What Is a Cash Commodity?
A cash commodity is a tangible product to be delivered in exchange for payment and is seen most frequently with futures options. A contract for a cash commodity will specify the exact amount of the commodity which is expected to be delivered, along with the delivery date, and the price. Cash commodities can include agricultural products, minerals, oil, and gold. Are treasury bond commodities? Yes, they are.
Cash commodities are also sometimes referred to as actuals.
Key Takeaways
- A cash commodity is a tangible product given as payment for a good.
- Companies enter into contracts for cash commodities because they are betting on a specific price for a commodity they plan to use.
- Speculators are often interested in capitalizing on the change of the commodity’sprice rather than the commodity itself.
Understanding Cash Commodity
A cash commodity is a tangible commodity for which a person or company has a use. Companies enter into contracts for cash commodities because they are betting on, or hedging, the price for a commodity that they need.
For example, a prominent sausage manufacturer may anticipate the price of pigs going up over the next six months. To lock in a reasonable price on the meat they need for production, they may execute a futures contract.
With the futures contract,the sausage company agrees to buy a certain number of pigs for a set price at a predetermined date. This date may be, for example, three months in the future. At that date, the company will receive a delivery of pigs in exchange for their payment commodities. The company was not speculating, because they were counting on the physical delivery of pigs, which they use in the production of theirproduct.
It is vital that contractsclearly state whether an actual cash commodity is expected for delivery at the contract's endor earlier. This requirement is because some commodities and futures contracts are cash-settled, which means that no physical goods change hands through the contract.
Speculating and Hedging Cash Commodities
In cash-settled contracts, only money changes hands, rather than the actual physical commodities. A contract would be cash-settled if the purchaser of the commodities was a speculator who was not actually interested in having the physical commodity but has an interest in the price fluctuations.
Speculators may only be interested in capitalizing on the change of the commodity’sprice. A speculator may buy a shipment of corn at a low price, for example, and then sell it at a profit when the price of corn goes up. Through the use of a broker, it is possible for this investor never actually to have physical possession of this shipment of corn.
In actuality, our sausage company example and a speculator may purchase that same lot of pigs for the same price at the same time through a futures contract. But in the case of the speculator, that person does not actually want 10 truckloads of pigs delivered to their door.
They are only trying to profit off of the change in prices that they anticipate in the price of pigs. Thus, this futures contract would be cash-settled, as opposed to settled through the cash commodity.
FAQs
A cash commodity is a tangible product to be delivered in exchange for payment and is seen most frequently with futures options. A contract for a cash commodity will specify the exact amount of the commodity which is expected to be delivered, along with the delivery date, and the price.
What is an example of a cash commodity? ›
A cash commodity refers to physical goods like aluminium, cotton, gold, silver, zinc, and other tangible goods which are delivered to a trader or company most commonly after exercising derivatives like options and futures contracts. Cash commodities are also known as actuals.
What is an example commodity? ›
Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum.
What is an example of commodity money? ›
Commodity money has been used throughout history as a medium of economic exchange. Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
What are the three types of commodities? ›
There are three major types of commodities; agriculture, energy, and metals. These three are differentiated in the means of accessing them. The means of accessing them is based on whether they are hard or soft.
What is one problem with commodity money? ›
Commodity money has intrinsic value but risks large price fluctuations based on changing commodity prices. If silver coins are used, for instance, a large discovery of silver may cause the value of the silver currency to plunge, resulting in inflation.
Is gold a cash or commodity? ›
Is gold a commodity or a currency? The answer – technically speaking – is that it is both. Gold is definitely a commodity, but it can be used in some similar ways to a currency.
What is commodity in simple words? ›
Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity.
What are 10 commodities? ›
The 10 largest sources of cash receipts from the sale of U.S.-produced farm commodities in calendar year 2022 are (in descending order): corn, cattle/calves, soybeans, dairy products/milk, broilers, hogs, miscellaneous crops, chicken eggs, wheat, and hay.
Is water considered a commodity? ›
Like gold and oil, water is a commodity—and it happens to be rather scarce nowadays. So, as with any other scarcity, the water shortage creates investment opportunities.
U.S. currency is fiat money. It is not a commodity with its own great value and it does not represent gold-or any other valuable commodity-held in a vault somewhere. It is valued because it is legal tender and people have faith in its use as money.
What is the most common form of commodity money? ›
The most common form of commodity money was dried indian corn, which was used to purchase the item depicted above and described below.
Is a 5 dollar bill commodity money? ›
Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
What is a financial commodity? ›
Commodities are basic goods such as wheat, gold, oil and cattle. Commodities can help diversify an investment portfolio but might not be suitable for all investors. It's important to understand the products and markets before investing.
What are the most common commodities? ›
Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas.
What is the most actively traded commodity in the world? ›
Brent Crude Oil
Accordingly, Brent Crude is considered the most used benchmark worldwide. It is extracted from the North Sea and is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide.
What is cash and commodities? ›
A cash commodity is a tangible product given as payment for a good. Companies enter into contracts for cash commodities because they are betting on a specific price for a commodity they plan to use. Speculators are often interested in capitalizing on the change of the commodity's price rather than the commodity itself.
What are the types of commodity money? ›
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
What are some examples of commodities in real life? ›
Commodities are often split into two broad categories: hard and soft commodities. Hard commodities include natural resources that must be mined or extracted, such as gold, rubber, and oil, while soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans, and pork.
