Editing Commodity market (section)

==Derivatives==
[[Derivative (finance)|Derivatives]] evolved from simple commodity future contracts into a diverse group of financial instruments that apply to every kind of asset, including mortgages, insurance and many more. Futures contracts, [[Swap (finance)|Swaps]] (1970s–), Exchange-traded Commodities (ETC) (2003–), forward contracts, etc. are examples. They can be traded through formal exchanges or through Over-the-counter (OTC). Commodity market derivatives unlike credit default derivatives, for example, are secured by the physical assets or commodities.<ref name=washingtonpost21apr2010 />

===Forward contracts===
A [[forward contract]] is an agreement between two parties to exchange at a fixed future date a given quantity of a commodity for a specific price defined when the contract is finalized. The fixed price is also called [[forward price]]. Such forward contracts began as a way of reducing pricing risk in food and agricultural product markets. By agreeing in advance on a price for a future delivery, farmers were able protect their output against a possible fall of market prices and in contrast buyers were able to protect themselves against a possible rise of market prices.

Forward contracts, for example, were used for rice in seventeenth century Japan.

===Futures contract===
[[Futures contract|Futures]] contracts are standardized forward contracts that are transacted through an exchange. In futures contracts the buyer and the seller stipulate product, grade, quantity and location and leaving price as the only variable.<ref>Garner, Carley. ''A Trader's First Book on Commodities''. (New Jersey: FT Press, 2010): pg 19.</ref>

Agricultural futures contracts are the oldest, in use in the United States for more than 170 years.<ref>[[Futures Trading Act of 1921]], Declared unconstitutional in [[Hill v. Wallace]] 259 U.S. 44 (1922), the [[Grain Futures Act]] of 1922 and ''[[Board of Trade of City of Chicago v. Olsen]]'' 262 U.S. 1 (1923).</ref> Modern futures agreements, began in Chicago in the 1840s, with the appearance of [[grain elevators]].<ref>Cronon, William. ''Pricing the Future: Grain''. Nature's Metropolis: Chicago and the Great West. University of Chicago, 1991. pp.109-133</ref> Chicago, centrally located, emerged as the hub between Midwestern farmers and east coast consumer population centers.

===Call options ===
In a [[call option]] [[counterparty|counterparties]] enter into a financial contract option where the buyer purchases the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the [[strike price]]). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.<ref>{{cite book
  | last1 = O'Sullivan
  | first1 = Arthur
  | author-link = Arthur O'Sullivan (economist)
  | first2 = Steven M. |last2 = Sheffrin
  | author-link2 = Steven M. Sheffrin
  | title = Economics: Principles in Action
  | url = https://archive.org/details/economicsprincip00osul
  | url-access = limited
  | publisher = Pearson Prentice Hall
  | year = 2003
  | location = Upper Saddle River, NJ
  | page = [https://archive.org/details/economicsprincip00osul/page/n304 288]
  | isbn = 0-13-063085-3}}</ref>

===Swaps===
A [[Swap (finance)|swap]] is a derivative in which counterparties exchange the cash flows of one party's financial instrument for those of the other party's financial instrument. They were introduced in the 1970s.<ref name=GlobalFinance2003>{{cite book
|title=Governing Global Finance: Financial derivatives, liberal states, and transformative capacity
|author=William D. Coleman
|series=GHC Working Paper 01/2
|year=2003
|url=http://www.healthagingandsociety.mcmaster.ca/institute-on-globalization-and-the-human-condition/documents/IGHC-WPS_01-2_Coleman.pdf
|access-date=15 April 2013
|archive-url=https://web.archive.org/web/20140209103857/http://www.healthagingandsociety.mcmaster.ca/institute-on-globalization-and-the-human-condition/documents/IGHC-WPS_01-2_Coleman.pdf
|archive-date=9 February 2014
|url-status=dead
}}</ref><ref name=JournalFuturesMarkets>
{{cite journal
|title=Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures
|author=Dennis W. Carlton
|journal=Journal of Futures Markets
|year=1984
|volume=4
|number=3
|pages=237–71
|doi=10.1002/fut.3990040302
|id={{ProQuest|228205962}}
}}</ref>

===Exchange-traded commodities (ETCs)===
{{main|Exchange-traded product}}
Exchange-traded commodity is a term used for commodity ETFs (which are funds) or commodity [[exchange-traded note]]s (which are notes). These track the performance of an underlying commodity index including total return indices based on a single commodity. They are similar to ETFs and traded and settled exactly like stock funds. ETCs have [[market maker]] support with guaranteed liquidity, enabling investors to easily invest in commodities.

They were introduced in 2003.

