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Journal of Commodity Markets
  1. Principles of Commodity Economics and Finance | The MIT Press
  2. H. Kent Baker, Greg Filbeck, and Jeffrey H. Harris
  3. Learning Resource: The Economics of Commodity Trading Firms
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A History of Commodities Trading. Commodities Exchanges.

Commodities Market Characteristics. Types of Investment Commodities. Using Futures to Invest.

Futures Market Explained

Using Options to Invest. Using Mutual and Index Funds. Using Pools and Managed Futures.


Principles of Commodity Economics and Finance | The MIT Press

The Bottom Line. Today, tradable commodities fall into the following four categories:. Metals such as gold, silver, platinum, and copper Energy such as crude oil, heating oil, natural gas, and gasoline Livestock and Meat including lean hogs, pork bellies, live cattle, and feeder cattle Agricultural including corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar. Two types of investors participate in the futures markets:. Who Uses Futures Contracts.

H. Kent Baker, Greg Filbeck, and Jeffrey H. Harris

Requirements for Futures Trading. The Advantages of Futures. It's a pure play on the underlying commodity Leverage allows for big profits if you are on the right side of the trade Minimum-deposit accounts control full-size contracts that you would normally not be able to afford You can go long or short easily. The Disadvantages of Futures. Futures markets can be very volatile and direct investment can be very risky, especially for inexperienced investors. Leverage magnifies both gains and losses A trade can go against you quickly, and you could lose your initial deposit and more before you are able to close your position.

Advantages of Stock Options. Investors usually already have a brokerage account, so trading is easier Public information on a company's financial situation is readily available The stocks are often highly liquid. Disadvantages of Stock Options. A stock is not a pure play on commodity prices Its price may be influenced by company-specific factors as well as market conditions. There are no management or redemption fees to worry about because they trade like stocks.

They provide an easy way to participate in the price fluctuation of a commodity or basket of commodities. ETNs have credit risk associated with the issuer. Advantages of Commodity Mutual Funds. Professional money management Diversification Liquidity. Disadvantages of Commodity Mutual Funds. Management fees may be high, and some of the funds may have sale charges.

They are not a pure play on commodity prices because most commodity mutual funds invest in stocks. Advantages of CTAs. They can provide professional advice. A pooled structure provides more money for a manager to invest.

Learning Resource: The Economics of Commodity Trading Firms

Closed funds require all investors to put in the same amount of money. Disadvantages of CTAs. It may be difficult to evaluate past performance, and you may want to look at the CTA's risk-adjusted return from previous investments. Investors should also read CTA disclosure documents and understand the trading program, which may be susceptible to drawdowns. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

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Related Articles. We access, develop, service and sustain international commodity markets on behalf of producers and end-users. We focus energy and resources on activities that make trade work better. We invest in high-quality infrastructure and build innovative, end-to-end services that bridge the gap between buyers and sellers more effectively. Our activities help to create more efficient markets, reducing long-term costs for participants.

In this paper, Heath constructs a macro-finance model for commodity futures. Model estimates suggest a feedback relationship between crude oil prices and U. Moreover, the channel from real activity to oil prices is unspanned - meaning not identified in current futures prices - consistent with oil futures as a hedge asset against supply shocks. Leduc , Moran , and Vigfusson examine the role of learning in accounting for the movements in oil price futures during the s, a period during which the oil market experienced important changes.

The researchers show that a simple unobserved component model in which investors must form beliefs about whether the source of oil price movements is transitory or permanent accounts remarkably well for the fluctuations in oil price futures. The authors' simple framework notably accounts for the relatively slow increase in futures prices at the beginning of the past decade and their unprecedented run-up between and Even during the first half of , a period during which oil prices reached historic highs, the model predicts a level of futures prices that is broadly in line with the data.

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The researchers' estimates suggest that, through learning, investors revised up the contribution of permanent shocks to the variance of oil prices throughout this period. Using a DSGE model in which oil is storable and used in production, they then show that this learning process may have significantly muted the effects of oil shocks on the economy during that period.

Erik P. Gilje, University of Pennsylvania; Robert C. Gilje , Ready , and Roussanov use evidence from asset price data to quantify the contribution of shale oil to the U. Equity market valuations of firms engaged in shale oil extraction reflect the market's expectations about the future growth in shale oil supply and its potential for raising aggregate productivity in the U. Authors pursue two complementary methods to estimate the value from shale oil discoveries. First, they examine returns on an index of shale oil producers orthogonalized with respect to oil prices and industry-wide return controls to extract an empirical measure of shale-specific productivity innovations.

Second, they use the cross-section of stock returns that captures the variation in industries' responses to shale-specific news announcements to construct a shale-factor mimicking portfolio. Arezki , Ramey , and Sheng first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery.

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They then estimate the effects of giant oil discoveries on a large panel of countries. The researchers' empirical estimates are consistent with the predictions of the model.

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After an oil discovery, the current account and saving rate decline for the first five years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after five years. Employment rates fall slightly for a sustained period of time. Darien Huang, Wharton School, University of Pennsylvania Gold, Platinum, and Expected Stock Returns Huang shows that the ratio of gold to platinum prices GP reveals variation in risk and proxies for an important economic state variable.

Itay Goldstein, University of Pennsylvania, and Liyan Yang, University of Toronto Commodity Financialization: Risk Sharing and Price Discovery in Commodity Futures Markets Goldstein and Yang theoretically study how commodity financialization affects trading behavior, prices and welfare through affecting risk sharing and price discovery in futures markets.