Business, Legal & Accounting Glossary
A commodities exchange is an exchange where commodities and derivatives merchandise is traded. Most commodity markets around the world trade in raw materials and agricultural products (like wheat, barley, sugar, maize, cotton, cocoa, coffee, dairy foods, pork bellies, oil, metals, etc.) and contracts based on them. These contracts may include spot prices, forwards, futures and choices on futures. Other sophisticated products might include rates, environmental instruments, swaps, or ocean freight contracts.
Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, such as corn, in a very certain month. A farmer raising wheat sell another contract on his corn, that will not be harvested for a number of months, and be sure that the price he will be paid while he offers a whole-wheat producer buys anything now and guarantees the purchase price won’t increase when it is delivered. This helps to protect the farmer from negative price changes and also the buyer from price increases.
Speculators and investors also purchase and sell the futures contracts in an attempt to produce a profit and offer liquidity to the system. However, due to the leverage provided by the exchange to traders those taking part in commodity futures trading face substantial amounts of speculative risk.
A commodity exchange is a market organized to allow for the selling and buying of commodities. Commodities, which are hard goods, as opposed to services, may be bought and sold on a commodity exchange in three types of markets: cash, futures and options. Cocoa, corn, crude oil, and gold are a few examples of commodities traded on a commodity exchange. A commodity exchange is considered to be essentially public because anybody may trade through its member firms. The commodity exchange itself regulates the trading practices of its members while prices on a commodity exchange are determined by supply and demand. A commodity exchange provides the rules, procedures, and physical for commodity trading, oversees trading practices and gathers and disseminates marketplace information. Commodity exchange transactions take place on the commodity exchange floor, in what is called a pit, and must be effected within certain time limits. Floor traders, floor brokers and futures commissions merchants working on the floor of a commodity exchange must be registered by the SEC.
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This glossary post was last updated: 15th April, 2020 | 7 Views.