Futures market in mitigating price risk: an explorative an alysis of castor market

Instability of commodity prices has always been a major concern of the producers as well as the consumers in an agriculture dominated country like India. Farmers in a bid to avert the price risk often tend to go for distress sale and thereby reducing the potential returns. In order to cope up with this problem, futures trading has emerged as a viable option and serves as a risk-shifting function. This study has analyzed the movement of futures and spot prices or co-integration in castor and the data were collected from July, 2004 to December, 2013. The ADF (Augmented Dickey Fuller) test has been used to check the stationarity of the time series data and it followed the stationarity pattern at the first difference. The cointegration test has been used to find out whether there existed a long-run relationship between spot and futures prices and it behaves in an expected manner. The result of Granger test detected unidirectional Granger Causality from futures to spot markets. This phenomenon of price convergence and causality indicated its better hedging efficiency for farmers and exporters to mitigate the price risk.