The Granger Causality Relationship & Margin Setting In Commodity Future Market

Commodity trading company often uses futures to hedge their spot trading. Due to the margin system and the daily liability-free system are used in future trading, the effective use of money for each commodity trading company are crucial. How to do that the money ready for margin is not too much idle so as not to lose the opportunity to invest in other products, but also not too little to add to margin accounts. The margin setting standards is closely related to the volatility of the futures price. So predicting the volatility of the price of the futures accurately can play a direct role on margin preparing. Through this study, the goal is to analyze if there is Granger causality between commodity convenience yield and the volatility of commodity futures price. If there is existing Granger causality relationship between above two factors, then predicting the volatility of futures price is necessary to take into account the factors of convenience yield. Then it leads to calculate the margin more precisely and also provide a better solution for companies to use money more reasonably and effectively, to enhance money liquidity. Meanwhile, the new method on setting margin can also be regarded as backup method for exchange on calculating margin. So it provides better solution for investors on margin reservation. I selected data from three years (2009-2011) and three different commodities:copper, aluminum and zinc, and to test if that Granger causality relationship exists in those different commodities and further to calculate more reasonable margin companies should prepare.