Role of futures trading in facilitating commodity exports

Abstract

In India, since its beginning in 1921 futures trading has been subjected to frequent intervention by the government in terms of allowing, banning and restricting its operations. As the debate on their utility for the economy as a whole, especially in terms of price stabilization, continues, the government is hesitant to encourage future trading. The usefulness of futures markets are being reexamined in the light of its positive effects on international trade. Futures market seems to help exporters by way of reducing transaction cost due to liquidity and standardization, better market information and so on. However, unless the exporters are assured that in the long run they do not incur losses by participating in the futures market, they will not participate in the futures market. Moreover, for the economy as a whole the influence of futures trading on price stabilization should not be negative. This study examined the issues of exporters' profitability from trading in castor seed futures and price stabilization effect to assess whether futures trading should be encouraged for enhancing exports. The results indicate that the castor oil exporters would not have incurred losses if they have consistently participated in the futures market. In fact they would have benefited by following certain trading strategies. The price stabilization test results also indicated that price stabilization effect is stronger than the destabilization effect. This is more so during high price years. These results indicate that futures trading can be beneficially used for export promotion.