Commodity Derivatives Trading Research Articles

How the financial market can dampen the effects of commodity price shocks

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the mid-2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the U.S. economy, by constructing a model with a financial accelerator and with financial intermediaries that own two assets tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries' holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.

How the Financial Market Can Dampen the Effects of Commodity Price Shocks

Commodities have begun to function as an asset class during the past decade, as trading in commodity derivatives has increased massively since the 2000s. This paper studies the role of commodities as an asset class in accounting for the recently lessened impacts of commodity price shocks on the economy, by constructing a model with financial frictions and with financial intermediaries that own two assets – tied to commodities as well as to capital. Simulation results of the model show that financial intermediaries’ holdings of commodities as assets have contributed to the recent reduction in the effects of commodity price shocks.

Gambling on Hunger? The Right to Adequate Food and Commodity Derivatives Trading

Non-governmental organizations (NGOs) have claimed that financial speculators, by gambling on food prices via commodity derivative instruments, contributed to the global food crisis from 2007 to 2011. Commodity futures contracts began life as a form of agricultural insurance and were predominantly used to stabilize commodity prices. How did it then come about that these instruments were turned against agricultural production, leading to violations of the human right to adequate food? This article draws on the history of commodity futures trading to explore the claims of NGOs regarding the causal significance of speculation in the recent crisis. It finds that the financialization of futures markets in recent decades has created new channels of influence whereby activity in commodity derivatives markets can impact on underlying food prices. The implications for efforts to realize the human right to adequate food are elaborated in the final section.

Mogućnosti primene hedžing strategija na inostranim robnim berzama

The aim of the paper is to determine the possibilities of implementing hedging strategies of Serbian agricultural producers on foreign commodity exchanges. Considerable fluctuations in prices of agricultural products in Serbia create the need for the use of futures in commodity exchanges in order to protect against unfavourable change in prices of agricultural products in the future period. Due to the fact that Serbia has not established the trading in commodity derivatives, Serbian producers are having to use developed commodity exchanges abroad. The paper analyses the possibilities of using the Chicago Mercantile Exchange in the USA and the MATIF commodity exchange in Paris, looking at two aspects of the activities. First, the correlation of corn prices on domestic and foreign commodity exchanges was investigated, given that it is the basic prerequisite for the application of successful hedging strategies and, secondly, legal requirements, primarily tax policies related to trade of futures contracts. This paper has found that there is a high correlation between the crops price in the foreign commodity markets and spot market in Serbia, which provides a solid basis for the implementation of hedging strategies for underlying assets in foreign commodity markets. However, it has been found that inadequate taxation policy is an aggravating factor for the implementation of hedging strategies.

MiFID II and MiFIR: stricter rules for the EU financial markets

This article analyses and discusses the new MiFID II and MiFIR rules for the EU financial markets. In particular, it analyses the concepts “regulated market”, “Multilateral Trading Facility” (MTF), “Organised Trading Facility” (OTF) and “(systemic) internalisation”. It also discusses (i) pre-trade and post-trade transparency, (ii) transaction reporting, (iii) data services providers, (iv) concentration of trading, (v) position limits, and (vi) position management powers in the case of trading in commodity derivatives and reporting obligations.

Changing Regulatory Landscape for Commodity Derivatives Trading in India -- Implications and the Way Forward

Every major crisis in the financial sector points to the varied patterns of market failures and results in eventual reorganization of markets and its regulatory architecture. Last three years have been a watershed in the history of commodity trading in India. A reform drill started by around mid 2012 accelerated with the payment crisis at one of the commodity spot exchanges in July 2013, and has culminated in 2015, in the merger of commodity market with securities market. This paper narrates the set of events and rationale that led to the decision to merge the regulator of commodity market – Forward Market Commission (FMC) – with the securities market regulator – Securities and Exchange Board of India (SEBI) and the implications that decision has on the future contours of commodities markets in India. The article also highlights the learnings from the ensued events, against the contemporary debates on regulating commodity markets.

Case Studies from Commodity Derivatives Debacles

Until recently, one could only gain expertise in commodity-derivatives relationships if one had worked in niche commodity-processor companies or in banks that specialized in hedging project risk for natural-resource companies. The contribution of this paper is to help fill the knowledge gap in the risk management of commodity derivatives trading. The paper emphasizes the constant challenges to a trader when attempting to navigate the very dynamic flows of both the commodity markets and the prevailing risk environment. The paper also emphasizes that operational controls are paramount in an age of increasing legal and regulatory risk, particularly for firms involved in large-scale commodity derivatives trading.

