Volume 4 | Issue 1|

APOTHEOSIS: Tirpudes National Journal of Business Research (TNBJR).

ISSN | 2319-5576

Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian Market; A

systematic review
*Dr Anil Kothari, **Ms Pallavi Kudal
ABSTRACT
Commodity derivatives have had a long and a chequered presence in India. The
commodity derivative market has been functioning in India since the nineteenth century;
with organized trading in cotton through the establishment of Cotton Trade Association in
1875.The Indian economy has witnessed a mini revolution in commodity derivatives and
risk management since then. Commodity options trading and cash settlement of
commodity futures was banned in 1952 and until 2002 commodity derivatives market was
virtually non-existent, except for some negligible activity on an OTC basis. But in
September 2005, the country had 3 national level electronic exchanges and 21 regional
exchanges for trading commodity derivatives. As many as ninety five (95) commodities
have been allowed for derivatives trading in India. Over the past few years, and especially
in the aftermath of the financial crisis of 2008, volatility in commodity markets has been
an issue of major concern for policy-makers around the world. In particular, politicians
have raised legitimate concerns over the efficiency and integrity of commodity derivatives
markets.
The research aims at identifying whether the physical commodity markets serve
their fundamental price discovery and hedging functions or not. Wildly fluctuating
commodity prices have made it more difficult for governments to produce accurate
economic predictions and have harmed the potential for growth. Due to the magnitude of
economic and political impact of such fluctuations, the world can neither dismiss nor
remain a passive observer of these market phenomena.
The present paper is an attempt to represent the gist of scholarly articles written on
the topic, which gives a direction for further growth of the research topic.

*Associate Professor, Faculty of Management Studies, Mohan Lal Sukhadia University

**ICSSR Doctoral Research fellow, Faculty of Management Studies, Mohan Lal Sukhadia University

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Volume 4 | Issue 1|

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Market; A systematic review

Introduction:

speculation and were detrimental to the

In the chairmans letter of the 2002 Annual

healthy functioning of the markets for the

report of Berkshire Hathaway Inc. finance

underlying

guru Warren Buffet cautioned the use of

research is aimed at analysing various

derivatives with the following phrase: I

factors

view derivatives as time bomb, both for

derivatives and to understand how they are

the parties that deal in them and the

used by manufacturers and producers to

economic system. Derivatives are financial

hedge their risks. Moreover commodity

weapons of mass destruction, carrying

derivatives have also been every now and

dangers that, while now latent, are

then blamed to affect the spot market

potentially lethal. Such words from the

prices and cause inflationary pressures on

globally

accepted

well

the economy.

explain

the

with

We have done a systematic review of both

derivatives. Popular opinion about the

national and international studies done in

existence of derivative contracts has been

the relevant area in order to have a better

mixed.

insight over the topic. The review is done

finance

risks

While

their

guru

associated

advantages

in

commodities.

related

to

the

managing risks have been understood, they

under following subheads

have also been identified with many

o Derivatives

incidents of financial crisis like collapse of

The

present

commodity

(Introduction

and

definition)

Barings Bank in 1995, collapse of Lehman

o Growth of derivative markets in India

Brothers in 2008, financial crisis of 2008-

o Commodity Derivative markets in

09, to name a few.

India
o Commodity derivatives - need and

Derivative contracts were most commonly

relevance

used on agriculture commodities since

o Commodity derivatives - a tool for

ages. Some of the earliest derivatives were

hedging

linked to tulip bulbs in Holland and to rice

o Commodity derivative and speculation

in Japan in the 17th century. Organized

commodity derivatives in India started as
early as 1875, barely about a decade after
they started in Chicago. However, many
feared that derivatives fuelled unnecessary
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Volume 4 | Issue 1|

Following table (1) gives an overview of

ISSN | 2319-5576

the S&P 500 stock index, the temperature

at Kennedy Airport, and the number of

referred and reviewed papers.

