Since the risk is shared only between the seller and buyer, a gain from price movement to one party is a loss to the other. In general, the development of a standardized risk management market requires transparent prices, low basis risks and enough liquidity. Prices of tea are fairly transparent since they are set at well-organized auctions. However, uncertainties remain in terms of basis risks and liquidity. Basis risk arises when the design of standardized contracts traded in the international markets is too generalized and does not reflect local needs.
Liquidity depends on the numbers of traders and investors willing to participate in the market.
An increasing volume of the trade in value added teas indicates that the market has became increasingly diversified. Diversification could contribute to lower liquidity and higher basis risks, but OTC markets can reduce basis risks and liquidity problems by customizing contracts. Developing new risk management products suitable for tea requires dealing with not only technical aspects but also commodity specific aspects or those related to local conditions. In addition to the traditional supply and demand side variations, the global tea market has been confronted by increasing uncertainties, as economic and market conditions of participants have become more changeable and unpredictable. Price fluctuations result in incomes from tea being unpredictable and may discourage long-term investment.