What are spreads in commodities?

What are spreads in commodities?

A commodity-product spread is the price difference between a raw material commodity and the price of a finished product made from that commodity. Traders in the futures market can use the commodity-product spread as the basis for different trading strategies.

What is intra commodity spread?

Intra-Commodity Calendar Spread: This is a futures spread in the same commodity market, with the buy and sell legs spread between different months. For instance, a trader could buy a March wheat futures contract and sell a September wheat futures contract.

How are commodity prices determined?

Just like equity securities, commodity prices are primarily determined by the forces of supply and demand in the market. 2 For example, if the supply of oil increases, the price of one barrel decreases. Conversely, if demand for oil increases (which often happens during the summer), the price rises.

How is crush spread calculated?

Crush Margin = Soybean Meal x 80\% + Soybean Oil x 18.3\% – Soybeans. This requires making two conversions—from bushels to metric tons and from USD to CNY.

What are spread contracts?

A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. A spread tracks the difference between the price of whatever it is you are long and whatever it is you are short.

What are the three 3 group of spreads in futures market?

The first step in learning how to trade futures spreads is to address their three fundamental classifications: intramarket, intermarket, and commodity product. In order to execute each type of spread, it’s necessary to simultaneously buy and sell futures contracts in the same or similar markets.

What is the importance of calculating the demand for a commodity in the market?

Supply and demand have an important relationship because together they determine the prices and quantities of most goods and services available in a given market. According to the principles of a market economy, the relationship between supply and demand balances out at a point in the future.

What is a commodity crush spread?

A crush spread is a commodity trading strategy in which the trader takes a long position in soybean futures against short positions in soybean meal futures and soybean oil futures to establish a processing margin.

What is soybean oil used for?

Soybean oil is a vegetable oil extracted from the seeds of the soybean (Glycine max). It is one of the most widely consumed cooking oils and the second most consumed vegetable oil. As a drying oil, processed soybean oil is also used as a base for printing inks (soy ink) and oil paints.

What are commodity spreads and straddles?

Commodity spreads ( or straddles) measure the price difference between two different contracts, usually futures contracts. The price difference is often analyzed in special futures spread charts.

What is \%carry in commodities?

Carry, in the commodities space, is the sum of the “roll yield” and the risk-free rate. The roll yield component is straightforward. Let’s say you go long WTI oil 12 months forward. The price on this contract is $55.80 as I write this. The spot price is $60.07. The carry is this differential, expressed as a percentage – ($60.07/$55.80 – 1 = 7.65\%).

Are commodity spreads worth the risk?

Despite being a relatively conservative trading strategy, there is still risk involved with commodity spreads. The premise for the spread trade is that the trader expects the corn market to be stronger than the wheat market.

What are carrying charges in the grain business?

In the grain business the difference between two contract months of the same commodity ( ie., canola) represents the carrying charges or the cost of holding the commodity for a period of time. Carrying charges are determined by the cost of interest and storage when physical commodities are held in store.