A commodity market is a marketplace for buying, selling, and trading raw materials or primary products. There are currently about 50 major commodity markets.
Table of contents
- Digitally Transforming Commodity Trading’s Value Chain
- The Physical Exchange
- How to trade commodities
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Digitally Transforming Commodity Trading’s Value Chain
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Overview Careers Contact Offices. Ghana Commodity Exchange The Ghana Commodity Exchange is a private company limited by shares, structured as a Public Private Partnership, with the government of Ghana currently the sole shareholder.
Both parties would exchange commodities at a later date. However, the terms would be agreed upon today!
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Windfall gains and losses will be avoided. However, forward contracts eliminated uncertainty and allowed buyers and sellers to have peace of mind. With the advent of time, futures contracts became the preferred way of dealing.
However, other problems started arising. For instance, many times counterparties would go out of business.
The Physical Exchange
Therefore the contract entered into would turn worthless. Farmers or buyers would get terms which were worse than what was agreed upon in the contract when they tried to purchase in the spot market. This created a need for a centralized counterparty, one that would never go out of business. Hence, the idea of an exchange was born. The exchange would be the common counterparty to all businesses. The farmer sells to the exchange and in a separate contract the buyer buys from the exchange. Since the exchange cannot go bust under normal circumstances, the contracts are almost foolproof.
When markets become centralized counterparties they also started providing leverage to the buyers. They realized that by receiving a small percentage of the contract value from both sides called margin money, they could ensure that both parties complied with the ethics of trading. Exchanges therefore started marking the trades to the market value.
Any differences had to be paid and received in cash. If the parties did not comply with the margin calls made by the exchange, it would sell off the position to another party and the margin money would be forfeited.
How to trade commodities
Using the techniques of margin money and mark to market modern exchanges ensure that none of the parties can back out on their word leaving the counterparty in a perilous position. Modern commodities exchanges also provide opportunities for both farmers as well as buyers to exit the contracts when they feel like. Suppose they entered into a contract to sell a certain quantity of corn at a certain price. However, later one of the parties wants to back out. They can do so by selling the contract on the commodities exchange. Since the exchange is the counterparty to everybody, the farmer may not even know that the buyer has been changed!
This is called liquidity and proves to be invaluable in case of commodities exchange. Lastly, since exchanges had to sell contracts from one party to another party at a short notice, there was a need that these contracts be standardized. Modern day exchanges provide contracts which are identical in terms of quantity traded, the quality of the commodities and even the expiration dates!