Futures Markets - Part 2: What is traded?

Futures Trading Short Course

A cash commodity must meet three basic conditions to be successfully traded in the futures market:
  1. It has to be standardized and, for agricultural and industrial commodities, must be in a basic, raw, unprocessed state. There are futures contracts on wheat, but not on flour. Wheat is wheat (although different types of wheat have different futures contracts). The miller who needs a wheat futures to help him avoid losing money on his flour transactions with customers wouldn't need a flour futures. A given amount of wheat yields a given amount of flour and the cost of converting wheat to flour is fairly fixed. hence predictable.
  2. Perishable commodities must have an adequate shelf life, because delivery on a futures contract is deferred.
  3. The cash commodity's price must fluctuate enough to create uncertainty, which means both risk and potential profit.

Next Page: Futures Exchanges - a look inside
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