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Pages:
10 pages/≈2750 words
Sources:
3 Sources
Level:
Oxford
Subject:
Mathematics & Economics
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Essay
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English (U.S.)
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Topic:

Commodity Price Mechanisms (Essay Sample)

Instructions:
Assigment Analyze a commodity trade. Use the concepts mentioned in the attached file, identify the underlying supply and demand fundamentals that determine whether the trade will be profitable. Specify how you anticipate that these fundamental factors will evolve and how these movements will result in a profitable trade. Identify the risks in the trade, i.e., what will happen to the trade if the fundamental factors do not evolve in the way you anticipate. As an example, analyze a calendar spread trade (buying one month, selling another month), or a basis trade (such as buying Brent and selling WTI.) Your paper will be more persuasive if you support your analysis with data and some analysis of that data. Do not hesitate to contact me for any questions. Kind regards source..
Content:

Commodity Price Mechanisms
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(20 April, 2011)
Commodity Price Mechanisms
Commodity trading which includes petroleum, natural gas, precious and base metals, oil and many more can be viewed to be one of the greatest concepts of a market economy in the world even though it is seen to be a challenge and also can instigate some fear to most people. This is because most people who have engaged themselves in the issues of commodity have ended up losing greatly especially when it comes to financial matters concerning money. Apart from money which can be categorized under the economy of the supplier, the production of data, the consumption patterns and political wave have impacted greatly considering them to be challenges. To avoid some of these challenges affecting the supplier, one needs to choose a better trading system that will make them feel comfortable. This trading system is normally actively promoted or simple in design while others are complex.
Apart from the trading system, one needs to understand the concept of the commodity markets which always come in two forms, the physical market (Spot market) and the financial markets. The physical market consists of all the stakeholders selling or delivering of the commodity product. This is normally done by brokers, matching sellers and buyers of cargoes during a certain period of time and in the area in question. Financial commodity market is meant for derivatives contracts which are the forwards meaning the price which is found in the market for any kind of delivery of the commodity at a given period of time which goes hand in hand with the other derivative called future, and the third derivative being the options in regardless to the physical markets. The only difference the forward and future contracts posses is, the latter which is forward possessing more standardized and market-to-market every day even though such a difference can never be relied upon fully because at times, when the forward is fully established, the long position is the forward contract being done on the date which will end up paying off during that time of settlement.
The supplier of the commodity needs to note that as long as the physical market proves to be in liquidity, then the idea of physical of financial forward contracts is likely to be the same to the market risk since they both offer a fixed purchase price. This forward contract in the market has given the supplier to come up with a forward curve because they pave ways to the management of risks and making informative choices about the likelihood. These derivatives are actually used for the risk management especially by those companies that trade in the physical markets and in conjecture of the other parties. With this in place, they end up settling up alongside the spot markets hence bringing them together. Nevertheless, these derivatives are at times physically established. For instance, the consu...
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