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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