Volatility Of Spot Prices Case Study

volatility of spot prices. Why this is supposed to happen? As mentioned above, the spot price is associated with the notion of some kind of average physical transaction and this mean or the average price gets reflected as the spot price. It is true that sharp increase in the trend of commodity price is not the same as volatility in these prices around their mean or average value (Ghosh J., 2011). In fact, volatility refers to swings in prices around their average value. Markets can experience either a rise in the trend of average price (and volatility can remain low) or prices could be volatile around a constant average price or both. Open interest, which refers to the number of contracts which has not yet been fulfilled through the delivery
(2011) argues that ‘speculative driven bubbles could thus have duration of year or longer’ and it connects the bursting of US real estate market and the financial crises of 2007-08 to the global food price increase. In the aftermath of the collapse of mortgage and stock market, the investors shifted to alternative investment opportunities. This created a context for intermittent bubbles where prices rise due to artificial demand of investment and then crash because they could not match the fundamentals of demand and supply. Ghosh J. et al. (2011) also argue that high levels of volatility in food commodity market are associated with rapid increase in liquidity starting in mid-2007 but by no means prices behaved in a more volatile manner when the markets were less liquid
Futures market as a risk management tool existed in India for more than a century. Commodity derivative market has been organised in commodities permitted by the government. Apart from setting up of de-mutualised multi-commodity exchange and expanding the list of commodities in the exchange, there are empirical evidences carried out in research papers that reveal the changing scenario of the Indian futures market. Gopal Naik, Sudhirkumar Jain (2002) , explains the performance of Indian commodity futures market prior to 2003 (when futures trading began in full fledged manner) and the performance of the market varied depending on commodities, exchanges and contracts. This paper was undertaken in 2002, before majority of commodities started trading at their full potential in the exchange however it revealed the potential for performing the functions of price discovery and risk management by the futures