0 20 80
0.3 0.0 0.1 0.3 0.0
May, 07 9 8 0 6 3 0 0 100
0.3 0.1 0.3 0.0 0.0
Jun, 07 1 0 7 7 7 0 0 100
0.1 0.3 0.0 0.0 0.1
July, 07 3 7 7 2 6 0 0 100
0.4 0.0 0.0 0.1
Aug, 07 9 7 1 8 0.22 0 0 100
0.3 0.0 0.2
Sept, 07 8 1 1 0.13 0.42 0 0 100
0.0 0.2
Oct, 07 2 0 0.04 0.38 0.19 0 0 100
0.3
Nov, 07 3 0.03 0.38 0.12 0.27 0 0 100
Dec, 07 0.09 0.38 0.10 0.20 0.16 0 0 100
0.0
Jan, 08 4 0.33 0.09 0.19 0.22 0 0 100
0.0 0.2
Feb, 08 6 8 0.13 0.17 0.23 0 0 100
0.0 0.1 0.2
Mar, 08 7 8 0 0.23 0.18 0 0 100
0.0 0.1 0.1 0.2
Apr, 08 7 7 9 4 0.14 0 0 100
0.1 0.1 0.1 0.1 0.1
May, 08 4 7 9 0 0 0 0 100
Jun, 08 0.1 0.1 0.0 0.0 0.0 0 0 100
8 9 9 6 6
0.2 0.0 0.0 0.0 0.1
July, 08 9 9 7 2 0 0 0 100
0.0 0.0 0.0 0.0
Aug, 08 9 7 2 3 0.02 0 0 100
0.0 0.0 0.0
Sept, 08 5 1 2 0.02 0.04 0 0 100
0.0 0.0
Oct, 08 1 2 0.03 0.05 0.08 0 0 100
0.0
Nov, 08 1 0.01 0.02 0.10 0.33 0 0 100
Dec, 08 0.03 0.02 0.12 0.08 0.56 0 20 80
0.3
Jan, 09 1 0.04 0.14 0.03 0.13 0 0 100
0.1 0.2
Feb, 09 1 0 0.13 0.03 0.14 0 0 100
0.1 0.1 0.3
Mar, 09 0 9 2 0.33 0.12 0 0 100
0.1 0.1 0.2 0.0
Apr, 09 0 8 3 4 0.14 0 0 100
> 1.0 0 0 0 0 0 0 0 0 0 0 0 0
0.5-1.0 18 9 10 11 26 0 0 0 0 0 0 15
<0.5 82 91 90 89 74 100 100 100 100 100 100 85
5.2 Convergence of Spot and Futures

There are two important factors that determine the market participation; hedging
performance of the futures contracts, and the markets perception about the futures
trading. The hedging performance is measured by convergence of the futures and spot
prices at maturity. The convergence between futures and spot prices shows that market is
efficient with regard to price discovery and hedge against the spot price variability.
However, the historical performance of Wheat contracts as shown in Table 5.5 has not
consistently supported this condition where the futures price on closing does not
converge with spot prices. The opening and closing prices of all the contracts of wheat
prior to ban along with spot prices on the expiry of the contract were reported in Table
5.5. The convergence analysis shows that the wheat futures prices at maturity were
divergent for the contracts after November 2005 till Feb. 2006 and from July 2006 to
December 2006.
Table-5.5: Spot and Futures Prices of Wheat

Contract
Contract Opening Closing Price Spot Price on Difference Difference
Contract Price (Fop) (Fxp) Closing (Sp) (Sp-Fxp) (Sp-Fop)
Sept, 04 702 747 751 4 49
Oct, 04 760 756 756.25 0.25 -3.75
Nov, 04 780 772 773.85 1.85 -6.15
Dec, 04 780 763.4 763.5 0.1 -16.5
Jan, 05 828 772.6 772.75 0.15 -55.25
Feb, 05 825 784.6 780.4 -4.2 -44.6
Mar, 05 766 774 769.65 -4.35 3.65
Apr, 05 667 686.6 685.55 -1.05 18.55
May, 05 691 731 727.45 -3.55 36.45
June, 05 686 764.4 758.75 -5.65 72.75
July, 05 705 766.4 766 -0.4 61
Aug, 05 800 754.4 758.2 3.8 -41.8
Sept, 05 800 755.8 761.65 5.85 -38.35
Oct, 05 820 784.6 801.45 16.85 -18.55
Nov, 05 838.2 837.4 875.15 37.75 36.95
Dec, 05 811 781.6 899.55 117.95 88.55
Jan, 06 810.2 866 1026.25 160.25 216.05
Feb, 06 825 871.2 943.25 72.05 118.25
Mar, 06 829.6 964.6 967.8 3.2 138.2
Apr, 06 731.4 816.2 811.3 -4.9 79.9
May, 06 733 874.8 867.75 -7.05 134.75
June, 06 785.6 848.2 862.05 13.85 76.45
July, 06 855 816.6 881.65 65.05 26.65
Aug, 06 940 955.8 992.05 36.25 52.05
Sept, 06 931 938.2 1005.85 67.65 74.85
Oct, 06 904 1054.4 1047.2 -7.2 143.2
Nov, 06 946 1066.6 1133.75 67.15 187.75
Dec, 06 971 921 1084.8 163.8 113.8
Jan, 07 992 1114.4 1091.85 -22.55 99.85
Feb, 07 992 1026.4 1067.85 41.45 75.85
Mar, 07 980 1090 1076.25 -13.75 96.25
In case of Maize, the futures prices at maturity showed convergence with the spot prices
for all futures contracts with few exceptions (Table 5.6). In most of the contracts futures
prices of maize contracts converge with the spot prices on closing day.
Table-5.6: Spot and Futures Prices of Maize

Contract Opening Contract Closing Spot Price on Difference Difference
Contract Price (Fop) Price (Fxp) Closing (Sp) (Sp-Fxp) (Sp-Fop)
Feb, 05 570 510.5 510.35 -0.15 -59.65
Mar, 05 555 527.5 527.45 -0.05 -27.55
Apr, 05 550 526 528.95 2.95 -21.05
May, 05 546.5 523.5 522.9 -0.6 -23.6
June, 05 566 546 557.1 11.1 -8.9
July, 05 570 577.5 582.05 4.55 12.05
Aug, 05 545 601 598.85 -2.15 53.85
Sept, 05 582 571.5 575.45 3.95 -6.55
Oct, 05 570 556.5 555.3 -1.2 -14.7
Nov, 05 550 547 544.5 -2.5 -5.5
Dec, 05 570 558.5 557.75 -0.75 -12.25
Jan, 06 568 551 554.8 3.8 -13.2
Feb, 06 540 556 562.1 6.1 22.1
Mar, 06 595 553 557.6 4.6 -37.4
Apr, 06 577.5 532.5 534.85 2.35 -42.65
May, 06 555 544 540.3 -3.7 -14.7
June, 06 638 603.5 609.1 5.6 -28.9
July, 06 587 639 636.6 -2.4 49.6
Aug, 06 578 751 733.55 -17.45 155.55
Sept, 06 605 619.5 620.25 0.75 15.25
Oct, 06 594 673.5 639.05 -34.45 45.05
Nov, 06 625 788.5 735.5 -53 110.5
Dec, 06 741.5 755.5 725.35 -30.15 -16.15
Jan, 07 645.5 757 710 -47 64.5
Feb, 07 669.5 790.5 761.05 -29.45 91.55
Mar, 07 851 769 725.8 -43.2 -125.2
Apr, 07 789 727 758.95 31.95 -30.05
May, 07 782 729 704.85 -24.15 -77.15
June, 07 832.5 783 769.95 -13.05 -62.55
July, 07 800 786.5 756.95 -29.55 -43.05
Aug, 07 811 739.5 710.4 -29.1 -100.6
Sept, 07 780 722 686.6 -35.4 -93.4
Oct, 07 781 661 655 -6 -126
Nov, 07 698 720.5 699.75 -20.75 1.75
Dec, 07 705 718.5 703.55 -14.95 -1.45
Jan, 08 714 765 756.35 -8.65 42.35
Feb, 08 719 739 724.9 -14.1 5.9
Mar, 08 793 755.5 766.05 10.55 -26.95
Apr, 08 806 681 737.9 56.9 -68.1
May, 08 879 784 777.85 -6.15 -101.15
June, 08 870 918 914.1 -3.9 44.1
July, 08 915 961.5 977.75 16.25 62.75
Aug, 08 810 979 996.3 17.3 186.3
Sept, 08 870 1003 999.45 -3.55 129.45
Oct, 08 936 917.5 904.4 -13.1 -31.6
Nov, 08 924 816 868.4 52.4 -55.6
Dec, 08 870 788 851.4 63.4 -18.6
Jan, 09 873 830.5 826.95 -3.55 -46.05
Feb, 09 820 815.5 818.35 2.85 -1.65
Mar, 09 850 805 804.8 -0.2 -45.2
Apr, 09 835 824 835.7 11.7 0.7
From the above discussion it can be concluded that there is insignificant utilization of
information by futures contracts of wheat and maize and there may be the increased
speculative activity in the delivery months for few contracts in both the selected
commodities. Basis risk analysis indicated that most of the wheat futures contracts does
not provided the hedge opportunities while in case of maize, hedgers find futures
contracts useful to manage business risk. Convergence analysis shows that in most of the
contracts futures prices converged with the spot prices at expiry of the contract with some
exceptions.
Chapter- 6
Physical Delivery Procedure on Commodity Exchanges
6.1 Delivery Procedure:
Participants of commodity futures trade who have taken position either as long or short
and not squared off their positions by taking counter position on the expiry of the contract
has to settle the positions through either cash settlement of by physical delivery as per the
requirement or option of the contract specification. The cash settlement is done by paying
or gaining difference of the price on which participant has taken position and the final
contract settlement price which is normally last three day’s average cash price.
The commodity futures contracts have both option, sellers option and compulsory
delivery logic. In case of both option based contracts, delivery of the commodity will take
place only if both buyer and seller give their intention to give/take delivery on or before
the expiry of the contract. Intention means a written request given by both buyer member
and seller member to take or give the delivery of the commodity. If the Exchange
receives intention from only one party than no delivery will take place and open interest
open interest position of the member will be closed out at final settlement price or due
date rate.
In case of sellers option contract delivery is based on seller’s choice. If the seller member
gives intention to give delivery than the Exchange will allocate the delivery to the buyer
member provided such intentions are received with in five days prior to the expiry of the
contract. The buyer has to take delivery on compulsory basis that has been allocated to
him by the Exchange. In case, if the buyer is not ready to take delivery, he should
intimate the same to the Exchange authorities before pay in date of funds. The
refusal/failure of the buyer to take delivery will attract penalty.
In Compulsory delivery contract, all open interest position of the members at the expiry
of the contract will result in compulsory delivery. Even in case, the Exchange does not
receive any intention from members, it will allocate the delivery against the counter
parties on the end of expiry of the contract on all of the outstanding position. In case of
failure/refusal from buyer or seller the penalty will be levied to member who fails to
honor their respective obligation.
The delivery logic for wheat and maize contracts is compulsory delivery. The market
participant with short or long open interest positions in a contract of futures trade of
maize or wheat commodities upon the expiry of the contract were compulsorily marked
for delivery but maize contract traded on MCX exchange has seller’s option delivery
logic. The seller is required to give documentary evidence for deposit of goods with the
exchange designated warehouse during the tender period which normally starts from last
5 days till the expiry of contract. Generally 20th day of a month or previous working day
other than Saturday is the expiry date of the contracts traded on NCDEX and MCX
platform but for maize contracts traded on MCX the due date is 15th day of the contract
expiry month. A penalty of 3 to 5% (of final settlement price) would be imposed on both
longs and shorts if they fail to meet their delivery obligations. Additionally the difference
between the final settlement price or DDR and the average of the three highest last spot
prices of the five succeeding days after the expiry of the contract (E+1 to E+5 days) if the
average price so determined is higher than final settlement price or DDR. In case of
compulsory option contract, marking is done on contract expiry date after trading hours
to all buyer and sellers having open interest position irrespective of any intention to
give/take delivery is received.
The members tendering delivery will have the option of delivering the grades of goods as
permitted by the Exchange under the contract specifications. The delivery grade offered
by the seller and allocated by the Exchange, the buyer is bound to take delivery of
tendered quality by the seller. At the time of issuing the delivery order, the member must
prove to the Exchange that he holds stocks of the quantity and quality specified in the
delivery order at the declared delivery center. This should be substantiated by way of
producing warehouse receipt. The Buyer member can endorse delivery order to a client or
any third party with full disclosure given to Exchange. Responsibility for contractual
liability would be with the original assignee.
An exchange member desiring to tender goods against an open short position in the
maturing contract sends delivery orders to the clearing house through the clearing
member up to such time on the stated tender days. The delivery order forms duly signed
by the sellers or seller’s representative, holding short open positions, should offer the
following particulars, in addition to the particulars in the delivery order:
 The quality and quantity of goods to be delivered

