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Risk Analysis in Trading with Castor Seeds Futures in India

Received: 18 January 2022     Accepted: 17 February 2022     Published: 28 February 2022
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Abstract

India is the largest producer and exporter Castor seeds in the World. Castor seeds is traded in both Spot market and Futures market are well established in India. The present study is time series analysis on daily Futures closing prices of Castor Seeds Commodity of National Commodity and Derivatives Exchange (NCDEX) and the corresponding Spot market prices in Deesa of Banaskantha district in Gujarat State. Since the introduction of commodity derivatives markets in 2003 in India, there was a lot of political/social criticism/resistance that these derivative markets lead to only speculation and paying way for high inflation of commodities prices. Hence, the author initiated to test few commodities price data. The present study is on castor seeds. The main objective of the study whether Price discovery is happening due to introduction of Futures in castor seeds or not, and to analyze price risk. The Futures and Spot prices of Castor seeds commodity are studied for six years by using important econometric tools: Unit Root test, Cointegration test, Granger Test, VECM, Wald test & Variance Decomposition test with the help of Eviews software Version 10. Futures are unbiased predictor of spot and this is the hypothesis that has been tested by using above Econometric tools. The study reveals that the Castor seeds time series data is stationary at first difference and having atleast one cointegrated equation. There is long term and short term causality from Futures towards Spot variable. The speed of adjustment from Futures variable towards equilibrium of the market price is 5.1% for any news/shock that is related to Castor seeds market. Granger casualty test indicates that there is bi-direction relationship between the variables. Variance Decomposition test reveals that Futures role in price discovery of spot ranges between 19% to 74% from 1 to 10 periods. It has been concluded that market prices in Spot and Futures of Castor seeds commodity are integrated and appropriate price discovery is happening in Indian commodity Exchange (NCDEX). Introduction of Castor futures are useful to development and stability of the market.

Published in International Journal of Finance and Banking Research (Volume 8, Issue 1)
DOI 10.11648/j.ijfbr.20220801.17
Page(s) 48-56
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2022. Published by Science Publishing Group

Keywords

Futures, Spot, Price Discovery, Price Risk, Stationarity, VECM, Integration, Decomposition

