Analysis of contract innovation on the Winnipeg Commodity Exchange : the case of canola oil and canola meal
Oakley, William Allan
Developing and implementing new commodity futures contracts ranges between one and two million dollars. The need for good market research is essential to increase the probability of choosing the most successful contract. The objective of the thesis is to review the methodologies for evaluating new commodity futures contracts. They are: 1. a general state of the industry approach. 2. the commodity characteristic approach to contract innovation. 3. the econometric approach to contact innovation. The desirability of providing trading facilities for canola oil and/or canola meal futures contracts on the Winnipeg Commodity Exchange was then analyzed according to the methodologies reviewed. The methods of analysis cover both qualitative and quantitative factors deemed important in studying contract innovation. The analysis takes into account past studies and presents a list of recommendations related to the desirability of the Winnipeg Commodity Exchange providing facilities for the trading of canola oil and/or canola meal futures. The general market analysis indicates many significant changes and trends for canola oil and canola meal. The trends would tend to support the inclination for new futures contacts for oil and meal. Statistics relating to production, domestic consumption, exports, market standing, and the underlying futures contract all indicate that the present situation is supportive for innovation. The commodity characteristic approach supports the findings of the general market analysis. Six out of the seven criteria related to commodity characteristics would support contract innovations for canola oil and canola meal. The concerns of storage, grading, price volatility, homogeneity, non manufactured good, and natural and competitive market flow criteria are all supportive of successful futures trading. The criteria and analysis of sufficient market supply and demand, specifically market concentation is the only qualitative consideration that would not support the proposed innovation of the canola oil and canola meal futures contracts. The econometric approach estimates potential trading volumes on the basis of past contacts introduced on the Winnipeg Commodity Exchange. Variables considered are related to relative residual risk of cross hedging as compared to own hedging, market liquidity, cash price volatility, and cash market size. For canola oil, based on past trends and observations, the model forecasts that the trading volume would be approximately 215 ten tonne contracts traded daily and 424 ten tonne contracts for meal. These average daily volumes are predicted to occur within the first three years of the contracts life cycle. The principle recommendation of this thesis is that the Winnipeg Commodity Exchange should not attempt to innovate futures contracts for canola oil and meal at this time. This is not to suggest that the contracts under consideration will not generate sufficient trading volume for survival, but rather the limited resources that are available to be used for contact innovation be placed in an area that offers a higher probability of success.