Hedging in agri commodities in India
Publisher: Indian Education Society’s Collage of Management, Mumbai Year: 2007
Abstract: In a commodity value chain, there are number of factors that make the prices fluctuate. The Ecosystem is often highly susceptible to the long-term decline and short-term volatility of prices as the adjustment of production to price changes is not very quick. This generates a need of effective hedging policy. The Institutional structure plays a vital role in providing hedging options. In a developing country like India, It is strongly recommended that tools like weather insurance, forward-pricing been a revival of interest in price insurance, forward-pricing systems and other schemes to manage the risks of commodity price volatility. However in most of the developing countries, the institutional arrangements for their widespread application still remains absent. This gap is filled by efficient futures exchanges in commodities coming up in India. Hedging, which is the most common method of price risk management, means reducing or controlling risk. Using the futures market to take a position that balances the position in the physical market with the objective of reducing or limiting risks associated with price changes. Hedging is a two-step process. A gain or loss in cash position due to the changes in price levels will be countered by changes in value of future position due to changes in future position. This paper tries to see how commodity exchanges can be used for efficient price risk management by corporate having exposure in different agricultural commodities.