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Commodity Future Price
The primary purpose of commodity futures markets is to
provide an efficient and effective mechanism to manage
price risk. By buying or selling futures market
contracts, these contracts establish a price level now
for items to be delivered later. Individuals and
businesses seek to achieve insurance against adverse
market price changes. This is done by buying or selling
futures market contracts, with a market price level
established now, for items to be delivered later.
Commodity Market Futures Prices Position
The principles underlying hedging are quite basic.
Hedgers are individuals and firms who wish to establish
a known commodity market price level weeks and sometimes
months or years in advance for products they want to buy
or sell in the cash market. This commodity market
futures position protects them against unfavorable price
changes in the interim which might occur. Alternatively,
a hedger may want to establish a guaranteed margin
between their purchase cost and their selling price.
For example, a food manufacturer will need to buy
additional corn from his supplier in three months.
However, he feels that the market price of corn is going
to increase by the time he needs the corn in three
months. Because of fierce competition, he needs to hold
his price constant. He wants to make sure that he pays
$3.55 per bushel. Therefore, to lock in the $3.55 per
bushel price, he buys a contract for three months out at
$3.55 per bushel. If three months later the price of
corn has risen to $3.69 per bushel, he will pay his
supplier $3.69. However, the 14 cent increase has been
offset by the 14 cent increase in his futures contract.
On the other hand, if the future market price of corn
declines by an amount of 10 cents per bushel to $3.45
per bushel, the decline in the futures contract will be
offset by the lesser amount the manufacturer has to pay
his supplier. Irrespective of what happens in the spot
market, the manufacturer has locked in a set price for
the corn he needs to purchase in the future.
Commodity Market Futures Gold Prices
The need for hedging is present in all forms of
commerce. Large borrowers can protect against higher
interest rates. Lenders can protect themselves against
lower interest rates. Investors can protect themselves
against lower stock prices. Jewelry manufacturers can
protect themselves against higher gold and silver
prices. Hedgers use market futures contracts to protect
themselves against adverse price changes. The drawback
is that the hedger is unable to participate in favorable
price changes. He locks in known costs to prevent
against the unknown.
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