Volume 16 | Issue 1 | Article 2

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Hedging and the Emergence of Commodity Futures: The Soya Oil Exchange in India
Bharat Ramaswami and Jatinder Bir Singh (G13, Q13)

Earlier literature has identified the involvement of “commercial” hedgers as a critical determinant in the evolution of commodity futures. In this light, the paper examines the exceptional success of the soya oil contract at the National Board of Trade (NBOT) in India. As information is not available on futures positions held by identifiable market participants, the paper employs a range of empirical strategies to infer the use of the futures contract by commercial hedgers, such as the correlation of open interest with commodity supplies and arbitrage returns to hedgers. If the market offers arbitrage opportunities to hedgers and if such activity is significant, then the activities of commercial firms should affect the returns to their hedging portfolio, that is, change in basis. This insight is developed into an examination of the impact of soya oil imports on the basis. Soya oil imports exercise a significant impact on the basis and provide enough short-term volatility to make the contract attractive to both hedgers and speculators. The paper notes the wider implications for developing country settings where spot markets are typically poorly developed.