Cash Price

08/07/2020 2 By indiafreenotes

The cash price is the actual amount of money that is exchanged when commodities are bought and sold in the real world. The cash price might include other costs, such as fees incurred for transportation or storage of a commodity.

Rather than buying and selling actual commodities, investors often trade commodity futures to profit from anticipated changes in commodity prices. However, commodity cash prices are actually separate from futures prices. The futures contracts reflect anticipated cash prices at a later time.

Cash prices are published by a number of different financial information service providers and are not the same as the futures price. These prices reflect buying and selling of a variety of actual or “physical” commodities in the marketplace. On the other hand, the futures prices come from prices on the futures exchanges and reflect what the commodity might be worth in later months.

The cash price is the amount paid for commodities on the spot market, where large manufacturers commonly purchase the commodities they need for production in their factories. Commodities are physical products that are generally indistinguishable, no matter which company brings them to the marketplace. Examples include corn, crude oil, gasoline, gold, cotton, beef, and sugar.

When paying cash prices, manufacturers are not speculating on the price of the commodities they need. Speculation is more common in the futures rather than the cash market. Instead, manufacturing companies are physically purchasing the raw materials they need for their manufacturing activities.

Cash Price vs. Futures Price

The price of a commodity with a futures contract can be very different from the cash price of the same commodity on any given day. For example, a one-month futures contract for oil, which will expire next month, could have a very different price than the cash price for oil (which is what oil costs to purchase today).

The cash price is also the price at which every futures contract expires. In other words, when a futures contract expires, the price of the futures contract at expiry is nearly the same as the cash spot price. The fact that the futures price tends toward the cash price into the expiration or delivery date is known as convergence. If prices are notably different, there is an arbitrage opportunity between the futures price and the cash price at expiration.

How Does the Cash Price Work?

For example, if you purchase a cup of coffee in a restaurant, you pay the cash price the price of the good for immediate delivery.

Why Does the Cash Price Matter?

There is an important link between cash prices and futures prices for commodities, and the difference between the two that is, the difference between the price of coffee now and the price for delivery of coffee in, say, three months is called the basis. This time spread can be an economically important variable because it indicates the market’s expectations about futures prices. For example, if people believe that coffee will sell for $40 a pound in three months, the price of a futures contract for delivery of coffee in three months cannot be $100; it will be more like $40, though the price for storing the coffee helps determine the relationships between futures prices and cash prices. In any case, futures prices for a given commodity generally converge toward the cash price as the delivery month of the futures contract approaches.