A commodity exchange trades in the economic sector. You can trade in commodities and related investments at the exchange. You can trade in commodities like agricultural products, metals, bullion and energy.

Commodity Derivatives
Commodity Derivatives

A derivative is a contract between two or more parties who value is based on underlying financial asset or security. The underlying financial assets can be bonds, commodity, currency and stock. The derivatives are based upon a broad range of transactions. There are derivatives even based on the amount of rain in a particular region. Investing in commodity derivatives is a new investment getaway. Global market movements have an effect on commodity prices.

Types of commodity derivative

The are many ways to trade in the commodities. They are the futures contract, forward contract, swaps and the exchange-traded commodities. The most common way of investing in the commodities is the futures contract.

Futures contract

A futures contract is the contract between two parties to buy or sell in future a specific amount of commodity at a specific price. There are two types of investors that participate in the futures contract. They are the commercial users of the commodity and the speculators. The commercial users use the futures contract as part of their budgeting process. The speculators hope to make profit from the from changes in the price of the futures contract. They close their positions before the contract is due and never actually take the delivery of the commodity.

Futures contract is a pure play on the underlying commodity. Leverages allow for big profits. You can easily go long or short.

Forwards contract

It is a contract between two parties to exchange on a fixed future date a specific amount of commodity at a specific price. The fixed price is called the forward price. They are not traded at an exchange but are traded over-the-counter.

Swaps

In this the cash flow of one party’s financial instruments is exchanged with those of the other party. It the contract between the two parties agreeing to trade loan terms.

Exchange-traded commodities

It is the term used for commodity exchange-traded funds (ETF). You can invest in the ETF of commodity-related companies. They trade like stocks and allow the investors to participate in the commodity fluctuations.

Importance of commodity derivatives

The derivatives can get profit from the change in the supply and demand of commodities. The two most important benefits of the commodity derivatives is the price discovery and risk management.

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