Commodity | COFFEE,GOLD,OIL,PLATINUM,SILVER,SUGAR, WHEAT



COFFEE,GOLD,OIL (LIGHT SWEET CRUDE),PLATINUM,SILVER,SUGAR,
WHEAT

A commodity is defined as goods for which there are demand in a market, but which is supplied without any differentiation in the market. The commodity market is divided in four segments and from it copper from base metals and petroleum from oils are main fluctuating ones copper fluctuates daily based on global supply and demand. So this can be considered as one of the characteristics of a commodity market good is that its price is determined as a function of its market as a whole. In commodity market well-established physical commodities is traded actively in intraday or spot market and other one is derivative market. There is another important class of energy commodities which includes electricity, gas, coal and oil. As commodities were things of value, of uniform quality, that were produced in large quantities by many different producers and the items in commodity market from each different producer were considered equivalent and traded on commodity exchange, it is based on standard stated contract that defines the commodity, not any quality inherent in a specific producer's product. Commodity is mainly traded on a commodity exchange and the list of some main exchanges are as follows:





Chicago Board of Trade.
Chicago Mercantile Exchange.
London Metal Exchange.
New York Mercantile Exchange.
Multi Commodity Exchange.
National commodity Derivative Exchange.
If we talk of commodity market in context of India then the Multi Commodity Exchange (MCX) and National commodity Derivative Exchange (NCDEX) are the main. Now we are going to talk over the main points of trading strategies to be laid in commodity market. The commodity market deals with four segments and trading in commodity will surely prove profitable if traded with strategy. Trading strategies to be followed in Commodity market:

1) In commodity market the trader should follow a strategy after checking their risk tolerance, comfort levels, knowledge of the markets. Doing this will clear your mind in case of risk tolerance that up to which amount of loss you can tolerate.

2) In commodity trading you can also follow "Trend Following" strategy that most of the professional traders use and recommend. The strategy says that the prices that are in a trend have a higher probability of continuing in that direction. Therefore, the odds should be in your favor by taking trades in the direction of the trend.

3) You also have a choice you can follow "Range Trading" when markets is not in a trend. In commodity markets range trading strategy, you would sell the commodity to market when it gets to the top of its range and buy it from the market when it gets to the bottom of its range. This strategy can work very well for a long period of time, but you have to be careful when the market breaks out of its ran. The person who is Trading in commodities can use these strategies and can grab profit. But first you has to have some knowledge of market you can also take help of advisory firms which provide commodity tips and MCX tips over the market.




Looking into futures
By Samir Ahmed
What prices are going to be in the future? This million-dollar question, for ages, has bugged growers, producers and consumers in the same way. The proposition is not just of
academic interest, but also of real economic value as ups and downs in asset and
commodity prices play a cardinal role in keeping a business afloat or running it aground.
The uncertainty associated with future prices is a fundamental risk that all enterprises
have to face and deal with. Just as this problem has been in existence since the advent of
trading in the history of mankind, we also know of measures to counter risks attached to
it. These measures, which have examples even from biblical times, are essentially the
same as practiced today in the increasingly sophisticated world of modern trade and
finance: agreeing and locking-in a price today of a commodity to be bought or sold at
some time later. This concept is the essence of price hedging where anyone exposed to
changing prices can lock in future prices, now, and protect from uncertainty and
volatility. It is also termed as 'price hedging'.
The interchangeable terms of forwards and futures represent the same transaction as the
one described above. (Technically speaking, futures are traded on exchanges and the
same transaction when concluded between two parties directly is termed as a forward).
Essentially, all higher order derivatives like swaps, options, and combinations of these
are aimed at reducing uncertainty and hedging price movements.
Of all types of derivatives, futures and forwards are the most basic and simple. Even
before the establishment of Pakistan's first futures exchange, forward hedging had been
practiced by participants in various commodities. While often unregulated, they have
nevertheless evolved their own trading protocols so as to protect future prices. We still
see active examples of these transactions in sugar and cottonseed oilcake among many
other commodities.
The primary purpose of commodity price hedging for a grower is to know at what price
he will be able to sell his crop so that he can ascertain his return given his input cost.
Same principle applies to any consumer of a commodity who is exposed to rising prices
and may wish to lock-in his purchase price ahead of time so that he can better plan his
consumption or business investment. Generally speaking, producer of a commodity hates
falling prices in the same way a consumer abhors to see them rising. In trading
terminology, the producer is referred to someone having a long position and the
consumer is the one who has a short position. If both of them can agree with each other
on a future date and price when the commodity will be ready for delivery, they will be
able to offset their price risk. While this represents a very clean and perfect way to
manage price risk, it has some practical problems when implementing in reality. And that
is where the benefits of futures trading on exchange come in.
Every time two parties enter into a transaction, they face multiple risks. These include
non-delivery of payment or asset, defects in the underlying asset or differences in quality
and issues of legal title. Most of these risks are classified under the heading of credit risk.
Market participants normally counter these risks by trading with selected parties where
they have built a good track record over a series of transactions. Often strong parties are
in a position where they can exploit weaker parties on terms of trade and prices. While
these risks are minimal in spot markets -- where both parties transact for immediate
delivery and payment -- in forward transactions the risks become larger. It is inevitable
that in a forward transaction, one party will be at a loss and the other will be in profit
when the final time of settlement arrives. This leads to a huge incentive for one party to
renege on the contract and lead to default. However, if all these transactions were done
through a central, neutral authority which takes upon itself the task of ensuring settlement
then most of these risks can be eliminated. Such a third party in forward trading is
actually called a Futures Exchange. While essentially the transaction is the same as that
entered into by two parties on their own, the mode of trading and fulfilling obligations is
different. Both parties agree to the rules of the independent third party as the arbiter and
regulator of trades between them. The Exchange guarantees financial settlement of all
trades and in order to discharge this responsibility, employs a multi-faceted risk
management scheme.
The difference between exchange and bilateral trading is the elimination of counterparty
settlement risk as well as the assurance of minimum standards of quality for the delivered
commodity. As the exchange is a centralised place for trading, a large number of
participants can take part where strong and weak counterparties are treated equally
thereby enhancing the efficiency of the marketplace. Exchange based futures trading is a
tried and tested mode of price hedging, which has been in operation for over 150 years
around the world and has proven its effectiveness for the improvement of market
infrastructure.
Pakistan Mercantile Exchange (PMEX) is the country’s only futures exchange and is
striving to play its part in the reformation of commodity markets. Change will be gradual
as most current practices are well entrenched over generations, but the path is clear:
modern and reformed modes of hedging on the exchange will eventually lead to better
price efficiency for all participants. The long journey on the path of overhauling the
country’s antiquated commodity market infrastructure has begun and 'futures hedging' is
one part of this commodities' ecosystem. Slowly but surely, the success of futures trading
on the exchange will result in efficient sowing, harvesting, investing and planning
decisions by stakeholders.
The writer is CEO of Pakistan Mercantile Exchange Ltd.
The News

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