Commodity Investment Instruments Research Paper

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Investment Instruments

An upsurge of The recent increasing interest in commodity investing is has driving en the development of investment instruments that accommodate the needs ofavailable for investors looking for exposure to commodity prices. Historically, direct exposure to the commodity market has been seen as complicated and often too costlyexpensive for the average investor. However, there are now instruments that offer investors a cheap and easy, inexpensive access to directly exposure to commodity price movements.

This section will explore This part will look more into the different instruments available to investors, and discuss commonly held paradigms about their advantages and disadvantages. This discussion is intended e purpose is to providegive the average investor with more complete and detailed better information about of the instruments well available, before they investing in the commodity market. In this paper, Sseven instruments are discussed in this paper, as follows: Futures contracts, stocks, options, exchange traded funds (ETFs), exchange traded notes (ETNs), commodity mutual funds, e-commodities, and contract for a difference (CFDs).

Futures contracts

Futures contracts are standardized agreementscontracts between two parties to buy or sell an underlying asset or commodity at a predetermined price at a specified particular point in the future when the contract matures (Bodie, et al.Kane and Marcus, 2011). That the contracts are standardized signifies that they are subject to the same terms for all trades.

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Standardization results in, as a result, traders always knowing what rights and obligations arise from the contracts (Bode, et al.Kane and Marcus, 2011). The standardization also makes it possible to price futures contracts in a futures market thereby enabling so that they may be subject to continuous trading.

It is important to note the differences between futures contracts and forward contracts. The primary differences between the two types of contracts are standardization and exchange-based trading. Forward contracts are made according to the needs of the customers since they are exchanged directly between buyers and sellers. As such, forward contracts are not standardized. Even though future trades are more constrained than forward trades, futures contracts standardization tends to stimulate the futures market and enhance liquidity. Futures contracts occur differ from forward contracts, in regards to not having direct contact with the other party entering the contract but instead through an intermediary, called a Clearinghouse, and . Another difference from the forward contracts is that futures contracts are settled daily on the basis of changes in closing prices the previous day before. Gains and losses are then charged to on both contract holders' account at the end of each day in what is . This account is called a margin….....

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