Commodity Future

Future trading is the most notable feature of business activity on the commodity exchange. In fact the commodity exchanges are organized mainly for futures contracts. The futures contracts are made for distinct purposes: speculation and hedging. Accordingly they are either speculative or hedging contracts. Speculative activity is such an important part of the working of the commodity exchanges that commodity exchanges are sometimes referred to as the speculative market.

In the context of a commodity exchange, speculation refers to an attempt to estimate the future trend of prices and proceed on that basis in such a manner that it may result in profit. Commodities may be bought at the current price in the hope (based on an intelligent estimate of the trend of prices) of selling them at a higher price in future, or vice versa. The opportunities for reaping such gains will arise only if there are changes in prices. Thus speculation is possible only when change in prices or value can be expected and reasonably predicted. Speculation consists of buying and selling commodities or securities in the hope of a profit from anticipated changes of value.

A speculator who is attempting to make a profit merely out of an anticipated change in price may sometimes be disappointed, for things may not move according to his calculations. In such circumstances he will obviously be suffering a loss. Speculation is thus a risky activity, and the speculator is one who assumes the risks incidental to change in the price of the commodity under consideration.

The futures markets are organized and used not only for speculation but also for hedging which is a method of eliminating risks arising from fluctuations in prices. Hedging may be referred to as the practice of covering the risks attaching to transactions in the cash market by contra-transactions in the futures market. If a commodity is purchased for delivery after three months in the cash market, where the actual commodity is handled, the trader may hedge the purchase by selling it for delivery after the same period in the futures market.