<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper empirically examines whether commodity derivatives can be used as an alternative investment asset in India where commodity markets are at emerging state and provides the same diversification benefit as they provide in developed commodity markets. In India only commodity futures are prevalent so various commodity indices representing various sectors has been used in the study. Diversification aspect of commodity derivatives has been tested initially by using correlation analysis. Compounded Daily Growth rate and Relative Standard deviation has been used as a measure of calculating risk and return of daily data of SENSEX, BOND and four Commodity Indices (MCX Comdex, MCX AGRI, MCX Metal, MCX Energy). Markowitz Efficient Frontier theory has been used to calculate portfolio risk return and Sharpe risk adjusted ratio has been used to evaluate the various portfolios. Optimal portfolio has been obtained for the combination of equity, bond and commodity and overall results of the study indicate that an investor who is risk averse will prefer to invest in combination of SENSEX, BOND &amp; MCX Energy whereas an investor who gets utility by taking more risk for more returns will prefer to invest in combination of SENSEX, BOND &amp; MCX Metal. Investor having inclination towards moderate risk return would tend to invest in MCX AGRI along with SENSEX and BOND.</p></abstract>

This paper empirically examines whether commodity derivatives can be used as an alternative investment asset in India where commodity markets are at emerging state and provides the same diversification benefit as they provide in developed commodity markets. In India only commodity futures are prevalent so various commodity indices representing various sectors has been used in the study. Diversification aspect of commodity derivatives has been tested initially by using correlation analysis. Compounded Daily Growth rate and Relative Standard deviation has been used as a measure of calculating risk and return of daily data of SENSEX, BOND and four Commodity Indices (MCX Comdex, MCX AGRI, MCX Metal, MCX Energy). Markowitz Efficient Frontier theory has been used to calculate portfolio risk return and Sharpe risk adjusted ratio has been used to evaluate the various portfolios. Optimal portfolio has been obtained for the combination of equity, bond and commodity and overall results of the study indicate that an investor who is risk averse will prefer to invest in combination of SENSEX, BOND & MCX Energy whereas an investor who gets utility by taking more risk for more returns will prefer to invest in combination of SENSEX, BOND & MCX Metal. Investor having inclination towards moderate risk return would tend to invest in MCX AGRI along with SENSEX and BOND.

Emergence of Commodity Derivatives as Defensive Instrument in Portfolio Risk Hedging: A Case of Indian Commodity Markets

Studies in Business and Economics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

This paper empirically examines whether commodity derivatives can be used as an alternative investment asset in India where commodity markets are at emerging...

Emergence of Commodity Derivatives as Defensive Instrument in Portfolio Risk Hedging: A Case of Indian Commodity Markets

Published Online: Jun 15, 2017

Page range: 202 - 234

DOI: https://doi.org/10.1515/sbe-2017-0015

Keywords
commodity derivatives, portfolio risk, Markowitz Efficient Frontier

© 2017 Singhal Shelly, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Emergence of Commodity Derivatives as Defensive Instrument in Portfolio Risk Hedging: A Case of Indian Commodity Markets

Published Online: Jun 15, 2017

Page range: 202 - 234

DOI: https://doi.org/10.1515/sbe-2017-0015

Keywordscommodity derivatives, portfolio risk, Markowitz Efficient Frontier

© 2017 Singhal Shelly, published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
commodity derivatives, portfolio risk, Markowitz Efficient Frontier