A Primer on Bills of Exchange
February 12, 2025
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Ever since the beginning of history, humans have been using commodities. This has created a necessity to trade commodities. However, as financial markets advances, trading commodities became a business unto itself.
The modern world provides a plethora of options when it comes to commodities investing. Commercial users of the products can use these financial markets to hedge their exposure to such commodities. However, at the same time traders and speculators can also make a fortune if they are able to accurately predict the movement of these commodities.
In this article, we will begin with the basics. We will first understand what commodities markets are how one should approach them.
The most basic definition of commodities would be that commodities are natural resources which are used as raw materials to create a better world.
Commodities’ trading is incredibly complex. This is because most of the time it involves trading in derivative instruments which by definition are quite complex. However, the commodities market also interfaces with equity and other markets. This happens when companies like Exxon (having a significant exposure to commodities like oil) are listed on the stock exchanges.
People buying their stock are virtually betting on the underlying commodity. Hence complex strategies are possible wherein a person goes short on the oil commodity while going long on Exxon stock. This means that the investor is betting that Exxon will outperform the oil and natural gas sector in general. Inter market arbitrage a strategy are quite commonly used and cross trading is indeed the norm. We will cover some of these strategies in great detail in the next few articles.
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