References
[1] Iyer, V. and Pillai, A., 2010, Price discovery and convergence in Indian market, Indian Growth and Development Review, 3, No. 1, pp. 53-61.
[2] Dey Kushankur, Roy Shiladitya, (2011) Price Discovery, Market Efficiency and Volatility: Indian Pepper Futures Markets. Society of Interdisciplinary Business Research (SIBR), conference on interdisciplinary Research available at http://ssrn.com/abstract=1867850.2.
[3] Jayagurunathan, V., Velmurugan, PS., Palanichamy, P., (2010), An Empirical Analysis of price discovery in gold spot-futures market: Evidence from Multi Commodity Exchange of India Ltd., Indian Commodity Market (Derivatives and Risk Management), Serial Publication, PP. 1-32.
[4] Ali Jabir, Gupta Kriti Bardhan (2011), Efficiency in Agricultural Commodity Futures Market in India: Evidence from Co-integration and Causality Tests, Agricultural Finance Review, Vol. 71, No. 2, Issue: 2, pp. 162-178.
[5] Srinivasan. P (2012), Price Discovery ad Volatility Spillover in Indian Spot–Futures Commodity Market, The IUP Journal of Behavioural Finance, 9, pp-70-85.
[6] Kushankur Dey, Debases Maitra (2012), Price Discovery in Indian Commodity Futures Market: An Empirical exercise, International Journal of Trade and Global Markets, Vol. 5, No. 1, pp. 68-87.
[7] Nazlioglu Saban E, Cumhur S and Ugur (2012), Volatility Spillover Between Oil and Agriculture Commodity Markets, Energy Economics, Vol, 36, No. C, pp-1-28. http:// dx.doi.org/10.1016/j.eneco.2012.11.009.
[8] Prashanta Athma, Venu Gopal Rao K. P (2013), Commodity Derivatives in India: A Study of MCX Comdex, International Journal of Marketing, Financial Service & Management Research, Vol. 2, No. 6, PP: 26-41.
[9] Dr. Nirmala. S, & Deepthy K (2016), Price Discovery in Commodity Markets: A Study of Precious Metals Market in Multi Commodity Exchange, International Journal of Multidisciplinary Research and Modern Education (IJMRE), ISSN (Online): 2454-6119, (www.rdmodernresearch.com), Vol II, Issue II, 2016.
[10] Dr. Tanusree Sharma (2016), An Empirical analysis on Commodity Futures Market in India, International Journal of Engineering Technology, Management and Applied sciences (IJETMAS),(www.ijetmas.com), March 2015, Volume 3, Special Issue, ISSN. 2349-4476.
[11] Arora Mehak and Chander Ramesh (2016), Price efficiency and Volatility in Agri Commodities Market in India: An Empirical investigation, Amity Journal of Finance, Vol. 1, No2, pp. 83-99.
[12] Arora Mehak and Chander Ramesh (2017), Does Derivatives Trade Facilitate Price Discovery and Risk Management?, The IUP Journal of Applied Finance, Vol. 23, NO. 4 2017, pp 18-29.
[13] Dr. S. P. Dhandayuthapani and R. Pavitra (2017), A Study on Energy Performance Commodity Trading in India, International Journal for Scientific Research & Development (IJSRD), Vol. 5, Issue 01, 2017, ISSN (online) 2321-0613.
[14] Shilpa Lodha (2017), A Cointegration and Causation Study of Gold Prices, Crude Oil Prices and Exchange rate, The IUP Journal of Financial Risk Management, Vol. 14, No. 1, pp. 55-66.
[15] Kaur Karamjee, 2019, Causality Relationship between Spot and Futures Markets: Evidence from India, The IUP journal of Financial Risk Management, Vol. 16, No1, pp-50-57.
[16] Siddavatam, Ravi Prakash, and S. Appa Rao, 2021. "Price risk management of turmeric commodity futures (NCDEX) and spot Market." Asian Journal of Multidimensional Research 10, no. 11 (2021): 814-834.
[17] Rajendra Daga, 2017, Commodities control-Castor, Retrived 10 January 2022, From www.commoditiescontrol.com/eagritrader/commodityknowledge/ castor/castor1.htm.
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  • APA Style

    Ravi Prakash Siddavatam, Appa Rao. (2022). Risk Analysis in Trading with Castor Seeds Futures in India. International Journal of Finance and Banking Research, 8(1), 48-56. https://doi.org/10.11648/j.ijfbr.20220801.17

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    ACS Style

    Ravi Prakash Siddavatam; Appa Rao. Risk Analysis in Trading with Castor Seeds Futures in India. Int. J. Finance Bank. Res. 2022, 8(1), 48-56. doi: 10.11648/j.ijfbr.20220801.17

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    AMA Style

    Ravi Prakash Siddavatam, Appa Rao. Risk Analysis in Trading with Castor Seeds Futures in India. Int J Finance Bank Res. 2022;8(1):48-56. doi: 10.11648/j.ijfbr.20220801.17

