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How does a commodities future differ from buying a commodity outright?
Wiki User
∙ 13y ago
Buying the commodity outright would be considered "Buying Actuals", where as a commodities futures contract is a contract for "Future Delivery."
For example, let's say that you decide to go into the chocolate cake business. One of your business issues would be the price /cost of cocoa and sugar today. In that case you would buy "Actuals" - i.e. you would by the actual sugar and cocoa for use today.
However, another issue is that you will need sugar and cocoa next month, and the month after etc, etc.
Now you might just go ahead and buy a warehouse, and store your sugar and cocoa, but a better alternative would be to "Lock In" at a price that you could work with by "Buying Futures." Buying futures is making a purchase today for future delivery.
The benefit of buying futures is that you now have price stability - you own that contact for delivery, and that now storage, insurance and interest are non factors as they are now built into your purchase price (these are known as carrying costs, or carrying charges.)
So in essence buying today for delivery today is buying actuals where as buying futures is purchasing a contract for delivery on a future date.
Wiki User
∙ 13y ago
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