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A Complete Guide to Commodity Exchange

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Commodity Exchange

Commodity exchanges have been the prime movers of human prosperity and principal determinants of economic growth in the 20th century financial sphere. Market centralization led to better regulation of essential commodities like natural gas also known as NG commodities. Capitalist market forces further increased the attractiveness of commodity exchanges. They have been the fundamental basis for scale-up manufacturing during the industrial revolution and also expanding the ever-evolving consumption patterns of the population. 

What are commodity exchanges? 

Transactions in standardized contracts-purchases and sales – are organized in a regulated market, which is also known as commodity exchange. The values attributed in these commodity exchanges are connected to the prices of crucial global market commodities such as crude oil, gold, aluminium air plane parts and technological minerals. 

Components of standardized contracts 

The following are the main parameters of this niched class of contracts:

  •  Globally accepted standard quantity 
  •  Peer-reviewed standard quality 
  •  Labour Protection Act enabled minimum price 
  •  Standardized delivery of implied products indicating robust Global Supply Chains 

 Key highlights of standardized contracts 

  •  Quantity is an important function of commodity exchange which has various geographical connotations of measurement such as metric unit, barrel, Chinese bags, and the commonwealth government enabled imperial unit. 
  •  One of the key functions of a commodity exchange is consistent quality maintenance to suit the needs of a particular region having distinctive economic requirements. NG Commodity quality has geo-political consequences and hence there is a certain amount of government regulation.
  •  Minimum prices determine the market capitalization in third world countries with regards to exchanges and trade commodities. It is pertinent to remember that, price determination is not a function of commodity exchange. That responsibility lies with the partner firms and experienced traders who set guidelines and allow market forces to guide the vehicle of price discovery 
  •  Delivery date is a key indicator of commodity exchange efficiency. Cash settlements are preferred on the spot of physical delivery. Delivery is an important component of trade option contracts in which index participation of S&P 500 and Dow Jones takes place.

What are the various functions of Commodity Exchange? 

  •  They are a platform that entertains a varied investor base for conducting transactions of selling and buying of commodities through a market-controlled fair price mechanism. 
  •  It offers a competitive arena for price discovery through the use of well-sourced and quickly disseminated commodity news, which in turn helps NG commodity traders in making profitable decisions. 
  • A strong regulatory framework exists within the bylaws of commodity exchange, which provides an avenue for trade dispute resolutions. 
  •  Quality grading of NG commodities is the cardinal function of these exchanges which helps all intertwined parties to come to a quick agreement.

 The way forward 

Commodity exchanges offer an unadulterated platform where day traders can access a fair and transparent risk transfer mechanism without the involvement of middlemen and their skyrocketing commission practices. Important functions of commodity exchanges such as hedging opportunities and price discovery mechanism should be closely looked into by traders to hedge their investments when price fluctuations happen.