Commodity Future Markets

This is part of a new series to understanding pages in the Financial Times. There are a lot of terms which seem quite complicated. This is an attempt to demystify financial jargon and make sense out of all the series of data and figures

Future markets are basically a paper market where traders ‘hedge’ against volatile prices. It is really a way to insure people against unexpected fluctuations in prices. In commodity markets, prices can often be volatile due to factors such as the weather. (basic economics – demand and supply for commodities are often inelastic and this makes prices more volatile)

For example, suppose you made a contract to buy coffee beans in the future. If the price of coffee beans rose significantly, your costs would be much higher than expected. Therefore, you can enter the coffee future market and place a parallel but opposite contract. Therefore, if the price of coffee rises, your future contract will appreciate in value, allowing you to put this gain towards buying the more expensive commodity.

Although future markets may be seen as encouraging speculation. They are often seen as a good thing because they enable physical goods markets to operate more efficiently

By on January 24th, 2008

2 thoughts on “Commodity Future Markets

  1. Pingback: Forecasts for Commodity Futures Markets | Economics Blog

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