SLOVENSKÁ POĽNOHOSPODÁRSKA UNIVERZITA V
NITRE
FAKULTA EKONOMIKY A MANAŽMENTU
1129920
COMMODITY MARKET AND ITS IMPORTANCE FOR
THE PRODUCERS OF COMMODITIES
Nitra 2011
Matej Hrabovský, Mgr
SLOVENSKÁ POĽNOHOSPODÁRSKA UNIVERZITA V
NITRE
FAKULTA EKONOMIKY A MANAŽMENTU
COMMODITY MARKET AND ITS IMPORTANCE FOR
THE PRODUCERS OF COMMODITIES
Bachelor thesis
Study program:
International business with agrarian
commodities
Specialization:
International Economic Relations (6221700)
Department:
Katedra financií
Suprevisor:
Tóth Marián Ing., PhD
Nitra 2011
Matej Hrabovský, Mgr
DECLARATION OF ORIGINALITY
I, the undersigned Matej Hrabovský, declare that the thesis „Commodity market
and its importance for the producers of commodities“ is a result of my own independent
research and was written solely by me using the literature and resources listed in
Bibliography.
I am aware of legal conseqences in case the data are not true and correct to the
best of my knowledge.
Nitra, May 13, 2011
........................................
ACKNOWLEDGEMENTS
I would like to acknowledge my supervisor Ing. Marián Tóth PhD. For assisting
me in writing my bachelor thesis. I am grateful to his thoughtful comments and valuable
suggestions and information which were great help in preparing the final version of the
work.
ABSTRAKT
Táto bakalárska práca ponúka bližší pohľad na problematiku komoditného trhu a jeho
významu pre producentov komodít. V teoretickej časti je rozobratá teória týkajúca sa
komoditného trhu. Jeho definícia, história, delenie rovnako ako účastníci a typy
transakcii. Hlavným cieľom práce je ohodnotenie významu komoditnej burzy pre
producentov komodít. Tento ciel je v práci splnený prostredníctvom vedľajších cieľov
a to: prehľadom literatúry, zhodnotení významu základných funkcii komoditnej burzy
pre producentom komodít, charakteristikou vybraných komoditných búrz a návrhmi na
zlepšenie komoditného trhu na Slovensku. Hlavný význam komoditnej burzy spočíva
v určení ceny. Sústredenie dopytu a ponuky na jednom mieste spolu s pôsobením
špekulantov umožňuje predpovedať cenu komodít na dlhý čas dopredu. Čo umožňuje
producentom už dnes predať budúcu úrodu a poistiť sa tak pred nepriaznivým vývojom
trhu. Práca ako celok pomáha pochopiť význam a fungovanie burzy čo je dôležité najmä
v krajinách východnej Európy kde burzy nemajú dlhú tradíciu
Klúčové slová:
Komoditný trh, Burza, Temínový obchod, Hedging
ABSTRACT
This bachelor thesis offers closer look on the issue of the commodity market and its
importance for the producers of commodities. In the theoretical part the work concerns
with the theory connected with commodity market. It gives a closer look to definition,
history, division as well as the market participants and the types of transactions. The
main goal of the work is to evaluate the importance of commodity market for the
producers of commodities. This goal is fulfilled with the use of the minor goals such as:
literature overview, evaluation the importance of the basic functions of commodity
exchange for the producers of commodities, characteristics of chosen commodity
exchanges and the suggestions for the improvement of commodity market in Slovakia.
Main goal of commodity exchange is the price discovery. Concentration of demand and
supply on one place as well as the activity of speculators enables the exchange to
discover the price long time in advance. This enables the producers to sell their future
crop today and secure themselves against the unfavorable development on the market.
The work as a whole helps to understand the importance and work of exchanges which
is important mainly in west European countries where the exchanges does not have long
history.
