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Role of Indian Commodity Derivatives Market in Hedging Price Risk: Estimation of Constant and Dynamic Hedge Ratio, and Hedging Effectiveness

Indonesian Capital Market Review

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Title Role of Indian Commodity Derivatives Market in Hedging Price Risk: Estimation of Constant and Dynamic Hedge Ratio, and Hedging Effectiveness
 
Creator Brajesh Kumar; Jindal Global Business School, O.P. Jindal Global University
Ajay Pandey; Indian Institute of Management Ahmedabad
 
Subject Capital Market
 
Description This  paper  examines  hedging  effectiveness  of  four  agricultural  (soybean,  corn,  castor seed and guar seed) and seven non-agricultural (gold, silver, aluminium, copper, zinc, crude oil  and,  natural  gas)  futures  contracts  traded  in  India,  using  VECM  and  CCC-MGARCH model to estimate constant hedge ratio and dynamic hedge ratios, respectively. We ind that agricultural  futures  contracts  provide  higher  hedging  effectiveness  (30-70%)  as  compared to  non-agricultural  futures  (20%).  In  the  more  recent  period,  the  hedging  effectiveness  of Indian futures markets has increased. When hedging effectiveness of non-agricultural Indian futures  contracts  with  the  world  spot  markets  (NYMEX  and  LME)  is  analyzed,  hedging effectiveness  increases  dramatically  which  indicates  the  fact  that  Indian  futures  contracts are more effective for hedging exposures to global prices. Other reasons of lower hedging effectiveness  of  Indian  futures  contracts  may  be  low  awareness  of  futures  markets  among participants,  high  transaction  costs  in  the  futures  markets,  policy  restrictions,  inadequate contract design, or high transaction costs in the spot market. These are, of course, expected birth pays for a nascent futures markets in an emerging economy. activate javascript
 
Publisher Management Research Center, Department of Management, Faculty of Economics and Business, U
 
Contributor —
 
Date 2014-08-25
 
Type Peer-reviewed Article
 
Format application/mbox
 
Identifier http://journal.ui.ac.id/index.php/icmr/article/view/3624
 
Source Indonesian Capital Market Review; Vol 3, No 1 (2011): January 2011
 
Language en