(a) State three benefits of a commodity exchange. (b) Explain two methods of trading in a commodity exchange. (c) State four requirements for trading in a c...

Answer Details

(a) Three benefits of a commodity exchange

1. It provides a central and organised market where buyers and sellers of commodities can meet and deal.
2. It helps to stabilise prices of commodities through the forces of demand and supply, and reduces wide price fluctuations.
3. It makes marketing of commodities easier and faster because goods are bought and sold by grade or sample without physical inspection of the whole bulk.

Other benefits include price information for producers and the opportunity for hedging against future price changes.

(b) Two methods of trading in a commodity exchange

• (i) Spot (cash) trading: This is the buying and selling of commodities for immediate delivery and payment at the current market price. The goods are available for immediate exchange.
• (ii) Futures (forward) trading: This involves an agreement to buy or sell a commodity at an agreed price now, but for delivery and payment at a fixed future date. It is used to guard against the risk of future price changes (hedging) and by speculators.

(c) Four requirements for trading in a commodity exchange

1. The commodity must be capable of being graded or classified into recognised standard qualities.
2. The commodity must be durable so that it can be stored while awaiting sale.
3. The trader must be a registered member of the exchange.
4. The commodity must be in regular and large supply so that continuous dealings can take place.