Key words:
Commodity market, Exchange, Futures contract, Hedging
TABLE OF CONTENT
INTRODUCTION .......................................................................................................... 7
1 LITERATURE OVERVIEW ................................................................................... 8
1.1
Commodity Exchanges in the world and their development................................. 8
1.2
Functions of commodity exchange ...................................................................... 10
1.3
Market participants .............................................................................................. 10
1.3.1
Hedgers ........................................................................................................ 10
1.3.2
Speculators ................................................................................................... 11
1.3.3
Arbitrageurs ................................................................................................. 13
1.4
Types of exchanges ............................................................................................. 14
1.4.1
According the subject of the exchange trade ............................................... 14
1.4.2
According the legal form ............................................................................. 14
1.4.3
According the settlement of the deal ........................................................... 15
1.5
Types of Exchange transactions .......................................................................... 19
1.5.1
Hedging ........................................................................................................ 19
1.5.2
Arbitrage ...................................................................................................... 20
1.5.3
Speculation ................................................................................................... 20
1.5.4
Options ......................................................................................................... 22
2 OBJECTIVES ......................................................................................................... 24
3 METHODOLOGY .................................................................................................. 25
4 RESULTS AND DISCUSSION ............................................................................. 27
4.1
Importance of commodity market ....................................................................... 27
4.1.1
Function of price discovery ......................................................................... 27
4.1.2
Trade function .............................................................................................. 31
4.2
Characteristics of the selected commodity exchanges ........................................ 33
4.2.1
CME Group .................................................................................................. 33
4.2.2
Budapest Stock Exchange (BSE) ................................................................. 35
4.2.3
Commodity Exchange Bratislava (KBB) ..................................................... 36
4.3
Suggestions for the improvement of Slovak commodity market ........................ 38
CONCLUSION ............................................................................................................. 40
RESUMÉ ....................................................................................................................... 42
BIBLIOGRAPHY ......................................................................................................... 45
INTRODUCTION
Commodity exchanges in advanced economies are the integral part of the market
environment. They contribute to the formation of prices of commodities and reduce risk
associated whit the no exchange transactions.
Commodity Exchange can be defined as a meeting place where buyers and sellers
meet each other in order to do the business. This concentration of supply and demand
on one place makes the trade easier and offers new possibilities to the buyers and
sellers.
In the past the main function of commodity exchange was the trade function.
Farmers could easily found the buyers for their crop and because of concentration of
more producers and buyers on one place, the actual price of commodities were
discovered. This trade function over the years lost its importance and was replaced by
the hedging function. Farmers can sell their future crop today at future price and secure
themselves against unfavorable conditions.
Markets for futures trading were developed in order to help the agricultural
producers and consumers manage the price risks that arises from the market
development, harvesting,and processing food.
According the FABOZZI (2008), only a very small percentage of future contracts
(usually less than 1%) results in delivery of the commodity. This is because majority of
participants on commodity exchange do not seek to own the commodity but rather enter
the market for profit from rising and declining prices through the buying and selling of
contracts, or from price differences related to time or location.
In our work, we will focus on the importance of commodity market for the
producers of commodities, which form only small share from all participants on
commodity market.
The commodity market in our region does not have long tradition and a lot of
people are not familiar with it. This work gives the closer look on the work of
commodity exchange and the opportunity that it gives to the producers of commodities.
7
1 LITERATURE OVERVIEW
1.1 Commodity Exchanges in the world and their development
Trading with commodities on the commodity exchange is popular and considered
as highly reliable. The indisputable advantage of this type of trading is many kinds of
commodities available for trade throughout the world, and new products are always
presented on the market to be traded with.
Beginnings of the exchanges
CHATNANI (2010) defines an exchange as an institution, organization, or
association which organize a market where stocks, options, futures and commodities are
traded, and where buyers and sellers meet each other in order to trade during specific
hours in business days.
DĚDIČ (1992) states, that the origin and development of exchanges in Europe is dated
to the 12th and the 13th century in Italian cities such as Genoa, Florence, Venice and
Milan. In Belgian Bruges used to meet regularly buyers on business meetings, which
was called „de burse“ according the house of the family Van de Burse. After the
diminution of Bruges was the exchange trade relocated to Antwerp, where was in the
1531 built the first building of bourse. In the 16th century bourses as organizational
institutions start to attain international meaning and to spread across the Europe. For
example: in the Paris, London or in the Hamburg. On the Amsterdam exchange,
established in the 1631 was developed techniques of modern exchange businesses and
exchange speculations, mainly in connection with development of trade with shares and
obligations.
