Future Market

Commodity Trade in the Future Market

Commodity Trade in the Future Market

One part of the future market deals with the future contracts based on commodities. These commodities are agricultural products, milk products, raw materials and precious metals.. These future contracts used for commodity trading include interest rates, spot prices, forwards, options and swaps. Future contracts on commodities can benefit both the buyer and seller. In a future contract on a particular commodity, generally a future date is fixed for delivery of the commodity and a price is also fixed which will be applied on the future date of delivery. This protects the seller from future price drops and protects the buyers from future price rises.

Trading of Financial Instruments in the Future Market

In the Future Market other than future contracts on commodities, future contracts on derivatives and other financial instruments are also traded. These future contracts on financial instruments are not issued and traded like securities. Here, it is considered that the party who is purchasing the contract is going “long” and the party who is selling the contract is going “short”. This type of trading takes place through the Future Exchange. So, the Future Exchange is the counter party for trading of all such future contracts on financial instruments.

Standardization of the Future Contracts in the Future Market

The future contracts that are traded in the Future Market are always standardized. This standardization ensures liquidity in the Future Market. The standardization process is done by following specifications:

• The commodity or the financial instrument, on which the future contract is made, is specified.
• The settlement is specified as cash settlement or physical settlement.
• The currency, in which the future contract is made, is quoted for sure.
• The quality of deliverable and the location of delivery are specified.
• The Delivery date, at least the Delivery Month is specified.
• The last trading date is specified.
• The minimum permissible price variation is specified.

Main Participants of the Future Market

The main participants of Future Market can be classified into two broad groups-Hedgers and Speculators. Hedgers are those who have interest in the underlying commodity of the future contract and aim at eliminating or reducing the financial risk of price changes. Hedgers are generally the producers and consumers of a commodity. The farmers often sell future contracts on their crops, in the Future Market to ensure a certain price for their produce. And the buyers of these contracts purchase these to ensure a fixed cost for the products, as they don’t want to suffer from price hike in future. Speculators are those who buy future contracts with the aim of earning profit by speculating market movements.

The main contribution of Future Market to an economy is that, through buying and selling of future contract it helps in transfer of risk and more precisely in risk management for the various traders with various risk and time preferences.