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Opportunities for Physical Trading Vs Futures Trading

Opportunities for Physical Trading Vs Futures Trading. Gopal Naik Professor, IIM Bangalore. Futures Trading. An agreement priced and entered on an exchange to trade at a specified time in future a commodity of specified quality Standardization of contract Trading in exchange Clearinghouse.

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Opportunities for Physical Trading Vs Futures Trading

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  1. Opportunities for Physical Trading Vs Futures Trading Gopal Naik Professor, IIM Bangalore

  2. Futures Trading • An agreement priced and entered on an exchange to trade at a specified time in future a commodity of specified quality • Standardization of contract • Trading in exchange • Clearinghouse

  3. Organized Exchange Standardized contract More liquid Low search cost OTC Customised contract Less liquid High search cost Futures Forwards

  4. Futures Trading • Conversion of cash price risk into basis risk • Higher liquidity • Low transaction cost • Low default risk

  5. Hedging • Motivation for Hedging • Types of Hedges • Merchant Hedging • Producer Hedging • Processor Hedging

  6. Inter-temporal Cash & Futures Price Relationships (1) May Futures Price in Apr July Futures Price in Apr Cash Price 1 Price Dec Feb Apr May …... Jul …... Nov

  7. Inter-temporal Cash & Futures Price Relationships (2) May Futures Price in Apr July Futures Price in Apr Cash Price 1 Price Dec Feb Apr May …... Jul …... Nov Basis Dec Feb Apr May …... Jul …... Nov

  8. Inter-temporal Cash & Futures Price Relationships (3) Cash Price 2 May Futures Price in Apr July Futures Price in Apr Cash Price 1 Price Dec Feb Apr May …... Jul …... Nov Basis Dec Feb Apr May …... Jul …... Nov

  9. Mustard Feb 2006 Contract - NCDEX

  10. Hedging Strategies • Basis risk • Strategies

  11. Table 4.7. Quantity offered for delivery of Pepper at NMCE

  12. Ratio of open interest and trade volume for Pepper seed at NCDEX and NMCE

  13. Table 3.13. Standard Deviation of basis and spot prices of pepper in National Exchanges

  14. Opportunities • Hedging • Carrying- Charge Hedge • Operational Hedge • Selective Hedge • Anticipatory Hedge • Cross Hedge • Electronic spot market

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