Physical delivery a ‘key’ in commodity trading

The commodities are delivered physically through exchanges on TSX(Toronto Stock Exchange), NYSE (New York Stock Exchange), CDNX(Canadian Index/Canadian Stock Exchange) and AMEX (American stock exchange) TheS&P/TSX Composite Index provides investors with a premier indicator of market activity for Canadian equity markets since its launch in 1977.

Price jumps have a significant impact on farmer’s production. It is based on end of day Options. Intra-day price behavior in grain markets furthers our understanding in cost, timely liquidity from an agricultural and a trader’s perspective. It includes corn and soybeans. We propose a Levy-based options pricing model that can accommodate both types of jumps.

Risks faced by Producers of Agricultural Commodities

Producers of agricultural commodities regularly face price and production risk. Furthermore, increased global free trade and changes in domestic agricultural policy have increased these risks. As the variability of price and production increases, producers are realizing the importance of risk management as a component of their management strategies.

Various categories of commodities

  • Energy
  • Metals
  • Livestock and Meat
  • Agriculture

In India, commodity trading is carried out in energy, metals and agricultural products only. Commodity trading is usually carried out in the futures market. Futures market is one where agrees to purchase a product after a definite period of time at a pre-determined price.

Commodity Futures

Futures contracts are a prevalent practice with commodities. Farming cooperatives also utilize this mechanism. Farmers who are uncertain of the monsoon pattern for that year, hedge their risk at a pre-determined price against the monsoon.

Organized Commodity Trading

Futures contracts on commodity trades in organized exchanges and are highly standardized. Most of the commodity Futures contracts involve cash-settlement. You offer the counterparty the difference in the expected value of your bets. To cite an example, let us say you assume the oil price to be Rs.150 per gallon. Another person assumes it to be Rs.155. If the price hovers around Rs. 153, then you have to pay the counter party Rs. 1. Commodities can quickly become a risky investment proposition in the event of unfavorable weather conditions

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