Commodities Exchange

A commodities exchange is an exchange where commodities and derivatives merchandise is traded. Most commodity markets around the world trade in raw materials and agricultural products (like wheat, barley, sugar, maize, cotton, cocoa, coffee, dairy foods, pork bellies, oil, metals, etc.) and contracts based on them. These contracts may include spot prices, forwards, futures and choices on futures. Other sophisticated products might include rates, environmental instruments, swaps, or ocean freight contracts.

Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, such as corn, in a very certain month. A farmer raising wheat sell another contract on his corn, that will not be harvested for a number of months, and be sure that the price he will be paid while he offers a whole wheat producer buys anything now and guarantees the purchase price won’t increase when it is delivered. This helps to protect the farmer from negative price changes and also the buyer from price increases.

Speculators and investors also purchase and sell the futures contracts in attempt to produce a profit and offer liquidity to the system. However, due to the leverage provided by the exchange to traders those taking part in commodity futures trading face substantial amounts of speculative risk.