Here we take the time to take a look at the investment objectives of the activities of commodity trading and why participants used this approach to protection of their business.
For those who sell or buy the physical commodities used in the conditions of the protection of the futures message.
The idea is to protect the trading volume of raw material prices move adversely against them.
Get the free INO trading alerts when you subscribe to the free newsletter of the asset in this Universe. Fill out the simple form below. Is as easy as 1-2-3!So, for example, the producer of high grade copper may want to make sure that when the copper content is brought to the attention of the, i.e., for a period of three months, the price they receive for today s for metal, which is great.
The copper market is always moving, copper prices rising or falling, is unlikely to get the right price.
If the global demand for copper is the copper futures price way LME: such as the value of the invoice and the conditions for this.
The producer of copper in copper futures and the futures contract to sell for profit, the agreement to equalize when he comes, the metal is at a lower price.
Or let s say, not the Chiltern oil, which is a small country in the Oil field discovery in the United Kingdom, these times will raise 100 000 barrels of crude oil prices, the crude to be sold to the search for the company.
Chiltern oil wants to ensure its light, sweet Crude oil Gets a good price for 8 months.
Today, the company could circumvent the $ 110 een but if the world economy slows down, and the NYMEX WTI benchmark crude oil futures, the ends of the South during the following eight months, the price can only be said of the $ 80.
Chiltern can sell its 100 000 barrels of crude, NYMEX to $ 110 and relax and carry on business as usual without the price may fall in the coming months.
Provide the oil to the market when the time comes, the price has decreased by $ 78 (a) the tank, which is lower than the revenue of the company.
But now they will stop their futures contract, which is the value of increased revenue and reduced, thus reducing the profits from the sale of the physical paper.
This way to help protect your profits when a producer sells a commodity on the market if the price of a short Hedgeis called.
Impracticable to commodity trading is a shipbuilding Center, not so much a way to make more money.
In other words, the risk of, or under the control of volatile markets and prices in such a way as to avoid spikes or collapses.
When the end users to protect their purchase costs
Let s be the commercial end users, such as the monitoring of foodstuffs intended for human consumption from the perspective of the manufacturer or the example is called Chocolotta Limited, which makes the chocolate factory.
Chocolotta Limited, be an important ingredient in chocolate in bulk in the Ivory Coast in Africa, the region, which may be a disorder.
The company needs more cocoa for a period of five months, but it needs to be backed up, how much to pay for a new forward.
Today, the July price is $ per tonne in the case of cocoa, but who knows what it is 5 months from 1,650.
Chocolotta decide to buy 5 December Futures at $ a ton serbejä, on the one hand, and each contract has a total of 10 tonnes, the futures messages for an agreement in the form of a $ 85,000.
Now the company has protected cocoa prices during the peak itself, even when it is still to make a purchase in the month of December.
Even if the Ivory Coast cocoa prices, which will send 2 000 EUR/tonne in serious civil disturbances, cocoa futures makes it Chocolotta, which will reduce the gains from higher purchases.
This is how futures provide a valuable way to protect the end users of the volatile and unforeseen price changes.
So when the company buys the futures contract in this way, it is called a Long Hedge.
When commodities are trading than a search for some of the profits to the speculator, just consider that there are producers and sellers in the market to protect their position will be maintained to avoid losses.
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