Author Archives: Claudia Soria

Basis risk is the potential adverse change in the cash price – futures price relationship while a hedger maintains an open commodity futures position. If the basis remains unchanged during the time the position is open, it is considered a … Continue reading →

Commodity hedgers are the sellers or buyers of the actual physical commodity (e.g. farmers, oil companies, millers, etc.) who engage in hedging strategies by selling or buying commodity futures contracts to protect themselves from the adverse effects of commodity price … Continue reading →

Switching, also referred as rolling forward, is a speculating strategy where a speculator extends the holding period of a commodity futures position by closing a position in a contract month close to the expiration date and at the same time, … Continue reading →

Pyramiding is a speculating strategy where, after establishing a futures position, an speculator increases the size of his initial open profitable position by adding more contracts in declining increments if prices of the underlying commodity continue increasing. For example, let’s … Continue reading →

Commodity speculators are market participants that trade commodities with  higher than average risk with the expectation of making higher than average profits. Commodity speculators try to forecast price changes and they base their futures positions on those forecasts. Speculators assume … Continue reading →

Market liquidity is defined by the number of participants in that market. The more the number of participants, the more liquid the market. Illiquid or thin markets, by contrast, have fewer participants. High liquidity commodity markets posses higher efficiency, which … Continue reading →

When securities such as stocks and bonds are used as the investment margin, they are discounted at a percentage to determine their collateral value. Discounting these securities by a certain percentage to determine their margin value is referred to as … Continue reading →

Over The Counter (OTC), also known as off-exchange trading, is trading financial instruments such as stocks, bonds, or commodities directly between two parties. OTC contracts are bilateral contracts in which two parties agree on how a particular trade or agreement … Continue reading →

The margin percentage is established as the cash deposit relative to the commodity. The margin percentage can be calculated in two ways: The investment margin per unit divided by the unit price of the commodity The total margin investment amount … Continue reading →

A clearinghouse is an entity separated from an exchange, but associated with it. It acts as guarantor for sellers and buyers of futures contracts. The clearinghouse acts as seller to all buyers and as buyer to all sellers. The clearinghouse … Continue reading →