Crude oil futures to manage the price risk of natural rubber: Empirical evidence from India

The trading of natural rubber derivatives in the Indian commodity exchanges was banned several times in the past. Hence, in India, the derivatives on natural rubber are not traded actively and regularly.  We have examined the possibility of forecast and cross hedge for natural rubber prices using crude oil futures in India. Johansen cointegration test proved that there is no cointegration equation in the model; hence, there is no scope to develop long-run models or error correction models. We have developed a vector autoregressive (VAR) (2) model to forecast the rubber price, further using the Pearson correlation coefficient and Granger causality test, the possibility of the cross hedge for natural rubber is examined. We have extended further to structural VAR (SVAR) analysis to examine the impact of crude futures and exchange rate shocks on the natural rubber price. The study concluded that the short-term relationship between crude oil futures price, United States Dollar/Indian Rupee (USD_INR), Thai Baht/Indian Rupee (THB_INR), and Malaysian Ringgit/Indian Rupee (MRY_INR) with natural rubber price in India exists. Policy maker’s effort to appreciate the Indian Rupee against Thailand Baht and Malaysian Ringgit may increase the natural rubber price in India. Natural rubber traders, growers, and consumers can use crude futures to hedge the price risk. To predict the short-run price for natural rubber in India, the Indian rubber board can suggest VAR (2) model.

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