Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.

Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets f...

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Main Authors: Sanjay Mansabdar, Hussain C Yaganti
Format: Article
Language:English
Published: Tuwhera Open Access Publisher 2020-11-01
Series:Applied Finance Letters
Online Access:https://ojs.aut.ac.nz/applied-finance-letters/article/view/239
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spelling doaj-12b3fdc4aebb4fb9b19d26f0629fa6372020-11-25T04:11:22ZengTuwhera Open Access PublisherApplied Finance Letters2253-57992253-58022020-11-019SI10.24135/afl.v9i2.239Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.Sanjay Mansabdar0Hussain C Yaganti1Department of Economics and Finance, Birla Institute of Technology and Science Pilani, Hyderabad Campus, Jawahar Nagar, Hyderabad, Telangana 500078Department of Economics and Finance, Birla Institute of Technology and Science, Pilani, Hyderabad Campus, Jawahar Nagar, Hyderabad 500078, Telangana, India Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets for the delivery options granted to the seller by virtue of contract design.  These cash markets are generally heterogenous. This paper studies the impact of heterogeneity of the underlying cash markets in different locations on the hedging effectiveness of the associated futures contract. The hedging effectiveness of cottonseed oilcake and soybean futures is regressed against several variables that represent heterogeneity of the underlying cash markets using ridge regression. We find that in general, the greater the heterogeneity, the poorer the hedging effectiveness of the contract. This paper is unique in that it provides a framework for guidance for contract designers at exchanges and regulators who will find this research useful in optimizing delivery specifications for agricultural futures contracts.  This is especially important given the declining volumes in Indian agricultural commodity futures. https://ojs.aut.ac.nz/applied-finance-letters/article/view/239
collection DOAJ
language English
format Article
sources DOAJ
author Sanjay Mansabdar
Hussain C Yaganti
spellingShingle Sanjay Mansabdar
Hussain C Yaganti
Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
Applied Finance Letters
author_facet Sanjay Mansabdar
Hussain C Yaganti
author_sort Sanjay Mansabdar
title Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
title_short Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
title_full Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
title_fullStr Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
title_full_unstemmed Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.
title_sort heterogeneity of cash markets at physical delivery points and the hedging effectiveness of agricultural commodity futures in india – lessons for contract optimization.
publisher Tuwhera Open Access Publisher
series Applied Finance Letters
issn 2253-5799
2253-5802
publishDate 2020-11-01
description Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets for the delivery options granted to the seller by virtue of contract design.  These cash markets are generally heterogenous. This paper studies the impact of heterogeneity of the underlying cash markets in different locations on the hedging effectiveness of the associated futures contract. The hedging effectiveness of cottonseed oilcake and soybean futures is regressed against several variables that represent heterogeneity of the underlying cash markets using ridge regression. We find that in general, the greater the heterogeneity, the poorer the hedging effectiveness of the contract. This paper is unique in that it provides a framework for guidance for contract designers at exchanges and regulators who will find this research useful in optimizing delivery specifications for agricultural futures contracts.  This is especially important given the declining volumes in Indian agricultural commodity futures.
url https://ojs.aut.ac.nz/applied-finance-letters/article/view/239
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AT hussaincyaganti heterogeneityofcashmarketsatphysicaldeliverypointsandthehedgingeffectivenessofagriculturalcommodityfuturesinindialessonsforcontractoptimization
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