bankruptcies among a group of selected

Table 1: Overview of Reviewed papers

companies (Stulz, 2005). Derivatives are

Subject

financial instruments widely used by all

Derivatives
(Introduction
and
definition)
Growth
of
derivative
markets
in
India

National Author
No. of No.
of
referre
reviewed
d paper
paper
5
0

International Author
No.
of No.
of
referred
reviewed
paper
paper
4
4

economic agents to invest, speculate and

hedge in financial market (Hull, 2002). A
derivative is defined by the BIS (1995) as

a contract whose value depends on the

price of underlying assets, but which does

Commodity
Derivative
markets
in
India

10

Commodity
derivativesneed
and
relevance

Commodity
derivatives- a
tool
for
hedging
Commodity
derivative
and
speculation

not require any investment of principal in

those assets. As a contract between two

3

counterparts to exchange payments based

on underlying prices or yields, any transfer

of ownership of the underlying asset and
2

cash flows becomes unnecessary (Oldani,

5

2005). This definition is strictly related to

the ability of derivatives of replicating

financial instruments (Neftci, 2000).
Derivative contracts, which have been in

Review- Derivatives (Introduction and

existence for more than 200 years now,

definition):

started as a way for farmers and merchants

The Merriam-Webster dictionary defines a

to manage risks of the price of agriculture

derivative in the field of chemistry as a

commodities moving against them. They

substance that can be made from another

started off as very simple contracts and the

substance. Derivatives in finance work on

parties entering into the contract had a

the

financial

good understanding of the risk involved.

instruments promise payoffs that are

Currently there are derivative securities to

derived from the value of something else,

manage the risks associated with equity

which is called the underlying. The

and debt instruments, credit exposures and

underlying is often a financial asset or rate,

changing commodity prices,

but it does not have to be. For example,

exchange rates and interest rates. To give

derivatives exist with payments linked to

an idea of the size of the derivative market,

same

principle.

These

currency

The Economist magazine has reported that

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Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian

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Market; A systematic review

as of June 2011, the over-the-counter

1970s, had become vigorous innovators,

(OTC) derivatives market amounted to

continually adding new products, refining

approximately $700 trillion, and the size of

the existing ones and finding new ways to

the market traded on exchanges totalled an

increase their liquidity.

additional $83 trillion. This shows the

As per Gambhir and Goel (2003) the

growing importance of derivative markets

gradual liberalization of Indian economy

in the world.

has resulted in substantial inflow of

Review- Growth of Derivative Markets

foreign capital into India. Simultaneously

in India:

dismantling of trade barriers has also

facilitated the integration of domestic

Before derivatives markets were truly

economy with world economy. With the

developed, the means for dealing with

globalization of trade and relatively free

financial risks were few and financial risks

movement

were largely outside managerial control.

As Indian businesses became more global

in limited ways and over short time

in their approach, evolution of a broad

horizons. Companies were often forced to

based, active and liquid forex derivatives

resort to operational alternatives like

markets was required to provide them with

establishing plants abroad, in order to

a spectrum of hedging products for

minimize exchange-rate risks, or to the

effectively

natural hedging by trying to match

exchange

currency structures of their assets and

managing

their

exposures.

foreign

However

they

concluded that Indian derivative market is

liabilities (Santomero, 1995). Allen and

at a nascent stage and has tremendous

Santomero (1998) wrote that during the

commercial

risk

other developed and developing countries.

hedge only against certain financial risks,

1990s

assets

became a necessity in India also like in

exist, but they allowed corporate users to

and

financial

management through derivatives products

Few exchange- traded derivatives did

1980s

of

growth potential.

and

investment banks introduced a broad

Vashishtha and Kumar Satish (2010)

selection of new products designed to help

analyzed

corporate managers in handling financial

derivatives

risks. At the same time, the derivatives

commented that emergence of derivatives

exchanges, which successfully introduced

market is an ingenious feat of financial

interest rate and currency derivatives in the

engineering that provides an effective and

171

development
market

in

of

financial

India.

They

APOTHEOSIS: Tirpudes National Journal of Business Research (TNBJR).