For the development of exchange from the 16th to the 19th century is typical
separate development which was caused with difficult and lengthy communication and
often with political and power interests. Connection between single exchanges and
businessman in given period was minimal, completely dependent on lengthy and often
problematically delivered correspondence. Turning point in separable development
came in the middle of the 19th century in connection with development of telegraph.
8
Easier and faster transfer of information stir the formation of international financial
market up (VESELÁ, 2007).
Commodity exchanges and their development
According the CHATNANI (2010) a commodity exchange offers a main meeting
place where buyers and sellers meet to do business, and where diverse commodities are
traded. On the commodity exchange can be traded spot, futures and options on futures
contracts. The exchange itself does not buy or sell contracts or commodities. It only
serves to provide the facilities where buying and selling can take place.
BROWN (2010) states, that the objectives for sale on commodity market are raw
materials such as ores, grains, cattle, and timber. The sellers are farmers, planters,
ranchers, lumbering and mining companies and buyers are diverse materials processing
businesses such as metal refiners, saw mills and vegetable canneries.
FONTINALLIS (2007) reported that “A commodity market is a place where
buyers and sellers of commodities gather to buy and sell the raw materials used in
products bought and sold in the open markets. Sellers offer their commodities to buyers
at a certain price, while buyers bid for commodity until a seller agrees to a price, a trade
is then established.”
Commodity exchanges have been developing later than the stock exchange. The reason
was mainly in technical problems which do not allowed movement of big volume of
commodities (DĚDIČ, 1992).
One of the first commodity exchanges was the Corn Exchange in Amsterdam
established in the 1617. Businessman with corn used to meet two times a week and corn
was traded according the samples. After the deal was made traders went to store to
make sure that the commodity correspond with sample.
At beginning they were traded with real commodity which was disposal. This was local
spot contracts. Contracts with the commodity which was not disposal started to develop
at the end of 19 century which was conditioned by the development of transportation.
From this contracts have later developed future and speculative contracts, which were
repressed and restricted by the state, mainly in the area of trade with corn. The future
9
contracts achieved the biggest boom at the 20th century, mainly in the big international
exchanges in the USA, Canada and Great Britain (DĚDIČ, 1992).
1.2 Functions of commodity exchange
A commodity exchange performs three valuable functions:

by the systems of price discovery it making better marketing efficiency for
agricultural products and create marketing opportunities to producers

It reduces price risk that sellers and buyers face by improving the market liquidity
and improving stability of local trading networks

It provides better information about future prices thus the farmers can make better
managerial decision (THE WORLD BANK, 2005).
1.3 Market participants
According the KEVIN (2010) traders in derivatives market can be divided into
three groups according the different objectives in trading. Those groups consist from
hedgers, speculators and arbitrageurs.
1.3.1
Hedgers
According the PARAMESWARAN (2003) is a hedger defined as a person who
wants to protect himself against an unfavorable price movement of the underlying asset.
For example, a wheat farmer who expects to harvest his crop, let´s say in three months
from now. The farmer is worried that the price of wheat may fall before the harvest, and
so in order to protect him selves against this price fall he would like to sell his crop in
today’s price. Similarly, on the other hand a wholesale dealer in wheat may be planning
to buy it after three months. Producer’s worry will be that the price may rise, and
consequently, he would like to buy the crop in current price. Futures contracts can help
both such people. Thus a hedger is a person whose objective is to reduce his risk.
10
Hedgers take a part in the futures markets to lock the prices at which they will be able to
do a buy or sell transaction in the future. This is because they have a position in the
underlying asset. The position is named long when they hold an asset which may be
sold in the future, and so face the risk that prices may drop when they are ready to sell.
