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The Products Which Possess The Following Characteristics Are Fit For Dealing in Commodity Exchange

Commodity markets allow buyers and sellers to trade standardized, raw goods in bulk. To be traded as a commodity, an item must be homogeneous, have a usable shelf life, and experience price fluctuations. Commodities are split into hard commodities, which are natural resources like metals and energy, and soft commodities, which are agricultural products. Commodity prices are influenced by factors like emerging market demand, supplies, currency exchange rates, substitutes, and weather. Commodity markets were established through the creation of forward contracts between buyers and sellers to lock in prices for future delivery. This led to the development of standardized futures contracts that are traded on exchanges and eliminate default risk.

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Abdullah Anjum Daar
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53 views3 pages

The Products Which Possess The Following Characteristics Are Fit For Dealing in Commodity Exchange

Commodity markets allow buyers and sellers to trade standardized, raw goods in bulk. To be traded as a commodity, an item must be homogeneous, have a usable shelf life, and experience price fluctuations. Commodities are split into hard commodities, which are natural resources like metals and energy, and soft commodities, which are agricultural products. Commodity prices are influenced by factors like emerging market demand, supplies, currency exchange rates, substitutes, and weather. Commodity markets were established through the creation of forward contracts between buyers and sellers to lock in prices for future delivery. This led to the development of standardized futures contracts that are traded on exchanges and eliminate default risk.

Uploaded by

Abdullah Anjum Daar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Commodity Markets

A commodity market is a place where buyers and sellers can trade any homogenous good in bulk.
In these markets trading is done in primary economic sector rather than manufactured products.

To be considered a commodity, an item must satisfy three conditions:

It must be standardized, and for agricultural and industrial commodities it must be in a "raw" state; it
must be usable (i.e., have a shelf life) upon delivery; and its price must vary enough to justify
creating a market for the item.

The products which possess the following characteristics are fit for
dealing in commodity exchange:

1. Homogeneity:
The commodity must be homogeneous i.e., all units of a particular commodity must
be perfectly identical so that all dealers may mean the same commodity when they
mention it in their dealings.

2. Durability:
It must be durable so as to last for a period of a future contract (ordinarily more than
one year). If it perishes rather quickly, contracts for its purchase and sale will be
frustrated.

3. Gradability:
The commodity should be such as will lend itself to grading. If the commodity
cannot be classified into well-known grades, trading will be difficult for every time
the quality will have to be ascertained.

4. Price Fluctuation:
There must be frequent fluctuations in the price of the commodity. If there were no
price fluctuations, the speculators would have no intention to speculate in it at the
exchange.

5. Open Supply:
The supply of the commodity should be open and free and should not be
monopolized by one or a few persons. Again, the supply of the commodity or its price
must not be controlled by the Govt.
Each individual commodity has unique factors that drive its price. However, certain common factors play a
role in determining prices for most commodities:

Emerging Market Demand

Supplies

The US Dollar

Substitution

Weather

Commodities are split into two types: hard and soft commodities. Hard commodities are typically
natural resources that must be mined or extracted (such as gold, rubber and oil), whereas soft
commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar,

Soft commodities are less well defined than hard commodities. Soft commodities are best
understood as grown commodities. Coffee, cocoa, orange juice, sugar, canola, corn, lumber,
wheat, lean hogs, feeder cattle and so on all go through a growth cycle which ends in harvesting
- usually for further processing.

Hard commodities that include mined metals (copper, gold, silver, etc.) and energy extraction
(crude oil, natural gas and products refined from them). Hard commodities are waiting in the
earth for extraction, as opposed to being planted and nurtured to maturity.
How commodity markets works

To allow buyers and sellers to lock in transaction prices prior to delivery, the parties created forward
contracts. These contracts bound the seller to deliver an agreed-upon amount of the grain in question for
an agreed-upon price at an agreed-upon date. In exchange for this obligation, the seller would receive
payment upfront for the grains. These contracts are called forward contracts.

They trade in the over-the-counter market, which means the contracts are privately negotiated between
two parties. The buyer faces the risk that the seller might default on the contract and fail to deliver the
asset.

Standardized contracts that were identical in terms of the

(a) quantity and quality of the asset being delivered,

(b) the delivery time and

(c) the terms of the delivery.

They also created a centralized medium to act as the counterparty to both parties in the transaction. This
eliminated the risk of default that was present with forward contracts. In 1848, they established the
Chicago Board of Trade (CBOT) to trade these contracts, which became known as futures contracts.

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