Developed Speculation and Under Developed Markets - The Role of Futures Trading on Export Prices in Less Developed Countries

Abstract

This paper examines the relationship between New York coffee futures and cash export prices in Guatemala and Honduras . Cointegration tests suggest that the futures market is serving its price discovery function, and provides a vehicle by which to manage the domestic price risk in export countries. However, further analysis finds that as the percent of speculative open interest increases in the coffee futures market, price volatility increases. This suggests that cash market price risk in exporting countries may actually increase as a result of futures trading activity in developed country futures exchanges.