They may also have a contrary position, named a short position, it means that they are
interested in buying some asset in the future, and face the risk that prices may increase
when they have to buy. Thus, they are exposed to risk connected with unbeneficial
movements in the price of the asset. They try to evade this price risk by using futures to
reduce or eliminate risk.
The sellers of the commodity, who want to decrease the risk of prices declining
by the time actually bring their commodity for sale in the market and will want to
secure as high a price as possible. So a hedger can basically be anyone, a buyer or a
seller, who has an underlying risk in a commodity, and wants to shift the price-risk onto
the market. The commodity futures contract provides a certain price certainty which
diminish the risks associated with the price volatility for both a parties (CHATNANI,
2010).
1.3.2
Speculators
BINGHAM & KIESEL (2004) claim, that the speculators take the opposite
position on the market to hedgers. Naturally, speculation is needed to make hedging
possible. Hedger, wishing to lay off risk needs someone to take risk on.
KOLB AND OVERDAHL (2007) state that “a speculator is a trader who enters the
futures market in search of profit and, by so doing, willing accepts increased risk.”
Speculator is an individual who is not a farmer of food processor but regardless he or
she is interested in commodity market.
In CHATNANI´S (2010) view a speculator is a risk taker who trades commodities with
risk which is higher than the average risk in return for the higher than average benefit
from the risky nature of commodity markets. The goal of speculator is to benefit from
the price change that the hedger seeks protection from. On the commodity market a
speculator buys a contract at a low price in order to sell it in higher price in the future.
He will most likely to buy a contract from a hedger who sells the contract because of
11
anticipation of declining prices in the future. The speculator does not actually seek to
own the commodity. He will rather enters the market profiting from offsetting rising
and declining prices through the buying and selling of contracts.
Speculator takes risk in order to gain a profit. This is a highly specialized business, and
the speculator´s accomplishment is proportional to his ability to forecast the future
prices of the underlying assets correctly. Unlike the hedger, a speculator takes
uncovered positions in the futures market. The speculator buys or sells different futures
contracts available in the market without owning the underlying asset, or planning to
own it. The speculator accomplishes a very significant function by acting as counterparty to the hedger. This is the reason why futures are thought to be useful for risk
reallocation or redistribution, from the hedgers who want to evade it to the speculators
who want to admit it.
FABOZZI ET AL (2008) claims, that the main task of the speculators is to
provide liquidity on the market while they balancing the long and short hedges.
Opposite to the commodity producers or the manufacturing industry, which try to evade
susceptibility to unfavorable price developments, the aim of speculators is to take a
definite market position and speculate for a price change. In order to make a profit,
speculators purposely take on risk by betting on rising or falling prices.
According the BAILEY (2005) speculators in futures markets are viewed as
highly specialized investors with a complete knowledge of the market for a certain
commodity of a restricted range of commodities. These investors are assumed to seek
the profit from their beliefs about price model in the future. It can happen that some
investors have access to better information or see themselves as being better equipped to
draw correct conclusion from information that is universally available.
KOLB AND OVERDAHL (2007) claim that according the length of time the
speculators plan to hold a position they can be categorized into different types.

Scalpers, who buy and sell futures contracts quickly when the price moves only
by a fraction of a cent. They hold the position only for few seconds or few
minutes. Since the period in which they hold the position is short they do not
expect to make a large profit from each trade.

Day traders, who want to make profit from price movement that, occur during one
trading day. They close their positions at the end of each trading day.

Position traders, who use to hold their position for a long time.
