Commodity Futures Contract Viability: A Multidisciplinary Approach

We propose a framework in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined. Both basis risk and market depth risk are taken into account, and the relationship between farmer's characteristics and the probability of using futures is examined. The relationships are tested on a set of data gathered in a stratified sample of 440 famrers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the farmer's use of futures are related to the tools of the exchange