Volume 4 | Issue 1|

less costly solution to the problem of risk

of

that

price

commodities, and hence to the farmers.

unpredictability of the underlying asset. In

With a view to restricting speculative

India, the emergence and growth of

activity in cotton market, the Government

derivatives market had been relatively a

of Bombay prohibited options business in

new. Since its inception in June 2000,

cotton in 1939. Later in 1943, forward

derivatives

exhibited

trading was prohibited in oilseeds and

exponential growth both in terms of

some other commodities including food-

volume and number of traded contracts.

grains, spices, vegetable oils, sugar and

The market turn-over has grown from

cloth. After Independence, the Parliament

Rs.2,365 Crore in 2000-2001 to Rs.

passed Forward Contracts (Regulation)

1,10,10,482.20

Act,

is

embedded

market

Crore

in

has

in

the

2008-2009.

the

markets

1952

for

which

the

ISSN | 2319-5576

underlying

regulated

forward

Within a short span of eight years

contracts in commodities all over India.

derivatives trading in India has surpassed

The already shaken commodity derivatives

cash segment in terms of turnover and

market got a crushing blow when in 1960s,

number of traded contracts. Their study

following several years of severe draughts

encompassed in its scope an analysis of

that forced many farmers to default on

historical roots of derivative trading, types

forward contracts (and even caused some

of derivative products, regulation and

suicides), forward trading was banned in

policy developments, trend and growth,

many commodities that were considered

future

primary

prospects

and

challenges

of

or

essential.

As

derivative

result,

derivative market in India. They even

commodities

markets

compared the status of global derivatives

dismantled and went underground where

markets vis-a-vis the Indian derivatives

to some extent they continued as OTC

market.

contracts at negligible volumes. Much

later, in 1970s and 1980s the Government

Review: Commodity Derivative markets

relaxed forward trading rules for some

in India

commodities, but the market could never

Since its inception in 1875, trading in

regain the lost volumes.

commodity derivatives had always been a

Subsequent to liberalization of Indian

debatable

that

economy in 1991, a series of steps were

unnecessary

taken to liberalise the commodity forward

speculation in essential commodities, and

markets. This found expression in many

were detrimental to the healthy functioning

reports and studies of committees and

derivatives

issue.

Many

fuelled

feared

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Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian

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groups

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Market; A systematic review

to

recommend

reforms

in

obstacles that need urgent attention if the

commodity futures market.

market is to realize its full potential? Why

The Kabra Committee (1994), the earliest

are commodity derivatives important and

post-1991, recommended opening up of

what could other emerging economies

futures trading in 17 selected commodities,

learn from the Indian mistakes and

although it was not unanimous regarding

experience? The paper very effectively

some of these.

identified few issues for better working of

Importantly the year 2003 is a watershed

commodity derivatives in Indian markets.

in the history of commodity futures

Author

market. The last group of 54 prohibited

warehouses

commodities was opened up for forward

commodity derivative markets and role of

trading, along with establishment and

regulators. Author concluded that more

recognition

of

power should be given to FMC for better

exchanges

with

three

new

on-line

national

trading

and

stressed
for

on

availability

functioning

of

of
the

functioning of these markets.

professional management. Not only was

prohibition on forward trading completely

Ghosh (2009) analysed the issues and

withdrawn,

challenges

including

in

sensitive

of

commodity

derivative

commodities such as wheat, rice, sugar and

market in India. The three major themes

pulses, which earlier committees had

discussed in his paper are:

reservations about, but the new exchanges

Strengthening and expanding the scope

brought capital, technology and innovation

of commodity derivative trading

to the market. These markets notched up

Impact of futures trading on commodity

phenomenal growth in terms of number of

prices

products on offer, participants, spatial

Role of commodity derivative markets

in the global meltdown

distribution and volume of trade. Starting

with trade in 7 commodities till 1999,

The principal aim of this paper has been to

futures trading is now available in 95

sensitize

commodities.

Ahuja

(2006),

the

research

and

policy

community as also the stakeholders of

this

paper

commodity markets on the issues and

analysed

concerns of commodity derivative markets

questions such as: how did India pull it off

in India, as also set an agenda for research.

in such a short time since 2002? Is this

The author concludes that issues of

progress sustainable and what are the

commodity markets are multidimensional.

