(a) State three benefits of a commodity exchange. (b) Explain two methods of trading in a commodity exchange. (c) State four requirements for trading in a c...
(b) Explain two methods of trading in a commodity exchange.
(c) State four requirements for trading in a commodity exchange
(a) Three benefits of a commodity exchange are:
Price discovery: Commodity exchanges provide a transparent platform for buyers and sellers to discover the market price of a commodity based on supply and demand.
Risk management: Commodity exchanges offer hedging instruments such as futures and options contracts, which enable market participants to manage their price risk.
Standardization: Commodity exchanges establish and enforce quality and quantity standards for commodities traded on their platform, which helps to ensure that buyers and sellers receive the products they expect.
(b) Two methods of trading in a commodity exchange are:
Open outcry: In this method, buyers and sellers gather on the trading floor of the exchange and communicate their bids and offers to each other verbally or through hand signals.
Electronic trading: In this method, buyers and sellers use a computerized trading platform provided by the exchange to submit their bids and offers, and execute trades.
(c) Four requirements for trading in a commodity exchange are:
Membership: To trade on a commodity exchange, a person or firm must be a member of the exchange or have an account with a member firm.
Margin deposit: Market participants must deposit a certain amount of money with the exchange or their member firm to cover potential losses from trading.
Compliance: Market participants must comply with the rules and regulations of the exchange, including those related to trading procedures, product specifications, and risk management.
Market knowledge: Market participants must have a good understanding of the commodity they are trading, including its supply and demand dynamics, quality standards, and price volatility. This knowledge can be acquired through research, analysis, and experience.
Answer Details
(a) Three benefits of a commodity exchange are:
Price discovery: Commodity exchanges provide a transparent platform for buyers and sellers to discover the market price of a commodity based on supply and demand.
Risk management: Commodity exchanges offer hedging instruments such as futures and options contracts, which enable market participants to manage their price risk.
Standardization: Commodity exchanges establish and enforce quality and quantity standards for commodities traded on their platform, which helps to ensure that buyers and sellers receive the products they expect.
(b) Two methods of trading in a commodity exchange are:
Open outcry: In this method, buyers and sellers gather on the trading floor of the exchange and communicate their bids and offers to each other verbally or through hand signals.
Electronic trading: In this method, buyers and sellers use a computerized trading platform provided by the exchange to submit their bids and offers, and execute trades.
(c) Four requirements for trading in a commodity exchange are:
Membership: To trade on a commodity exchange, a person or firm must be a member of the exchange or have an account with a member firm.
Margin deposit: Market participants must deposit a certain amount of money with the exchange or their member firm to cover potential losses from trading.
Compliance: Market participants must comply with the rules and regulations of the exchange, including those related to trading procedures, product specifications, and risk management.
Market knowledge: Market participants must have a good understanding of the commodity they are trading, including its supply and demand dynamics, quality standards, and price volatility. This knowledge can be acquired through research, analysis, and experience.