Definition
The term cash commodity refers to a physical commodity to be delivered as part of an agreement or contract. Cash commodities can be agricultural products, precious metals, and even financial instruments like treasury bills.
Explanation
Parties entering into agreements in the futures market will do so for two reasons. Speculators enter into agreements for the sole purpose of making profits by betting on the price direction of the underlying asset. Speculators have no intention of taking physical delivery of the commodity and will close out their position before the contract expires.
Hedgers are parties that either produce the underlying asset or use it in their processes. Unlike speculators, hedgers are oftentimes interested in physically exchanging the underlying asset for cash. For example, an electric utility may take physical delivery of natural gas to use in its generating plants. The physical commodity delivered at the expiration of the futures contract is known as the cash commodity.
The relationship between a futures contract and cash commodity can be explained in this manner: a futures contract is an agreement to deliver a predetermined quantity of the cash commodity of a given quality.
Related Terms
The term cash market refers to a marketplace where securities and commodities are exchanged for cash with immediate delivery. Cash markets can be regulated or unregulated markets.
Moneyzine EditorJanuary 10th, 2024
The term carrying charge refers to the total cost associated with owning a financial instrument or physical commodity. Carrying charges will include applicable cost such as financing, storage, and insurance.Moneyzine EditorJanuary 10th, 2024
The term Bretton Woods Agreement refers to the creation of a system for managing exchange rates and conducting monetary policy. Developed in 1944, the Bretton Woods Agreement was a product of the 44 Allied nations of World War II.Moneyzine EditorJanuary 9th, 2024
