Risk Management of Selected Products Imported by Iranian Agriculture Using quasi-futures contracts

Khodaverdi, Omid; Mehrara, Mohsen; Rezaee, Majid; Kiaalhoseini, Seyed Ziaediin

doi:10.22075/jem.2019.16503.1234

Risk Management of Selected Products Imported by Iranian Agriculture Using quasi-futures contracts

Document Type : Original Article

Authors

Omid Khodaverdi ¹

Mohsen Mehrara ²

Majid Rezaee ³

Seyed Ziaediin Kiaalhoseini ³

¹ PhD in Economics

² Professor College, Tehran University Faculty Member, Tehran, Iran

³ Assistance Professor, Mofid University Faculty Member, Qom, Iran

10.22075/jem.2019.16503.1234

Abstract

The present study aims to provide a model for covering price risks in Iranian importers of agricultural commodities. In order to assess the efficiency of the model, daily spot and futures prices of soybeans and corn were collected from the Chicago Mercantile Exchange (CME) during the period 05/01/2010 to 06/08/2018. The data were analyzed for two situations as follows: 1- Futures contracts can be traded. 2- Futures contracts cannot be traded. One of such methods in the dynamic state is Markov switching GARCH model. The application of the Markov switching GARCH model produced a high volatility and a low volatility regime. In case the quasi futures contracts are used, the optimal risk coverage ratio for the soybean and corn products would respectively be equal with 0.849 and 0.9065; while the efficiency of the risk coverage would be respectively equal to 82 and 78 percent for these two products.

Keywords

The optimal hedge ratio

Spot exchange rate

futures market

Markov switching model

Garch