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Commodities, simply defined, are things of value and of uniform quality that are produced in large quantities by many different producers; different items from different producers are considered equivalent in quality.
This is a contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide future delivery of a fixed amount of a commodity at a predetermined price at a specified location and time. Futures contracts are most often liquidated prior to the delivery date and are more often used as a financial risk management and investment tool rather than for price hedging. These contracts are traded exclusively on regulated exchanges and are settled daily based on their current value in the marketplace. A contract traded off the exchange, also known as an over-the-counter transaction, is referred to as a forward contract. In contrast to a forward contract, a futures contract requires initial margin to be paid by the buyer to the seller when a trade is executed. Specifications, such as quality and delivery date, for futures are standardised, while a forward contract can be unique for each contract based on the client’s requirement.
Settlement is the official closing of a futures contract. It can be done in one of two ways, through physical delivery or cash settlement. When a contract expires and a cash payment is made based on the settlement price, that is cash settlement. Physical delivery is settled by the actual commodity, meaning the buyer will be able to pick up the commodity as specified in the futures contract.
There are many types of commodities products available for trade in the market, both on-exchange and via OTC. Examples are:
