Commodity

A tangible good that generates utility (satisfaction) and is exchangeable. Tangible goods include [Page 88]coffee, wheat, computers, and gold. Commodities are traded in markets, which is generally referred to as a commodity exchange. A much broader definition of commodity includes all products that are traded in a commodity exchange. These products will include international currencies and bonds.

The values of commodities are susceptible to changes because of price movements, perceived inflation, or changes in supply and demand. When commodities are in abundance, their prices tend to fall. Conversely, when they are scarce, their prices tend to rise. If the demand for commodities is greater than the available supply of commodities, the prices of commodities tend to rise in order to offset the increasing demand.

To hedge against unwanted losses, unexpected changes (shocks), and adverse price movements, the participants of a commodity exchange may enter into futures contracts that will guarantee the sale or purchase of commodities at contracted or prearranged prices. They agree to make margin payments (deposits) and subsequently maintain the margin on a daily basis to reflect price changes until the contracts mature.