Inflation and Trading in Commodity Derivatives - Opportunities and Threats

Indian markets recently thrown open a new avenue for retail investors and traders to participate is the commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option that provides risk management facility. Investing directly in the agricultural products and commodities gives the investor a share in the commodity components of the country’s production and consumption. Money managers and average investors prefer commodity derivatives rather than commodity themselves. A common investment objective is to purchase indirectly those real assets that provide a good hedge against inflation risk.

Derivatives Trading Mechanisms

Commodity derivatives trading started in over-the-counter markets, but the trading has since expanded to exchange markets where futures contracts are now transacted, daily. Additionally, although, commodity derivatives were initially designed to hedge against adverse price movements in agricultural produce such as cotton, grain, pigs, and cattle they currently cover other aspects of commerce, such as minerals trading- encompassing, petroleum, gold and others. This paper reports on the various commodity derivatives trading, including agricultural produce; and, most importantly, on how the net cost of carry relations is used to explain the derivatives trading mechanism.

THE IMPACT OF COMMODITY TRANSACTION TAX ON FUTURES TRADING IN INDIA: AN EX-ANTE ANALYSIS

Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery and better price-risk management besides helping the macroeconomy with better resource allocation. In the 2008–2009 budget, the Indian government proposed to impose a commodity transaction tax (CTT) amounting to 0.017% of trading value. In this context, we examine the relationship between trading activity, volatility and transaction cost for five most traded commodities in India. Results suggest that there exists a negative relationship between transaction cost and liquidity and a positive relationship between transaction cost and volatility. Further, the results of structural model support the results of VAR analysis. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.

What Explains the Growth in Commodity Derivatives?

This article documents the massive increase in trading in commodity derivatives over the past decade—growth which far outstrips the growth in commodity production and the need for derivatives to hedge risk by commercial producers and users of commodities. During the past decade, many institutional portfolio managers added commodity derivatives as an asset class to their portfolios. This addition was part of a larger shift in portfolio strategy away from traditional equity investment and toward derivatives based on assets such as real estate and commodities. Institu­tional investors’ use of commodity futures to hedge against stock market risk is a relatively recent phenomenon. Trading in commodity derivatives also increased along with the rapid expansion of trading in all derivative markets. This trading was directly related to the search for higher yields in a low interest rate environment. The growth was both in organized exchanges and over-the-counter (OTC) trading, but the gross market value of OTC trading was an order of magnitude greater. This growth is important to note because a critical factor in the recent crisis was counterparty failure in OTC trading of mortgage derivatives.

Efficiency and Futures Trading-Price Nexus in Indian Commodity Futures Markets

Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery, better price risk management, besides helping macroeconomy with better resource allocation. Though the volume of commodity futures trade increased exponentially after the withdrawal of prohibition in 2003, the functioning of futures markets came under scrutiny during 2006–07 due to price rise and the government has proposed to impose transaction tax by 0.017 per cent on trading volume in the 2008–09 budget. In this context, we examine the efficiency and futures trading-price nexus for five top selected commodities namely gold, copper, petroleum crude, soya oil, and chana (chickpea) in commodity futures markets in India. Our results suggest that the commodity futures market is efficient for all five commodities. Further, we do not have sufficient evidence to support that futures market leads to higher inflation.

Are Commodity and Stock Markets Independent of Each Other? A Case Study in India

The temporal relationship between the commodities market and the stock market has a lot of implications for not only the participants of the markets but also for the policy makers, the producers of the commodities, and, in the case of developing nations, the economy as a whole. This relationship may be studied using various methods and by identifying the lead-lag relationship between the values of representative indices of the markets. The history of the organized commodity derivatives market in India dates back to the 19th century with the establishment of the Cotton Trade Association, where cotton futures contracts were traded in 1875, barely a decade after trading in commodity derivatives started in Chicago. In this article, the dynamics of such information transfer among the commodities spot, commodities derivatives, and stock markets in India are studied, using the information theoretic concept of entropy, which captures non-linear dynamic relationships as well. <b>TOPICS:</b>Commodities, security analysis and valuation, emerging, financial crises and financial market history