The document discusses commodities markets and futures/forwards contracts. There are two main categories of commodities - hard commodities like gold and oil that must be mined/extracted, and soft commodities like agricultural products. Most commodity trading involves futures contracts, which are exchange-traded forward contracts. A futures contract establishes the price today for buying or selling an asset in the future. While delivery occurs if a contract is held to expiration, most parties offset their positions before expiration to avoid delivery.
The document discusses various types of derivative contracts including forwards, futures, options, and swaps. It defines each type of contract and provides examples. Key details covered include how futures contracts are exchange-traded and standardized while forwards are over-the-counter. Options give the buyer the right but not obligation to buy or sell the underlying asset. The document also discusses terminology used in derivatives and futures markets.
The document discusses forward contracts and interest rate parity. It defines a forward contract as an agreement to deliver a specified amount of currency at a future date at a fixed exchange rate. The purpose of forwards is to hedge against exchange rate risk. Interest rate parity theory states that the forward rate should differ from the spot rate by an amount equal to the interest rate differential between two countries. Covered interest arbitrage may occur if the forward premium/discount does not equal the interest rate differential.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
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Derivatives are financial instruments whose value is based on an underlying asset such as stocks, bonds, currencies, or commodities. There are two main types of derivative markets - the exchange traded market where instruments like futures are traded, and the over-the-counter market where forwards, swaps, and options are privately negotiated. Derivatives are used by financial and non-financial firms to hedge risks and increase returns, but there are also concerns that their misuse could destabilize markets, especially if major participants in the over-the-counter interest rate or currency swap markets fail.
The document provides an introduction to derivatives, including defining key terms like underlying assets, exchange-traded vs over-the-counter derivatives, and players in the derivatives market like hedgers, speculators, and arbitrageurs. It also explains different types of derivatives like standardized derivatives (futures, options, swaps) and exotic derivatives (forward contracts). Specific products are defined, like calls and puts for options, and interest rate swaps and currency swaps.
The document provides an overview of derivatives presented by group "The Trio" comprising of Neelam, Fatima, and Benish. It discusses the history and development of derivatives markets dating back to medieval times. It describes the key players in derivatives markets as hedgers, speculators, and arbitrageurs. Hedgers use derivatives to reduce risk, while speculators aim to profit from price movements. Arbitrageurs exploit temporary price differences across markets. The document also covers various types of derivatives including forwards, futures, and options contracts. It provides details on how these contracts work, their risk-return characteristics, and the current status of derivatives markets in Pakistan.
The document discusses currency derivatives, including forward contracts, futures contracts, and options. It provides details on:
- How forward contracts allow corporations to lock in future exchange rates for currency exchanges.
- How futures contracts standardize currency amounts and settlement dates for exchange on an futures exchange.
- The types of currency options (calls and puts) and how their values are determined by the relationship between the strike price and spot rate.
The document discusses various types of derivative contracts including forwards, futures, options, and swaps. It defines each type of contract and provides examples. Key details covered include how futures contracts are exchange-traded and standardized while forwards are over-the-counter. Options give the buyer the right but not obligation to buy or sell the underlying asset. The document also discusses terminology used in derivatives and futures markets.
The document discusses forward contracts and interest rate parity. It defines a forward contract as an agreement to deliver a specified amount of currency at a future date at a fixed exchange rate. The purpose of forwards is to hedge against exchange rate risk. Interest rate parity theory states that the forward rate should differ from the spot rate by an amount equal to the interest rate differential between two countries. Covered interest arbitrage may occur if the forward premium/discount does not equal the interest rate differential.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Derivatives are financial instruments whose value is based on an underlying asset such as stocks, bonds, currencies, or commodities. There are two main types of derivative markets - the exchange traded market where instruments like futures are traded, and the over-the-counter market where forwards, swaps, and options are privately negotiated. Derivatives are used by financial and non-financial firms to hedge risks and increase returns, but there are also concerns that their misuse could destabilize markets, especially if major participants in the over-the-counter interest rate or currency swap markets fail.
The document provides an introduction to derivatives, including defining key terms like underlying assets, exchange-traded vs over-the-counter derivatives, and players in the derivatives market like hedgers, speculators, and arbitrageurs. It also explains different types of derivatives like standardized derivatives (futures, options, swaps) and exotic derivatives (forward contracts). Specific products are defined, like calls and puts for options, and interest rate swaps and currency swaps.
The document provides an overview of derivatives presented by group "The Trio" comprising of Neelam, Fatima, and Benish. It discusses the history and development of derivatives markets dating back to medieval times. It describes the key players in derivatives markets as hedgers, speculators, and arbitrageurs. Hedgers use derivatives to reduce risk, while speculators aim to profit from price movements. Arbitrageurs exploit temporary price differences across markets. The document also covers various types of derivatives including forwards, futures, and options contracts. It provides details on how these contracts work, their risk-return characteristics, and the current status of derivatives markets in Pakistan.
The document discusses currency derivatives, including forward contracts, futures contracts, and options. It provides details on:
- How forward contracts allow corporations to lock in future exchange rates for currency exchanges.
- How futures contracts standardize currency amounts and settlement dates for exchange on an futures exchange.
- The types of currency options (calls and puts) and how their values are determined by the relationship between the strike price and spot rate.
The document provides an overview of derivatives concepts, including the different types of derivatives contracts such as forwards, futures, swaps, and options. It discusses key terms like underlying assets, features of derivatives, and important concepts in options. The history of derivatives trading in India is covered, along with the regulatory framework and guidelines put forth by committees like the L.C. Gupta Committee and J.R. Verma Committee.
A Presentation on Financial Derivatives. this covers it's definition, features, types, benefits, challenges and applications.
Derivative is defined as the future contract between two parties. It means there must be a contract-binding on the underlying parties and the same to be fulfilled in future.
Normally, the derivative instruments have the value which is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets.
This document provides an overview of financial derivatives, including definitions, common types of derivatives such as options, futures, and swaps. It discusses why derivatives are used to reduce risk, but also notes the risks involved, especially with leveraging. Several case studies are presented where the use of complex derivatives led to major financial catastrophes for the organizations involved.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
This document provides an introduction to derivative securities. It defines derivatives as financial instruments whose value is derived from an underlying asset. The main types of derivatives discussed are options, futures contracts, and swaps. Futures and options markets originated to help farmers and commodity producers manage price risk and have since expanded to other assets. Swaps emerged in response to increased foreign exchange and interest rate volatility in the 1970s. Derivatives are useful for hedging risk but also enable speculation and can be misused, as shown by some major financial losses. The course aims to illustrate how derivatives are used for both risk management and investment.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
The document discusses Islamic derivatives and provides examples of their development and use in Malaysia. It explains that conventional derivatives involve elements like interest and speculation that are prohibited in Islam. The report then examines why futures contracts specifically are considered haram and provides some potential solutions to make them shariah-compliant, such as ensuring the underlying asset exists. Examples are given of Islamic derivatives developed in Malaysia, including cross-currency swaps and profit rate swaps. The conclusion maintains that while conventional derivatives are non-compliant, examples from Malaysia show the benefits of derivatives can be achieved within Islamic law.
The document discusses various derivatives contracts including forwards, futures, options, swaps, and their key characteristics. A forward contract involves a customized, over-the-counter agreement to buy or sell an asset at a future date for a predetermined price. A future is a standardized forward contract traded on an exchange. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows of different assets or currencies to hedge risks.
This document defines derivatives and describes different types of derivative contracts. It states that a derivative is a contract whose price is dependent on an underlying asset such as a security, commodity, or index. It provides examples of derivative contracts including forwards, futures, options, warrants, LEAPS (long-term equity anticipation securities), and swaps. The document also discusses exchange-traded versus over-the-counter derivatives and describes participants in derivative markets such as hedgers, speculators, and arbitrageurs.
This document discusses currency derivatives markets. It explains how forward contracts, currency futures contracts, and currency options contracts work and how multinational corporations and speculators use them to hedge against or speculate on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are traded on exchanges and standardized, while options provide the right but not obligation to buy or sell a currency at a set price.
This document provides an overview of derivative contracts, specifically forward and future contracts. It defines derivatives and describes how forward contracts are bilateral agreements between two parties to buy or sell an asset at a future date for a predetermined price. Future contracts are similar to forwards but are standardized and exchange-traded. The key differences between forwards and futures highlighted are that futures are traded on exchanges, require margin payments, follow daily settlement marked to market, and can be closed prior to delivery, whereas forwards are customized OTC contracts.
This document provides an overview of derivatives and the capital markets in India. It defines key terms like the primary and secondary markets, stock exchanges, indices, and types of derivatives like forwards, futures, options, and swaps. It describes the functions and objectives of derivatives for hedging risk and speculation. The history of derivatives trading in India is summarized, along with the major participants like hedgers, speculators, and arbitrageurs.
The document discusses various types of financial institutions and derivative instruments. It provides examples of how companies can use derivatives like forwards to hedge foreign exchange risk when importing or exporting. It also discusses the roles of commercial banks, investment banks, and mixed banks in international markets. Derivatives allow firms to manage various risks related to commodity prices, interest rates, bonds, and other factors.
This document defines derivatives and describes their key features and types. It explains that a derivative is a financial instrument whose value is based on an underlying asset. The main types of derivatives discussed are forwards, futures, swaps, and options. It provides examples of each type and outlines their key characteristics. It also discusses derivative markets in Pakistan and how derivatives can help reduce risk but also enable speculation.
The document discusses forward contracts and compares them to futures contracts. It notes that both specify a commitment to deliver an asset at a specified price, with the seller committing to deliver and the buyer committing to receive. For forwards, default risk lies with the counterparties rather than a clearinghouse. Features like standardization, tradability and liquidity differ between forwards and futures. The document also provides examples of how profits and losses are calculated for forward contracts and foreign exchange contracts.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
The document provides information about stock markets, stocks, stock exchanges, and derivatives markets. It discusses:
1) What a stock market and equity market are, how stocks are listed and traded on exchanges.
2) What stocks are and how companies raise money by issuing shares.
3) Details on some major Indian stock exchanges like BSE and NSE, their locations and roles.
4) Concepts related to stock trading like brokers, demat accounts, stock market crashes.
5) An overview of derivatives markets, different types of derivatives like forwards, futures, options, swaps, and assets they are based on.
1. Forward contracts, futures contracts, and options contracts can be used to hedge against or speculate on anticipated exchange rate movements.
2. Forward contracts involve an agreement to exchange currencies at a specified exchange rate on a future date. Futures contracts are standardized forward contracts that are traded on an exchange.
3. Currency options provide the right but not the obligation to buy or sell a currency. Call options grant the right to buy a currency while put options grant the right to sell. These derivatives can be used to hedge or speculate on currency risk.
1. The document discusses various derivatives trading concepts such as futures contracts, forward contracts, and options. It explains that futures contracts are standardized agreements to buy or sell an asset at a specified price on a future date, while forward contracts are customized agreements with physical delivery of the asset.
2. Options are described as contracts that give the buyer the right but not the obligation to buy or sell an asset at a specified price on or before the expiration date. The main types are calls, which are rights to buy, and puts, which are rights to sell.
3. Participants in futures markets are identified as hedgers who protect their positions, speculators who take risks seeking profits, and arbitrageurs who exploit
Derivatives are financial instruments whose value is derived from an underlying asset. Forward and futures contracts are types of derivatives that allow parties to lock in a price today to purchase or sell an asset in the future. A forward contract is a customized over-the-counter agreement between two parties, while a futures contract is traded on an exchange with standardized terms. Both require mark-to-market adjustments and margin payments to mitigate risks from price fluctuations until contract settlement.
The document provides an overview of derivatives concepts, including the different types of derivatives contracts such as forwards, futures, swaps, and options. It discusses key terms like underlying assets, features of derivatives, and important concepts in options. The history of derivatives trading in India is covered, along with the regulatory framework and guidelines put forth by committees like the L.C. Gupta Committee and J.R. Verma Committee.
A Presentation on Financial Derivatives. this covers it's definition, features, types, benefits, challenges and applications.
Derivative is defined as the future contract between two parties. It means there must be a contract-binding on the underlying parties and the same to be fulfilled in future.
Normally, the derivative instruments have the value which is derived from the values of other underlying assets, such as agricultural commodities, metals, financial assets, intangible assets.
This document provides an overview of financial derivatives, including definitions, common types of derivatives such as options, futures, and swaps. It discusses why derivatives are used to reduce risk, but also notes the risks involved, especially with leveraging. Several case studies are presented where the use of complex derivatives led to major financial catastrophes for the organizations involved.
This document provides an overview of futures contracts. It discusses:
1. The basics of futures contracts, including that they are agreements to buy or sell an asset at a predetermined price on a specified future date.
2. How futures contracts are used for both speculation, where traders bet on price movements, and hedging, where companies protect against price changes.
3. Examples of how speculators can profit from correct bets on price increases or decreases, and how companies can hedge inventory or supply purchases by taking offsetting long or short positions in futures markets.
A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
This document provides an introduction to derivative securities. It defines derivatives as financial instruments whose value is derived from an underlying asset. The main types of derivatives discussed are options, futures contracts, and swaps. Futures and options markets originated to help farmers and commodity producers manage price risk and have since expanded to other assets. Swaps emerged in response to increased foreign exchange and interest rate volatility in the 1970s. Derivatives are useful for hedging risk but also enable speculation and can be misused, as shown by some major financial losses. The course aims to illustrate how derivatives are used for both risk management and investment.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
The document discusses Islamic derivatives and provides examples of their development and use in Malaysia. It explains that conventional derivatives involve elements like interest and speculation that are prohibited in Islam. The report then examines why futures contracts specifically are considered haram and provides some potential solutions to make them shariah-compliant, such as ensuring the underlying asset exists. Examples are given of Islamic derivatives developed in Malaysia, including cross-currency swaps and profit rate swaps. The conclusion maintains that while conventional derivatives are non-compliant, examples from Malaysia show the benefits of derivatives can be achieved within Islamic law.
The document discusses various derivatives contracts including forwards, futures, options, swaps, and their key characteristics. A forward contract involves a customized, over-the-counter agreement to buy or sell an asset at a future date for a predetermined price. A future is a standardized forward contract traded on an exchange. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows of different assets or currencies to hedge risks.
This document defines derivatives and describes different types of derivative contracts. It states that a derivative is a contract whose price is dependent on an underlying asset such as a security, commodity, or index. It provides examples of derivative contracts including forwards, futures, options, warrants, LEAPS (long-term equity anticipation securities), and swaps. The document also discusses exchange-traded versus over-the-counter derivatives and describes participants in derivative markets such as hedgers, speculators, and arbitrageurs.
This document discusses currency derivatives markets. It explains how forward contracts, currency futures contracts, and currency options contracts work and how multinational corporations and speculators use them to hedge against or speculate on anticipated exchange rate movements. Forward contracts allow corporations to lock in exchange rates for future currency needs. Currency futures contracts are traded on exchanges and standardized, while options provide the right but not obligation to buy or sell a currency at a set price.
This document provides an overview of derivative contracts, specifically forward and future contracts. It defines derivatives and describes how forward contracts are bilateral agreements between two parties to buy or sell an asset at a future date for a predetermined price. Future contracts are similar to forwards but are standardized and exchange-traded. The key differences between forwards and futures highlighted are that futures are traded on exchanges, require margin payments, follow daily settlement marked to market, and can be closed prior to delivery, whereas forwards are customized OTC contracts.
This document provides an overview of derivatives and the capital markets in India. It defines key terms like the primary and secondary markets, stock exchanges, indices, and types of derivatives like forwards, futures, options, and swaps. It describes the functions and objectives of derivatives for hedging risk and speculation. The history of derivatives trading in India is summarized, along with the major participants like hedgers, speculators, and arbitrageurs.
The document discusses various types of financial institutions and derivative instruments. It provides examples of how companies can use derivatives like forwards to hedge foreign exchange risk when importing or exporting. It also discusses the roles of commercial banks, investment banks, and mixed banks in international markets. Derivatives allow firms to manage various risks related to commodity prices, interest rates, bonds, and other factors.
This document defines derivatives and describes their key features and types. It explains that a derivative is a financial instrument whose value is based on an underlying asset. The main types of derivatives discussed are forwards, futures, swaps, and options. It provides examples of each type and outlines their key characteristics. It also discusses derivative markets in Pakistan and how derivatives can help reduce risk but also enable speculation.
The document discusses forward contracts and compares them to futures contracts. It notes that both specify a commitment to deliver an asset at a specified price, with the seller committing to deliver and the buyer committing to receive. For forwards, default risk lies with the counterparties rather than a clearinghouse. Features like standardization, tradability and liquidity differ between forwards and futures. The document also provides examples of how profits and losses are calculated for forward contracts and foreign exchange contracts.
This document provides an overview of various types of financial derivatives, including futures, forwards, options, and swaps. It defines derivatives as financial instruments whose value is derived from an underlying security such as a commodity, stock, bond, or other derivative. The document explains the obligations associated with each type of derivative contract and discusses how they can be used for hedging risk or speculative purposes. It also outlines some key concepts for understanding derivatives markets.
The document provides information about stock markets, stocks, stock exchanges, and derivatives markets. It discusses:
1) What a stock market and equity market are, how stocks are listed and traded on exchanges.
2) What stocks are and how companies raise money by issuing shares.
3) Details on some major Indian stock exchanges like BSE and NSE, their locations and roles.
4) Concepts related to stock trading like brokers, demat accounts, stock market crashes.
5) An overview of derivatives markets, different types of derivatives like forwards, futures, options, swaps, and assets they are based on.
1. Forward contracts, futures contracts, and options contracts can be used to hedge against or speculate on anticipated exchange rate movements.
2. Forward contracts involve an agreement to exchange currencies at a specified exchange rate on a future date. Futures contracts are standardized forward contracts that are traded on an exchange.
3. Currency options provide the right but not the obligation to buy or sell a currency. Call options grant the right to buy a currency while put options grant the right to sell. These derivatives can be used to hedge or speculate on currency risk.
1. The document discusses various derivatives trading concepts such as futures contracts, forward contracts, and options. It explains that futures contracts are standardized agreements to buy or sell an asset at a specified price on a future date, while forward contracts are customized agreements with physical delivery of the asset.
2. Options are described as contracts that give the buyer the right but not the obligation to buy or sell an asset at a specified price on or before the expiration date. The main types are calls, which are rights to buy, and puts, which are rights to sell.
3. Participants in futures markets are identified as hedgers who protect their positions, speculators who take risks seeking profits, and arbitrageurs who exploit
Derivatives are financial instruments whose value is derived from an underlying asset. Forward and futures contracts are types of derivatives that allow parties to lock in a price today to purchase or sell an asset in the future. A forward contract is a customized over-the-counter agreement between two parties, while a futures contract is traded on an exchange with standardized terms. Both require mark-to-market adjustments and margin payments to mitigate risks from price fluctuations until contract settlement.
- A forwards contract is a customized agreement between two parties to buy or sell an asset at a predetermined price at a specified future date. Forwards contracts involve delivery of the asset.
- Futures contracts are standardized exchange-traded contracts to buy or sell an asset with delivery or cash settlement at expiration. They are marked to market daily and involve margin requirements. Positions can be offset by entering an equal but opposite transaction rather than settling via delivery.
This document provides an overview of derivatives, including financial derivatives and commodity derivatives. It defines derivatives as instruments whose value is derived from an underlying asset. Financial derivatives discussed include forwards, futures, options, and swaps, which are used for hedging risks and speculating on financial instruments. Commodity derivatives allow trading of agricultural and mined products to manage price risks. Benefits of commodity derivatives trading include risk management, price discovery, and portfolio diversification. The document also outlines the commodity futures trading process and delivery or cash settlement at contract expiration.
