Abstract:
Risk management and price discovery are the two main functions of futures market. The prime objective behind establishment of Futures markets was to enable companies and individuals to insure against the possible adverse effects of changes in interest and exchange rates. Futures were established to enable portfolio managers and other investors to insure against the possible adverse effects of changes in stock prices. Thus the main role of financial futures markets is the reduction of risk or 'hedging'. 'Hedging' has the significant role in stabilizing the market, realizing market efficiency and enabling minimization of risk and thus maximizing utility. This paper tries to evaluate the long term and short term co-integration in spot and future prices & estimate the hedge ratio and hedging effectiveness for select actively traded Indian commodity futures using selected models.
