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Commodity Linked Credit: A Risk Management Instrument for the Agrarians in India

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  • Shee, Apurba
  • Turvey, Calum G.
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    Abstract

    This research analyzes daily commodity spot prices and designs risk contingent structured financial instruments as a means to mitigate business and financial risk by reducing debt obligations depending on the embedded commodity options whose payoffs are linked with commodity price fluctuations. Models are developed for operating loans and farm mortgages. The results show that the distributions with the embedded option have higher probability of greater returns and the embedded option with the repayment contingent on the price fluctuation reduces the downside risk of the return from the investment.

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    File URL: http://purl.umn.edu/48139
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    Bibliographic Info

    Paper provided by Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition in its series Proceedings: 2007 Agricultural and Rural Finance Markets in Transition, October 4-5, 2007, St. Louis, Missouri with number 48139.

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    Date of creation: 2008
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    Handle: RePEc:ags:nc1007:48139

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    Web page: http://www.agfin.ifas.ufl.edu/

    Related research

    Keywords: Agricultural Finance; Risk and Uncertainty;

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    1. Myers, Robert J, 1992. "Incomplete Markets and Commodity-Linked Finance in Developing Countries," World Bank Research Observer, World Bank Group, vol. 7(1), pages 79-94, January.
    2. Calum G. Turvey, 2006. "Managing food industry business and financial risks with commodity-linked credit instruments," Agribusiness, John Wiley & Sons, Ltd., vol. 22(4), pages 523-545.
    3. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
    4. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
    5. repec:ags:nc2006:133091 is not listed on IDEAS
    6. Rajan, Raghuram, 1988. "Pricing commodity bonds using binomial option pricing," Policy Research Working Paper Series 136, The World Bank.
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