 Delivery order rate (to be filled in by the clearing house)
 Name of the seller issuing the delivery order
 Period of delivery
 The address or addresses of the warehouse(s) or any storage place where the
goods are kept and the quantity thereof at each warehouse
 The name and address of the seller’s representative who should be contacted by
the buyer for collecting the delivery
Demat Account: It is mandatory to open an electronic (Demat) account with both the
depositories i. e. National Securities Depository Limited (NSDL) and Central
Depositories Services (India) Ltd. (CSDL) for taking delivery of commodities while
trading through exchange system.
6.1.1 Tender Period Margin
Tender period usually starts five days before the expiry of the contract. Tender Period
days are those days during which the seller member will deposit goods with designated
warehouse of Exchange and gives its intention for delivery to the Exchange. When a
contract enters into tender period, tender margins are applied on the open interest position
of the member. Such margin is applicable on both buy and sell side The tender period
margin is applicable on all the open interest position held by the clients in the expiring
contract. The tender margin continues up to the settlement of delivery obligation or
expiry of the contract, whichever is earlier.
6.1.2 Delivery Period Margin
Delivery Margin is levied on the open interest position that has been marked for delivery.
Thus, once the delivery is marked Tender period Margin is released and Delivery Period
Margin is levied. It is levied till the time the member makes pay in of funds to collect
delivery. Delivery Period margin is exempted if goods tendered during tender period with
all the documentary evidence. This margin continues till the settlement of the delivery by
way of payment of funds or delivery.
6.1.3 Pay in and pay out of funds and commodities
Commodity and funds pay in: The commodity pay-in should be done on or before the
Schedule pay-in day. The seller has to submit documentary evidence of deposit of
Commodity in Exchange designated Warehouse along with the quality certificate. The
Buyer member has to make available the funds in his bank settlement account on
scheduled pay in day to enable the Exchange to collect the funds. Normally the funds pay
in is on E+2 basis where ‘E’ stands for expiry of the contract.
Commodity and funds pay out: The pay out of Commodity will be effected only on
receipt of the funds pay in from the buyer member. The Warehouse receipt will be
couriered / handed over to the member along with quality certificate. Normally the
delivery pay out is on E+3 basis. Pay out of funds will be credited to Seller member on
schedule pay out date in their bank settlement account. Normally the funds pay out is on
E+3 basis.
Premium/Discount, standard deduction & weight differential: These are the few variables
that the Exchange has to compute at the time of the delivery. Since the actual quantity &
quality may differ at the time of the delivery, the Exchange debits or credits such
differences as per the schedule. The variance has to be within the stipulated limits
prescribed by the Exchange in the contract specification.
6.1.4 Weighment at the time of delivery:
The goods tendered shall be weighed at the buyer’s option, at the seller’s weighbridge or
at a mutually agreed independent weighbridge, and the weights determined in this
manner shall be treated as final and fully binding on both the parties. The buyer’s
representative shall present himself at the sellers warehouse at the timer of delivery
failing which the seller reserves the right to proceed with sampling and weighment of the
commodity tendered for delivery even in absence of the buyers representative.
Delivery shall be treated as complete if the seller supplies a quantity that is within
minimum and maximum prescribed quantity. When a certain quantity is supplied and if it
fails short of minimum permissible quantity then the shortage will be calculated in
relation to the mean of minimum and maximum quantity. Likewise when quantity
supplied is more than maximum quantity then the balance shall be treated as excess
quantity. For calculating such shortage or excess delivery, the total quantity delivered by
a seller is to be considered collectively as well as the minimum truckload permissible in
each instance.
In case of a shortage, the Buyer shall be entitled to claim the difference between the price
payable as per the delivery order and the market price on the date of delivery from the
seller if the ready market price is higher; whereas in case of excess delivery the buyer is
required to pay for the excess quantity at a price which is lower to the delivery order
price or the ready market price on the date of delivery.
6.1.5 Sampling and Analysis at the Time of Delivery:
In case of buyer does not agree to the surveyors report as to the quality of the commodity,
he shall go for second sampling. The system for drawing samples tendered for the
delivery will be as prescribed in the Bureau of Indian Standards procedure. The samples
shall be taken from the seller’s warehouse directly. Four samples shall be taken as under:
 One for the long position holder (buyer) taking delivery of commodity- first
sample
 One for the quality certification agency
 One for the final reference by the warehouse, if it becomes necessary- third
sample
If the first sample collected by the buyer and analysed by the surveyor appointed by him,
confirms to the specifications, then the goods tendered for delivery shall be accepted and
no subsequent claims from buyer regarding quantum of rebate or any other
indemnification shall be admissible nor shall be obliged to pass any sealed samples to the
buyer if requested subsequently.
If the first sample as examined by the buyers surveyor fails to confirm the quality
standard specified, the buyer shall intimate the seller within 72 hours of the collection of
sealed samples along with a copy of analysts report. The seller shall immediately send the
second sealed sample to an approved laboratory, which is also agreed by the buyer. The
result of the same shall be binding on both parties. In the event the buyer do not mutually
reach agreement as to the laboratory to be used for analysis, then exchange shall direct
the seller to send the third sealed sample to any one of the approved laboratories/
surveyor, as decided by the exchange.
The analysts report of the approved and agreed independent laboratory shall be forwarded
by the seller to exchange and intimation to the buyer within 72 hours after the submission
of the second sealed sample for analysis. Exchange shall direct the party in whose favour
the result has been decided to collect the cost of tests and detention charges from the
other party. In case the commodity stands rejected then the seller shall be given 48 hours
from the day of rejection to re-tender the goods. If the re-tendered goods do not confirm
to the quality standards, then it will tentative amount to failure on the part of the seller to
give delivery, which shall be closed out as per the Due Date Rate treating the same as
shortage.
In order to ensure that the tests are exactly comparable and the results are consistent, the
independent analyst shall determine the particular analytical test by applying the methods
specified in the relevant ISI. The analyst shall be required to append a certificate to that
effect to the analysis report issued by him.
6.1.6 Delivery Related Charges:

Charges incurred on maintaining the physical delivery like warehousing charges,
assaying charges, storage charges, demat charges, handling charges etc. will be borne by
the seller till the date of pay in. Once the pay out is completed the charges will have to be
borne by the buyer. The above said charges are paid to the Warehouses. The Exchange
will act as a facilitator in collecting the warehouse charges and pass it to the respective
warehouses.
The member taking delivery shall bear transportation and insurance cost from the sellers
godown to his destination, except provided otherwise. The member or his client issuing
Delivery Order and giving delivery shall maintain adequate insurance commodity held in
stock prior to delivery and in no circumstances either exchange or the member or his
client taking delivery will be responsible for any losses prior to delivery being completed.
Warehouse, fumigation, insurance and transportation Charges:
Borne by the seller upto commodity pay-out date
Borne by the Buyer after commodity pay-out date
6.1.7 Payment by Exchange to the Tenderer: exchange shall pay the invoiced amount
to the member tendering delivery on completion of delivery and receipt of confirmation
from the buyer to this effect. However if the buyer fails to confirm or raise objection
within such time as may be specified by the exchange for the respective commodity, the
exchange will pass on the proceeds to the seller.
Table-6.1: Complete Schedule of Settlement/ Delivery

