A commodity futures contract allows you to exchange a certain amount of a commodity for a set price at a future date. These contracts are used by investors to protect themselves from the risk of price fluctuations in futures’ underlying products or raw materials. Futures contracts are used by sellers to lock in prices for their commodities.
BREAKING DEAD Commodity Futures Contract
Stockholders can trade in commodities futures contracts to obtain directional price risk on raw materials. The new can take on a lot of risk when trading in commodity futures contracts. This is due to the high leverage involved in futures contracts. A trader could open a futures contract for 1,000 oil barrels at $45,000 with a margin of $3,700. This oil is valued at $45/barrel. Due to this high leverage, even a small change in the price of a commodity can result in significant increases or losses. Futures, unlike other options, are subject to the purchase or sale of the asset. A new investor could take delivery of many unwanted commodities if an existing position is not closed. The use of short futures positions can result in a lot of losses.
Commodity Futures Hedge Example
Sellers and buyers can use commodity futures contracts for protection against the loss of sales values that are weeks, months or even years ahead. Let’s say that a farmer assumes that 1,000,000 bushels will be produced in the next 12 month. Soybean futures contracts typically include a quantity of 5,000 bushels. If the farmer has a break-even point of 10 bushels and understands that soybean futures contracts for one year are priced at 15 per barrel, it may be wise to sell complete one-year soybean contracts to lock in that 15 rate. This is (1,00 x 5,00 = 20).
Unaffected by price, the farmer will give 1,000,000 bushels to the farmer one year later and take $15 x 200x 5000, which is 15,000,000. This rate is fixed. The farmer will not be able to take more or less if soybeans are priced at $15 per bushel on the day of the place market. The farmer gets a $2 per-bushel benefit from hedging if soybeans were valued at 13 dollars per bushel. This would be 2,000,000. The farmer also loses 2 per bushel profit if the beans are rated at 17.
Tip to a New Trader on the Stock Market
If you’re a beginner in the market. You should learn about the market and how it works before you trade. Any reputable company can provide commodity tips that will help you make the best investment in the market. These tips are free to you if you have any doubts.
