Commodity and futures contracts are based on what’s termed as forward contracts. Early on, these forward contracts agreements to buy now pay and deliver later, were used as a way of getting products from producer to the consumer.
SANDEEP KUMAR KOIRALA
In the context of Nepal, commodity market is in its developing stages. In the international scene, the commodity market has become one of the investment sectors against stock and forex market. But, in Nepal, due to lack of knowledge and research in this market, it is not a priority for the government. If the government pays attention to the commodity market, it can also become one of the investment sectors for the local investors against stock and other line of investment. But, the lack of awareness regarding the commodity market, it is still relegated to the back. This is a brief attempt to provide some insight into the commodity market and its benefits.
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchange in which they are bought and sold in standardized contracts. The commodities markets are one of the oldest prevailing markets in human history. In fact, derivatives trading started off in commodities with the earliest records being traced back to the 17th century when Rice futures were traded in Japan.
Spot trading is any transaction where delivery either takes place immediately, or with a minimum interval between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale market. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.
A forward contact is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price. A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and futures contracts are based on what’s termed as forward contracts. Early on, these forward contracts agreements to buy now pay and deliver later, were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts.
Hedging, a common practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets.
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