Advantages and Disadvantages of Commodity forward contracts

Expert Solution

There are various advantages and disadvantages of commodity forward contracts-

Advantages-

A. It will help in gaining through future movements of commodities by taking a contract at present.

B. It will also help in speculating through this commodity contracts and help in returning a high amount of profits.

C. This can also act as a hedge for various commodity producers and commodity purchases to fix a certain amount of price.

D. this contract will generally be customised in nature and this will help in hedging and speculation.

Disadvantages related to commodity features are as follows-

A.the commodity markets are highly volatile Markets and there is also a high possibility of loss.

B.this commodity futures are not completely synchronised with the prices of the spot because they are generally not acting like shares which are running on the fundamentals

C. There is always a cost of hedging associated with the contracts and these cost of hedging can be the optimum loss if the commodity does not move in the adverse direction.

jeff jeffy answered 1 year ago

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