Delivery particulars Wheat NCDEX Wheat MCX Maize NCDEX Maize MCX
Delivery logic Compulsory Compulsory Compulsory Sellers option
Expiry of the Contract 20th day of expiry 15th day of expiry
(Date) month month
Tender Period Last 5 working Last 5 days
days of the (Tender day for
contract expiry buyers & sellers
and 1st working intension – 10th
day after expiry day of expiry
of the contract month by 6.00
pm)
Tender Period Margin Increase 1% Increase 3% Increase 2% every Increase 3% every
every day every day (total day day (total 15% on
15% on last day) last day) in
in addition to addition to daily
daily margin margin
Deliver Period Three working Three working
days after expiry days after expiry
of the contract of the contract
(E+1 to E+3) (E+1 to E+3)
Delivery Period X days VaR 25% on the X days VaR margin 25% on the market
Margin margin plus market quantity plus additional quantity
additional margin
margin
Exemption from Exempted if Exempted if goods
delivery period margin goods tendered tendered during
during tender tender days with
days with all the all the
documentary documentary
evidence evidence
Tender notice/ delivery Seller-On tender Seller-On tender
pay in days alongwith days alongwith
WR and QC. WR and QC.
Delivery Marking On expiry of the On expiry of the
contract contract
Delivery Pay in E+2 by 11.00 E+1 by 5.00 pm E+2 by 11.00 am During tender
am period by 6.00 pm
Funds Pay in E+2 by 11.00 E+2 by 11.00 am E+2 by 11.00 am E+2 by 11.00 am
am
Delivery pay out E+2 by 12.00 E+3 by 11.00 am E+2 by 12.00 noon E+3 by 11.00 am
noon
Funds pay out E+2 by 12.00 E+3 by 11.00 am E+2 by 12.00 noon E+3 by 11.00 am
noon
Packaging 50/100 kg jute 50/60 kg B twill Jute bags (50 kg)
bags bags
Taxes, Duties, Cess & On account of Inclusive of all
Levies seller, post lifting taxes, charges,
by buyer levies or APMC
Cess applicable at
the delivery
center- by seller.
Post lifting by
buyer.
Warehouse, insurance - by seller upto - by seller upto
& transportation pay out date pay out date
charges - by buyer after - by buyer after
pay out date pay out date
Buyers option for As per allocation As per allocation
lifting of delivery made by made by exchange
exchange
Delivery centres Delhi, Delhi, Khanna, Nizamabad, Karim Nagar &
Ahmedabad, Karnal, Kanpur, Karimnagar, Nizamabad
Bareilly, Indore, Kota & Indore Nimbaheda,
Kanpur, Karnal, Bahraich,
Sirsa Khanna, Davengere,
Moga, Kota and Ratlam, Jalgaon,
Shahjahanpur Jalna
Transfer of delivery WR shall be WR shall be
endorsed in the endorsed in the
name of buyer name of buyer
after pay in & after pay in & pay
pay out out procedures are
procedures are completed
completed
6.2 Taking Physical Delivery

The member or his client or final endorsee in possession of a Delivery Order shall be
obliged to take delivery within such period, as may be specified by the exchange (see
table 6.1) for a specific commodity. He is also entitled to lift delivery on various days
during such defined period (see table 6.1), provided that on each day he has to lift at least
1/10th of his total allocated delivery. In the event that the member or his client in
possession of a delivery order is unable to lift the material within the prescribed days
after the receipt of the Delivery Order, the seller shall claim and receive compensation at
such rate, as may be decided by the exchange (see table 6.1) for that specific commodity
in respect of warehouse charges, insurance charges, etc. in the same manner if the seller
fails to give delivery on the scheduled date the buyer shall claim and receive
compensation at such rate, as may be specified by the exchange (see table 6.1) for that
specific commodity. The buyer has to intimate to the seller the schedule for taking
delivery of the tendered goods in advance, with a copy to the Exchange. The seller has to
confirm and intimate in writing to the buyer with a copy to exchange in advance about his
confirmation to deliver as scheduled or change in the delivery schedule.
6.2.1 Remat of warehouse receipt

As and when the client wants to take the physical delivery of the commodities, he can do
so by making the request in prescribed form to the DP with whom he holds his demat
account. The physical delivery request form (known as Remat Request Form or RRF)
will be issued by DPs to their clients. The process is as follows:
- Client fills in the RRF and hands it over to the DP;
- DP verifies the signature of the client and the quantity mentioned in the form with
the holdings in the demat account and enter the information to the DP module and
generate the Remat Request Number (RRN);
- DP gives the acknowledgement copy of RRF to the client and sends the delivery
instruction electronically to the warehouse through the Depository and Registrar;
- Client or his representative required to approach the warehouse with the following
documents:
o Original acknowledge slip issued by DP on which RRN is written
o Authority letter from the client authorizing the agent to take the physical
delivery on his behalf (if representative approaches for taking physical
delivery)
o Proof of identification of the person taking the physical delivery
- On receiving the above documents, the warehouseman will verify the authenticity
with the authorization in the system;
- On the successful authentication he will give the physical delivery.
- In CSDL the RRN generated by the DP is captured on the same day and in NSDL
it is captured on next day. Hence the remat request can be processed on the same
day in case of CSDL and on next day in case of NSDL accounts.
In case of warehouse refuses to give the physical delivery the beneficiary may contact the
Exchange customer care for assistance.
6.3 In Case of Cash Settlement

The buyer who fails to accept delivery orders is required to pay the difference between
the settlement price and the due date rate. In addition, the buyer will have to pay a
penalty, as ascertained by the exchange. The seller, who tenders the delivery document, is
compensated with the penalty recovered from the buyer, while the delivery is returned to
the seller. Failure to pay the dues and penalties relating to such closing out within the
stipulated period causes the member to be declared a defaulter, and renders him liable for
disciplinary action.
6.4 DELIVERY AND SETTLEMENT PROCEDURE: AT A GLANCE
Member enters order in to the system which results into a trade for a specific
contract
Contract nearing expiry, enters into Tender period
Member interested in delivery gives its intention during Tender period.
On delivery marking date, delivery is allocated/marked
Seller member delivers the commodities in the warehouse
Buyer member makes pay in of funds on scheduled Pay in day.
Payout of funds made to seller member on scheduled pay out date.
Buying member lifts delivery after pay in of funds.
6.5 The mandatory requirements for physical delivery and farmers’

participation
- The participants giving delivery are required to be registered with sales tax : All
seller members/clients are advised to quote their sales tax registration/Value
Added Tax (VAT) number on the invoices issued by them. In some states, the
buyer is also required to be registered with the Local State Tax/VAT authorities.
Such buyers should inform their sales tax registration/VAT number to the seller.
local mandi: the member/client giving/taking physical deliveries in agricultural
commodities are required to be registered with the respective local Mandis under
the applicable APMC law. The members/clients are advised to make payment of
mandi tax, if applicable, while depositing the goods in the warehouse and obtain
the receipt / certificate for the same. The said mandi tax paid receipt /certificate is
required to be handed over/transferred to the next buying member/client along
with other settlement related documents like invoice/s. The warehouses are also
advised to collect the proof of mandi tax paid receipt/certificate for their records if
required by local mandi authorities.
about last three years income and investment (full 14 page document written in
english).
Farmers as a participant of commodity futures trading can’t even open an account with
the broker members as list of documents required for opening of accounts with brokers
may not be available with farmers like PAN number, registration of sales tax, copy on
income tax return, etc.
The requirement of client giving/taking delivery be registered with local mandi and the
seller member is required to make the payment of mandi tax, if applicable, while
depositing the goods in warehouse and handover the receipt/ certificate of same to the
buying client along with the settlement related documents. As per the APMC act in all the
states, sellers are not required to pay the mandi fee, and the same is to be paid by the
buyer.
delivery are:
settle in cash.
Suggestions
exact entry price.
Chapter-7
Knowledge and Perception of Farmers and Traders Regarding Futures
The commodity futures provide risk transference function through hedging mechanism to
the farming community in the country. It is often argued that farmers do not benefit from
futures either directly through hedging on commodity exchanges or indirectly through
price discovery for the future spot prices. It has been tried to take the response of selected
farmers and traders on the direct and indirect benefits of commodity futures and the
results are presented in this chapter.
7.1 Knowledge and Perceptions of Farmers on Commodity Futures

The benefit of commodity futures to the farmers is expected with direct participation as
hedgers for managing their price risk arising out of market fluctuations due to demand-
supply conditions particularly at the time of harvest, and indirect benefit through using
futures price as expected spot price for future date and deciding on crop area allocation,
planning for market their crop produce i.e., deciding on immediate sale or deferring sale
referring futures price of distant or lean period contracts. The results of analysis of
farmers’ knowledge and perceptions on commodity futures are explained below;
7.1.1 Socio-economic conditions of Farmers

Of the total selected wheat growing farmers (241 farmers), 66% farmers were from
Marginal and Small category, about 25% were of Semi-medium category, 8.7% from
Medium category and merely 0.4% from Large farmers (Table 7.1.1).
Table-7.1.1: Socio-economic conditions of selected Wheat growing farmers in Hardoi.

Particulars Marginal & Small Semi-Medium Medium Large Overall
No. of Farmers 159 60 21 1 241
Av. Age (Years) 70.0 56.0 45.4 50.9 47.8
Land Holding (in Ha)
Irrigated 0.86 2.79 5.47 20.25 1.82
Unirrigated 0.003 0.00 0.00 0.00 0.002
Total 0.86 2.79 5.47 20.25 1.82
Phone Connectivity (% Farmers)
No Phone 78.6 61.7 47.6 0.0 71.4
Landline 0.6 5.0 19.0 0.0 3.3
Mobile 20.8 33.3 33.3 100.0 25.3
Total 100.0 100.0 100.0 100.0 100.0
Average age of the farmers was about 48 years, marginal and small farmers having
household heads from higher age group. Average size of farm holding was 1.82 hectares.
The land holding pattern indicates that large farmers have about 20.25 ha land followed
by medium farmers (5.47 ha), semi-medium farmers (2.79 ha) and marginal and small
farmers (0.86 ha). Almost complete operational land is irrigated in the study area. The
phone connectivity among farm households indicates that about 30% farm households are
connected with telephone either landline or mobile.
Of the total 251 selected maize farmers of Davangere district, 38% were of marginal and
small category, 32% of semi-medium category, 27% of medium category and 4% of large
farm holdings (table 7.1.2). Average age of farmers was 46 years, and farmers in different
farm size holdings were of about same age group. Average size of holdings with selected
farmers in Davangere was 3.23 hectares, with 92% unirrigated land. The land holding
pattern showed that large farmers have 14.43 ha. operational holdings with them followed
by medium farmers (5.36 ha), semi-medium farmers (2.61 ha), and marginal and small
farmers (1.21 ha).
Table-7.1.2: Socio-economic conditions of selected maize growing farmers in Davangere.

