Fundamentals of Commodity Futures Contracts With Focusing on Crude Oil Futures Contracts

R. Hadi, Maithem; A. I. Al-Ameri, Mohammad

	Fundamentals of Commodity Futures Contracts With Focusing on Crude Oil Futures Contracts
THE IRAQI MAGAZINE FOR ADMINISTRATIVE SCIENCES
Article 1, Volume 4, Issue 21, 2008, Pages 1-45 PDF (0 K)
Authors
Maithem R. Hadi; Mohammad A. I. Al-Ameri
Abstract
Spot markets allow investors to purchase and sell spot tools for immediate delivery and immediate payment. In some cases, however , an investor my be concerned with the price at which he will be able to transact in the future. One way to eliminate the price risk on transaction that will not be completed until some future date is to enter into deterred delivery contract. There are two types of markets for deferred delivery transaction,forward contracts market and future contracts market. A forward contract is a bilateral contract between a purchaser and a seller. The asset to de exchanged and the settlement price and date of delivery is whatever is mutually agreeable to the two transactors. When the settlement date arrives, the buyer tenders cash equal to the previously agreed upon settlement price to the seller , and the seller delivers the previously agreed upon asset to the buyer. For some assets , buying and selling for deferred delivery is facilitated be the organization of a formal exchange markets. One of the principal characteristics of exchange trading is the establishment of standardized settlement dates at which time buyers and sellers tender payment and delivery,respectively,against their open obligations. Standardized settlement dates make for more homogeneous contracts and thereby improve the liquidity of the market. Contracts for deferred delivery entered into an organized exchanges are called futures. Thus, this paper aimed to discussing the fundamentals underlying the commodity,in general,energy and crude oil futures contracts,in particular. This paper reached to many conclusions,most important of them is the commodity futures contracts is an organized deferred delivery contract in contrast to the forward contract which is over the counter contract,and the physical commodity is represent it's underlying assets not the financial tool like look in the financial futures. The commodity futures contract do not have success until met the number of requirements. First,the commodity must be homogeneous and fungible. There must be a substantial hedgers interested in the market,and there must be price volatility in the spot market for underlying commodity. The contract should offer the two liquidity characteristics: low transactions costs and highly elastic excess demand. The contract needed to be traded in small enough lots to generate the speculators interest from non-industry concerns. It also needed to be close linked to the spot market in such a way that sufficient price convergence between the two markets would render it a viable hedging tool for industry participants. This paper approached to many recommendations,most important of them is necessity to benefit from obvious advantages of commodity futures contract by establishing market to these contracts in Iraq for trading,on one side,in crude oil and distillates futures contracts in order to hedging the price risk of exported Iraqi crude oil and of imported distillates and,on other side,in wheat, sugar, rice and other consuming commodities that imported to Iraq in huge quantities.

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