Futures and forwards are financial contracts to buy or sell an asset at a predetermined future date and price. Futures are traded on an exchange and have standardized terms, while forwards are customized over-the-counter contracts. Futures offer elimination of counterparty risk through a clearing house and use of margin accounts. They can be used to hedge risk or for speculative trading and have advantages of liquidity, lack of counterparty risk, and flexibility compared to forwards.
The document provides an overview of risk management with futures contracts, explaining key concepts like hedging, short and long positions, forwards versus futures, margins, mark-to-market process, and how taking opposite positions in the cash and futures markets can help reduce risk for buyers and sellers. Futures contracts standardize terms to allow for trading on exchanges, use a clearing house to minimize counterparty risk, require daily margin payments to settle profits and losses, and can be closed out before expiration.
This document defines and describes various financial markets, including spot markets, futures markets, foreign exchange markets, and interbank lending markets. It provides the following key details:
Spot markets involve the immediate delivery of assets traded at the current market price. In futures markets, participants agree today to buy or sell an asset at a specified future date. The foreign exchange market allows participants to buy, sell, and speculate on currencies. The interbank market involves banks exchanging currencies with each other, excluding retail investors. Interbank lending markets involve banks extending short-term loans to one another, usually overnight, at an interest rate known as the interbank rate.
The capital market deals in long-term securities with maturities over 1 year that are less liquid but offer higher returns due to more risk. The money market deals in short-term securities with maturities under 1 year that are highly liquid but offer lower returns due to less risk. Instruments in the capital market include equity, bonds, and derivatives, while the money market includes treasury bills, commercial paper, and certificates of deposit.
The document discusses various aspects of derivatives markets, including defining what a derivative is, the functions of derivatives markets, participants in derivatives markets, and classifications of different types of derivatives contracts. It provides details on over-the-counter derivatives markets and exchange-traded derivatives markets. It also defines key terms related to forwards, futures, swaps, and options contracts.
Describes what derivatives are and explains the differences between over-the-counter and exchange traded derivatives, Identifies types of underlying assets on which derivatives are based, describes participants in and uses of derivative trading, describe what options are and how they are traded, evaluates call and put option strategies for
individual and in-stitutional investors and corporations, describes what forwards are, distinguishing futures contracts from forward agreements, evaluate futures strategies for investors and corporations, Define and describe rights and warrants, explain why they are issued, and calculate the value of rights and warrants
Derivatives are financial instruments whose value is derived from an underlying asset such as a commodity, currency, or stock. A derivative is a contract between two parties that specifies conditions to buy or sell the underlying asset at a future date. There are several types of derivatives including forwards, futures, options, and swaps. Forwards are customized contracts negotiated between two parties, while futures are standardized contracts traded on an exchange. Derivatives are used by hedgers to reduce risk, speculators to seek profits, and arbitrageurs to exploit pricing discrepancies across markets.
- A forward market allows for the future delivery of stocks, currencies, or commodities at a predetermined price, protecting buyers and sellers from price fluctuations. Forward contracts are privately negotiated over-the-counter, while futures contracts are standardized and traded on an exchange.
- The main purposes of forward and futures markets are to hedge against risks from fluctuating prices and interest rates and to allow investors to speculate. These markets provide flexibility and reduce risks for financial companies and investors.
Derivatives are financial contracts whose value is based on an underlying asset such as a commodity, currency, or stock. There are several types of derivatives including futures, forwards, options, and swaps. Derivatives are traded both over-the-counter (OTC) between private parties and on exchanges. Derivatives help transfer risk, discover prices, catalyze business activity, and increase savings and investment over the long run. Participants in derivatives markets include hedgers seeking to reduce risk, speculators betting on price movements, and arbitrageurs looking to profit from price discrepancies.
Derivatives are financial contracts whose value is based on an underlying asset such as a commodity, currency, or stock. There are several types of derivatives including futures, forwards, options, and swaps. Derivatives allow participants to transfer risk, help discover prices, catalyze entrepreneurship, and increase savings and investment. Participants in derivatives markets include hedgers who reduce price risk, speculators who leverage bets on price movements, and arbitrageurs who exploit price discrepancies. Derivatives can be traded over-the-counter between two parties or on a derivatives exchange.
Describes what derivatives are and explains the differences between over-the-counter and exchange-traded
derivatives, Identify types of underlying assets on which derivatives are based, describes the participants in and use of derivative trading, describes what options are and how they are traded, and evaluate call and put option strategies for
individual and institutional investors and corporations.
5. Describe what forwards are, distinguish futures contracts from forward agreements, and evaluate
futures strategies for investors and corporations, define and describe rights and warrants, explaining why they are issued,
1. The document discusses futures and forward contracts, outlining key differences like futures being traded publicly on exchanges while forwards are private agreements.
2. It describes various types of futures contracts including stock index futures, equity index futures, currency futures, and interest rate futures; and explains concepts like payoffs, margins, and marking to market.
3. Futures trading strategies like hedging, speculation, and arbitrage are also covered briefly.
Derivatives are financial instruments that derive their value from an underlying asset such as stocks, bonds, currencies or commodities. There are several types of derivatives including forwards, futures, options and swaps. Forwards and swaps are traded over-the-counter (OTC) while futures and options are traded on organized exchanges. Derivatives allow participants to hedge risk, speculate, or seek arbitrage opportunities. While derivatives can help manage various risks, they also pose risks such as leverage, increased speculation, and complexity that can be difficult for retail investors to navigate. The derivatives market has various participants including hedgers who seek to reduce risk, speculators who take risks to earn profits, and arbitrageurs who exploit pricing
PROFIT YOUR TRADE EDUCATION Series - By Kutumba Rao - Feb 7th 2021.pptxSAROORNAGARCMCORE
Futures contracts obligate buyers and sellers to transact an underlying asset at a predetermined price and date. Weekly options contracts on stock indices like Nifty and Bank Nifty have grown in popularity as they allow traders to better participate in short-term price movements with lower premiums and gamma risk than monthly contracts. Top holdings in the Nifty 50 index are HDFC Bank at 11.21%, Reliance Industries at 11.17%, and HDFC at 7.23%, demonstrating their heavy weighting.
The document discusses forwards and futures contracts. Forwards are privately negotiated agreements to buy or sell an asset at a future date, while futures are standardized contracts traded on public exchanges. Key differences are that futures are exchange-traded while forwards are over-the-counter, and futures have standardized contract terms while forwards are customized. The document also covers futures pricing models, margin requirements for long and short positions, and arbitrage strategies like cash and carry arbitrage.
