Financial risk quantification of indian agro-commodities using value at risk

Abstract

Indian commodity traders are exposed to various risks like price risk, market risk, financial risk, credit risk, etc. To understand the risk resulting in the financial impact, this paper attempts to assess the historical trends of commodity prices and probability of loss occurrence in the commodity invested. The present study analyses five Indian agro commodities namely, Almond, Cardamom, Cotton, Guar Seed and Wheat using the data collected from secondary sources like Multi Commodity Exchange (MCX), Securities Exchange Board of India (SEBI) etc. This paper uses the Historical Simulation method for the calculation of Value at Risk (VaR) by considering spot prices of the commodities on MCX for a five year period (2013-2018). It is established that Value at Risk (VaR) is a relevant measure to arrive at risk which is useful for the commodity traders to estimate the financial risk and thus control the risk exposure.