Commodities Market Example For Free

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The agreement to buy and sell such commodities is made through contracts to bring in legality in trading as it involves cash payments margins, delivery of goods and scope for profit maximisation. The emergence of contract systems eventually led to trading in contracts whereby a middlemen stands in between buyers and sellers. The active trading in such contracts brought standardisation which in turn led to the development of futures contracts. A future contract is a standardised, binding agreement to make or take delivery of a specified quantity and grade of a commodity at an established point in future at an agreed upon price. The organization of merchants involved in the trading these commodities evolved into an organisation that standardised the contracts and trading practises and came to be known as – The Futures Exchange such as the New York Board of Trade (NYBOT) and the London International Financial & Futures Exchange. One essential objective of the exchange is to provide the dealers with all necessary information with regard to price volatility i.e. the magnitude of price movement in either direction. Note that it measures price risk and volatility but does not remove or eliminate risks. The exchange provides the benchmark for the determination of price by making price margins mandatory for effective fair trading. Future transactions do not require full advance payments for the commodity (just the margin), the buyer of a futures contract which increases in value (or the seller of futures contract which decreases in value) can realize a profit which can be substantial in relation to the commitment of capital. Brazil today is the world largest producer of coffee. Considering this figures, it is not surprising to note that it has attracted considerable amount of speculation and ever increasing susceptibility to price volatility. Coffee production has direct linkage with weather besides many other factors such as world coffee prices. A coffee drink manufacturer will buy coffee beans from a coffee producer at an agreed price if he/she expects to have drastic climatic changes which will result in coffee being expensive at a future date. A sudden drop in the production in future will cut supply and make it more expensive. the buyer can, therefore, avoid unnecessary risk by buying a futures contract that will guarantee him delivery of coffee at a future date at a price fixed now. However, it must also be noted that he/she will suffer loss if the future current/spot price of coffee beans were to fall drastically due to improved production and competitions. Take an example of Brazil – The Brazilian Crop was initially expected to produce about 50 million bags of coffee. Seasonal disturbances such as rain, harvest delays and quality problem caused production to fall to 33.5 million bags. Due to severe drought in Viet Nam coffee production dropped by almost 1 million bags. These shortages of coffee output distort the supply level which leads to a global rise in prices. So what roles does the future markets play in the production and selling of coffee?

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