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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 8

The Commodity Market

Helen Lu

Princeton University SBCC Group

Cara M. Marshall

Queens College of the City University of New York

Commodity Market Snapshot

History: Commodity markets pre-date recorded history, and their evolution was critical to the development of modern civilization. Early barter trades evolved into loosely organized markets, which then evolved into more organized markets. Today we have highly efficient cash and derivatives markets for most major commodities. The latter include both exchange-traded components and over-the-counter components. These markets continue to evolve with new electronic platforms rapidly replacing traditional open outcry.

Size: The growth in trading volume for both exchange-traded and OTC commodity derivatives has been impressive. The size of the exchange-traded markets, principally futures, is most often measured in terms of contract volume and contract open interest. The size of the OTC derivatives markets is most often measured in notional principals outstanding and gross market values. Notional principal in the OTC commodity derivatives markets grew from under $1 trillion in 1998 to almost $18 trillion 10 years later.

Products: The markets trade an array of products ranging from physical commodities for immediate delivery, to highly standardized exchange-traded products, such as futures and options on futures, that allow individuals and institutions to enter and exit positions quickly and efficiently. Customized derivative ...

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