Monday, January 31, 2011

A Lesson in Commodity Futures

In the near future, you are going to have to understand how commodities are bought and sold. Both growing global demand and the pressure for money to go somewhere are lighting up commodities. Oil, gold, cotton, wheat and rice are just some of the commodities that are about to figure prominently in your life.

Why this is important: Many businesses - like airlines and fuel options - engage in options due to their operational needs. And inflation - and growing demands - makes this an attractive trade in the future.

Unlike equities, commodities often involve contracts to deliver the actual product at a certain price. Most of the time, no actual physical products change hands.

This is good because people sell and resell options and contracts in excess of the actual amount of physical products available. A lot of people don't really have the products to deliver at certain prices either.


Most of the time markets engage in this 120 mph, highwire act without undue consquences. The Great Maine Potato imbroglio of 1976 is a great example of what happens when you find you need to deliver 3 million potatoes to lower Manhattan by 3 pm the next day.

Another take on the whole sordid episode here.

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