12
1.3.3
Arbitrageurs
Arbitragers represent a third important group of participants in futures and
options markets. An arbitrage is a safe profit generated by simultaneously entering into
several transactions in two or more markets (FONTANILLS, 2007)
BINGHAM & KIESEL (2004) reported that arbitrageurs try to secure a safe profit by
simultaneously entering into transactions in two or more markets. The fact that there are
not a lot of arbitrageurs means, that there are not a lot of arbitrage opportunities in the
prices quoted in most markets
Arbitrageurs are the market participants who try to take advantage of price
differences related to time or location in commodity futures markets, or between spot
and futures markets, in order to make riskless profits. Clearly, this group also plans to
generate profits, but their trading activity does not include taking risky positions. They
use economic and financial data to find existing price differences with respect to time
and location. If these price differences exceed transfer costs such as shipping, interest
rates, warehouse costs, or insurance costs, riskless profits can be realized. Therefore,
price differences among the markets are adapted, price relationships among the markets
are restored, and arbitrageurs guarantee market balancing (FABOZZI ET AL. 2008).
CHATNANI (2010) argued that “since both the spot price and the futures price
of a commodity react to the same supply/demand factors, they tend to move in tandem
with each other, the gap being known as the basis. In other words, basis is the difference
between the underlying spot price and the futures price, and is more stable and
predictable than movements in the spot or the futures prices or the underlying. The spot
price of an asset converges to the futures price as the delivery date of the contract
approaches. If this fails to happen, an arbitrage opportunity exists.
An arbitrageur is one who predicts the basis, and uses this knowledge to take positions
in the cash and futures markets. The arbitrageur looks for non-speculative profits by
operating in two or more markets simultaneously, by taking a long position in one
market and a short position in another market. If, for example, he sees the futures price
of a commodity getting out of sync with its spot price with regards to its basis, he will
take offsetting positions in the two markets to lock in a profit. In the process,
13
arbitrageur, by his actions, serves to remove mispricing, if any, in either the cash or
futures markets, and aligns the prices though operating in both markets.
Speculators and arbitrageurs give enormous liquidity to the contracts traded on the
exchanges. This liquidity, in turn, results in better price discovery, lower transaction
costs and less manipulation of the market.”
1.4 Types of exchanges
Exchanges can be classified according the various criteria. The most important
is considered an aspect of the subject of the exchange trade and the aspect of the time
settlement of the deal.
1.4.1
According the subject of the exchange trade
According the subject of the exchange trade we can distinguish exchanges on
effect, where as the subject of trade are considered perfect goods (the effects), such as
securities and foreign currency, and commodity exchanges, where goods are traded
(DĚDIČ, 1992).
VESELÁ (2007) states, that the commodity exchanges can be divided into
common exchanges, where the stock of any kind of goods is traded, and special, where
only with one or a few commodities is traded. The subject of trading on commodity
exchanges is very diverse. Here, they are standardized and transportable raw materials,
minerals and agricultural crops. As specific examples of what is traded on commodity
exchange are: non-ferrous metals, oil, natural gas, ferrous alloys, coffee, cocoa, sugar,
rubber, wool, wheat, barley, maize, meat, etc.
1.4.2
According the legal form
VESELÁ (2007) asserts that, one of the other criteria for dividing the exchanges
is a legal form according which the exchanges are created and exist, and according
14
which the subjects founding them and control them. According to this perspective
exchanges can be divided into a public type of exchange, private type of exchange and
the exchanges controlled by banks. Public type of exchange is historically the oldest
type of exchange with a strong tradition in Western Europe, including France, Belgium,
Spain and Germany, but also in Latin America. There plays an important role the state,
represented by the relevant ministry, which leads to a much less independent and more
stringent regulation of the founder. Private type of exchange is usually setting up in the
form of joint-stock company and is characteristic of the Anglo-Saxon countries like the
U.S., Canada, Great Britain and Australia. Exchanges controlled by banks usually arise
in countries with a strong tradition of universal banking, which covers mainly European
countries such as Germany, Austria, Scandinavia, the Netherlands and Switzerland.
1.4.3
According the settlement of the deal
Buying and selling of commodities may be done in two ways. They can be
purchased or sold either in the physical spot market or in the futures market. These are
two different but linked markets.
The spot market deals with the actual, physical commodities that are stored in the
warehouse or ready for delivery at the time when the price is negotiated between the
buyer and the seller.
On the other hand the futures market deals with legally binding agreements and not the
actual commodities. We call these agreements futures contracts because they provide
for delivery of a receipt of a defined amount of a particular commodity during a defined
future month (CHATNANI, 2010).
