Price risk management using commodity futures in India
Publisher: Prestige Institute of Management and Research Year: 2007
Abstract: In a commodity value chain, there are number of factors that make the prices fluctuate. This generates a need of efficient Price Risk Management. Price-Risk Management means managing the price risk associated with the future price fluctuations. In a developing country like India, It is strongly recommended that tools like weather insurance, forward-pricing systems and market-based price insurance should be introduced. Of late there has 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 is the most common method of price risk management. Hedging 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 commodities.