MBA (IB) 2020-22

INDIAN INSTITUTE OF FOREIGN TRADE

AGRI COMMODITY TRADING
END – TERM EXAMINATION
CLOSED BOOK
Date: 23rd December 2021 (afternoon)
Duration: 2 hours
Maximum Marks: 40

Instructions: This Question paper is divided into two sections– A and B, of 20 marks each. Section A
consists of 4 questions. Answer all the 4 questions. Marks for the question are indicated against each
question. For Section A, use the space provided after the question to write your answers, and only
submit pages 1-5 with your answers. For Section B, use the answer sheets provided to write your
answers.

Note: Submit answer sheets for SECTIONS A and B separately

SECTION A

You are the Head of Treasury for a large food processing company, and after much research and
consideration, have decided to hedge the purchases of the major agricultural commodities the company
procures in very large quantities from the Indian markets. Before you can implement hedging, you must
get approval for your Hedging Policy from the Board of your company. You are preparing a presentation
for the Board:

A. How will you illustrate hedging in your presentation to explain the mechanics of hedging to the
Board, and to convince them of the need for hedging? (8 marks)

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B. Your presentation includes a disclaimer that the hedge will replace price risk with basis risk. One of
the members of the Board is not convinced of the utility of a hedge that still leaves the company
with basis risk. How will you explain the meaning of basis risk and the reasons for the existence of
basis risk to the Board? Use examples to explain to the Board the impact of likely strengthening or
weakening of basis on your hedge? (5 marks)

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C. One of the Board member suggests that once the company sets up a trading account for hedging the
purchases of agricultural commodities, it can also extend its hedging and sell puts when prices are
expected to remain stable. Enlighten the other members of the payoffs from selling puts, and the
pros and cons of such a trade for your company. Use diagrams and examples to explain this. (5
marks)

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D. The CEO also advises you to also explore hedging on the CBOT platform, since the CBOT contracts
are highly liquid. Explain to your CEO the prerequisites the futures contracts traded on CBOT must
meet in order to be suitable for hedging use by your company. (2 marks)

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 SECTION B
(20 marks)

Q1. Read the following newspaper clipping and answer the questions
Amid sliding prices of maize in the wake of the Covid-
19 lockdown, the Centre has notified norms for import of
5 lakh tonnes of maize under Tariff Rate Quota Scheme
during the current financial year at a concessional
customs duty of 15 per cent. At present, maize attracts 50
INDIAN EXPRESS, 14th Jan 2021 per cent import duty.

Q1. What is the impact of this announcement on: (1*6=6 marks)

i. Indian maize farmers
ii. Brazil as L2 player in maize
iii. Conagra foods procuring maize from Indian FPOs for their ACTII popcorn
iv. Roquette importing maize from Thailand
v. Venagro Nutrifoods importing maize from Canada
vi. Exports of Kellogs corn flakes manufactured in India

Q2. You plan to export your mangoes in 2022 and have five options to choose from. Bound rates of duty
of all these five destinations are listed below. Indicate the best option (7 marks)

USA Canada Mexico Japan Pakistan Eritrea

BR in 2021 150 200 250 300 200 100

# Mangoes under Special product in Canada and Japan

Q3. The data below indicates the subsidy levels of various crops across countries. Based on the data
below, indicate whether amber box subsidies are an issue for an Indian agri exporter targeting these
markets in March 2022. If yes in which commodity? (7 marks)

In USD Germany Morocco Afghanistan Algeria Ethiopia Canada China

Product Eggs Rubber Cotton Turmeric Lobster Maize Grapes
Intervention 310 110 289 567 110 - -
price
Fixed external 80 300 123 321 300 - -
reference price
Domestic 2,000,000 5, 00,000 1,50,000 61,00,00 5, 00,000 - -
production (ton)
Compensatory - - - - - 5,000,000 -
payments
Subsidy on R&D - - - - - 13,000
Value of 620000000 55000000 43350000 345870000 55000000 100,000 250,000
Production (USD)

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