Investor's wiki
en English
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy
Navigation
Home Glossary
InvestingStocksBondsCryptoPersonal FinanceFundamental AnalysisTechnical AnalysisTradingBankingTaxes
Disclaimer Terms of Use Privacy Policy Cookie Policy

Spot Commodity

Spot Commodity
TradingFutures Commodities TradingFutures and Commodities Trading

What Is a Spot Commodity?

In finance, the term "spot commodity" alludes to a commodity that is being sold determined to be delivered to the buyer decently right away — either as of now or inside a couple of days. As their name recommends, spot commodities are commodities that trade on the spot market. In like manner, a spot commodity's price is known as its spot price.

Paradoxically, commodity futures or forward markets involve delivery of the commodity at a future point in time.

How Spot Commodities Work

Spot commodities are an important part of the financial markets, allowing companies, traders, and intermediaries to purchase a great many commodities on short notice. The present spot commodity markets incorporate energy commodities like oil, coal, and power; agricultural commodities like corn, wheat, and soya beans; metals like gold, silver, and steel; and numerous others.

Generally talking, there are two major types of buyers in the spot commodities market: commercial customers and speculators. For commercial customers, the commodities they purchase are essential contributions to their business operations. For example, airlines like Delta Airlines Inc. (DAL) require a large amount of stream fuel to operate their aircraft, while a company like Starbucks Corp. (SBUX) requires huge amounts of coffee beans as part of their coffee simmering and production lines. Speculators, then again, utilize the commodities market as a method for profitting from anticipated ascents or falls in commodity prices and don't mean to take physical delivery of the commodities they buy.

Ordinarily, speculators will utilize the spot market as a method for finishing off a position they have recently gone into through the commodity futures market. For instance, a speculator who purchased coffee bean futures contracts could close out that position by selling those contracts to a commercial buyer in the spot market once that futures contract has arrived at its settlement date. Since the value of a commodity futures contract depends on the value of its underlying commodity, the price of a given futures contract will trend toward the spot price of that commodity as the futures contract moves toward its settlement date.

True Example of a Spot Commodity

Frequently, commodity market participants will utilize both the spot and futures commodity markets. For instance, consider the case of an airline that necessities to secure its supply of stream fuel for the following year. In October 2020, the spot price of U.S. Gulf Coast lamp oil type fly fuel was just more than $1 per gallon. Paradoxically, that equivalent commodity cost generally $1.85 per gallon in October 2019.

Taking a gander at these prices, an airline company may be glad to purchase its stream fuel in the spot market, taking physical delivery inside a couple of long stretches of purchasing the fuel. Notwithstanding, it could likewise need to purchase stream fuel futures contracts to "secure in" the low price several months into what's to come. The price of the futures contracts would then reflect not just the spot price of the commodity today yet additionally the anticipated future bearing of spot prices.

Spot Price, Futures Price, and Basis

The basis is the difference between the spot price of a deliverable commodity and the price of the futures contract for the earliest accessible date. Basis is utilized by commodities traders to determine the best opportunity to buy or sell a commodity. Traders buy or sell in view of whether the basis is reinforcing or debilitating.

Basis is a pivotal concept for portfolio managers and traders since this relationship among cash and futures prices influences the value of the contracts utilized in hedging. To act as an illustration for basis in futures contracts, accept the spot price for crude oil is $50 per barrel and the futures price for crude oil deliverable in two months' time is $54. The basis is $4, or $54 - $50.

Features

  • A spot commodity is a commodity that is traded on its cash market instead of a derivatives market.
  • Spot markets are those where the transactions are settled inside just a couple of days.
  • Market participants frequently utilize a combination of spot and futures markets for trading commodities, as hedgers or as speculators.