Particulars Marginal & Small Semi-Medium Medium Large Overall
No. of Farmers 96 79 67 9 251
Av. Age 46.6 44.8 46.2 43.9 45.8
Land Holding (Ha)
Irrigated 0.08 0.15 0.55 0.85 0.25
Unirrigated 1.13 2.46 4.81 13.58 2.98
Total 1.21 2.61 5.36 14.43 3.23
Phone Connectivity (% Farmers)
No Phone (%) 74 76 69 67 73
Landline (%) 2 1 7 0 3
Mobile (%) 24 23 24 33 24
Total 96 79 67 9 251
The phone connectivity with farm households shows that about 24% households were
connected either with landline or mobile phones. Of the farm households having phone
connectivity, about 90% were having mobile connection.
7.1.2 Cropping pattern of selected wheat farmers
Major crops with the farmers in the study area were wheat and mustard in Rabi, and rice
and urad in Kharif season (Table 7.1.3). Sugarcane and fruits were the perennial crops
with farmers. The cropping intensity is highest with marginal and small farmers followed
by medium, large and semi-medium farmers, though there was almost similar cropping
intensity with the selected farmers.
Table-7.1.3: Cropping intensity of wheat farmers of Hardoi

Crops Marginal & Small Semi-Medium Medium Large Overall
Kharif Area (Ha)
Rice 0.49 1.68 3.74 16.20 1.14
Urad 0.07 0.10 0.08 0.08
Tilly 0.05 0.12 0.04 0.07
Groundnut 0.05 0.09 0.06
Others Kharif 0.03 0.07 0.16 0.25 0.05
Total Kharif 0.70 2.06 4.02 16.46 1.39
Rabi Area (Ha)
Wheat 0.78 2.15 4.14 16.20 1.47
Mustard 0.02 0.12 0.36 2.03 0.08
Others Rabi 0.02 0.09 0.13 0.00 0.05
Total Rabi 0.81 2.35 4.63 18.23 1.60
Sugarcane (Ha) 0.02 0.20 0.59 0.12
Fruits (Ha) 0.01 0.12 0.16 0.05
Total Perennials 0.04 0.32 0.76 0.17
GCA (Ha) 1.55 4.74 9.40 34.68 3.16
CI % 180 170 172 171 174
Major crops with the maize farmers in the Davangere district of Karnataka were Jowar
and Sunflower in Rabi, and Maize, Jowar, Ragi and Sunflower in Kharif season (Table
7.1.4). The cropping intensity is highest with marginal and small farmers followed by
semi-medium, medium and large farmers.
Table-7.1.4: Cropping pattern of selected farmers in Davangere

Crops Marginal & Small Semi-Medium Medium Large Overall
Kharif Area (Ha)
Maize 1.05 1.89 3.47 5.94 2.13
Jowar 0.06 0.19 0.43 1.08 0.23
Ragi 0.04 0.14 0.23 1.26 0.16
Sunflower 0.04 0.23 0.60 2.70 0.34
Other Kharif 0.04 0.12 0.37 1.17 0.20
Total Kharif 1.22 2.57 5.09 12.14 3.07
Rabi Area (Ha)
Jowar 0.11 0.20 0.38 1.17 0.25
Sunflower 0.04 0.12 0.32 0.09 0.14
Other Rabi 0.01 0.06 0.14 1.75 0.12
Total Rabi 0.16 0.38 0.83 3.01 0.51
GCA (Ha) 1.39 2.95 5.93 15.15 3.59
CI % 114.69 112.94 110.59 104.98 110.92
7.1.3 Awareness regarding commodity futures

If farmers are well aware about commodity futures trading and its role in the farming
business, then only farmers will be able to get benefit of this market instrument directly
or indirectly. Here it has been tried to know the knowledge and depth of farmers on
commodity futures. From the observations of the study it can be inferred that, in case of
wheat farmers only 2 farmers out of 241 total sampled farmers in Hardoi district of Uttar
Pradesh have only heard about commodity futures. They do not know further about the
commodity futures and its direct or indirect benefits they can derive.
In case of maize, only 4 farmers out of 251 total selected farmers from Davangere district
of Karnataka were aware about commodity futures. Similar results were also reported by
Sahadevan (2009) in his study on commodity futures of the mentha farmers and reported
that only seven out of 30 sample mentha cultivating farmers were aware about
commodity futures in Uttar Pradesh. IIMB (2006) study also reported that awareness
regarding commodity futures among farmers is almost negligible in different states of the
country. Study reported that only 11 wheat growing farmers out of 781 total farmers, 5
out of 424 Gram growing farmers, 6 out of 384 Tur growing farmers, 5 out of 384 Urad
growing farmers, 10 out of 466 sugarcane growing farmers were aware about commodity
futures trading. Sabnavis and Jain (2007) and Greenberg (2007) reported that farmers in
the vicinity of commodity centric towns are aware of the futures trading (70% large
farmers and 1% small farmers), and do find the futures prices a useful tool for deciding
when to sale their produce as well as to bargain in the mandis.
Rural farming community, with the socio-economic profile of the farmers in India, is
more likely to enjoy the indirect benefits of commodity futures such as improved and
transparent price forecasts that the direct benefits from initiating positions in futures
markets. Even in US, where futures in agricultural commodities are more than a centaury
old, only a small percentage of farmers use them directly. In the majority of cases they
access the market through farmers associations/ cooperatives, processors and traders
(UNCTAD, 1997).
7.1.4 Crop Area Allocation Decision

them (Table 7.1.3). No single farmer reported considering futures price as a deciding
factor in crop selection and area allocation to the crop before sowing of the crop. This is
clear from the results mentioned above that farmers in the study area have almost
negligible awareness regarding commodity futures and its direct and indirect benefits in
their farming business.
Table-7.1.5: Factors for deciding crop area allocation by farmers

(% Farmers)
Factors Marginal & Small Semi-Medium Medium Large Overall
Previous years price of crop 66 73 86 100 70
Price of related crop 84 80 90 100 84
Futures price of harvest period contract 0 0 0 0 0
Resource availability 59 57 76 100 60
Other 6 0 0 0 4
The maize farmers in Davangere district considers previous year’s price of the crop as a
major factor to decide the area allocation at the time of sowing maize. The other factors
farmers consider at the time of deciding on area allocation under different crops were
price of the related crop, resource availability with them and labour availability.
Table-7.1.6: Factors for deciding crop area allocation by farmers

(% Farmers)
Previous years price of crop 98 97 97 89 97
Price of related crop 77 82 82 44 79
Futures price of harvest period contract 0 0 0 0 0
Resource availability 75 56 54 33 62
Labour availability 97 80 85 100 88
Since most of the farmers were not aware on direct and indirect use of commodity futures
in their farming business, they do not consider futures price of harvest period contract at
the time of making decision on area allocation to a particular crop during sowing of the
crop.
Availability of Harvest period contract at the time of sowing

Particulars Wheat Maize
Time for Planning of sowing (Months) October April- May
Sowing time (months) October- November May-June
Harvest time (months) End of March - April Sept.- Oct.
Futures contracts available at sowing April August
Farmers’ starts planning for sowing of wheat from the month of October and November
and the harvesting period for wheat is normally end of March and April months. Thus for
taking futures price of harvest period wheat futures contract for making decision on
allocation of area under wheat, the April Wheat futures contract should be available in
the month of October. At NCDEX April contract was available in the month of October.
But on MCX platform February contract was available thus harvest period contract was
unavailable at the time of planning for sowing of wheat.
In case of maize, sowing of maize starts from the month of May and harvesting starts
from the September month. In the month of April, only July / august contract was
available to farmers thus harvest period contract were unavailable at the time of planning
for sowing of the crop.
7.1.5 Farmers Information Seeking Behaviour and Source of Price Information
Farmers in the study area seek price information before sale of their produce decides crop
market planning of farmers produce. If farmers seek information before sale of their
produce, based on prevailing prices in the market and comparing it with either futures
price in the distant contracts or previous years lean season price of the commodity,
farmer can decide either on immediate sale of the produce or to decide on defer sale for
some months and sale when prices are high in the market. Almost all the selected farmers
in the study area try to get price information before sale of their produce in the market by
various sources.
As regards price information source, wheat farmers in the study area bank mainly upon
traders (83% farmers reported sourcing price information from traders) followed by
fellow farmers (43%), news paper (38%) and television/radio (37%). Very few farmers
take price information from mandi, implying that for farmers in the study area traders
were easily accessible and trusted source for getting information related to commodity
prices.
Table-7.1.7: Wheat farmers’ response (% farmers) on source of price information

Source of Price Information (% Marginal & Semi- Mediu Larg Overal
Farmers) Small Medium m e l
Mandi 12 20 19 0 15
Trader 82 88 81 100 83
News Paper 37 40 43 0 38
Mobile 20 60 95 100 37
TV/Radio 19 27 19 0 21
Fellow Farmers 53 28 10 0 43
Major source for getting price information for maize farmers in Davangere district were
traders in the market (57% of the total farmers responded seeking price information from
traders), followed by fellow farmers (36%), news papers (28%), and radio/television
(26%).
Table-7.1.8: Maize farmers’ response (% farmers) on source of price information

Marginal & Small Semi-Medium Medium Large Overall
News Paper 8 32 45 78 28
Phone 4 8 4 11 6
Television & Radio 5 32 43 78 26
Market/ Trader 51 58 58 89 57
Fellow Farmer 45 34 28 11 36
Local Agent 5 3 3 0 4
These traditional channels of farmers for price information can be used to spread
awareness regarding futures as well as prices of futures contracts to the farmers. Also
through review of local news papers during tour in the study areas, it was observed that
no any local newspaper covers the prices of futures contracts in agricultural commodities
as the English daily newspapers like Economic Times and Business Standards covers on
daily basis. Thus, local newspapers can be better and potential source of futures prices of
agricultural commodities dissemination on daily basis, as it was observed from field
survey that about 30-40% of farmers seek price information through news papers in the
study area.
7.1.6 Risk Management through Retaining Produce for future sale

Farmers generally manage their price risk by storing their produce at the time of harvest
for sale in future point of time in anticipation of that price will increase in the lean
season. The sales deferring behaviour of wheat farmers in Hardoi district revealed that
one-fourth of the total farmers store their produce of wheat for taking benefit of higher
prices. About 76% farmers of medium category were highest to store their produce for
future sale followed by Semi-medium farmers (48%) and marginal and small farmers
(10%). For storing the produce no any farmer availed credit or pledge loan. If benefits of
Table-7.1.9: Proportion of Farmers stored wheat for Sale in Future time.

% Farmers Marginal & Small Semi-Medium Medium Large Overall
Store Produce 10 48 76 0 25
Sale Immediately 90 52 24 100 75
higher prices in the market during lean season (table 7.1.10).
Table-7.1.10: Proportion of Farmers stored Maize for Sale in Future time.

