Commodities

Commodities & Derivatives

1

If investors are to deal in commodities at all, they are likely to do so on the derivatives market. The only exception to this usually, is when investors buy gold as a hedge for inflation.

2

The modern commodity markets rely heavily on the use of derivatives, such as futures and forward contracts. This allows investors to trade in large volumes of commodities, without taking physical delivery.

3

Commodity derivatives are also used by the producers of the commodities as a type of insurance. It allows them to lock in a guaranteed price for the commodity, before actually producing it.

4

However, the risk for producers is that prices may rise. They may agree on an acceptable price, only for their cost of production to unexpectedly rise, reducing their profits or even making them a loss. 

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