Free Economics Dissertations - One Essential Objective Of The Exchange Is To Provide The Dealers With All
One essential objective of the exchange is to provide the dealers with all necessary information with regard to price volatility i.e. the magnitude of price movement in either direction. Note that it measures price risk and volatility but does not remove or eliminate risks. The exchange provides the benchmark for the determination of price by making price margins mandatory for effective fair trading.
Futures transactions do not require full advance payments for the commodity (just the margin), the buyer of a futures contract which increases in value (or the seller of futures contract which decreases in value) can realize a profit which can be substantial in relation to the commitment of capital.
1.1 Coffee in Futures Markets.
In this analysis of futures trading, I will focus on Coffee as the traded commodity in the Indian and World futures market. Coffee forms an important source of income for many countries. One study shows that 70 countries produce coffee with some accounting (45) for more than 97 percent of the world production. Brazil today is the world largest producer of coffee. Considering this figures, it is not surprising to note that it has attracted considerable amount of speculation and ever increasing susceptibility to price volatility.
Coffee production have direct linkage with weather besides many other factors such as world coffee prices. A coffee drink manufacturer will buy coffee beans from a coffee producer at an agreed price if he/she expects to have drastic climatic changes which will result in coffee being expensive at a future date. A sudden drop in the production in future will cut supply and make it more expensive. He/She can, therefore, avoid unnecessary risk by buying a futures contract that will guarantee him delivery of coffee at a future date at a price fixed now. However, it must also be noted that he/she will suffer loss if the future current/spot price of coffee beans were to fall drastically due to improved production and competitions.
Take an example of Brazil The Brazilian Crop was initially expected to produce about 50 million bags of coffee. Seasonal disturbances such as rain, harvest delays and quality problem caused production to fall to 33.5 million bags. Due to severe drought in Viet Nam coffee production dropped by almost 1 million bags. These shortages of coffee output distort the supply level which leads to a global rise in prices.
So what roles does the future markets play in the production and selling of coffee ? Taking these points into account the next chapter looks at the Indian and world coffee markets and the role future market plays in its pricing. In the analysis, I have made use of some articles from the Times of India newspaper and other websites.
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