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Such concerns cannot merely be addressed

want to fix the price at which it purchases

in a reductionist framework of financial

electricity for air conditioning during the

economics only, but entail deep thinking in

summer. An airline wants to lock in the

institutional

social

price of the jet fuel it needs to purchase in

anthropology, quantitative methods, as

order to satisfy the peak in seasonal

also information systems and data mining.

demand for travel.

economics,

This requires a trans-disciplinary research

At the same time, investors and financial

framework.

intermediaries can either

Review: Commodity derivatives- need

commodities

and relevance

derivatives.

through

buy or
the

use

sell
of

They put capital that is

Commodity derivatives markets have been

essential to facilitating the business of the

in existence for centuries, driven by the

producer and of the end-user. They stand

efforts of commodities producers, users

ready to transact with these market

and investors to manage their business and

participants; without them, producers and

financial risks.

end-users could not hedge their risks.

Producers want to manage their exposure

Today, the commodity derivatives market

to changes in the prices they receive for

is global, and includes both exchange-

their

traded

commodities.

They

are

mostly

and

over-the-counter

(OTC)

focused on achieving the same effect

derivatives contracts. It consists of a wide

as fixed prices on contracts to sell their

range of segments:

produce. A silver producer, for example,

metals, coal, commodity index products,

wants to hedge its losses from a fall in the

crude oil, emissions, freight, gas, oil

price of silver for its current silver

products,

inventory. Cattle ranchers want to hedge

precious metals and weather.

plastics

agriculture, base

products,

power,

their exposure to changes in the price of

cattle. Food companies need to hedge the

Thousands of companies of all shapes and

risk of price changes in green coffee,

sizes, in all industries and in all regions

cocoa beans, cereals, milk and other

use

commodities they sell.

Manufacturers,

commodity
energy

derivatives.
companies,

farmers, agriculture and food companies,

End-users want and need to hedge the

IT companies these and other types of

prices

purchase

firms make up the global commodity

commodities. A hospital system might

derivatives markets. They all contribute to

at

which

they

can

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Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian

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Market; A systematic review

the supply of needed commodities for

And in a reversal of earlier trends, the

ever-rising earths population. In this

development

respect, the first half of the 21st century is

markets is being pursued actively with

a critical moment. The worlds population

support from governments (UNCTAD,

is expected to reach 9 billion in 2050,

2002).

creating

ever-increasing

demands

on

benefits in terms of price discovery, risk

limited

resources

providing

management and better allocation of

challenge for industrial producers, market

resources. Similarly, the World Bank has

intermediaries,

makers,

undertaken many initiatives to explore the

international

possibility of market-based systems of

governments

and

policy
and

organizations.

of

Policy

commodity

makers

futures

expect

social

price stabilization (Claessens and Duncan,

1993).

This leads to concerns about

price

increases and volatility, as Nobel Prize-

Gronvik (2008) argued that hedging

winning economist Paul Krugman pointed

against future price movements can be

out in a recent editorial saying that

important both for those producing goods

volatility exists in our markets because we

and for those buying them. Commodity

live in a finite world where there is not,

derivatives may be employed as a hedge

at

against price risk, and this is one of the

any given moment

in time, an

inexhaustible supply of oil, wheat, milk or

reasons

other physical commodities to meet the

establish

global demand for such products. Simply

Norway. This article discusses the general

put, prices are higher because the demand

terms

for a product around the globe is greater

derivatives markets.

than the supply.

behind

several

initiatives

fish derivatives

for

establishing

to

markets in

commodity

Naik and Jain (2002) reviewed the

Commodity futures markets have a limited

performance of futures market in India and

presence

countries.

found that Barring a few, they (futures

Historically, governments in many of these

market) are still not congenial markets for

countries

futures

hedgers. The markets are deficient in

markets. If they were not banned, their

several aspects such as infrastructure,

operations were constricted by regulation.

logistics,

management,

linkages

with

In the recent past, however, countries have

financial

institutions,

reliability

and

begun to liberalize commodity markets.

integrity, dominance of speculators and

in

have

developing

discouraged

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efficient

information

systems,

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which

suggest that this relationship is nonlinear

discourage market players from trading in

in nature. Specifically, the use of financial

these markets

derivatives is associated with a risk

reduction for moderate derivative users.

