Commodities Risk Definition
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. This lack of differentiation gives the commodity market its unique characteristics.
Most importantly, commodities are priced according to their spot price, which is the price at which a particular good can be bought or sold immediately. This pricing structure means that there is always risk associated with holding a commodity, as prices can fluctuate greatly from day to day. In order to mitigate this risk, many investors choose to trade futures contracts instead of buying and selling the underlying commodity itself.
Futures contracts are agreements to buy or sell a particular commodity at a set price on a future date. These contracts can be traded on an exchange, and they provide investors with a way to lock in a price for a commodity today, even if the price of that commodity increases in the future. By hedging their bets with futures contracts, investors can minimize their exposure to commodities risk.
