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

By Apurba Shee and Calum G. Turvey

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.Agricultural Finance, Risk and Uncertainty,

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