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1Analysis of commodity indices in the global shipping trade
COMMODITY MARKET
Commodity markets are markets where raw or primary products are exchanged. It covers
physical product (food, metals, and electricity) markets but not the ways that services,
including those of governments, nor investment nor debt, can be seen as a commodity.
HISTORY OF COMMODITY MARKETy Modern Commodity Market have their roots in the trading of agricultural
products.y Wheat and corn, cattle and pigs, were widely tradedusing standard
instruments in the 19th century in theUnited States.y Historically, in ancient times Sumerian use of sheepor goats, or other
peoples using pigs, rare seashells, orother items as commodity money, have
tradedcontracts in the delivery of such items, to render tradeitself more smooth and
predictable.
SIZE OF THE MARKETy The trading of commodities includes physical tradingof food items, Energy
andMetals, etc. and trading ofderivatives.y In the five years up to 2007, the values of global physical exports of
commodities increased by 17% while the notional value outstanding of commodity. OTC
derivatives increased more than 500% andcommodity derivative trading on exchanges
morethan 200%.
2Analysis of commodity indices in the global shipping tradey Agricultural contracts trading grew by 32% in 2007, energy 29% and
industrial metals by 30%.y Precious metals trading grew by 3%, with higher volume in New York being
partially offset by declining volume inTokyo.
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y OTC trading accounts for the majority of trading in gold and silver.
LIST OF TRADED COMMODITY
y Agricultural (Grains, and Food and Fiber)
y Livestock & Meat
y Energy
y Precious metals
y Industrial metals
Agricultural ProductsCorn, Oats, Rough Rice, Soybeans, Rapeseed, SoybeanMeal, Soybean Oil,Wheat, Cocoa, CoffeeC, Cotton No.2, Sugar No.11, Sugar No.14.
Livestock and meatLean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.
EnergyWTI Crude Oil, Brent Crude, Ethanol, Natural Gas, Heating Oil, Gulf Coast
Gasoline, RBOB Gasoline,Propane, Uranium
3Analysis of commodity indices in the global shipping trade
Precious Metal
Gold,Platinum,Palladium, Silver.Industrial MetalsCopper,Lead, Zinc,Tin, Aluminum, aluminum alloy, Nickel, aluminum
alloy, Recycled steel.COMMODITY EXCHANGES
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y Abuja Securities and Commodities Exchange
y Bhatinda Om & Oil Exchange Bathinda
y BrazilianMercantile and Futures Exchange
y Chicago Board ofTrade
y ChicagoMercantile Exchange
y Commodity Exchange Bratislava, JSC
y Dalian Commodity Exchange
y Dubai Mercantile Exchange
y Intercontinental Exchange
y Minneapolis Grain Exchange
y Multi Commodity Exchange
y National Commodity and Derivatives Exchange
y National Multi-Commodity Exchange of India Ltd
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y New YorkMercantile Exchange
y New York Board ofTrade
y London Metal Exchange
y Winnipeg Commodity Exchange
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RECENT TRENDS IN COMMODITYMARKETy 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.y Speculation in forward markets.y Farmers are expected to face a sharp drop in crop prices as a result of bad
rainfall.y Other commodities, such as steel, are also expected to fall due to lower
demand.Basics of Futures TradingPerhaps the biggest advantage to trading futures contracts is the leverage provided
by the exchange.However, controlling large contracts with relatively low amounts of
capital can create high levels of volatility. As a result, many traders will argue that
leverage is actually a disadvantage. Regardless of your opinion on leverage and margin
requirements, it is important that you fully understand the concepts.
Before a customer can establish a position he is required to make a minimum good faith
deposit, or margin, to assure the performance of his obligations. A margin deposit is, in
essence, a performance bond, which is usually between 5% and 10% of the underlying
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contract value. A good faith deposit indicates the buyer or sellers willingness and
capability to compensate the opposite party to a transaction
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Because margin requirements are low, hedgers are given the ability to lock in
pricing of cash market goods without tying up a lot of capital. It would be
counterproductive for a hedger who handles large quantities to put up 100% of the
value of the hedged commodity.The exchange grants margin discounts to those
that are deemed to be bonefied hedgers, due to the fact that the underlying cash
position is seen as collateral to secure the capital risked in the futures market.
Low margins make speculation in the futures markets very attractive, without the
advantage of leverage the rate of return on most commodities would be marginal.The exchanges are responsible for setting margin requirements, but brokerage
firms have discretion to require higher deposits. Generally, the initial margin is
sufficient to cover the maximum daily price fluctuations. It is not uncommon for
margin requirements to fluctuate with the volatility of the market. A maintenance
level is established below the initial margin, usually 75% of the initial
margin. Once a trader's good faith deposit falls below this threshold additional
funds must be deposited or positions must be liquidated.This is known as a margin
call.
Orders
There are several types of orders that can be placed. In order to maximize
efficiency and profitability, traders must be comfortable in executing each of the
following options.Market Order: The purpose of a market order is to execute a trade immediately at
the best possible price. Such orders give traders the ability to enter or exit a trade quickly,
but do not guarantee a favorable price.This order should be used when time is more
valuable than price.
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6Analysis of commodity indices in the global shipping tradeLimit Order: Limit orders are used to buy or sell at a specified price or better, and
will only be filled at the state price or one that is more favorable. For a sell limit
order better means higher, for buy limit orders better means lower.
Stop Order:This type of order is usually placed to close a position; its name is
derived from the fact that, if placed properly, it will stop loss should the market
go against a traders position.Most traders chose to place a stop order at the time
that they enter a position. By definition, a sell stop will be placed below the market
while a buy stop will be placed above. All orders are day orders unless specified
otherwise and are canceled at the end of the trading day. By entering the order
GTC (good til canceled), the order will be working in each trading session until
canceled by the trader.
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ExecutionManybeginni
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ngtradersare
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unaware of themecha
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nics ofexecuting a
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futurestrade.
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yourbroker,an
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orderticketis
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completed andtime
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stamped inorder
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to keepaccurate track
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of thetimeand
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specifics ofeach
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order.T
hebroker
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thentransmits the
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orderto hisfirms
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tradingdesklocated
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on thefloorof the
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exchangeeither
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by acomputerized
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tradingplatform or
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byphone.The
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orderclerkthen
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fillsout anorder
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card;timestamps
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