% Farmers Marginal & Small Semi-Medium Medium Large Grand Total
Store Produce 26 43 69 89 45
Sale Immediately 73 56 31 11 55
7.1.7 Crop Sales Storage for future sale

Period of Storage: Period of storage analysis shows that most of the farmers stored their
wheat for seven to eight months period after the harvest to take the maximum benefit of
the increased market prices during the lean season. That means they sale their wheat in
the months of November-December months. Few farmers sold their wheat after storing
for 3-4 months from harvest.
Table-7.1.11: Duration of Wheat storage by Selected Farmers in Hardoi
(% Farmers)
Stored Wheat for no. of months Marginal & Small Semi-Medium Medium Large Overall
3 6.3 0 0 0 1.6
4 6.3 3.4 6.3 0 4.9
7 50.0 34.5 31.3 0 37.7
8 31.3 55.2 62.5 0 50.8
9 6.3 6.9 0 0 4.9
Total no. of farmers stored wheat 16 29 16 0 61
Maize farmers in Davangere deferred sales for about 3-6 months and store the produce.
The farmers sold their produce at the time of high prevailing prices in the market after 3-
4 months of storage. Large and medium farmers mainly store maize for 3-4 months and
marginal & small and semi-medium farmers even go upto 5-6 months in anticipation of
further increase in prices.
Table-7.1.12: Duration of Maize storage by Selected Farmers in Davangere

(% Farmers)
Stored Maize for no. of months Marginal & Small Semi-Medium Medium Large Overall
1 4.0 5.9 2.2 0.0 3.5
2 8.0 0.0 6.5 0.0 4.4
3 32.0 35.3 28.3 62.5 33.6
4 24.0 23.5 37.0 25.0 29.2
5 24.0 14.7 17.4 12.5 17.7
6 8.0 20.6 6.5 0.0 10.6
7 0.0 0.0 2.2 0.0 0.9
Total no. of farmers stored maize 25 34 46 8 113
Factors deciding storage: Decision factors for deferring sales of wheat produce and
storing it for sale in future point of time when prices in the market are high are previous
years price of the crop during lean season and expectation of high price in future point of
time through own analysis. It is obvious that with the negligible awareness about
commodity futures, farmers does not consider futures price while deciding on deferring
sale and storing wheat for sale in future. On the contrary, Greenberg (2007) reported that
about 24% small and 45% small farmers use commodity futures price information after
sowing and about 1/3rd of the small farmers and half of the large farmers store crops after
harvest based on futures price information.
Table- 7.1.13: Factors determining Decision to store wheat by farmers for future sale
(% Farmers)
Based on price during lean
period previous year 94 97 100 0 97
Based on futures price of commodity
for lean period contract 0 0 0 0 0
Based on own analysis 63 66 75 0 67
Prices of maize realized by farmers in the previous year and own analysis of expected
price in the future point of time were the major factors based on those farmers decided to
defer sale and put the produce to store to minimize price risk and gain from higher prices.
Only 1 farmer in each semi-medium and medium category responded that they
considered futures price of distant contract while deciding for storage and sale in future
point of time.
Table- 7.1.14: Factors determining decision to store maize by farmers for future sale
(% Farmers)
Based on price during lean
period previous year 88 71 83 100 81
Based on futures price of commodity
for lean period contract 0 3 4 0 3
Based on own analysis 44 74 72 75 66
Factors deciding sale from storage: Money requirement for meeting different
obligations by farmers was the major factor that decides the time of sale of stored wheat
by farmers in Hardoi followed by the prevailing high price in the market during lean
season. Farmers under medium farm size group were the majority of farmers who stored
wheat for sale in future and they decide to sale stored wheat when prices in the market
were high during lean season.
Table-7.1.15: Factor determining when to market from storage decision

(% Farmers)
As and when money is required
by the family 88 100 88 0 93
After some time when price is good 56 69 94 0 72
The time of sale of stored maize with the selected farmers in Davangere district of
Karnataka was decided by the prevailing price in the market. More than 90% farmers
who stored maize for future sale responded that they decide time of sale on the basis of
prevailing high price in the market (table 7.1.16). About 70% responded the need of
money for meeting different family obligations as a factor in deciding the time of sale of
stored maize.
Table-7.1.16: Factor determining when to market from storage decision

(% Farmers)
As and when money is required
by the family 56 76 78 88 73
After some time when price is good 96 85 91 100 91
Farmers in the study area on asking about the availability of scientific warehouse space to
store their commodities responded that they have to resort to store their produce in their
home only and often complain about the non-availability of space in warehouses of
Central and State Warehousing Corporations. Farmers revealed that the warehouses of
CWC or SWC either do not allow farmers to store their produce or ask for complicated
paper work like copy revenue / land records, certificate of farmers own produce, etc.
which farmers were not able to fulfill, and they often complain that these warehouses
only store the produce of traders and FCI commodities or fertilizers, etc.
7.1.8 Benefits of Storage of Crop
The ultimate aim of storing wheat for sale in future point of time is to take advantage of
higher price of the commodity during lean season. The farmers, who had stored wheat,
gained Rs. 46.5 per quintal benefit in terms of higher price than the harvest period price
(table 7.1.17). Semi-medium farmers got highest benefit of Rs. 64.5 per quintal followed
by Medium (Rs. 49.5/qt.) and marginal & small farmers (Rs. 38/qt.).
increased price realization compared to the prices in the harvest period. Semi-medium
farmers benefited more (Rs. 39/qt.) followed by marginal & small and medium farmers.
Table-7.1.17: Increased price realized due to storage of Wheat in Hardoi

Av. Production (Qt/farmer) 26.10 73.23 153.33 500 50.89
Wheat sold just after harvest (Qt/farmer) 10.4 29.1 34.0 465.0 19.0
Price (Rs/Qt) 954.1 943.8 957.6 1040.0 959.4
Wheat stored for sale in future (Qt/farmer) 2.6 22.7 97.1 15.8
Average Price 961.6 972.1 994.2 1040.0 980.5
Increased price realized (Rs/qt) 38.0 64.5 49.5 46.5
Table-7.1.18: Increased price realized due to storage of Maize in Davangere

Marginal & Semi- Mediu Larg Overal
Small Medium m e l
Av. Production (Qt/farmer) 29.3 55.0 106.1 165.6 62.8
Maize sold just after harvest (Qt/farmer) 20.4 30.2 30.6 23.3 26.3
Price (Rs/Qt) 746.1 746.6 758.8 770.0 751.0
Maize stored for sale in future
(Qt/farmer) 8.8 24.5 74.3 141.9 36.0
Average Price 775.4 785.2 781.2 786.9 782.3
Increased price realized (Rs/qt) 29.4 38.6 22.3 16.9 31.3
Popular marketing channels for sale of wheat by farmers of Hardoi district are; sale
through commission agent in mandi and sale to local traders in village itself. The
common channels of marketing of maize in Davangere district were sale through
commission agent in mandi, through local traders, and to processing agencies, etc. Since
most of the wheat and maize farmers were not aware about the commodity futures trading
and role of futures price as an indicative spot price for future date, they did not consider
take use futures price indication at the time of sale of their produce in the market.
Other interesting observation from table- 7.1.17 is that, even total wheat and maize
production per farmers at Marginal & small farmers and semi-medium farmers is well
below the minimum lot size (10 Tonnes) tradable on commodity exchanges. The
marketable surplus would even be very meager out of total production. But the medium
and large farmers certainly have the production of wheat with them confirming the
minimum lot size in futures trade. If this group of farmers were trained well on direct and
indirect use of commodity futures, they can potentially be benefited even by direct
participation by hedging. The marginal and small farmers and semi-medium farmers can
be benefited directly by commodity futures through forming common marketing group
and the group consolidates the marketing and hedging activities in behalf of all the farmer
members.
Small farmers are not expected to participate directly in the futures markets- at least, not
until they built up the necessary knowledge, resources and capacity. Instead
dissemination of pricing and other market information, coupled with training of small
farmers about how to use it, is one source of increasing farmers’ capacity and resilience
(UNCTAD, 2007). In China, the Dalian Commodity Exchange launched in 2004 the
“1000 villages and 10000 farmers” educational programme that does just that. By early
2007, over 40,000 farmers had been educated on how to use futures prices to make
optimal planting decisions. Additionally, intermediary organizations – including
cooperatives, input suppliers, purchasers, financiers (including micro-finance
organizations) – can embed hedging functionally into the terms of contracts they offer to
farmers. In this way, the small farmers can receive the benefits of price risk management
without needing to devote the considerable time and resources that direct involvement in
commodity futures would require (UNCTAD, 2007).
7.1.9 Farmers inability to manage risk through Commodity Futures

The major risks farmers face at the time of harvest are many fold. If the climatic and
other conditions remained favourable and farmers were able to reap good harvest, then
they faces downward price risk as most of the farmers in the country are marginal and
small farmers and they need cash just after harvest to meet their economic and social
obligations by selling their small marketable surplus in the market immediately. Thus,
they have to resort to distress sale and in turn receive low market prices. Hedging on
commodity futures in this case would result certainly in minimizing their downward price
risk provided that the futures prices suits to them and they know the mechanism. The
major factors that hinder the farmers to take active part in commodity futures and benefit
directly through hedging were:
commodity futures;
- the cash requirement to fulfill the margin requirement is about Rs 10,000 to
15,000 they have to deposit at the time of entry in the market, maintain mark-to-
market margin and tender period & Delivery period margin which was 2-3 times
higher than normal margin requirement is so high that they need finance;
- They were also unaware on physical delivery procedure on commodity
exchanges;
exchanges;
- The fear of non-compliance of commodity quality to the contract specifications at
the time of assaying leading to major loss to farmers;
- They have to face risk of futures also.
On the other hand, the condition before farmers may arise where they have hedged their
expected harvest stock at the time of sowing in expectation of normal weather and other
conditions. But, due to natural calamity or disease/ pest outbreak or other reasons, if the
farmers either were not able to reap harvest of the quality not confirming the contract
specifications or not able to reap any quantity. In this case, commodity prices at the time
of harvest in both futures as well as in spot market would be much higher than the price
which farmer locked in for hedge. Thus, farmer would neither be able to deliver the
commodity in physical to exchange, in absence of commodity or quality, nor be able to
settle in cash.
To save the farmers from such a condition, options in commodities may be the best
alternative for transferring their market risk.
7.2 Perceptions of Wheat Traders and Processors
study. The results of the analysis of their responses are discussed below.
7.2.1 Characteristics of Traders and Processors
Of the total 37 selected traders and processors, 2 were educated upto primary level, 3
upto middle class, 12 upto senior secondary, 14 were graduates and 6 were completed
post graduation. It can be observed from the trading/processing experience (average 11
years) that the sample traders/ processors were well experienced in their business. Most
of the arrivals come from the primary assembling markets and villages in the district and
nearby district. Dispatches of commodity from traders are government procurement
agencies, processors in the district and nearby district, and to Lucknow, Kanpur, Delhi,
Jammu, and occasionally to markets in Southern states. Wheat Millers procure wheat
from these selected markets as well as from primary assembling markets at tehsil level.
The flour was being dispatched to different states like Gujarat, Delhi, Jammu, and major
cities within the state. Most of traders store commodities in warehouses of SWC, CWC
and godowns of rice mill owners and some traders also have their own godowns with
1000 MT capacity.
Out of 37 traders and processors selected for the study, 3 processors do not trade on
commodity futures. Of the traders and processors trade on commodity futures, majority
trade as speculators (50%), only 15% trade as hedgers and 35% trade as both hedger and
speculator. Thus, more than three fourth traders and processors take part in commodity
futures to take profit of price movements of commodities.
Table-7.2.1: Wheat traders and processors take position on exchanges as