Commodity derivatives markets allow farmers, producers, and other entities to hedge against risks from price fluctuations in commodities. Derivative contracts date back to ancient times but organized exchanges began emerging in the 18th century in locations like Osaka, London, and Chicago. Common derivative products include forwards, futures, swaps, and options. Forwards and futures are agreements to buy or sell an asset at a future date, while swaps and options provide rights to exchange or buy/sell assets without obligations. Derivatives markets benefit participants by allowing risk transfer between hedgers and speculators/arbitrageurs and facilitating price discovery. However, derivatives also introduce risks like counterparty default, basis risk, and complexity that
Similar to Commodities fundamentals futures & forwards (20)
The document defines money laundering and describes the process. It involves disguising illegally obtained money to make it appear legitimate. There are three stages: placement, layering, and integration. Money laundering has significant negative effects, including increased organized crime, corruption, and economic distortions. It undermines legitimate businesses and financial stability. The document then outlines the various financial institutions and businesses that may be involved in money laundering, such as banks, money services businesses, casinos, and professional gatekeepers like lawyers and accountants.
Communication involves a sender encoding a message and transmitting it through a channel to a recipient who decodes the message. Effective communication requires the recipient to understand the message similarly to how the sender intended. There can be barriers at each stage of the communication process that cause misunderstandings. Some key parts of communication include the sender, message, and recipient. Nonverbal cues and active listening are also important for fully understanding messages.
Individual financial advisory with respect to individual clients has occupied center stage especially due to the attendant effects of the global COVID-19 pandemic. Clients as well as advisors have had to react to these changes.
This is the first part of a two part presentation that will assist advisors/ individual wealth managers anticipate and react/address client management in a customised manner.
This document outlines the key components of organizational customer relationship management (CRM), including verbal communication, internet, email, advertising, telephone, marketing, data classification, data entry into organizational databases, data collection and analysis, and information dissemination across an organization to support sales and marketing management.
The document provides an overview of various analysis methods used to evaluate investments, including fundamental analysis, quantitative analysis, technical analysis, and market theories like the efficient market hypothesis. It then discusses several types of fundamental analysis, including macroeconomic analysis and how fiscal and monetary policy can impact industries. Different market theories are also examined, suggesting markets are generally efficient but may not perfectly reflect all available information at once. Both technical and fundamental analysis are seen as valid approaches to help understand how markets move in response to different factors.
The document discusses various ratios used for risk analysis and valuation of companies. It defines ratios that measure asset coverage, capital structure, profitability, debt levels, cash flows, earnings, market values and preferred share quality. Specific ratios covered include asset coverage, debt-to-equity, interest coverage, preferred dividend coverage, return on equity, price-earnings and book value per share. The purpose, calculation and interpretation of these ratios are explained.
This document provides an overview of various analysis methods used to evaluate investments, including fundamental analysis, quantitative analysis, and technical analysis. It also discusses relevant market theories like the efficient market hypothesis. Fundamental analysis examines macroeconomic factors, industry conditions, and individual company financials. Quantitative analysis uses computers and statistics to identify patterns for investment opportunities. Technical analysis studies historical stock price movements and trading volumes to predict future price changes. The efficient market hypothesis posits that stock prices instantly reflect all available information.
1) Buying call options provides the right to purchase the underlying asset at a specified strike price within a specified time period. Call buyers pay a premium to the option writer for this right.
2) Strategy #1 involves buying calls to speculate on a rise in the underlying asset's price, allowing the option to be sold at a profit. Strategy #2 involves buying calls to manage risk by establishing a maximum purchase price when buying the underlying asset.
3) Both strategies rely on the underlying asset rising above the strike price for the call to have value. If it remains below the strike price, the calls can expire worthless.
1) Buying call options allows investors to speculate on a rise in the price of the underlying stock or manage risk. The buyer pays a premium for the right to purchase the stock at a set strike price.
2) Strategy #1 involves buying calls to speculate, paying $1,000 in premiums for calls with a $55 strike price hoping to sell them at a profit if the stock rises above $55 before expiration.
3) Strategy #2 involves buying calls to manage risk, protecting a fund manager's planned stock purchase from increases above the $55 strike price before receiving funds in December.
Understanding for Incorporation, client bias diagnoses into the enhanced marketing and sales of investment products whilst, building mutual and beneficial long-term relationships.
This document discusses asset allocation strategies and investment philosophies for clients. It describes strategic asset allocation (SAA) as establishing a long-term benchmark portfolio based on a client's objectives and risk tolerance. SAA involves specifying asset classes, expected returns, and deriving an efficient portfolio. Tactical asset allocation allows short-term adjustments within SAA limits. Asset allocation is also discussed in the context of a client's accumulation stage in life. The document also contrasts passive indexing strategies with active investment strategies using bottom-up or top-down approaches.
Fortuna Favi Et Fortus Ltd provides custom training and skills upgrades to clients to enhance business growth. Benefits include knowledge additions that improve job performance and prepare staff for increased responsibilities. Understanding client biases, personalities, and investment objectives is key to managing relationships and achieving goals. A thorough investment policy statement that incorporates a client's unique situation and needs allows for customized portfolio allocation and management. Considering a client's stage in life cycle planning provides strategic guidance for asset accumulation tailored to their goals.
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Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
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2. Commodities Market
A marketplace for buying, selling, and trading raw materials or primary products.
The Commodity Trader: A commodity trader is an individual or business that focuses on investing in
physical substances like oil, gold, or agricultural products. This buying and selling are often driven by
expected economic trends and/or arbitrage opportunities in the commodities markets. - currently about
50 major commodity markets worldwide that facilitate trade in approximately 100 primary commodities.
• Hard Commodities include natural resources that must be mined or extracted—such as gold,
rubber, and oil,
• Soft Commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar,
soybeans, and pork. - A soft commodity is a grown or agricultural commodity such as coffee, cocoa,
sugar, and fruit.
Most commodity trading involves the purchase and sale of futures contracts, though physical trading
and derivatives trading are also common.
Commodity pools: Funds that buy and sell commodity futures contracts.
Two Broad Categories Of Commodities:
3. Forwards and Futures
A Forward is a contract between two parties: a buyer and a seller.
The buyer of a forward agrees to purchase an underlying asset from the seller on a future date at a
price agreed upon today. - both parties are obligated to participate in the future trade.
Forwards can trade on an exchange or over the counter.
Futures Contracts: exchange-traded forward contracts, thus they have features inherent to all forward
contracts.
Futures are normally classified into two groups based on the type of underlying asset.
• Contracts That Have A Financial Asset such as a stock, bond, currency, interest rate or index – as
the underlying asset are referred to as Financial Futures.
• Contracts That Have A Physical Asset such as gold, crude oil, soybeans and more as the
underlying asset are known as Commodity Futures.
What are “Futures & Forwards Contracts?
4. • Futures are standardized with respect to the amount of the asset underlying each contract, expiration
dates and delivery locations. - the expiration date is set by the exchange on which the contract is
listed.
