Pages: 17-28

Abstract

The background of organized commodity exchanges dates back to the 17th century when grain merchants in Japan stored rice in warehouses for future use. The concept propounds that futures contract should have a good contract design in order to enhance performance of the commodity exchange. However, there is no consensus on the importance of contract specifications on commodity exchange. The increasing role of the agricultural commodity exchange and financial sector, on both economic development and poverty alleviation, has seen the concept being applied more on the financial sector than before; this has been further aggravated by world financial crisis, hunger and its consequences. In this regard, Zimbabwe is no exception, by the year 2002, the Zimbabwe Agricultural Commodity Exchange ceased to operate due to number of issues; but chief among them has been cited as poor contract specifications. The paper presents the findings of the study that was conducted to determine the futures contract specifications that would make Zimbabwe agricultural commodity exchange thrive again. It applies both primary and secondary data in gathering the necessary information, to assess the causal relationship between contract design and exchange market (Price quotations, trading system, trading hours, contract sizes, delivery days and exchange fees). The study extended the knowledge of commodity and financial sectors to the stakeholders. The research was motivated by the fact that, most nascent commodity exchanges. The study showed that contract design affect commodity exchange; poor contract design would cause the business activities, to “shut doors. Field research was beneficial to obtain an in-depth understanding of the contract designs from local experts in the commodities markets. Therefore, in order to improve commodity exchange, good contract designs must be implemented, this includes improving trading system, trading hours, contract sizes. On the hand, the Reserve Bank of Zimbabwe should ensure or put in place robust supervisory and regulatory policies.