ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Generally speaking, commodities trade either in spot markets or derivatives markets. Spot markets are also referred to as “physical markets” or “cash markets” where buyers and sellers exchange physical commodities for immediate delivery. Derivatives markets involve forwards, futures, and options.

Detailed explanation-2: -A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Futures are exchange-traded derivatives contracts that lock in future delivery of a commodity or security at a price set today.

Detailed explanation-3: -Businesses use futures to lock in prices of the commodities they sell or use in production. The goal of hedging is to prevent losses from potentially unfavorable price changes rather than to speculate. Many companies that hedge use or produce the underlying asset of a futures contract.

Detailed explanation-4: -Commodities exchange Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them.

Detailed explanation-5: -Stocks denote company ownership, while commodities represent goods that include agricultural products, metals, oil, etc. Both these asset classes reserve sizeable profit-making potential. However, they are traded in different marketplaces.