Commodity Options Trading System
Commodity options trading system, also called Futures Market or Futures Exchange is an organized market for the purchase and sale of enforceable contracts to deliver a commodity such as wheat, gold or cotton or a financial instrument such as U.S. Treasury bills or Eurodollars at some future date. Futures are also bought and sold through a competitive system in the open market. Options and indexes are also traded on commodity exchanges.
The largest commodity exchange is the Chicago Board of Trade. The seller of a futures contract on a commodity exchange does not normally intend to deliver the actual commodity, nor does the buyer intend to accept delivery; each will, at some time prior to the date of delivery specified in the contract, cancel out his obligation by an offsetting purchase or sale. The parties merely wish to engage in the assumption or delegation of the risk involved in a change in price.
Commodity options trading system are thus ancillary to the markets in which commodities are actually bought and sold; commodity exchanges in effect provide insurance against the risk of price changes by transferring that risk to speculators who are willing to assume it. Commodity exchanges also provide a basis for the determination of prices at which commodities are actually traded.
The great bulk of commodity trading is in contracts for future delivery. The purpose of commodity options trading system in futures is either to insure against the risk of price changes (hedging) or to make a profit by speculating on the price trend. If a trader believes that prices will rise, he buys a futures contract and sells it when he wishes (e.g., at a more distant delivery date). The speculator either gains (if prices have risen) or loses (if they have fallen). The difference being due to the change in price. If supply could be adjusted relatively quickly to changes in demand, speculation would become too difficult and risky because exceptionally high or low prices, from which speculators are able to profit, are eliminated as soon as supply is adjusted.
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