Notesale: Turn your study into money

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Factors which can influence supply
and/or demand of commodities include:
Floods, drought, plant disease
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1-2

Purchasing commodities…
PRICE is the main uncertainty!

MAIN OPTIONS FOR BUYERS:
1• Spot purchasing

• Commodity exchanges give
reference prices, but involve
more “paper trading” than
physical delivery…
• You will normally buy from a
trader/dealer or producer

2• Speculating: will prices

go up

or down?
3• Hedging by Buying forward
4• Hedging in more complex situations
5• Call options
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Quantities are purchased only as & when needed
Little stock is held
In some cases it may be possible to regularly adjust the
prices of your finished products to reflect commodity market
prices - if not, you will bear the risk

12
3

9
6
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The example of Clunk Industries Ltd
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2-3

Option 2 - Speculating
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Speculating
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Spot: $100
T1

1

Spot: $?
T2

Clunkonite price used
for your contract

Spot T2: $?

T3

Your risk &
client’s risk

You purchase
clunkonite at

Spot T1: $100

2

ITC

Clunkonite price used
for your contract

You purchase
clunkonite at

Spot T1: $100

Spot T2: $X

Your risk

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Use “forward contracts” which fix the price (based on the
“futures price” on the commodity exchange) for a given
quantity to be delivered to you at some point in the future
Forward buying eliminates your price risk
The main difference (“basis”) between the spot price and the
futures price is due to the carry cost (of holding stock) and
variations in supply & demand
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Forward buying
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Spot: $100
T1

Futures: $110
Spot: $?
T2

T3

Clunkonite price used
for your contract

Futures T2: $110
You place forward contract to
buy clunkonite at

No risk to you or
to your client

Futures T2: $110
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g
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by Clunk Industries Ltd
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2-9

Option 5 - Call options
Another form of hedging
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When to use which strategy
Guidance on the usage of different commodity purchasing strategies
Strategy
Buy only for
immediate
requirements

Speculation

Effect

When appropriate

Pay the market price (and accept
that the market will change)
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If successful, you pay less than
the average market price – if
unsuccessful, you pay more
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 When the price of finished goods can vary to take
full account of variations in the price of the
commodity
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 Avoid this option wherever possible
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 When future requirements are certain
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 When you will be paid based on the price of the
commodity at a date different to that when you
need to buy it
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 When you need a fixed price for the commodity
for use in a quotation or bid
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 You may spot buy or use term contract
 You may try for a fixed price, but may
have to renegotiate if prices change much
 Build in pricing schemes if appropriate (e
...
,
minimum & maximum thresholds)

…or from the local market
 No commodity exchange mechanisms, so you will
have to spot buy or speculate
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