Trade as No. of Traders & Processors Per Cent
Do not Trade 3 8
Hedger 1 3
Speculator 28 76
Both 5 14
Total 37 100
Of the 27 maize traders and processors, 2 of them do not trade in commodity futures,
about a quarter responded that they trade in commodity futures as hedgers and two-third
trade as both hedgers and speculators (table 7.2.2). Thus the basic motive of about two-
third of traders and processors was taking profit of price movements in futures trading.
Table-7.2.2: Maize traders and processors take position on exchanges as

Trade as No. of Traders & Processors Per Cent
Do not Trade 2 7
Hedger 7 26
Hedger and speculator 18 67
Total 27 100
7.2.2 Exchanges Traders and Processors Trade on

Out of total 34 traders and processors trade on commodity futures, 15% trade on NCDEX
exchange platform, 24% trade on MCX, and 62% trade on both the national level
commodity exchanges. All the traders trade in wheat and other commodities in which
these traders trade were Guar, Mentha oil, Pulses, Silver, Gold and Crude.
Table-7.2.3: Wheat traders trade on Exchanges

Exchanges trading with No. of Traders & Processors Per Cent
NCDEX 5 14
MCX 8 22
Both 21 57
Grand Total 37 100
Out of 25 maize traders and processors selected in davangere market who trade in
commodity futures, 68% trade on NCDEX exchange platform and 32% trade both in
NCDEX and MCX exchange platform. Maize traders in Davangere trade mainly in
maize, paddy, and sunflower in mandi and in futures they trade mainly in Maize, Guar,
Chilli, gold, silver, etc.
Table-7.2.4: Maize traders trade on Exchanges

Exchanges trading with No. of Traders & Processors Per Cent
NCDEX 17 68
MCX 0 0
Both 8 32
Grand Total 25 100
7.2.3 Knowledge on Commodity Futures
trading (table 7.2.6). About 93% traders and processors were aware about hedging
mechanism on commodity futures but only 33% know about the physical delivery
procedure of commodities on exchange platform and only 30% were aware about margin
system and cost of hedging. Seventy per cent of the traders were aware on contract
specifications of commodities traded on exchange platform.
Table-7.2.5: Knowledge of Wheat traders regarding commodity futures

Knowledge regarding futures No. of Traders & Processors Per Cent
Know what is futures 34 100
Know benefits 15 44
Know role of futures in business 13 38
How to participate 4 12
How to hedge 1 3
Physical delivery 1 3
Contract specifications 1 3
Margin & cost of hedging 4 12
Table-7.2.6: Knowledge of Maize traders regarding commodity futures

Knowledge regarding futures No. of Traders & Processors Per Cent
Know what is futures 27 100
Know benefits 27 100
Know role of futures in business 26 96
How to participate 23 85
How to hedge 25 93
Physical delivery 9 33
Contract specifications 19 70
Margin & cost of hedging 8 30
7.2.4 Who influences decision

futures was mainly based on advice from broker operator and specialists’ opinion (table
7.2.7). Only one trader responded that his decision to take position in commodity futures
was based only on own analysis of supply and demand condition of the commodity they
trade in.
Table-7.2.7: Who influences decision of Wheat traders for Commodity futures

Agents No. of Traders Per Cent
Own Analysis 1 3
Broker Operator 9 26
Own Analysis and Broker Operator 10 29
Specialists opinion and Broker operator 11 32
Friends opinion and specialists opinion 3 9
A quarter of maize traders and processors taken position in commodity futures based on
take position based on advice either from broker operator or specialist opinion (table
7.2.8).
Table-7.2.8: Who influences decision of Maize traders for Commodity futures

Agents No. of Traders Per Cent
Own Analysis 7 26
Friends opinion 1 4
Specialist opinion 8 30
Broker operator 9 33
Total 25 93
7.2.5 Impact of futures on Trade

earning out of their business and price risk management (table 7.2.9). A quarter of wheat
traders responded that the price risk after ban of futures trading in wheat has increased.
Table-7.2.9: Wheat traders’ response on impact of commodity futures trading

(% Farmers)
Impact particulars Increased Decreased No Effect
Turnover after futures 19 14 68
Turnover after futures ban 27 5 68
Cost of trade after futures 22 11 68
Cost of trade after futures ban 16 14 70
Profit after futures 16 22 62
Profit after futures ban 30 8 62
Price risk after futures 11 16 73
Price risk after futures ban 24 3 73
On the other hand, most of the maize traders and processors responded that turnover of
their trade had increased after the introduction of futures trading in maize, 85%
responded that the cost of trade had reduced, 81% responded that profit have increased
and 96% traders and processors had responded that their price risk have reduced after
introduction of commodity futures in maize (table-7.2.10).
Table-7.2.10: Maize traders’ response on impact of commodity futures trading

(% Farmers)
Impact particulars Increased Decreased No Effect
Turnover after futures 93 4 4
Cost of trade after futures 7 85 7
Profit before futures 81 4 15
Price risk after futures 4 96 0
7.2.6 Perception regarding commodity futures
understanding of the concepts and process (table 7.2.11). Thus, thorough training of this
important segment of stakeholders of commodity futures is required.
Table-7.2.11: Perceptions of wheat traders on commodity futures

Attributes No Yes Don’t Know Total Traders
Instrument of price discovery 14 49 38 37
Instrument of price risk management 19 54 27 37
Futures prices helps in better bargaining 27 41 32 37
Dissemination of real time information 22 27 51 37
Transparency 35 5 59 37
Trusted trading platform 30 16 54 37
Instrument for market manipulation 22 5 73 37
Table-7.2.12: Perceptions of Maize traders on commodity futures

Attributes No Yes Don’t Know Total Traders
Instrument of price discovery 0 70 30 27
Instrument of price risk management 0 100 0 27
Futures prices helps in better bargaining 4 96 0 27
Dissemination of real time information 15 78 7 27
Transparency 4 96 0 27
Trusted trading platform 7 93 0 27
Instrument for market manipulation 48 37 15 27
On the perception of maize traders and processors, most of them were positive on
commodity futures. More than 70% responded that the commodity futures is an
instrument of better price discovery, price risk management, it disseminates real time
price information and thus help in better bargaining at the time of buying/ selling of
commodities. Commodity futures is transparent and trusted trading platform was
responded positive by more than 90% traders (table 7.2.12).
Chapter-8
Conclusions and Recommendations
Commodity futures are market instruments to achieve price discovery, market price
stabilization and price risk management. There was a significant upsurge in prices of
some of the agri-commodities from the middle of 2006 to the first quarter of 2007,
though the contribution of agricultural commodities, particularly ‘food grains’, in WPI
inflation was small due to relatively low weight. This spurt in prices of essential
commodities and increasing inflation was, according to one school of thought, caused by
the excess speculation in commodity futures trade and had become an issue of concern
for the government as well as people. In response to the public outcry against futures
markets and their perceived role in causing inflationary trends in the prices of essential
commodities, on January 23, 2007, the FMC, at the suggestion of the GoI, de-listed two
commodities - urad and tur, both pulses from trading on futures exchanges out of concern
about rising food prices which was perceived as caused by speculation in the futures
markets. Later, on February 27, 2007, FMC limited the trading in wheat and rice futures
to squaring off until the expiration of running contracts, for similar reasons. Hence it is
felt imperative to study the working of futures markets in agro-commodities, particularly
essential commodities with the specific objectives of knowing the impact of commodity
futures on spot price volatility, to understand the problems in physical delivery procedure
and farmers and traders views on commodity futures trading.
Two crops viz.; wheat and maize have been selected for the study. Wheat being the major
staple food crop and futures for wheat has been banned. Maize is also a cereal crop for
which futures trade is continuous. Secondary as well as primary data were used to fulfill
the objectives of the study. Daily prices of Wheat from Bareilly, Shahjahanpur and
Hardoi markets and for maize from Davangere and Bangalore markets were collected
from January 2000 to December 2008. Futures prices and trading volume and open
interest data were collected from the website of NCDEX.
For collection of primary data, largest producing states and districts, one for each
commodity, were selected for Wheat (Hardoi in Uttar Pradesh) and Maize (Davangere in
Karnataka). From the district selected four villages for wheat and three villages for
maize, in consultation with district agriculture officer and mandi officials, were selected
for the study from the largest producing taluka/block. About 15% of the total crop
growing farmers were selected randomly from the list prepared for crop growers in each
village. To fulfill the objectives of the study, annualized volatility in market prices of
wheat and maize was analysed (seasonal as well as before and after futures trading) from
the return series of mandi prices.
To know the impact of introduction of futures on the volatility of spot prices, a measure
of volatility was so constructed and regress it on a proxy variable (to account for macro-
economic factors) and a dummy variable (to account for the impact of futures trading).
Monthly volatility measure has been constructed as standard deviation of daily spot
returns. This volatility series was constructed for wheat at Bareilly and Sahjahanpur
market and for maize at Davangere market.
To know the effect of futures trading activity on the volatility of commodity prices, the
Granger causality test was conducted by running the regressions on the wheat and maize
futures trading data collected from NCDEX. This test will help determine if there is a bi-
directional impact flowing from one to other prices and vice versa. Apart from prices, the
test is also used for understanding the relationship between volumes and prices of wheat
and maize.
The results of analysis do not find significant evidence of impact on volatility in market
prices of wheat and maize after the introduction of futures trading. Though analysis
indicated that the ban in wheat futures suppressed the price volatility in wheat may be
due to restriction on movement and increased supply through imports. It was also evident
that the futures trading activity i.e., volume of trade, has significant causal effect in spot
prices of wheat and maize.
The volatility in wheat prices at Bareilly market was higher during pre-futures period.
Monthly pattern shows higher volatility during harvesting months and in the October
month. Post futures monthly volatility in wheat prices observed to be higher during pre-
harvest and harvest months particularly in the year 2006. Monthly volatility in wheat
prices at Shahjahanpur indicates that wheat prices in March and April months were
fluctuating higher during pre-futures which have reduced during post futures but during
post futures volatility in wheat prices in the lean months has increased compared to pre-
futures period. Monthly volatility pattern in Maize prices at Davangere market suggests
that during pre-futures period the volatility in maize prices was higher in pre-harvest and
harvest months which also continued during post futures period. Also the volatility
during lean months has increased marginally during the post- futures period.
The preliminary analysis was conducted on the mandi by the descriptive analysis and
unconditional volatility on the price data collected from Bareilly and Shahjahanpur for
wheat and from Davangere for maize, the monthly SD of daily return series of this data
was modeled as GARCH (1,1) to know the impact of futures introduction on the series.
The purpose of this study is to empirically investigate the effect of introduction of futures
trading on the market price volatility of wheat and maize. The main hypothesis that the
volatility of the spot market has not changed after the introduction of futures is
investigated along with others such as change in news transmission speed and change in
persistence of volatility shocks.
The main finding of this investigation is that there has not been any significant change in
the spot price volatility after the introduction of futures trading for both market prices in
case of wheat and maize, implying thereby that there in no impact of introduction of
futures trading in wheat and maize. However, the coefficient for the after futures ban in
wheat period was found significant and negative in case of Bareilly, suggesting that the
volatility there is marginal reduction in volatility after ban in futures.
The nature of volatility analysis indicated that there is no significant change in the nature
of volatility in three sub-periods for wheat at Shahjahanpur and two sub-periods for
maize at Davangere, suggesting that introduction of futures in wheat does have neither
stabilizing nor destabilizing effect on wheat and maize, and therefore, did not contributed
to the increase in the market efficiency of the spot markets. But in case of Bareilly market
the nature of volatility has changed after the introduction of futures trading. Thus, pre-
futures the effect of information was persistent over time, i.e. a shock to today’s volatility
due to some information that arrived in the market today, has an effect on tomorrow’s
volatility and the volatility for days to come. After futures contracts started trading the
persistence has disappeared. Thus, any shock to volatility today has no effect on
tomorrow’s volatility or on volatility in the futures. This might suggest the increase in
market efficiency after futures, since all information is incorporated into prices
immediately.
The results of the Granger causality test suggested that volume of wheat trade in futures
had a significant causal impact on open interest and vice versa, both volume and open
interest on futures had significant causal impact on spot price volatility and not vice
versa, futures prices had significant causal impact on spot prices and vice versa. It is
evident from the results of the Granger causality test for maize that futures prices had a
significant causal impact on spot prices of maize and vice versa, volume had a significant
causal impact on futures prices and vice versa, and volume had a significant causal
impact on spot price volatility and not vice versa. Thus, volatility in futures prices does
have a causal effect on the volatility in spot prices of wheat and maize. Further, the
futures trading activity has a significant causal effect in spot prices of wheat and maize.
The ratio of standard deviation of futures to spot price and ratio of standard deviation of
basis to spot indicated that the futures and spot price variability is substantially different
for Wheat and Maize. The results suggests that the futures price variability is
substantially less than the cash price variability in some of the contracts of wheat,
indicating inefficient utilization of information if we assume cash markets are efficient.
The month-wise analysis indicates that there may be the increased speculative activity in
the delivery month in few contracts or prices not incorporation current information
efficiently. For maize futures, the ratios indicate that the futures prices do not utilize
information efficiently as their cash markets and in some contracts there may be the
increased speculative activity in the delivery month or prices not incorporation current
information efficiently.
Basis risk analysis indicated that for wheat variation in basis was higher than the spot
price variation leaving meager chance to hedgers to manage risk. Thus, futures contracts
in wheat does not provide hedge opportunity. In case of maize, the volatility in basis is
less that the volatility in prices and these results suggests that the hedger find futures
useful to manage business risk. Thus futures contracts of maize provide perfect hedge
opportunity to minimize their risk through hedging activity.
The mandatory requirements for physical delivery and farmers’ participation

