Commodities Exchange - Explained
What is a Commodities Exchange?
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Table of ContentsWhat is a Commodities Exchange?How Does a Commodities Exchange Work?Where to Invest in CommoditiesInvestment Characteristics of CommoditiesTypes of CommoditiesAcademic Research on Commodities Exchange Center
What is a Commodities Exchange?
A commodities exchange refers to an organized marketplace where derivative products and commodities are traded. Trades that take place in a Commodity exchange include the trade of raw products and materials such as metal, agricultural items, and contracts such as forward contracts, futures, and options. Examples of commodity exchanges in the world are the New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), Kansas City Board of Trade (KCBT), Chicago Mercantile Exchange (CME), London Metal Exchange (LME), among others.
How Does a Commodities Exchange Work?
Aside from the products listed above, there are other sophisticated items that are traded in commodities exchanges. Generally, in a Commodity exchange, futures contracts can be traded for commodities that will be delivered at a particular time of the month. Real market traders trade in the commodities market, as well as speculators who trade in futures contracts just to make a profit.
Where to Invest in Commodities
Numerous commodities exchanges exist around the world, they include;
- Mercantile Exchange Nepal Limited (MEX), Nepal
- Australian Securities Exchange (ASX), Australia
- Tokyo Commodity Exchange (TOCOM), Japan
- Central Japan Commodity Exchange (C-COM), Japan
- Multi Commodity Exchange (MCX), India
- Dubai Mercantile Exchange (DME), Middle East
- Singapore Exchange Limited (SGX), Singapore
- Dalian Commodity Exchange (DCE), China
- Zhengzhou Commodity Exchange (ZCE), China
- The South African Futures Exchange (SAFEX), South Africa
There are certain standards that guide transactions in the commodities exchanges, although, there might be some variance depending on the regulations of the country.
Investment Characteristics of Commodities
Commodities in the exchange markets are influenced by the principles of demand and supply. When there is a disruption in the supply of derivatives and commodities in the market, prices tend to go up. It has been observed that a decline in the number of raw materials available in the commodities market can create a spike in price. Also, when there is a higher demand in the market, it will lead to higher prices.
Types of Commodities
There are different categories of commodities that can be traded in the commodities exchange, they include the following ;
- Agricultural products: wheat, barley, sugar, maize, cotton, cocoa, coffee, and cooking oil
- Metals: Copper, gold, silver, and platinum
- Energy: gasoline, Crude oil, and natural gas
- Livestock: milk products, pork bellies, feeder cattle
Academic Research on Commodities Exchange Center
- International trade with forward-futures markets under exchange rate and price uncertainty, Kawai, M., & Zilcha, I. (1986). International trade with forward-futures markets under exchange rate and price uncertainty. Journal of International Economics, 20(1-2), 83-98. The paper examines a risk-averse firm's decisions on the level of trade, when the exchange rate and the commodity price are uncertain, and the extent of forward exchange and commodity futures commitments. First we verify the Separation Theorem and the Full Double Hedging Theorem. Second, we investigate the implications of the existence of both forward foreign exchange and commodity futures markets in comparison to the case where only one (or no) market is available to the firm. The second exercise enables us to focus on conditions under which establishing forward-futures arrangements promotes international trade.
- Trade as action at a distance: questions of integration and communication, Renfrew, C. (1975). Trade as action at a distance: questions of integration and communication. Ancient civilization and trade, 3, 3-59.
- Alternative models for exchange and spatial distribution, Renfrew, C. (1977). Alternative models for exchange and spatial distribution. In Exchange systems in prehistory (pp. 71-90). This chapter reviews some of the regularities that have now become apparent about proposed mechanisms of exchange and discusses whether it is justified to associate these with specific kinds of trade or exchange. Characterization methods and the development of efficient field recovery procedures have now made possible the quantitative investigation of trade or distribution patterns in a detailed manner. The most obvious suitable subjects for such studies are classes of artifact. The underlying regularities in the patterns observed are being sought, with the aim of understanding the mechanisms of exchange involved and, hence, of gaining insight into the economic and social processes at work in the society in question. In circumstances of uniform loss or deposition, and in the absence of highly organized directional exchange, the curve of frequency or abundance of occurrence of an exchanged commodity against effective distance from a localized source will be a monotonic decreasing one. Various approaches have been made toward a regression analysis of the fall-off with distance of traded commodities. In each case, some measure of abundance or frequency is plotted against distance from the source in question. Three principal classes of curves have, up to the present time, been considered relevant as possible approximations for the distance regressions observed.
- On money as a medium of exchange, Kiyotaki, N., & Wright, R. (1989). On money as a medium of exchange. Journal of political Economy, 97(4), 927-954. We analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilibria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the general medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, acceptability, and liquidity are discussed.
- Evidence of chaos in commodity futures prices, Decoster, G. P., Labys, W. C., & Mitchell, D. W. (1992). Evidence of chaos in commodity futures prices. Journal of Futures Markets, 12(3), 291-305.
- The valuation of commodity contingent claims, Cortazar, G., & Schwartz, E. S. (1994). The valuation of commodity contingent claims. Journal of Derivatives, 1(4), 27-39.
- The mechanics of a commodity futures exchange: A critique of automation of the transaction process, Melamed, L. (1977). The mechanics of a commodity futures exchange: A critique of automation of the transaction process. Hofstra L. Rev., 6, 149.
- Structural determinants of real exchange rates and national price levels: Some empirical evidence, Bergstrand, J. H. (1991). Structural determinants of real exchange rates and national price levels: Some empirical evidence. The American Economic Review, 81(1), 325-334.
- The price of gold and the exchange rate, Sjaastad, L. A., & Scacciavillani, F. (1996). The price of gold and the exchange rate. Journal of international Money and Finance, 15(6), 879-897. This paper examines the theoretical relationship between the major exchange rates and the prices of internationally-traded commodities. In the empirical section, the case of gold is analyzed using forecast error data. Among other things, it is found that, since the dissolution of the Bretton Woods International monetary system, floating exchange rates among the major currencies have been a major source of price instability in the world gold market and, as the world gold market is dominated by the European currency bloc, appreciations or depreciations of European currencies have strong effects on the price of gold in other currencies.
- Exchange-Trading Requirement of the Commodity Exchange Act, The, Stein, W. L. (1988). Exchange-Trading Requirement of the Commodity Exchange Act, The. Vand. L. Rev., 41, 473.Financial innovation: The last twenty years and the next, Miller, M. H. (1986). Financial innovation: The last twenty years and the next. Journal of Financial and Quantitative Analysis, 21(4), 459-471. The word revolution is entirely appropriate for describing the changes in financial institutions and instruments that have occurred in the past twenty years. The major impulses to successful financial innovations have come from regulations and taxes. The outlook for the future is for a slowing down of the rate of financial innovation, but much growth and improvement are still in prospect.