At first, only professional institutional investors had access, but online exchanges opened some ETC markets to almost anyone. ETCs were introduced partly in response to the tight supply of commodities in 2000, combined with record low inventories and increasing demand from emerging markets such as China and India.<ref name=ETC>{{cite journal
|title=Exchange Traded Commodities Led by Gold, ETCs Opened the World of Commodities to Investors
|url=http://www.lbma.org.uk/assets/alch48_etc.pdf |archive-url=https://web.archive.org/web/20101126100012/http://lbma.org.uk/assets/alch48_etc.pdf |archive-date=2010-11-26 |url-status=live
|publisher=The London Bullion Market Association
|first=Nik
|last=Bienkowski
|journal=Alchemist
|issue=48
}}</ref>

Prior to the introduction of ETCs, by the 1990s ETFs pioneered by [[Barclays Global Investors]] (BGI) revolutionized the mutual funds industry.<ref name=ETC /> By the end of December 2009 BGI assets hit an all-time high of $1 trillion.<ref>
{{cite web
|url=http://www.opalesque.com/56714/blackrock/Assets_Global_ETF_assets715.html
|title=Black Rock's global ETF's hit an all time high of $1tln
|author=Opalesque
}}</ref>

Gold was the first commodity to be securitised through an ETF in the early 1990s, but it was not available for trade until 2003.<ref name=ETC /> The idea of a Gold ETF was first officially conceptualised by [[Benchmark Asset Management Company Private Ltd]] in India, when they filed a proposal with the [[Securities and Exchange Board of India]] in May 2002.<ref>{{cite web |url=http://www.etfglobalinvestor.net/gold-etf.php |title=Benchmark Asset Management Company conceptualises Gold ETF |publisher=Etfglobalinvestor.net |access-date=3 October 2011 |archive-url=https://web.archive.org/web/20111009035807/http://www.etfglobalinvestor.net/gold-etf.php |archive-date=9 October 2011 |url-status=dead }}</ref> The first gold exchange-traded fund was [[Gold Bullion Securities]] launched on the ASX in 2003, and the first [[silver exchange-traded fund]] was iShares Silver Trust launched on the NYSE in 2006. As of November 2010 a commodity ETF, namely [[SPDR Gold Shares]], was the second-largest ETF by market capitalization.<ref name="etfdb1">{{cite web|url=http://etfdb.com/compare/market-cap/|title=Largest ETFs: Top 25 ETFs By Market Cap|publisher=ETFdb|access-date=3 November 2010}}</ref>

Generally, commodity ETFs are index funds tracking non-security [[index (economics)|indices]]. Because they do not invest in securities, commodity ETFs are not regulated as investment companies under the [[Investment Company Act of 1940]] in the United States, although their public offering is subject to SEC review and they need an SEC [[no-action letter]] under the [[Securities Exchange Act of 1934]]. They may, however, be subject to regulation by the [[Commodity Futures Trading Commission]].<ref>Michael Sackheim, Michael Schmidtberger & James Munsell, DB Commodity Index Tracking Fund: An Innovative Exchange-Traded Fund, ''Futures Industry'' (May/June 2006).</ref><ref>{{cite web |last=Koyfman |first=Yevgeniy |url=http://www.indexuniverse.com/sections/newsinfocus/6362-nogaz.html |title=No Gas: Barclays Halts Issuance of Natural Gas ETN |publisher=Index universe.com |date=21 August 2009 |access-date=3 October 2011 |archive-date=26 August 2009 |archive-url=https://web.archive.org/web/20090826171306/http://www.indexuniverse.com/sections/newsinfocus/6362-nogaz.html |url-status=dead }}</ref>

The earliest commodity ETFs, such as SPDR Gold Shares {{NYSE Arca|GLD}} and [[iShares]] Silver Trust {{NYSE Arca|SLV}}, actually owned the physical commodity (e.g., gold and silver bars). Similar to these are {{NYSE Arca|PALL}} (palladium) and {{NYSE Arca|PPLT}} (platinum). However, most ETCs implement a futures trading strategy, which may produce quite different results from owning the commodity.

Commodity ETFs trade provide exposure to an increasing range of commodities and commodity indices, including energy, metals, [[Soft commodity|softs]] and agriculture. Many commodity funds, such as oil roll so-called front-month futures contracts from month to month. This provides exposure to the commodity, but subjects the investor to risks involved in different prices along the ''term structure'', such as a high cost to roll.<ref name=GoldMutualVSETF /><ref name=commodityETF />

ETCs in China and India gained in importance due to those countries' emergence as commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, up from 40% the previous year. The global volume of ETCs increased by a 20% in 2010, and 50% since 2008, to around 2.5 billion million contracts.{{<ref>{{Cite journal|url=https://hbr.org/2007/12/china-india-the-power-of-two|title = China + India: The Power of Two|journal = Harvard Business Review|date = December 2007|last1 = Khanna|first1 = Tarun}}</ref>}}

=== Over-the-counter (OTC) commodities derivatives ===
[[Over-the-counter (finance)|Over-the-counter]] (OTC) commodities derivatives trading originally involved two parties, without an [[exchange (organized market)|exchange]].  Exchange trading offers greater transparency and regulatory protections. In an OTC trade, the price is not generally made public. OTC commodities derivatives are higher risk but may also lead to higher profits.<ref>Jon Gregory. Counterparty credit risk. {{ISBN|978-0-470-68576-1}}. p. 7.</ref>

Between 2007 and 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in the previous three years.

Money under management more than doubled between 2008 and 2010 to nearly $380 billion. Inflows into the sector totaled over $60 billion in 2010, the second-highest year on record, down from $72 billion the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.<ref>[http://www.thecityuk.com/assets/Uploads/Commodities-Trading-2011.pdf Commodities Trading report] ([https://web.archive.org/web/20151107060517/http://www.thecityuk.com/assets/Uploads/Commodities-Trading-2011.pdf archive])</ref>