Nair (2004) found out that the major

Derivative

stumbling block for the development of

usage

among

extensive

derivative users, on the other hand, appears

commodity futures markets in India is the

to lead to an increase in firm risk.

fragmented physical/spot market. He

Nevertheless, compared to firms that do

pointed out that government laws and

not make use of derivatives, there is no

various taxes hinder the free movement of

evidence that extensive derivative users

commodities.

are exposed to a risk level in excess of that

Lokare (2007) analyzed the development

of non derivative users. The results are,

of commodity markets in India in the wake

therefore, indicative of a hedging motive

of globalization. He endeavoured to test

behind the use of financial derivatives.

the

efficacy

and

performance

of

commodity derivatives in steering price

Bartram & Brown (2011): Using a large

risk management. He concluded that

sample of nonfinancial firms from 47

liquidity

primary

countries, authors examined the effect of

commodities was found to be high only in

derivative use on firm risk and value. They

few commodities such as castor seed, soya

controlled for endogeneity by matching

bean oil while in the case of others it was

users and nonusers on the basis of their

thin. These markets in India are thus yet to

propensity to use derivatives. They used a

achieve minimum critical liquidity that can

new technique to estimate the effect of

generate greater economies of scale,

omitted variable bias on inferences. They

minimum transaction costs and wider

found out strong evidence that the use of

participation.

financial derivatives reduces both total risk

in

respect

of

and

Review: Commodity derivatives- a tool

systematic

risk.

The

effect

of

derivative use on firm value is positive but

for hedging

more sensitive to endogeneity and omitted

Nguyen and Faff (2010): The focus of

variable concerns. However, the authors

their article has been on investigation of

concluded

the relationship between the use of

associated with significantly higher value,

financial derivatives and firm risk using a

abnormal returns, and larger profits during

sample of Australian firms. Their results

the economic downturn in 20012002,

176

that

using

derivatives

is

Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian

Volume 4 | Issue 1|

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Market; A systematic review

suggesting

that

firms

are

hedging

optimal hedge ratios are calculated from

downside risk.

Ordinary Least Squares (OLS) regression

and Error Correction Model (ECM). It is

Vipul (2006): This article investigates the

found that the futures market dominates in

changes in volatility in the Indian stock

price discovery in nearby month contracts.

market

of

In far month contracts, there is no long-

derivatives. There is strong evidence of a

term relationship between spot and futures

reduction in the volatility of the underlying

prices for turmeric and cardamom. In case

shares after the introduction of derivatives.

of base metals, futures market leads spot

Takeshi Inoue (2012): The paper is aimed

market for all the three contracts. This

at examining the market efficiency of the

study

commodity futures market in India. Author

representing the collective market opinion

estimated

equilibrium

is considered as reference price for spot

relationship between the multi commodity

market players like traders, farmers and

futures and spot prices and then tested for

other stakeholders in commodity trading

market efficiency in a weak form sense by

domain. Hedging effectiveness is also

applying DOLS and FMOLS methods.

measured at various maturity periods. The

The results indicated that a co integrating

results suggested that only 40% of

relationships is found between these

contracts are suitable for hedging. It is

indices and commodity futures market are

generally found that there is no significant

efficient only during the more recent sub

difference

sample period and not the whole sample

between far month and nearby month

period.

maturity periods for spices, while in the

after

the

the

long

introduction

run

supports

in

that

hedging

futures

price

performance

case of base metals slight variation is seen

Hussain & Kamaiah(2012): The present

in hedging performance among different

study

hedging

maturity periods. Further, there is not

futures

much difference in the estimates of

contracts for spices and base metals by

hedging effectiveness obtained from OLS

employing

error

method and ECM. It is found that for far

correction methodology with different

and nearby maturity periods hedging is

maturity time horizons varying from one

more effective, which has some important

month to three months, i.e., maturity

implications for hedging strategy. These

investigated

effectiveness

of

the

commodity

cointegration

and

month, nearby month and far month. The

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Volume 4 | Issue 1|

ISSN | 2319-5576

findings are helpful to risk managers,

Schnepf (2008), this report identifies the

farmers, stakeholders and policy makers.