- The participants giving delivery are required to be registered with sales tax
local mandi and mandi tax paid receipt /certificate is required to be handed
over/transferred to the next buying member/client along with other settlement
related documents like invoice/s.
about last three years income and investment. Farmers as a participant of
commodity futures trading can’t even open an account with the broker members
as list of documents required for opening of accounts with brokers may not be
available with farmers like PAN number, registration of sales tax, copy on income
tax return, etc.
delivery are:
settle in cash.
From the observations of the study it can be inferred that, in case of wheat farmers only 2
farmers out of 241 total sampled farmers in Hardoi district of Uttar Pradesh have only
heard about commodity futures. They do not know further about the commodity futures
and its direct or indirect benefits they can derive. In case of maize, only 4 farmers out of
251 total selected farmers from Davangere district of Karnataka were aware about
commodity futures.
them. The maize farmers in Davangere district considers previous year’s price of the crop
as a major factor to decide the area allocation at the time of sowing maize. Since most of
the farmers were not aware on direct and indirect use of commodity futures in their
farming business, they do not consider futures price of harvest period contract at the time
of making decision on area allocation to a particular crop during sowing of the crop.
The sales deferring behaviour of wheat farmers in Hardoi district revealed that one-fourth
of the total farmers store their produce of wheat for taking benefit of higher prices. About
76% farmers of medium category were highest to store their produce for future sale
followed by Semi-medium farmers (48%) and marginal and small farmers (10%). For
storing the produce no any farmer availed credit or pledge loan. If benefits of
higher prices in the market during lean season.
The farmers stored their wheat for seven to eight months period after the harvest to take
the maximum benefit of the increased market prices during the lean season. That means
they sale their wheat in the months of November-December months. Maize farmers in
Davangere deferred sales for about 3-6 months and store the produce. The farmers sold
their produce at the time of high prevailing prices in the market after 3-4 months of
storage.
Decision factors for deferring sales of wheat produce and storing it for sale in future point
of time when prices in the market are high are previous years price of the crop during
lean season and expectation of high price in future point of time through own analysis. It
is obvious that with the negligible awareness about commodity futures, farmers does not
consider futures price while deciding on deferring sale and storing wheat for sale in
future. Prices of maize realized by farmers in the previous year and own analysis of
expected price in the future point of time were the major factors based on those farmers
decided to defer sale and put the produce to store to minimize price risk and gain from
higher prices.
Money requirement for meeting different obligations by farmers was the major factor that
decides the time of sale of stored wheat by farmers in Hardoi followed by the prevailing
high price in the market during lean season. Farmers under medium farm size group were
the majority of farmers who stored wheat for sale in future and they decide to sale stored
wheat when prices in the market were high during lean season. The time of sale of stored
maize with the selected farmers in Davangere district of Karnataka was decided by the
prevailing price in the market. More than 90% farmers who stored maize for future sale
responded that they decide time of sale on the basis of prevailing high price in the
market. About 70% responded the need of money for meeting different family
obligations as a factor in deciding the time of sale of stored maize.
The farmers, who had stored wheat, gained Rs. 46.5 per quintal benefit in terms of higher
price than the harvest period price. Semi-medium farmers got highest benefit of Rs. 64.5
per quintal followed by Medium (Rs. 49.5/qt.) and marginal & small farmers (Rs. 38/qt.).
increased price realization compared to the prices in the harvest period. Since most of the
wheat and maize farmers were not aware about the commodity futures trading and role of
futures price as an indicative spot price for future date, they did not consider take use
futures price indication at the time of sale of their produce in the market.
The major factors that hinder the farmers to take active part in commodity futures and
benefit directly through hedging were:
commodity futures; the cash requirement to fulfill the margin requirement is
about Rs 10,000 to 15,000 they have to deposit at the time of entry in the market,
maintain mark-to-market margin and tender period & Delivery period margin
which was 2-3 times higher than normal margin requirement is so high that they
need finance;
exchanges;The fear of non-compliance of commodity quality to the contract
specifications at the time of assaying leading to major loss to farmers;
study. Out of total 34 traders and processors trade on commodity futures, 15% trade on
NCDEX exchange platform, 24% trade on MCX, and 62% trade on both the national
level commodity exchanges. All the traders trade in wheat and other commodities in
which these traders trade were Guar, Mentha oil, Pulses, Silver, Gold and Crude. Out of
25 maize traders and processors selected in davangere market who trade in commodity
futures, 68% trade on NCDEX exchange platform and 32% trade both in NCDEX and
MCX exchange platform. Maize traders in Davangere trade mainly in maize, paddy, and
sunflower in mandi and in futures they trade mainly in Maize, Guar, Chilli, gold, silver,
etc.
trading. About 93% traders and processors were aware about hedging mechanism on
commodity futures but only 33% know about the physical delivery procedure of
commodities on exchange platform and only 30% were aware about margin system and
cost of hedging. Seventy per cent of the traders were aware on contract specifications of
commodities traded on exchange platform.
futures was mainly based on advice from broker operator and specialists’ opinion. Only
one trader responded that his decision to take position in commodity futures was based
only on own analysis of supply and demand condition of the commodity they trade in. A
quarter of maize traders and processors taken position in commodity futures based on
take position based on advice either from broker operator or specialist opinion.
earning out of their business and price risk management. A quarter of wheat traders
responded that the price risk after ban of futures trading in wheat has increased. On the
other hand, most of the maize traders and processors responded that turnover of their
trade had increased after the introduction of futures trading in maize, 85% responded that
the cost of trade had reduced, 81% responded that profit have increased and 96% traders
and processors had responded that their price risk have reduced after introduction of
commodity futures in maize.
understanding of the concepts and process. Thus, thorough training of this important
segment of stakeholders of commodity futures is required.
On the perception of maize traders and processors, most of them were positive on
commodity futures. More than 70% responded that the commodity futures is an
instrument of better price discovery, price risk management, it disseminates real time
price information and thus help in better bargaining at the time of buying/ selling of
commodities. Commodity futures is transparent and trusted trading platform was
responded positive by more than 90% traders.
Recommendations:
exact entry price.
- Since awareness regarding commodity futures among farming community as well
as among traders and processors is very limited. Thorough training on project
basis for farmers and traders on the use and role of commodity futures prices is
required. This will boost up the direct and indirect use of commodity futures in
farming as well as trading business and risk minimization.
- Since most the farmers in the country are small and marginal and semi-medium
farmers having minimum marketable surplus, intermediary organizations may be
promoted who would assume the role of aggregator and hedge the farmers stock
on futures on behalf of farmers. These organizations should be given thorough
training on all aspects of commodity futures and agricultural marketing and
should have legal status for taking positions on behalf of farmers in commodity
futures.
- Introduction of smaller trading lots in all the major food grains items may ensure
mass participation by the farmers leading to in the increased stability in the
futures as well as in physical market. With the introduction of small trading lots
the participation of genuine participants and farmers as hedgers can be increased
in futures trading which would lead to better price discovery.
Chapter-9
References:
Ahuja, Narendar L., (2006). Commodity Derivatives Market in India: Development,

