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Commodities Trading

In commodities markets, trading or buying and selling of goods is often done through futures contracts and in commodity exchanges, which are responsible for standardizing the volume and minimum quality of the goods exchanged. The Chicago Chamber of Commerce, for example, states in its rules that a futures wheat contract will include 5,000 bushels (a container with a capacity equivalent to a bushel equivalent to 36.4 liters of dry or liquid goods) and also specify the size of each grain. Many types of commodities can be traded, such as metals, energy, livestock and meat, and agriculture. Popular exchanges in the United States include the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), and New York Board of Trade (NYBOT).

 

In general, there are two categories of traders who benefit from futures contracts:

Category 1: Manufacturers (sellers) and consumers (buyers) of these products. By purchasing these contracts, the buyers of these goods pre-purchase these products, to ensure that the prices of these goods do not increase at the time of delivery. These traders often deliver and receive the original goods on the expiration date of the contract. For example, a wheat farmer uses this contract to pre-sell his product and eliminate the potential risk of lower wheat prices at the time of delivery.

Category 2: This type of traders are speculators who use this money to profit from price fluctuations through buying and selling these futures contracts. These traders never intend to deliver or deliver the goods related to these contracts on the due date.

 

Of course, it should be noted that the first category of traders described above have to create such contracts to cover future risks, and the philosophy of creating futures contracts was originally to cover the risks for this group of traders. The second category of traders have no obligation to make these actually  deliver or receive the goods, and they only participate in commodity transactions with the aim of making a profit. They exit the transaction before the expiration date, but by doing so, they increase liquidity and create prosperity in these markets.

 

 

References:

https://www.investopedia.com/terms/c/commodity.asp

https://www.investopedia.com/terms/c/commodity-market.asp

https://www.thebalance.com/commodities-futures-and-how-they-work-3305647