Spot
On the webpage of INVESTORWORDS a spot market is defined as a type of
market in which commodities, such as wheat, sugar or coffee are bought and sold for
cash and delivered immediately. It is also called cash market.
15
BENHAMOU & MAMALIS (N. D.) argue that the spot markets are organized
exchanges where commodity products can daily be traded. Typical examples are the
Chicago Mercantile Exchange or the Mid America Commodity Exchange.
KIRKPATRICK AND DAHLQUIST (2011) reported that “in the cash
market, a contract is entered into that will result in immediate exchange of the agreed –
upon items. Different rules and conventions regarding the meaning of immediate apply
depending upon the type of asset being traded.”
On a spot market, sellers offer fixed amounts of some commodity or asset that
can be sold immediately at a specified location. The market connects buyers and sellers,
and forms the price at which supply equals demand through an auction mechanism
(DEMANGE & LAROQU 2006).
JOHNSON (2003) asserts that “the spot market is mostly an over-the-counter
market conducted by telephone and not on the floor of an organized commodity
exchange.”
FONTANILLS (2003) states that, the spot price for a commodity is its value,
when it is available for delivery on the spot.
In KIRSCHEN & STRBAC (2004) view an advantage of spot market is
immediacy. Exact amount of a commodity can be sold by the producer and exact
amount the consumer needs can be purchased. However, prices in a spot market use to
change fast. A sudden increase in demand or decrease in supply rockets the price
because the stock of goods available for immediate delivery may be limited. Similarly, a
surplus in production or drop in demand depresses the price. News about future
availability of a commodity is also an issue on which the spot market reacts.
Unpredictability and quantity of variations in the price of a commodity make life more
difficult to both suppliers and consumers of this commodity. The producer of a
commodity will try to avoid the situation where he would have to sell its output at a
very low price. Similarly, the consumer does not want to be forced to buy an important
commodity at a very high price. Issue, such as the wild price fluctuations that are
common in spot markets has led to the introduction of other types of transactions and
markets.
16
Futures
According the FLANDERS & GILLESPIE (2010) the futures market can be
seen as a system of trading in contracts for future delivery. The contract is a legal
document demanding for the future delivery of a given commodity. Trading in futures
concerns many types of commodities. Trading in contracts means that the contract
representing the commodity is traded rather than the certain commodity.
There are traded futures contracts on futures market, in which the seller agrees to
provide a particular standardized commodity to the buyer on a defined future date at an
agreed upon price (MISHKIN, 1992).
CHATNANI (2010) argued that futures contracts do not involve direct transfer
of ownership of the commodity instead they involve receipt for delivery of the
commodity at some future date. For this reason, traders can trade commodities in
futures market, in the form of contracts, without the need to bring the physical
commodity.
FABOZZI (2008) asserts that “a futures contract obligates the seller of the
futures contract to deliver the underlying asset at a set price at a specified time.
Conversely, the buyer of a futures contract agrees to purchase the underlying asset at the
set price and at a specified time. If the seller of the futures contract does not wish to
deliver the underlying asset, she must close out her short futures position by purchasing
an offsetting futures contract. Similarly, if the buyer of the futures contract does not
wish to take delivery of the underlying asset, he must close out his long futures position
by selling an offsetting futures contract. Only a very small percentage of futures
contracts (usually less than 1%) result in delivery of the underlying asset.”
LERNER (2000) states that, these purchases and sales must be made through a
broker who is a member of an organized exchange and they must be made under the
terms and conditions of a standardized futures contract.
According the INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT (2005) “Contract terms (for example, amounts, grades, delivery
dates) are standardized and transactions handled only by organized exchanges. Profits
and losses in trades are settled daily through margin funds deposited in the exchange as
collateral. Futures contract are usually settled before or at maturity, and do not generally
involve physical delivery of the product.”
17
In GAVENDISH (2010) view the trading with futures tends to even out price
fluctuations, which can be caused for example by seasonal availability, by allowing the
market to mirror expectations for example about future harvest and changes in demand.
