Commodity trading takes a large sector of the market. Because of it is the oldest and one of the safest assets, commodity has different types of contracts.
Each one is an instrument for making a deal. It is can be called a derivative, whose value comes from the product, which is called the base.
Derivatives that includes futures contracts, swaps, commodity exchange, forward contracts have passed into the fundamental trading instruments in commodity markets.
Futures are traded on regulated commodity exchanges. OTC contracts are bilateral contracts concluded as a result of bilateral negotiations between the contracting parties directly.
Futures contracts serve as a financial instrument that get its value as a result of price movements of crude commodities. It can be used either to hedge investment positions or to try to capitalize on price movements. Planting and harvesting cycles created price fluctuations.
Futures were created to manage this risk. The futures contracts specifications for a particular product, quantity, grade, and location are pre-determined. The seller and buyer determine only the price and delivery time, which are fixed at the time of conclusion of the contract.
CFD (or contract for difference) allows the trader to earn on the rise and fall of the market, without owning the product.
In fact, CFD is a contract between two parties – a trader and a broker. Upon expiration of contract, participants receive the difference between opening and closing a position in cash.
Hedging is the usual practice of agricultural production cooperatives. It insures by purchasing a futures contract for the same commodity. This is a protective mechanism to limit losses from possible negative scenarios in the financial markets.
Such measures can be compared with a lifebuoy, which is rarely used, but saves a person’s life. The price of such insurance is insignificant in comparison with possible losses.
A commodity swap is an agreement between the parties, according to which one or more series of payments is determined by the price of the goods or the commodity index.
It is used by many consumers and commodity producers for long-term hedging against rising prices.
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