The importance of developing future contracts: a case study of Iran Agricultural Commodity Exchanges

In addition to interest in establishing local exchanges, there are growing interests in countries without futures markets to use established contracts on existing world exchanges. Cash contracts are dominant in Iran Agricultural Commodity Exchange (IACE), established recently in 2004 but cannot play relevant role of hedge for producers in agricultural markets. This paper attempts to find out either existing future contracts in the exchanges of rest of the world or establishing new future contracts are more relevant for the IACE. In this regard, we utilized the basis risk analysis to study whether or not local physical cash markets in Iran have a strong price relationship to existing futures contracts. The usefulness of making future contracts available at the IACE operators is also investigated using simulation of futures price in a Monte Carlo approach framework. The results showed that the usefulness of the particular foreign future contract (such as Tokyo Grain Exchange) in hedging domestic cash price risks is low. Either, there could be inefficiencies related to the transmission of information to the Iran agricultural markets. Furthermore, using effective risk management tools are needed for such future contracts in the IACE.