A feasibility study of a New Zealand log futures market. (1994)
AuthorsWensley, Philipshow all
If the input or selling price of a commodity changes in a negative manner the effect on business profits and investment worth can be disastrous. The risk of this occurring is defined as "price risk". Price risk is inherent in New Zealand forestry markets. Futures markets trade contracts with standardized specifications for the purchase or sale of commodities, or fmancial instruments, at predetermined delivery dates in the future, at prices agreed upon when the contract is entered. These markets provide two essential economic roles: hedging and price discovery. Essentially, they act as a means to eliminate unwanted price risk. The objective of this research is to determine the feasibility and likelihood of a successful futures market for the New Zealand forestry industry, and to develop the specifications of a contract, if one is feasible, which has the greatest chance of success. The nature of futures markets is first explored. This is followed by an investigation ofprerequisites for successful futures contract innovation. The commodity and market characteristics of the New Zealand forestry industry are then defmed, and using all this information, the feasibility and likelihood of success of a futures market for the New Zealand forestry industry is then determined. The essential conclusion of the research is that a successful log futures contract is feasible, and contract specifications are consequently defined. The basic recommendation is therefore that the NZFOE consider listing a log futures contract reflecting the specifications detailed in the research.