A commodity is a material that is traded in big quantities and whose quality standards and price are objective and universally applicable. For example, gold is a commodity because quality standards and price of gold are objective and universal, but gold jewellery is not a commodity because the price of jewellery depends on subjective factors such as design, brand image, etc. Other examples of commodities are: agricultural produce such as foodgrains, pulses, cotton, etc; metals such as nickel, zinc, aluminium, etc.
A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery.
The basic markets where the commodities are bought and sold for immediate cash and immediate delivery are known as the spot market.
In derivatives market, various financial instruments based on commodities are traded. These financial instruments such as 'futures' are traded in exchanges. Any contract entered into based on the current market prices for a future delivery and payment obligations are know as the derivative contracts of the underlying spot commodity. A few derivative contracts are listed below.
FORWARDS: Customized, Risk Exposed, Contracted to be bought or sold for a future date
FUTURES: Standardized, Exchange Traded, Daily Settled forward contract.
Different segments of Commodities Market
There are two major segments of the commodities market. They are, Over-the-counter (OTC) market and Exchange-traded market. Both these markets are given below.
Over-the-counter (OTC) market:
Over-the-counter means that there is no formal structure of trading and parties trade on the basis of bilateral understanding. In terms of commodity trading, OTC represents spot trading of commodities. Since the structure is not formal, it is also referred as 'customized market". Almost all the trading that takes place over in these markets is... [continues]
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