1Analysis of Commodity Indices in the Global Shipping Trade

8/9/2019 1Analysis of Commodity Indices in the Global Shipping Trade

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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


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


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


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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Whenyoucall


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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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it, andhandsit to a


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runnerwhowill


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take itdirectly to a


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brokerin thepit.The


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pitbrokerwill


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execute theorder


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byopenoutcry


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andrecordthe


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execution onthe


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cardbeforeit is


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givenback tothe


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runner.Therunner


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takestheexecut


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edorderback to


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thedeskwhere


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theorderclerk


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timestampsthe


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cardonemore


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timebeforethe fill


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isreported to


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yourbroker

1Analysis of Commodity Indices in the Global Shipping Trade

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