Examining Linear Relationship between Spot and Future Prices of Selected Agro Commodities

Abstract

Volatility or risk spillover from one market or asset to another market or asset is an important drawback in commodity derivatives market. As we know, in a competitive environment information transmission is a key factor in price discovery. Similarly, risk also transmits from one segment to another segment. Derivatives market helped in reducing volatility in spot markets due to increase in the information flow from future market to the spot market. Also, it attracts the speculators to the spot market and take alternate positions at lower cost. This helps in reducing volatility in spot markets. Derivative markets perform many functions like Price Discovery, reducing volatility spillover, hedging and risk management.  The objective of the study was identified to Examine Linear Relationship between Spot and Future prices of Selected ten Agro Commodities. Ten agricultural commodities frequently traded on NCDEX i.e. Mustard Seed, Refined Soy Oil, Crude Sunflower Oil, Refined Castor Oil, Groundnut, Raw Yellow Peas, Moong, Bajra, Paddy (Basmati), Maize Feed were undertaken in the study. The results reported the presence of high positive significant correlation between the Agro spot and future commodity prices. Higher the spot prices of the Agro commodities, higher is the future prices. The Spot and future prices of all the agro commodities showed   fluctuations during the period of study. Mean spot prices were greater than mean future prices for all agro commodities except Mustard Seed, Groundnut and Paddy (Basmati). ADF Unit root test showed that time series was not stationary at level 0. However, the time series became stationary at first log transformation for all 10 commodities. High positive significant correlation existed between the Agro spot and future commodity prices which showed that during the period of study they were moving in the same direction. Volatility in agricultural markets is a known devil due to the nature of the commodities (seasonal and dependent on rainfall). Volatility shall exist in both spot and future markets of commodities. The only way it can be managed well in the interests of stakeholders by having a larger segment of the market participants on the online trading platforms and the latest information is always available to them.