ECONOMICS OF COMMODITIES: SPOT AND FORWARD TRANSACTIONS

As seen earlier in the chapter, commodities are different in many ways from traditional financial assets such as bank deposits, foreign exchange or bonds. This affects the way they are priced. However, pricing oil and oil products is markedly different from pricing gold, or indeed soya. Here, I will revert back to first principles of pricing as far as possible.

With most asset classes there are two distinct pricing methodologies: spot and forward markets. A spot rate is a fixed price quoted for delivery in the very near future – today, tomorrow or the next day – and a forward price is a fixed price quoted today for delivery in the future on a forward date. Nevertheless, many commodities ...

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