predominant factors behind the current

D.A. Rata (2009): Agriculture is a risky

(2007/2008 crop year) market conditions

business and it requires attentive risk

for major agricultural commodities, with a

management practices in order to protect

focus on U.S. farm program crops. In

the investor's wealth. Functioning in a

addition, it also discussed how higher,

similar manner to any other insurance,

more volatile commodity prices have

hedging can protect against the three risks

impacted farm incomes, government farm

that threaten more or less all agricultural

programs, hedging activities, the livestock

businesses: bad crops, exchange rate risk

and food processing sectors, food prices,

and market risk. All agricultural businesses

and

except sustenance farms are subjected to

situation. It reviewed both the near- and

these

consultancy

longer-term commodity price outlook, and

organisms and NGOs should inform farm

finally, it discussed various viewpoints and

owners of these techniques of risk

policy options that have been suggested as

management that can safeguard the farms'

possible responses to the perceived causes

profits and as well their existence. The

and consequences of the unusually high

usage

commodity prices.

risks.

of

Agricultural

financial

management

markets

tools

in

as

risk

agricultural

evidences are shown on the role played by

Developing Countries".

commodity
sources

for

well

derivatives
hedging

shows
are

the

the nascent futures markets in price

that

discovery. They documented the problems

effective

of both the spot and the futures markets.

unforeseen

Three policy proposals were suggested

movements in prices. Now let us see

whether

commodity

derivatives

security

the spot and the futures markets. Some

Force for Commodity Risk Management in

very

food

existing market design prevalent on both

World Bank and its International Task

review

international

Thomas (2003): the paper, describes the

businesses is as well recommended by the

The

the

using reference rates for strengthening

and

transparency, exploring a greater role for

speculation in these markets can be blamed

cash settlement, and treating warehouse

for inflationary pressures on the economy

receipts as securities.

or not.
Review: Commodity Derivatives and

Scott H Irwin. Dwight R. Sanders (2009):

Speculation

it is commonly asserted that speculative

178

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Volume 4 | Issue 1|

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Market; A systematic review

buying by index funds in commodity

statements of 425 large U.S. corporations,

futures and overthecounter derivatives

we

markets created a bubble in commodity

systematically reduce or increase their

prices, with the result that prices, and

riskiness with derivatives. We find that

crude oil prices, in particular, far exceeded

many firms manage their exposures with

fundamental values at the peak.. The

large derivatives positions. Nonetheless,

purpose of this paper is to show that the

compared to firms that do not use financial

bubble

not

derivatives, firms that use derivatives

withstand close scrutiny. Four main points

display few, if any, measurable differences

are explored. First, the arguments of

in risk that are associated with the use of

bubble proponents are conceptually flawed

derivatives.

and

argument

reflect

simply

fundamental

does

and

investigate

whether

firms

basic

misunderstandings of how commodity

Wahl (2008): this paper argues that

futures markets actually work. Second, a

speculation on food prices has played the

number of facts about the situation in

decisive role in the price bubble in

commodity markets are inconsistent with

2007/2008. The paper describes in detail

the existence of a substantial bubble in

the difference between speculation and

commodity

available

investment. It explains how speculation in

statistical evidence does not indicate that

general and food speculation in particular

positions for any group in commodity

works and describes the emergence of the

futures markets, including longonly index

speculative

funds, consistently lead futures price

beginning in late 2006. Author argues that

changes. Fourth, there is a historical

the speculative move on commodity

pattern of attacks upon speculation during

market distort prices, reinforces instability,

periods of extreme market volatility.

increases

prices.

Third,

bubble

market

in

food

ineffeciency

prices

and

periodically leads to the formation of

Hentschel (2001): Public discussion about

bubbles.

corporate use of derivatives focuses on

Sen (2008): In the wake of consistent rise

whether firms use derivatives to reduce or

of rate of inflation during the first quarter

increase firm risk. In contrast, empirical

of calendar year 2007 and responding to

academic studies of corporate derivatives

the concerns expressed at various forums,

use take it for granted that firms hedge

Parliamentary Standing Committee of the

with derivatives. Using data from financial

179

APOTHEOSIS: Tirpudes National Journal of Business Research (TNBJR).