Commodity futures might require additional standardization for - the quality of the underlying asset and
the delivery location.
Normally, standardization allows users to offset their contracts prior to expiration and provides the
backing of a clearinghouse. – i.e. When commodities are traded on an exchange, they must meet
specified minimum standards, also known as a basis grade.
• The party that agrees to buy the underlying asset holds a long position in the futures contract.
• This party is also said to have bought the futures contract.
• The party that agrees to sell the underlying asset holds a short position in the futures contract, and
is said to have sold the futures contract.
Forwards And Futures
5. The buyer of a futures contract does not pay anything to the seller when the two enter into the contract.
The Seller does not deliver the underlying asset right away.
*The Futures contract establishes the price at which a trade will take place in the future.
As it turns out, most parties end up offsetting their positions prior to expiration, thus few deliveries
actually take place.
But
If a contract is not offset and is held to the expiration date, delivery will occur.
- Longs will have to accept delivery of the underlying asset and make payments to the shorts.
- Shorts have to make delivery of the underlying asset and accept payments from the longs based on
pre-established prices.
Forwards and Futures
6. Types of Commodity Markets
Spot markets are also referred to as “Physical Markets /Cash Markets” where
buyers and sellers exchange physical commodities for immediate delivery.
Derivatives markets involve
• forwards
• futures
• options
Forwards and futures are derivatives contracts that use the spot market as the
underlying asset.
These are contracts that give the owner control of the underlying at some point in the
future, for a price agreed upon today.
Commodities trade either in Spot Markets or Derivatives Markets.
7. Types of Commodity Markets
When the contracts expire physical delivery of the commodity or
other asset will take place, and often traders will ’roll over’ or ‘close
out’ their contracts in order to avoid making or taking delivery
altogether.
Forwards and futures are basically the same, except that forwards
are customizable and trade over-the-counter (OTC), whereas
futures are standardized and traded on the exchange.
Commodities Exchange: an exchange where various commodities
and derivatives are traded. Most commodity markets across the
world trade in agricultural products and other raw materials (e.g.,
wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products,
pork bellies, oil, metals, etc.) and contracts based on them.
These contracts can include spot prices, forwards, futures and
options on futures.
Other sophisticated products may include interest rates,
environmental instruments, swaps, or freight contracts
8. Cash-settled Futures Contract
Many financial futures are based on underlying assets that are difficult or even impossible to deliver.
For these types of futures, delivery involves an exchange of cash from one party to the other based on
the performance of the underlying asset from the time the futures contract was entered into until the
time that it expires.
These futures are known as Cash-Settled Futures Contracts. E.g., equity index futures contracts
A person who is ‘long’ a stock index futures contract is not obligated to accept delivery of the stocks
that make up the index, nor is one who is ‘short’ required to make delivery of the stocks.
Rather, if the position is held to the expiration date, either the long or the short will make a cash
payment to the other based on the difference between the price agreed to in the futures contract and
the price of the underlying asset on the expiration date.
• If the price agreed to in the futures contract is greater than the price of the underlying asset at
expiration, prices have fallen, and the long must pay the short.
• If the price agreed to in the futures contract is less than the price of the underlying asset at expiration,
prices have risen, and the short must pay the long.
As with all other futures contracts, cash-settled futures can be offset prior to expiration.
9. Margin Requirements And Marking-to-market
Buyers and sellers of futures contracts must deposit and maintain adequate margin in their futures
accounts. Unlike margin on stock transactions (which are the counterpart to the maximum loan value
that a dealer may extend to its clients), futures margins are meant to provide a level of assurance that
the financial obligations of the contract will be met.
In effect, futures margins represent a good-faith deposit or performance bond.
There are two levels of margin used in futures trading: initial margin and maintenance margin.
• Initial or Original Margin is required when the contract is entered into.
• Maintenance Margin is the minimum account balance that must be maintained while the contract is
still open.
Minimum initial and maintenance margin rates for a particular futures contract are set by the exchange
on which it trades, although investment dealers may impose higher rates on their clients. Dealers,
however, may not charge their clients less than the exchange minimums.
An important feature of futures trading is the daily settlement of gains and losses.
10. This process is known as marking-to-market.
At the end of each trading day, those who are
long a contract make a payment to those who are
short, or vice versa, depending on the change in
the price of the contract from the previous day.
If either party accumulates losses that cause their
account balance to fall below the maintenance
margin level, they must deposit addition margin to
their futures accounts.
Margin Requirements and Marking-to-
Market
11. Futures Strategies: Investors
2 basic positions with futures contracts – long and short.
BUYING FUTURES
• Investors buy futures either to profit from an expected increase in the price of the underlying asset
i.e. Speculation - traders who trade in the commodities markets for the sole purpose of profiting from
the volatile price movements. These traders never intend to make or take delivery of the actual
commodity when the futures contract expires.
• To lock in a purchase price for the asset on some future date i.e. Risk Management / Hedging
Commodity prices typically rise when inflation accelerates, which is why investors often flock to them
for their protection during times of increased inflation—particularly unexpected inflation.
12. Strategy #1: Buying Futures to Speculate
Suppose an investor buys 10 December gold futures at a price of US$575 an ounce. Since each gold
futures contract has an underlying asset of 100 ounces of gold, the investor has agreed to buy 1,000
ounces of gold from the futures seller on a specific date in December for a total cost of US$575,000
($575 × 100 ounces × 10 contracts).
If the investor bought the futures to profit from the expectation of a higher gold futures price, the
investor probably has no intention of actually buying 1,000 ounces of gold. Rather, the investor wants
to sell the 10 December gold futures, preferably at a higher price than what was paid for them.
The chances of this happening depend primarily on the price of gold in the spot or cash market.
If the spot price of gold rises, then the price of gold futures will rise, too.
Of course, the investor faces the risk that the price of gold will fall. If this happens, the price of gold
futures will fall as well, and the investor may be forced to sell the contracts at a loss.
13. Strategy #1: Buying
Futures to Speculate
E.g., if in early November the price of December
gold futures have risen to $600 in response to a
rising gold spot price, the investor could choose to
sell the futures at $600 and realize a profit of $25
an ounce, or $25,000 total ($25 × 100 ounces ×
10 contracts).
If, however, December gold futures were trading at
$550, the investor would have to decide whether
to sell the futures or hold on in the hope that the
price recovers before the expiration date.
If the investor decided to sell at this price, a loss
equal to $25 an ounce, or $25,000 total ($25 ×
100 ounces × 10 contracts), would result.
14. Strategy #2: Buying Futures to
Manage Risk
Suppose a different investor buys 10 December gold
futures at a price of US$575 an ounce with the
intention of actually buying 1,000 ounces of gold in
December.