Regulation and Future Prospects, International Research Journal of Finance and
Economics, Issue 2.
Antoniou Antonios and Andrew J Foster (1992): “The Effect of Futures Trading on Spot
Price Volatility: Evidence for Brent Crude Oil using GARCH”, Journal of Business
Finance and Accounting, 19(4); 473–484
Antoniou Antonios and Phil Holmes (1995): “Futures Trading, Information and Spot
Price Volatility: Evidence for the FTSE 100 Stock Index Futures Contract using
GARCH”, Journal of Banking and Finance, 19(1); 117–29
Antoniou Antonios, Phil Holmes and Richard Priestley (1998): “The Effects of Stock
Index Futures Trading on Stock Index Volatility: an Analysis of the Asymmetric
Response of Volatility to News”, The Journal of Futures Markets 18(2) 151–66
Bessembinder H. and Paul J. Seguin (1992): “Futures trading activity and stock price
volatility”, The Journal of Finance, Vol. 47(5) 2015–34.
Bessembinder H. and Paul J. Seguin (1993): “Price volatility, trading volume, and market
depth: evidence from futures markets”, Journal of Financial and Quantitative
Analysis 28(1), pp. 21–39.
Bollerslev, T., (1986): “Generalized Autoregressive Conditional Heteroscedasticity”,
Journal of Econometrics, 31, 307-327.
Dasgupta, Basab (2004): “Role of Commodity Futures Market in Spot Price Stabilization,
Production and Inventory Decisions with Reference to India”, Indian Economic
Review, 39 (2); 315-325.
Fama Eugene F. and Kenneth R. French (1987): “Commodity Futures Prices: Some
Evidence on Forecast Power, Premiums and the Theory of Storage”, Journal of
Business 60(1) 55–73
Fama, E. (1965): “The Behavior of Stock-Market Prices”, Journal of Business, 38, 34-
105
Gilbert, C.J. (1985): “Futures Trading and the Welfare Evaluation of Commodity Price
Stabilisation”, Economic Journal, 95, pp 637-661.
GOI (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, Government of India, New Delhi.
Greenberg, Donald E. (2007): “Price Risk Management by Indian Farmers: Hedging
Wheat in Haryana State”, presentation made in 3rd International Conference on
Linking Markets and Farmers: Exploring Leading Practices to Foster Economic
Growth in Rural India, 11-15 March, 2007 held at Taj Palace Hotel, New Delhi.
Harris Lawrence (1989): “S&P 500 cash stock price volatilities”, The Journal of Finance
44(5) 1155–75
Indian Institute of Management (2008): “Impact of Futures Trading in Wheat, Sugar,
Pulses and Guar seed on Farmers”, Research Report, IIM, Bangalore.
Kamara, A (1982): “Issues in Futures Markets: A Survey”, Journal of Futures Markets,
2, 261-94.
Kamara, A., Thomas W. Miller Jr. and Andrew F. Siegel (1992): “The effect of futures
trading on the stability of Standard and Poor 500 returns”, The Journal of Futures
Markets, 12(6); 645–58.
Kaul, Sanjay (2008): “Commodity Futures Trading in India: Myths and Misconceptions”,
available at http://www.nicrindia.com/wfrmRPAReport.aspx?id=43&type=Articles
Lokare, S.M.(2007): “Commodity Deriviatives and Price Risk Management: An
Empirical Anecdote from India”, Reserve Bank of India Occasional Papers, 28 (2);
27-77.
Mallikarjunappa T. and Afsal, E. M. (2007): “Futures Trading and Market Volatility in
Indian Equity Market: A Study of CNX Index”, Asian Academy of Management
Journal of Accounting and Finance, 3 (1); 59-76.
Morgan C. W. (2000): “Commodity Futures Markets in LDCs: A Review and Prospects”,
CREDIT Research Paper, No.00/10, Centre for Research in Economic
Development and International Trade, University of Nottingham.
Morgan C.W. (1999): “Futures Markets and Spot Price Volatility: A Case Study”,
Journal of Agricultural Economics, 50, pp 247-57.
Naik, G and Sudhir Jain (2002): “Indian Agricultural Commodity Futures Markets- A
Performance Survey”, Economic and Political Weekly, 30 (3); 3161-3173.
Nath, G. C. (2003): “Inter-linkages among Global Equity Markets – A Cointegration
Approach”, Decision, Vol 30 (2), pp 77-108.
Nath, G. C. and T. Lingareddy (2008): “Impact of Futures Trading on Commodity
Prices”, Economic and Political Weekly, 43 (3); 18-23.
Newbery, David M (1987): “When Do Futures Destabilize Spot Prices?” International
Economic Review, 28 (2); 291-297.
Nitesh Ranjan (2005): “Role of Commodity Exchanges, Futures & Options - A Case
Study On Soya Oil”, Occasional paper 46, Department of Economic Analysis and
Research, NABARD
Prasad D.G. and R. Singh (2007): “Commodity Exchanges Initiating the Second Green
Revolution”, Paper presented in Committee on Commodity Problems: Joint
Meeting of the Intergovernmental Group on Grains and the Intergovernmental
Group on Rice at Istambul, Turkey, 14-17 May 2007.
Raju, M. T. and Karande, K. (2003): “Price Discovery and Volatility on NSE Futures
Market”, SEBI Bulletin, 1(3), pp. 5-15.
Rao S. V. Ramana (2007): “Impact of Financial Derivative Products on Spot Market
Volatility: A Study of Nifty”, The ICFAI Journal of Derivatives Market, 4(1), pp. 7-
16.
Ross S. A. (1989): “Information and Volatility: the No-arbitrage Martingale Approach to
Timing and Resolution Irrelevancy”, The Journal of Finance, 44(1); 1–17
Sahadevan K.G. (2002): “The Sagging Agricultural Commodity Exchanges: Growth
Constraints and Revival Policy Options”, Economic and Political Weekly, Vol
XXXVII No.30, July 27-Aug.02, PP.3153-60.
Sahi, Gurpreet S. (2006): “Influence of Commodity Derivatives on Volatility of
Underlying”, Available at SSRN:http://ssrn.com/abstract=953594
Shenbagaraman, P, (2003): “Do Futures and Options Trading increase Stock Market
Volatility?”, NSE Research Initiative Paper no 60, National Stock Exchange, India.
Shunmugam V. and Singh B. K. (2006): “Commodity Futures: A Spot of Teething
Trouble”, The Hindu Business Line, 29th August, 2006.
(http://www.blonnet.com/2006/08/29/stories/2006082900261100.htm)
Singh, J. B. (2000): “Futures Markets and Price Stabilization: Evidence from Indian
Hessian Market”, available on
http://www.sasnet.lu.se/EASASpapers/8JatinderSingh.pdf
Stein J C (1987): “Information Externalities and Welfare Reducing Speculation” Journal
of Political Economy, 95, 1123-45.
UNCTAD (2007): “Report of the UNCTAD Study Group on Emerging Exchanges:
Development Impacts of Commodity Futures Exchanges in Emerging Markets”,
Working Paper, UNCTAD, Geneva.
Varangis, P. and Larson, D. (1996): “Dealing with Commodity Price Uncertainty”, Policy
Research Working Paper 1167, World Bank, International Economics Department,
World Bank, Washington D.C.
Witherspoon, James T. (1993): “How price discovery by futures impacts the cash
market”, The Journal of Futures Markets, Vol. 13(5), pp. 469–96.
World Bank (1999): “Using Markets to Deal with Commodity Price Volatility”, PREM
Notes –Economic Policy, January, No.13, from the Development Economics Vice
Presidency and Poverty Reduction and Economic Management Network.
Yang Jian, Brian Balyeat R and David J. Leatham (2005): “Futures Trading Activity and
Commodity Cash Price Volatility”, Journal of Business Finance Accounting, Vol
32, Nos 1 & 2, pp. 297-323
This is an excellent analysis and a much needed contribution in the area of risk
management in essential commodities
Sabjay Kaul, MD & CEO, NCMSL

View publication stats

Futures Report Final Niam

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Futures Report Final Niam

Uploaded by

Copyright:

Available Formats

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Impact Analysis of Commodity Futures on Spot Prices, and Risk Management in

Technical Report · February 2010

Soybean Market intelligence View project

The user has requested enhancement of the downloaded file.

Impact Analysis of Commodity Futures on

Dr. Purushottam Sharma

CCS National Institute of Agricultural Marketing

Dr. Purushottam Sharma

NIAM Research Report

CCS National Institute of Agricultural Marketing

Impact Analysis of Commodity Futures on

Table Name of Table Page No.

Anurag Bhatnagar, IAS

Sh. Anurag Bhatnagar, IAS, Director General, National Institute of Agricultural

Impact of Futures on Volatility

Impact of Trading Activity on Volatility

Performance of Commodity Futures

Farmers Awareness and Decision Making

Farmers Information Seeking Behaviour and Source of Price Information

Risk Management through Retaining Produce for future sale

Farmers’ inability to manage risk through Commodity Futures

Perceptions of Wheat Traders and Processors

Knowledge of Traders on Commodity Futures

Impact of futures on Trade

Perception regarding commodity futures

A key aspect of the process of strengthening agricultural markets is the question of

1.1 Economic Rationale for the Futures Market:

Development and Growth of Futures Markets in India

2.1 Origin of Commodity market:

2.2 Structure of Commodity Market in India:

Table-2.1: Commodity Group-wise Value of Trade

Fig- 2.1 Value of Trade on Commodity Futures

Data and Methodology

3.1 Selection of crops

3.2 Selection of Sample

3.3 Analytical methods:

Vt = sqrt (no. of days traded)* SD (Rt)

Where, sqrt is the square root

Yt  a0  a1Yt 1   t ,  t | t 1 ~ N (0, ht ) …. (1a)

Yt  a0  a1Yt 1   t ,  t | t 1 ~ N (0, ht ) …. (2a)

3.3.2 Futures Trading Activity and Spot Price Volatility

Where, p is a suitably chosen positive integer and is determined using Akaike

Table-4.1: Volatility in Wheat and Maize Prices (in % CV)

4.1 Seasonal volatility of commodity prices

Table-4.2: Volatility in Wheat Prices at Bareilly Market (in % CV)

Table- 4.3: Volatility in Wheat Prices at Shahjahanpur Market (in % CV)

Table-4.4: Volatility in Maize Prices at Davangere Market (in % CV)

4.2 Impact of Futures on Volatility

Table-4.5: Descriptive statistics of Wheat Bareilly Monthly SD of Spot Price Returns

Table-4.6: Descriptive statistics of Wheat Shahjahanpur Monthly SD of Spot Price

Table-4.7: Descriptive statistics of Maize Davangere Monthly SD of Spot Price Returns

Impact of Futures Introduction on Spot Prices

Rtwhp  a0  a1 Rtwhp1  a2 R jow,t 1  ut …..(3)

ht  a0   1 t21   2 ht 1   3 DAFt   4 DFBAN t …. (4)

Pre-Futures Post-Futures Futures Ban

Pre-Futures Post-Futures Futures Ban

Residual Actual Fitted

Fig-4.2: Volatility plot for Wheat Shahjahanpur

Residual Actual Fitted

Fig-4.3: Volatility plot for Maize Davangere

Residual Actual Fitted

4.3 Impact of Trading Activity on Volatility