Volume 4 | Issue 1|

ISSN | 2319-5576

Ministry of Consumer Affairs Food and

Indian Market that there are variety of

Public Distribution, appointed an Expert

views about the efficiency of commodity

Committee under the Chairmanship of

derivatives market. On one hand authors

Prof. Abhijit Sen, Member of Planning

have proved that commodity derivatives

Commission, to examine whether and to

are effective hedging tools whereas on the

what extent futures trading has contributed

other hand these instruments have also

to price rise in agricultural commodities.

being blamed for increasing inflation in the

The objectives of the committee were:

economy. Volatile commodity prices have

spawned

1. To study the extent of impact, if any,

of futures trading on wholesale and
retail

prices

of

government

agencies,

academics

key

Committee

may

regarding

by
and

weather,

factors
trade

include
flows,

Perceptions about the financialization of

increased

physical commodity markets are raising

concerns about the impact of investments

market/trading so that farmers are able

on commodity price changes and volatility.

to get the benefit of price discovery

While financialization is a trendy concept,

through Commodity Exchanges.

there is little evidence that supports the

idea that it is unduly affecting commodity

The report concluded that there are no

markets, as a number of research articles

evidences of futures markets affecting the

of

These

production quotas and export controls.

consider

association of farmers in the futures

prices

drivers.

demographics,

3. Make such other recommendations as

market

reports

supply and demand of commodities are the

ways to minimize such an impact

spot

of

that fundamental factors that affect the

2. Depending on this impact, to suggest

appropriate

plethora

researchers. From these efforts, it is clear

agricultural

commodities

the

and papers have highlighted the same.

commodity.

Although speculation is often blamed for

However committee came up with some

causing problems in markets, the economic

important measures to be taken to decrease

evidence shows that overall it is a

the risk of trading in derivative market.

necessary activity that makes markets

Conclusion: It is quite evident from the

more liquid and efficient. This, in turn,

above systematic review of literature for

benefits hedgers, investors, and other

the topic Commodity Derivatives- An

market participants. Speculation increases

Effective Tool for Hedging - A Study of

market liquidity by reducing bid-offer

spreads, by making it possible to transact
180

Commodity Derivatives - An Effective Tool for Hedging - A Study of Indian

Volume 4 | Issue 1|

ISSN | 2319-5576

Market; A systematic review

more quickly at a given size, and by

BIS. 1996. "Macroeconomic and monetary

making markets more resilient. Without

policy issues raised by the growth of

speculation,

derivatives markets", Basle.

there

would

be

fewer

opportunities for other market participants,

Claessens, S., & Duncan, R. C. 1993.

especially hedgers, to manage the risks

"Managing commodity Price risk

they encounter in their financial activities.

Hence

various

diametrically

developing

countries".

World

in

Bank.

Baltimore and London: Johns Hopkins

opposite

views persist in this respect and the

University Press.

proposed research is an attempt to throw

D.A.

some light on how commodity derivatives

instrument important in management of

can

risk in agriculture". World Bank.

be

used

manufacturers

by
for

producers

hedging

and

Rata,

L.

2009."Hedging:

An

purposes.

Speculation is unavoidable but we even

Ghosh, N. 2009. Retrieved may 24, 2013,

wish to know how a smart investor can

from

make

www.taerindia.com/pdf/TAER-Working-

use

of

commodity

derivative

www.taerindia.com:

instruments for curbing the excessive risk

Paper-No-5.pdf

in the markets.

Gronvik,

G.

2008.

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commodity

derivatives and the Norwegian Initiatives

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Ahuja, N. 2006. "Commodity Derivatives

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Hentschel, S. A. 2001. "Are corporations

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reducing or taking risks with derivatives?"

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Hull, J. C. 2002. Options, Futures and

"The Effects of Derivatives on Firm Risk

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