Commodity Prices

Additional details of commodity derivatives, including who buys, sells and the detailed information on risks and profitability.

In order to understand what commodity derivatives are, you must first understand what derivatives are and how they function. The objective of every investor is to minimize his/her risk which is why financial institutions and banks invent various financial instruments in an effort to minimize the risk. Similarly, a derivative minimizes risk by deriving its value from an asset; this asset is simply known as the “underlying”. For example, a derivative deriving its value from the shares of a particular company. The derivative is an agreement through which an investor can either buy or sell its underlying by an agreed future date and at a pre-agreed price. The profit or loss associated with a derivative comes from the increase or decrease in the value of the underlying, because remember the price of the derivative has already been fixed.

In commodity derivatives, as the name states, the underlying is a commodity such as gold, wheat, machinery etc. Originally, commodity derivatives were designed to protect farmers from the risk of under or over production of crops. Commodity derivatives were a financial instrument for investors who traded in the underlying commodity. However, commodity derivatives are now used as an investment tool for managing your risk and are traded in the market most frequently by investors who have no need for the commodity itself (i.e. they never actually are possession of the commodities, they keep trading them in the market.)

It is easier to predict the fluctuations in the value of a commodity derivative, than it is to predict the fluctuations for a company’s share, because the values of the commodities are determined by the forces of demand and supply.

The commodity derivative contract has two parties; the buyer and the seller. The buyer of the commodity derivative has to submit an initial margin (an agreed percentage of the total value of the derivative) with the seller of the commodity. If the seller is satisfied with the initial margin he agrees to give the buyer ownership of the commodity at that agreed future date. The physical delivery of the commodity will take place at a future date. The buyer, depending on the spot price (current price) of the commodity, makes a profit or a loss. Besides the physical delivery, the buyer and the seller can agree to settle the trade in terms of cash instead.

There are exchanges dedicated to the trading of commodity derivatives. The primary function of these exchanges is to facilitate the contract settlement and clearing. The most common commodities to be traded on these exchanges through derivatives include cotton, rice and soybean. The prices prevailing on these exchanges play a very important role in determining the prices of those commodities nationally as well as internationally.

For the original article, go to, click here

For more information, go to:
en.wikipedia.org


0 to “ All You Need to Know about Commodity Derivatives – Updated Article With Extra Information”

  1. 1
    Lyndon Dave Says:

    Substantially, the write-up is in reality the high on that valuable subject. I harmonise with your conclusions and also will definitely eagerly appear ahead for your subsequent updates. Simply saying thanks will not merely be adequate, for the phenomenal lucidity in your writing. I’ll directly grab your rss feed to stay knowledgeable of any updates. Delightful get the job done and a lot good results within your business dealings!

  2. 2
    non woven bag making machine Says:

    I really like your site. Very good posts! Please continue posting such awesome cotent.

  3. 3
    muscle and fitness magazine for her Says:

    I like this information and it has presented me some sort of commitment to have success for some reason, so thank you. Furthermore I´m definitely thinking about mentioning these facts in my own blog!

  4. 4
    Tiffany Says:

    Thank you for the work you have put into your nice blog. We will bookmark to your blog because it is very informational. We love the site and will come back to see your new posts.

  5. 5
    zero cost commission Says:

    Great!!! Bookmarked this page that has this precious facts and techniques. Will come back to see if there are any updates. You, the author, are a master. Thanks

Leave a Reply