Asked in Commodities
A commodity futures market exists within the broader commodities market for what reason?
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A commodity futures market exists within the boarder commodities market for which reasons?
What are some characteristics of the foreign exchange spot markets?
The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In spot market, settlement happens in t+2 working days, i.e., delivery of cash and commodity must be done after two working days of the trade date. A spot market can be: an organized market; an exchange; or over-the-counter (OTC) Spot markets can operate wherever the infrastructure exists to conduct the transaction
Why future trading is considered to be more risky than Equity Investment?
Equity investment is an investment in a company by purchasing its stock. While there may be some risk, the company exists and has made a public offering, which indicates some stability. Futures trading involves a to buy or sell a certain commodity (sugar, pork bellies, etc.) on a specified date in the future and at the market-determined price at that time. Both equity investment and futures trading can be considered risky, much like walking a tightrope; the former has a slightly larger safety net below.
The History of Future Contracts and Future Prices?
The future prices represent the agreed upon monetary value for certain assets. The buyer and seller come to a compromise on when the asset will be sold; they also agree to a future date for this transaction. The futures contract is a written document between these two parties for the transaction. There is an exchange that exists solely for the trading of futures contracts. The futures contract is totally different from direct securities. For example, stocks, bonds, and warrants are all examples of direct securities. The purchaser of the futures contract is willing to take a long position for the future prices. The seller in the transaction takes a short position in this transaction. The main influence on future prices is supply and demand. This factor has the greatest influence on the entire process. In addition, the underlying asset does not have to be a commodity. Commodities are things like currencies, financial instruments, and securities. Another factor in the transaction is the delivery date of the contract. This date can also be referred to as the future date. This is the date that the contract must be delivered. The history of future prices can be traced all the way back to Japan in the 1730's. In 1864 the Chicago Board of Trade listed the first forward exchange contract. This contract was based on grain, and this contract also started a trend. A number of futures exchanges were set up around the world. By the year 1875, cotton was being traded in Mumbai. In the next few years the trade expanded to raw jute, jute goods, and edible oilseeds complex. The futures prices are stabilized by the futures contract being liquid. This is possible because the contract is highly standardized. The futures contract specifies the underlying asset or instrument. This can be a barrel of crude oil, or this can be a short term interest rate. The type of settlement is also specified. The settlement can be cash or physical. Another example is the contract in which the futures contract is quoted. Also, the quality and grade of the deliverable is factored into the equation. When it comes to bonds, the contract specifies which bonds can be delivered. Another factor affecting future prices is the credit risk. For instance, the trader must post a performance bond to reduce the risk. The amount of the performance bond is typically 5%-15% of the contract value.
Agricultural Benefits of the Commodity Options Market?
There is nothing more reliable than change; it is a constant phenomenon and cannot be controlled. In the Commodity Options Market, agricultural producers are those directly affected by constant change: price changes. In the past 10 years, there has been great agricultural risk due to price changes. Farmers may plant and grow a product that is believed to turn a profit, but abrupt price decreases may cause financial loss. The uncertainty of price changes make it very difficult to ensure profit and prevent losses to producers. However, the Commodity Options Market now provides opportunities to insure products to avoid declines while still allowing producers to benefit from price increases. The marketing plan is simple: producers are given the opportunity to purchase insurance that allows them to buy or sell a certain commodity at a designated price. Farmers can purchase the right to sell his products at a designated price, even if the market prices fall below that price. It is a form of agricultural insurance; there is a small, but certain financial loss that provides back-up for a much larger and uncertain loss, if it is needed. Modeled in the same fashion, another market exists that allows the purchase of commodities at a designated price, even if the market prices exceed that price. Both markets insure products against abrupt increases or declines in prices. This is not an obligation, by any means; they are appropriately called option market for this reason. If producers take this opportunity, they are able to protect themselves from price increases when purchasing commodity and price declines when trying to sell a commodity. If the price decreases for buying a commodity, the producer still enjoys the lower price and the same is true for selling a commodity at a higher price. Without certainties in agriculture, it is very difficult to turn a profit. For farmers that make their living buying and selling commodities, it is important to have some sort of stabilization and the Commodity Options Market affords them that opportunity. Though it is not an obligation, the small loss that comes from insuring a product is worth its salt if it could potentially save product loss and maximize profit.
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