The gold purchase may actually be a speculative
decision, but the purchase of futures to lock in a
purchase price is considered a risk management
decision.
In this case, all the investor needs to do is not offset
the contract. At expiration, the investor will be
required to take delivery of 1,000 ounces of gold for a
payment of US$575,000.
The purchase of the futures contracts locks the
investor in to a purchase price of US$575 an ounce
regardless of what happens to the price of gold in the
spot market.
15. Strategy #1: Selling Futures to Speculate
Suppose an investor sells 5 December Government of Canada ten-year bond futures at a price of 105.
(Just like prices in the bond market, the price of a bond futures contract is always quoted on a “per
$100 of face value” basis.)
Since each bond futures contract has a $100,000 face value bond as its underlying asset, the investor
has agreed to sell a $500,000 face value bond to the buyer on a specific date in December for total
proceeds of $525,000 ([105 ÷ 100] × $100,000 bond × 5 contracts).
The investor in the above scenario could have sold the futures simply to profit from an expectation of a
lower bond futures price.
The investor probably has no intention of actually selling $500,000 of bonds. Rather, the investor will
want to buy back the 5 December bond futures in the market, preferably at a lower price than what they
were sold for. The chances of this happening depend primarily on the price of ten-year Government of
Canada bonds in the spot or cash market. If bond prices fall in the cash market, then the price of bond
futures will fall, too.
Of course, the investor faces the risk that bond prices will rise. If this happens, the price of bond futures
will rise as well, and the investor may be forced to buy back the contracts at a loss.
16. Strategy #1: (Selling)
Speculating with Futures
E.g., if in early November the price of December bond
futures have declined from 105 to 100, the investor
could choose to buy back the futures at 100 and realize
a profit of 5 points, or $25,000 total ([5 ÷ 100] ×
$100,000 face value × 5 contracts).
If, however, December bond futures were trading at
107.50, the investor would have to decide whether to
buy the futures or hold on in the hope that the price
falls before the expiration date. If the investor decided
to buy them back, a loss equal to 2.5 points, or $12,500
total ([2.5 ÷ 100] × $100,000 face value × 5 contracts),
would result.
17. Strategy #2: Using Futures to
Manage Risk
Suppose a different investor sells 5 December
Government of Canada ten-year bond futures at a
price of 105 and that, for whatever reason, the investor
actually wanted to sell $500,000 of bonds
in December.
In this case, all the investor needs to do is ‘not’ offset
the contracts. At expiration, the investor will be
required to make delivery of $500,000 of bonds and in
return will receive
$525,000.
The sale of the futures contracts locks the investor in
to a sale price of 105 regardless of what happens to
bond prices.
18. FUTURES STRATEGIES FOR
CORPORATIONS
Corporations use futures to manage risk in the same
way that investors do. When a company
needs to lock in the purchase price of an asset, they
may decide to buy futures on the asset.
Similarly, when a company needs to lock in the sale
price of an asset, they may decide to sell
futures on the asset.
Even though they take futures positions consistent
with their risk management needs, many
companies offset their positions before expiration
rather than actually making or taking delivery
of the underlying asset, as the investor examples
illustrated. But the futures can still satisfy a
company’s risk management needs by providing
price protection.
19. Examples of Commodities
Markets
The major exchanges in the U.S., that trade commodities,
include:
• Chicago Board of Trade (CBOT) - Commodities traded on
the CBOT include corn, gold, silver, soybeans, wheat, oats, rice,
and ethanol.
• Chicago Mercantile Exchange (CME) - trades commodities
such as milk, butter, feeder cattle, cattle, pork bellies, lumber,
and lean hogs.
• New York Board of Trade (NYBOT) commodities
include coffee, cocoa, orange juice, sugar, and ethanol trading on
its exchange.
• New York Mercantile Exchange (NYMEX) trades
commodities on its exchange such as oil, gold, silver, copper,
aluminum, palladium, platinum, heating oil, propane, and
electricity.
• Kansas City Board of Trade (KCBT) and Minneapolis Grain
Exchange (MGE).
These exchanges are primarily focused on agricultural
commodities.
20. International CommodityExchange :
• The London Metal Exchange and Tokyo Commodity Exchange are also prominent international
commodity exchanges.
• Bourse de Montréal lists financial futures contracts e.g. index futures, two-year and ten-year
Government of Canada bonds, bankers’ acceptances, and the 30-day overnight repo rate.
Commodities are predominantly traded electronically; although, several U.S. exchanges still use the
open outcry method.
Commodity trading conducted outside the operation of the exchanges is referred to as the over-the-
counter (OTC) market.
Examples of Commodities Markets
21. Commodity Market Trading vs. Stock Trading
• Untenable for most individual investors except via the managed fund structure i.e. mutual funds,
hedge funds etc
• Commodities are considered an alternative asset class, pooled funds that trade commodities futures
(Commodity ETFs - that track a wide range of underlying commodities/ a diversified basket of
commodities), such as CTAs, typically only allow accredited investors.
• ordinary investors can also gain indirect access to commodities via the stock market itself - Stocks on
mining or materials companies tend to be correlated with commodities prices - there are various
ETFs now that track various commodities or commodities indexes.
• Commodity prices tend to be more volatile than stock and bond prices,
• Commodities trading is often most-suited for those with a higher risk tolerance and/or longer time
horizon.
• Many online financial portals will provide some indication of certain commodities prices such as gold
and crude oil.
• ETFs provide more diversification and lower risks while futures are more speculative and the risks
are higher because of margin requirements.
• commodities are normally seen as a hedge against inflation, and gold, in particular they can be a
hedge against a market downturn.
22. Difference: Commodity vs Product
Commodity: e.g. copper, crude oil, wheat, coffee
beans, and gold etc.
• Raw material used to manufacture finished
goods.
• Part of the production and manufacturing
process; - in the early stages of production
• Raw material used in the production process to
manufacture finished goods
• No value is added to a commodity, which can
be grown, extracted, or mined.
• Traded on exchanges through futures contracts,
stocks, and ETFs, and can also be bought and
sold in their physical states.
Product: can be differentiated, and value can be
added by the manufacturer and
through branding and marketing.
• Are made using commodities and are then put
on the market and sold to consumers.
• The finished good sold to consumers.
• Part of the production and manufacturing
process; - products fall at the final stage.
• Product are finished goods sold to
consumers.
• sold on the market for consumption by the
average consumer and can also be found in
investment portfolios.
23. Major Impediments
• The lack of transparency and uniformity of process.
• Competition
• Market information – dissemination through the market to participants.
• Bargaining power of small-scale producers.
• Credit in the industry.
• Poor quality standards – should be strict with enforceable guidelines.
• inadequate volumes of production.
• Widespread warehousing system closely monitored including collection points for the small-scale
farmer.