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  • @article{10.11648/j.ijfbr.20220801.17,
      author = {Ravi Prakash Siddavatam and Appa Rao},
      title = {Risk Analysis in Trading with Castor Seeds Futures in India},
      journal = {International Journal of Finance and Banking Research},
      volume = {8},
      number = {1},
      pages = {48-56},
      doi = {10.11648/j.ijfbr.20220801.17},
      url = {https://doi.org/10.11648/j.ijfbr.20220801.17},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20220801.17},
      abstract = {India is the largest producer and exporter Castor seeds in the World. Castor seeds is traded in both Spot market and Futures market are well established in India. The present study is time series analysis on daily Futures closing prices of Castor Seeds Commodity of National Commodity and Derivatives Exchange (NCDEX) and the corresponding Spot market prices in Deesa of Banaskantha district in Gujarat State. Since the introduction of commodity derivatives markets in 2003 in India, there was a lot of political/social criticism/resistance that these derivative markets lead to only speculation and paying way for high inflation of commodities prices. Hence, the author initiated to test few commodities price data. The present study is on castor seeds. The main objective of the study whether Price discovery is happening due to introduction of Futures in castor seeds or not, and to analyze price risk. The Futures and Spot prices of Castor seeds commodity are studied for six years by using important econometric tools: Unit Root test, Cointegration test, Granger Test, VECM, Wald test & Variance Decomposition test with the help of Eviews software Version 10. Futures are unbiased predictor of spot and this is the hypothesis that has been tested by using above Econometric tools. The study reveals that the Castor seeds time series data is stationary at first difference and having atleast one cointegrated equation. There is long term and short term causality from Futures towards Spot variable. The speed of adjustment from Futures variable towards equilibrium of the market price is 5.1% for any news/shock that is related to Castor seeds market. Granger casualty test indicates that there is bi-direction relationship between the variables. Variance Decomposition test reveals that Futures role in price discovery of spot ranges between 19% to 74% from 1 to 10 periods. It has been concluded that market prices in Spot and Futures of Castor seeds commodity are integrated and appropriate price discovery is happening in Indian commodity Exchange (NCDEX). Introduction of Castor futures are useful to development and stability of the market.},
     year = {2022}
    }
    

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  • TY  - JOUR
    T1  - Risk Analysis in Trading with Castor Seeds Futures in India
    AU  - Ravi Prakash Siddavatam
    AU  - Appa Rao
    Y1  - 2022/02/28
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    DO  - 10.11648/j.ijfbr.20220801.17
    T2  - International Journal of Finance and Banking Research
    JF  - International Journal of Finance and Banking Research
    JO  - International Journal of Finance and Banking Research
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    PB  - Science Publishing Group
    SN  - 2472-2278
    UR  - https://doi.org/10.11648/j.ijfbr.20220801.17
    AB  - India is the largest producer and exporter Castor seeds in the World. Castor seeds is traded in both Spot market and Futures market are well established in India. The present study is time series analysis on daily Futures closing prices of Castor Seeds Commodity of National Commodity and Derivatives Exchange (NCDEX) and the corresponding Spot market prices in Deesa of Banaskantha district in Gujarat State. Since the introduction of commodity derivatives markets in 2003 in India, there was a lot of political/social criticism/resistance that these derivative markets lead to only speculation and paying way for high inflation of commodities prices. Hence, the author initiated to test few commodities price data. The present study is on castor seeds. The main objective of the study whether Price discovery is happening due to introduction of Futures in castor seeds or not, and to analyze price risk. The Futures and Spot prices of Castor seeds commodity are studied for six years by using important econometric tools: Unit Root test, Cointegration test, Granger Test, VECM, Wald test & Variance Decomposition test with the help of Eviews software Version 10. Futures are unbiased predictor of spot and this is the hypothesis that has been tested by using above Econometric tools. The study reveals that the Castor seeds time series data is stationary at first difference and having atleast one cointegrated equation. There is long term and short term causality from Futures towards Spot variable. The speed of adjustment from Futures variable towards equilibrium of the market price is 5.1% for any news/shock that is related to Castor seeds market. Granger casualty test indicates that there is bi-direction relationship between the variables. Variance Decomposition test reveals that Futures role in price discovery of spot ranges between 19% to 74% from 1 to 10 periods. It has been concluded that market prices in Spot and Futures of Castor seeds commodity are integrated and appropriate price discovery is happening in Indian commodity Exchange (NCDEX). Introduction of Castor futures are useful to development and stability of the market.
    VL  - 8
    IS  - 1
    ER  - 

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Author Information
  • School of Entrepreneurship & Management Studies, SRM University-AP, Vijayawada, India

  • Avanthi PG College, Osmania University, Hyderabad, India

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