Market Equilibrium through Commodity Futures

Abstract

A commodity forward contract is an agreement between counterparties for the delivery of a physical asset at a certain time in the future for a certain price that is fixed at the inception of the contract. On the other hand, commodity future contracts are highly uniform and well-specified commitments for a carefully described good to be delivered at a certain time and place and in a certain manner and the permissible price fluctuations are specified. Commodity market is a place where raw and primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized contracts. It is similar to an equity market. The forward commodity prices have a strong relation with the prices of commodities prevailing in the spot commodity market. In addition to that the forward commodity prices are supported from the stock market stability, rate of interest, economic condition of the internal and external environment etc.

From the price signal of the commodity forward market the producer and the consumer get an idea of the future price of the commodity. With this price expectation the producer can plan for his production budget and similarly the consumer can plan for his consumption budget. As the production and the sales budget of the producer and the consumption budget of the consumer both are planned from the same price signal, there is a good chance for the equality of production and consumption in the market. Therefore, with the help of commodity forward trading and commodity future, the market may attain equilibrium easily with less speculation and price fluctuation.

In this article an attempt has been made to find out the relation between the commodity forward and future market in the general market equilibrium.