Major impediments to a fair and efficient commodities market system: The African Experience
24. Intermarket Analysis:
Stocks Versus Bonds
An old adage …, what is good for stocks is bad for bonds,
and vice versa.
Bond prices normally move in the same direction as stock
prices.
Hence falling interest rates are normally favourable for
equities.
A key point to remember here is that the bond market (or
prices) historically peaks and bottoms before the stock
market does.
25. Intermarket Analysis:
Bonds vs Commodities
Inflation is particularly bad for bonds. Analysts closely
follow commodity markets as a leading indicator of
inflation.
When commodity prices begin to trend higher – as
measured for example by the CRB Index, a widely
watched composite of different commodities – market
participants look for emerging inflationary signs, which
can lead to central banks raising interest rates and thus
lower bond prices.
26. Intermarket Analysis:
Commodities vs Currencies
Foreign Currency Exchange (Forex) Trading involves
determining whether a certain nation's currency will go
up or down compared to another major currency.
Commodities (anything found naturally in nature or
planted) you determine if the price of a certain
commodity will go up or down based on whether you
believe there will be a good growing season, increased
mining prospects, a bad growing season, floods, drought,
strikes etc.
Mother Nature plays a much stronger role in trading
commodities than it does in trading currency.
27. Intermarket Analysis:
Commodities vs Currencies
World Events: As mentioned above, the constant
change in weather patterns from year to year can play
havoc on the commodities market. - the possibility of
good sized gains exists in the commodities market, but
the risk of huge losses due to crop failures, etc. is also
present.
Information Accessibility: Information about trading
commodities can be fairly difficult to find, especially
information which is free. There is an ample amount of
information available, but a lot of it is costly to obtain.
Forex information is much more accessible and most of it
is free.
Hours of Operation: The Forex Market is open 24 hours
a day, five days a week. There is no other market open
this long.
28. Intermarket Analysis:
Commodities vs Currencies
Liquidity - Ease of Buying and Selling: Forex Market
does the most volume as compared to all other markets.
If it is going to be easy to buy and sell positions, Forex
will be the easiest with all its volume.
Highly Predictable: Commodity prices can jump all
around the board depending on demand, weather, crop
percentages planted, oil found or not found, etc.
Commission Free Trading and Instantaneous Order
Execution: he Forex Market is an open market and has
no centralized trading floor, when you trade in the Forex,
you don't pay a middleman. In other words, you don't pay
a commission to trade. Money is made by institutions on
the difference between the bid and ask price, but that
occurs with any market.
29. Commodities as Part of an Investment Portfolio
Commodities are a class of ‘Alternative investments’ – i.e., an alternative investment class that offers
diversification benefits when combined with a traditional portfolio containing equities and bonds.
2 primary ways of investing in commodities:
• Directly by buying and selling commodities
• Indirectly through commodity derivatives (that is, options, futures, forwards or swaps)
Although less direct, exposure to commodities can be had by investing in the securities of companies
that produce commodities.
Xteristics as part of an Investment Portfolio
A separate asset class cause they can offer diversification benefits when combined with a traditional
portfolio containing equities and bonds.
Often display high volatility, as well as a negative correlation with equity and bond returns and a
positive correlation with inflation.
30. Commodities as Part of an Investment Portfolio
In portfolios where income is a high priority, direct investment in commodities is generally not suitable,
since commodities do not provide any interim cash flows, unlike bonds, which provide interest income,
or some common equities, which provide dividends.
The only return on a commodity investment comes from changes in the commodity’s price.
One form of indirect investment in commodities is through a structured product design commonly
referred to as a Commodity-linked Note. - generally offers a small amount of periodic income in
addition to realizing, in the form of capital gain, some portion of the underlying commodities’ price
change.
However, these notes do not have a large market share. The most popular method of commodity
investment is through a pooled fund vehicle called a Managed Futures Fund / Commodity pools:
Managed futures funds that are structured and sold as mutual funds. Managed futures funds actively
trade derivatives products as well as physical commodities, financial assets, and currencies.
31. Managed Futures Funds
A Managed Futures Fund invests in listed financial and commodity futures markets and currency
markets around the world. Fund managers are usually called commodity trading advisors (CTAs).
Thus, Managed futures are alternative investments consisting of a portfolio of futures contracts that
are actively managed by professionals. The are used as an alternative to traditional hedge funds to
achieve both portfolio and market diversification.
2 common approaches for trading managed futures:
• Market-neutral strategies look to profit from spreads and arbitrage created by mispricing,
• Trend-following Strategies look to profit by going long or short according to fundamentals and/or
technical market signals. - goal is to capture gains by analyzing various indicators, determining an
asset's direction, and then executing an appropriate trade.
Most managers of managed futures funds apply a systematic approach to trading, using technical
and statistical analyses of price and volume information to determine investment decisions.
Once the manager has developed the system, trading decisions are largely mechanical and little or no
discretion is involved. Other fund managers make discretionary decisions according to current
economic and political fundamentals.
32. Financial Planning: Risk – Return Possibilities
High Risk / High
Returns
Lowest Risk / Lowest
Earning
Commodities, Penny Stocks
Collectibles & Speculative Stocks, Bonds or Mutual Funds
Blue Chip Common Stock, Real Estate and Growth Mutual Funds
Balanced Mutual Funds, High Grade Preferred Stock & High Grade Convertible Bonds
Cash or Cash Equivalents e.g. Money Market Accounts, Some Mutual Funds, High Grade
Municipal Bonds & High Grade Corporate Bonds
Savings & Checking Accounts, Federal Savings Bonds, Certificates of Deposits & Treasury
Issues
33. References:
• Project: New Business Models for Sustainable Trading Relationships, Commodity exchanges and
smallholders in Africa; Peter Robbins in collaboration with Catholic Relief Services
• Investing in Commodity ETFs, MICHAEL CORCORAN, Jan 15, 2021
• Commodity vs. Product: What's the Difference?, NICK LIOUDIS, Jan 13, 2021
• Commodity Trader, JAMES CHEN, Oct 29, 2020
• Investment Management Techniques – CSI Global
• Canadian Securities Course Vol 01 & 02, CSI Global
• Forex Trading Vs. Commodities - See What You Could Be Missing; Chris Murphy
• ValueWalk, HOW TO INVEST IN A VOLATILE MARKET PART 3: DIVERSIFYING IN THE RISK PYRAMID; Michelle Jones, Aug 18, 2019
•
34. Fortuna Favi et Fortus Ltd.,
118 Old Ewu Road, Aviation Estate, Lagos.
+234 703 253 0965 Nigeria, +1 416 262 7271 Can
www.ffavifortus.com info@ffavifortus.com
Compiled and assembled by: Olufemi Feyisitan