ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

K G SahadevanSubscribe to K G Sahadevan

Economic Benefits of Futures

This article examines the economic benefits of futures. Theoretically, futures are expected to aid price discovery and risk mitigation. But empirical analysis shows that speculators drive the markets and, by virtue of their domination, abduct the price discovery process in certain commodities. The deceptive price discovery leads to suboptimal forecast of future prices. So futures markets fail to offer an effective hedge against price risk. In addition, the current public-private partnership regulation is a deterrent to the sustainable growth of futures markets.

Commodity Futures and Regulation

The Forward Contracts (Regulation) Amendment Bill, 2010 is critical to commodity futures markets and the farm sector in India for three reasons. One, it is risky for an agrarian country to liberalise internal trade in commodities without a powerful regulator in place. Two, lending institutions do not consider commodities as a standard asset class because they lack back-end infrastructure and well-regulated liquid markets. Three, foreign direct investment can be attracted to build infrastructure in the commodities supply chain only if there is a powerful regulator that ensures integrity and investor confidence in the marketplace.

Mentha Oil Futures and Farmers

An analysis of futures trading in mentha oil suggests that excessive speculative interests lead to spurious price discovery and distortion in spot prices. Initiatives towards a judicious balance between genuine hedging and speculative interests will lead to excellent prospects for mentha farmers.

Sagging Agricultural Commodity Exchanges

Commodity derivatives have a crucial role to play in managing price risk especially in agriculture dominated economies. However, as long as prices of many commodities are restrained to a certain extent by government intervention in production, supply and distribution, forward and futures markets for hedging price risk in those commodities have only limited practical relevance. A review of the nature of institutional and policy level constraints facing this segment calls for more focused and pragmatic approach from the government, the regulator and the exchanges for making the agricultural futures market a vibrant segment for risk management.
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