Commodities Dollar Relationship
Nov/090
An article on commodity and currency markets
ABSTRACT:
The following white paper explores the commodity future market and currency market.It inhaliates the information about what they really are,what is their basis,how we can use them in order to understand the oppertunities and risks involved in the future trading.
Therefore, you may find usefull information about commodity and currency market and the benefits and risks involved in it.
INTRODUCTION:
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchange in which they are bought and sold in standardized contracts.
This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets,bond markets and currency cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets.
SIZE OF THE MARKET:
The trading of commodities consists of direct physical trading and derivatives trading.The commodities markets have seen an upturn in the volume of trading in recent years. In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%.
The notional outstanding of banks’ OTC commodities’ derivatives contracts increased 27% in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold and silver. Overall, precious metals accounted for 8% of OTC commodities derivatives trading in 2007, down from their 55% share a decade earlier as trading in energy derivatives rose.
Global physical and derivative trading of commodities on exchanges increased more than a third in 2007 to reach 1,684 million contracts. Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%. Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo. Over 40% of commodities trading on exchanges was conducted on US exchanges and a quarter in China. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers.
RECENT TRENDS IN COMMODITIES:
The 2008 global boom in commodity prices – for everything from coal to corn – was fueled by heated demand from the likes of China and India, plus unbridled speculation in forward markets. That bubble popped in the closing months of 2008 across the board. As a result, farmers are expected to face a sharp drop in crop prices, after years of record revenue. Other commodities, such as steel, are also expected to tumble due to lower demand. This will be a rare positive for manufacturing industries, which will experience a drop in some input costs, partly offsetting the decline in downstream demand.
“Currency market”, another name for foreign exchange market is “tool” which allows people to trade currencies. It lets banks and other financial institutions buy and sell currencies easily. The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business’s income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton wood system
The foreign exchange market is unique because of
- its trading volumes,
- the extreme liquidity of the market,
- its geographical dispersion,
- its long trading hours: 24 hours a day except on weekends,
- the variety of factors that affect exchange rates,.
- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- the use of leverage.
CONCLUSION:
“Commodity and Currency markets are not as commonly believed. In many ways, they operate just as public market places or auctions. For instance, prices of commodities on an exchange
are determined solely by supply and demand conditions, which is no different from
the way in which prices are determined in more familiar markets. In addition,
commodity margins are analogous to the down payment one generally makes in
connection with a real estate transaction. Once certain facts are understood, one can see that commodity markets are an integral part of a well-run economy.”
About the Author
I have completed my BBM
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