Commodity Derivatives

23/08/2020 2 By indiafreenotes

Two important types of Commodity Derivatives

Commodity Futures Contracts

A futures contract is a contract for buying or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized agreements that are traded on organized futures exchanges that ensure performance of the contracts and therefore eliminate the default risk.

Commodity Options contracts

Options are also financial instruments like hedges, which are used for hedging and speculation. The commodity option holder has the right, except he don’t have the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option agreements involve two parties, namely the seller of the option writes the option in favor of the buyer (holder) who pays a certain premium to the seller as a price for the option.