Managing Imported Soybean Oil Seed Price Risk with Futures Market

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Abstract

Oil seeds and crude vegetable oil are the raw materials used in vegetable oil producing industry. Vegetable oil producing plants in Iran are dependent on importing the material in a way that more than 90 percent of these materials are to be imported. Soybean oil seed is the main oil seed utilized in the oil producing plants which is procured through importation from other countries. In the world market, the price of this commodity is ever fluctuating and the demanders are faced with price risks. In the present study, participation in the Chicago Futures Market and purchasing future contracts are evaluated as tools for managing price risks by Iranian importers, and the optimum hedge ratio determined using Mean-Variance as well as Minimum Variance models. In addition, the effects of introducing exchange rate as well as its interaction with the price risks were investigated and, ultimately, the risk efficiency of each of the optimum hedge ratios calculated. Results indicated that, the Future Market can be considered as an appropriate price risk manipulation tool by the Iranian importers such that if importers purchase 96 percent of their imports as future contracts, they will be able to reduce their price risk by 45 percent.

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Iranian Journal of Agricultural Economics and Development Research
42-2, Issue 4 - Serial Number 1127905
October 2012
Pages 479-492

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