Can Someone Please Help Me to Understand the Concepts Involved in the Commodity Exchange Market?

2 Comments

1. vani v says:

   February 27, 2010 at 6:16 am

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2. Mathew C says:

   March 2, 2010 at 12:07 am

   When you ask about Commodity exchages I have to assume two things either you know more about other type of exchanges or you don’t know much about any exchanges. I shall assume the latter so that many lines of answer can be avoided.

   An exchange is a place where the buyers and sellers of a financial product, commodity, precious metal, bonds etc; come together to bargain on a best price on which they can execute either a sale or a buy.

   In commodity exchanges this is what happens buyers and sellers of either corn, soya, hog, maize all USA and in India rubber, cardamom, pepper, groundnut, dal etc; come together to make the buy or sale on bargained prices.

   In each of the above there is a specified quantity for each like a bushel of wheat or 100 hog heads making one sale.

   In India it is the Mercantile exchange or MCX where the commodities are traded. They trade in what is called derivative futures. So here a buyer or sell can make a buy or sell on a future date on a predetermined price.

   So if I am a cardamom planter and has a cropping in three moths time and if I feel the price is going to go down, then I can sell cardamom future now three months ahead. The buyer of the future bets against it. In actuality if the price go down he will loose on the holding of the cardamom in his hand but he gains by selling futures earlier and thus hedge protects him from price movements.

   One can also speculate here by doing the buy and sale of futures without actual commodity in hand to deliver.