The Financial Commodity Markets

In legal terms, "financial instruments" (FIs) are financial securities and financial contracts. The broad categories of FIs are stocks, bonds, futures contracts, options, and swaps. This chapter examines derivative FIs, such as futures, options, and swaps, where the underlying entities are agricultural, mineral or fuel commodities. It presents a few facts regarding physical markets and focuses on financial markets. The chapter describes various operations carried out by actors on commodity markets. Speculation consists of trying to take advantage of anticipation of future states of the market. Leverage makes it possible to speculate with low initial costs, relatively speaking. Apart from pure speculators, as well as certain arbitrageurs, economic agents carry out operations on both financial and physical markets. Industries, still called transformers, are chiefly subject to two risks: a risk of an increase in prices and a risk of a break in supply, especially for process industries.