Commodity futures markets allow commercial producers and
commercial consumers to offset the risk of adverse future price
movements in the commodities that they are selling or buying.
In order to work a futures contract must be standardized. They
must have a standard size and grade, expire on a certain date and
have a preset tick size. For example, corn futures trading at the
Chicago Board of Trade are for 5000 bushels with a minimum tick
size of 1/4cent/bushel ($12.50/contract).
A farmer may have a field of corn and in order to hedge
against the possibility of corn prices dropping before the
harvest he might sell corn futures. He has locked in the current
price, if corn prices fall he makes a profit from the futures
contracts to offset the loss on the actual corn. On the other
hand, a consumer such as Kellogg may buy corn futures in order to
protect against a rise in the cost of corn.
In order to facilitate a liquid market so that producers and
consumers can freely buy and sell contracts , exchanges encourage
speculators. The speculators objective is to make a profit from
taking on the risk of price fluctuation that the commercial users
do not want. The rewards for speculators can be very large
precisely because there is a substantial risk of loss.
Advantages of commodity trading
Leverage. Commodity futures operate on margin, meaning that to
take a position only a fraction of the total value needs to be
available in cash in the trading account.
Commission Costs. It is a lot cheaper to buy/sell one futures
contract than to buy/sell the underlying instrument. For example,
one full size S&P500 contract is currently worth in excess
off $250,000 and could be bought/sold for as little as $20. The
expense of buying/selling $250,000 could be $2,500+.
Liquidity. The involvement of speculators means that futures
contracts are reasonably liquid. However, how liquid depends on
the actual contract being traded. Electronically traded
contracts, such as the e-mini's tend to be the most liquid
whereas the pit traded commodities like corn, orange juice etc
are not so readily available to the retail trader and are more
expensive to trade in terms of commission and spread.
Ability to go short. Futures contracts can be sold as easily
as they are bought enabling a speculator to profit from falling
markets as well as rising ones. There is no 'uptick rule' for
example like there is with stocks.
No 'Time Decay'. Options suffer from time decay because the
closer they come to expiry the less time there is for the option
to come into the money. Commodity futures do not suffer from this
as they are not anticipating a particular strike price at
expiry.
Disadvantages of commodity trading
Leverage. Can be a double edged sword. Low margin requirements
can encourage poor money management, leading to excessive risk
taking. Not only are profits enhanced but so are losses!
Speed of trading. Traditionally commodities are pit traded and
in order to trade a speculator would need to contact a broker by
telephone to place the order who then transmits that order to the
pit to be executed. Once the trade is filled the pit trader
informs the broker who then then informs his client. This can
take some take and the risk of slippage occurring can be high.
Online futures trading can help to reduce this time by providing
the client with a direct link to an electronic exchange.
You might find a truck of corn on your doorstep! Actually,
most futures contracts are not deliverable and are cash settled
at expiry. However some, like corn, are deliverable although you
will get plenty of warning and opportunity to close out a
position before the truck turns up.
Tim Wreford operates Online Futures
Trading, a website that provides information and resources
for traders. Tim also provides an article detailing the
development of a
day trading system, the results of which are updated daily on
the site.
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India Eases Currency Trading Limits for Some Banks Wall Street Journal By SUDEEP JAIN MUMBAI -- India's central bank has asked banks to approach it individually for relaxing some foreign currency trading limits and has already eased restrictions for some banks, a top official said Monday. "Some limits, based on their ...
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This January Azerbaijan's exchange currency trading totaled $82.5 million Azerbaijan Business Center Baku, Fineko/abc.az. The Baku Interbank Stock Exchange (BBVB) has renewed statistics of its operations. BBVB reports that in January 2012 the nine participating banks concluded 28 deals in 36 trading sessions in e-trading system (BEST).
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Morgan Stanley Currency-Trading Head Stephen Mettler Leaves Bank BusinessWeek By Michael J. Moore Jan. 26 (Bloomberg) -- Stephen Mettler, who oversaw Morgan Stanley's interest rates and foreign-exchange trading businesses, has left the bank. Mettler, who joined the firm in 1997, retired, according to an internal memo obtained by ...
Bank of England and ECB Hold Steady, Indonesia Cuts CNBC.com [CNBC] ----------------------- MULTI CURRENCIES VS THE DOLLAR Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm. Learn more: The essential vocabulary for currency trading is on Key Currency ...
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MORE RESOURCES updated Thu. February / 09 / 2012
