An analytical research into the price risk management of the soft commodities futures markets

Abstract

Agriculture is of inestimable value to South Africa because it is a major source of job creation and plays a key role in earning foreign exchange. The most significant contribution of agriculture, and in particular maize, is its ability to provide food for the nation. For a number of decades government legislation determined prices, and as such the trade of grains on the futures exchange requires market participants to adapt to a volatile environment.

The research focuses on the ability of market participants to effectively mitigate price volatility on the futures exchange through the use of derivative instruments, and the possibility of developing risk management strategies that will outperform the return offered by the market.

The study shows that market participants are unable to use derivative instruments in such a way that price volatility is minimised. The findings of the study also indicate that the development of derivative risk management strategies could result in better returns than those offered by the market, mainly by exploiting trends on the futures market.