Futures are not usually used for the buying or selling of the certain commodity, but for
hedging price fluctuations. By hedging individuals or businesses acquire protection
against future price changes.
BROWN & REILLY (2002) asserts that “in futures contracting, an investor
wishing either to buy or to sell in the futures market gives his order to a broker, who
then passes it to a trader on the floor of an exchange. After a trade has been agreed on,
details of the deal are passed to the exchange clearing house, which catalogs the
transaction. The ultimate end-users in a futures contract never deal with each other
directly. Rather, they always transact with the clearinghouse which is also responsible
for overseeing the delivery process, settling daily gains and losses, and guaranteeing the
overall transaction.”
Functions of futures markets
KOLB AND OVERDAHL (2006) argued that such old and large industry as
the future market must serve to some social purpose. Otherwise it would probably do
not exist for so long. Futures market is seen as industry which is meeting the needs of
three groups of futures market participants: participants who want to know the future
price of commodities, participants who want to speculate and the group of market users
who want to hedge. As the speculation is not recognized as socially useful there are two
main social functions of futures market- price discovery and hedging.
Price discovery - Futures market represents a centralized place where buyers and sellers
meet each other. There are continuously evaluated supply and demand factors as well as
other market indicators. Based on analysis of this information and future expectations
the trades are made and prices are discovered.
It does not mean that futures exchanges set the prices. The price arises as the
result of total sum of all market data and opinions at any given time. The equilibrium
price is not constant as there are bids and offers adjusted as a result of continuous flow
of market information. Through the internet is price discovery immediately
communicated around the world in real time as the transactions occur.
18
Hedging – “in the agricultural markets, for example, commercial firms, producers,
merchandisers, and processors of commodities use futures to protect themselves from
changing cash prices. They can do so because cash and futures prices usually respond to
the same economic factors and tend to move together in the same direction.”(THE
CHICAGO BOARD OF TRADE, 2006).
1.5 Types of Exchange transactions
1.5.1
Hedging
Exchange rates among major currencies have been very volatile since the origin of
the floating rate regime starting in 1973. This volatility can represent serious impact on
the profitability of importers, exporters, and multinational corporations with contracts or
positions denominated in foreign currencies. Hedging helps these businesses to evade
currency exposure, that is, volatility in profits due to exchange rate volatility (FUNG &
MEHTA, 2004).
BINGHAM & KIESEL (2004) claims that, successful companies focus on
economic activities in which they can achieve the best result. Hedgers use the market
that insures them against adverse movements of prices, currencies, interest rates etc.
Hedging is an attempt to decrease exposure to risk a company faces.
According the GREIF & JOHNSON (2000) hedging is a common technique
used by businesses to decrease risk that results from certain assets, liabilities, or foreign
currencies. Farmers generally enter into hedging transactions to decrease the risk of
price changes with respect to inventory and no inventory supplies.
REJNUŠ (2008) states that, the objective of the hedging transactions, is the
hedge against the risk from unfavorable exchange rate developments on the spot market.
In the hedging transactions, where the risk, that arise from fluctuations in the prices of
the underlying asset, is possible to fix the price on an agreed future date. Hedger makes
a deal in the futures market to cover the risk of price trends on the spot market. Risk is
taken by another entity, usually a speculator, because speculators are the most frequent
trading partners of hedgers in the futures exchanges
The base of the hedging trade is that the hedger takes the same time in one position in
the spot market and in futures market opposite position, so the gain or loss is usually
19
offset to each other, because the prices on spot and futures markets always tended to
converge with each other. If the hedgers are in the spot market in the buyer's position,
they must also take in the futures market position of the sellers and vice versa. Hedging
transactions are concluded especially by those who bear the risk of fluctuations in prices
of certain raw materials and agricultural products as farmers and their customers, these
products processors, traders and everyone involved in price can affect the development
of products (DĚDIČ, 1992).
1.5.2
Arbitrage
Arbitrage can be seen as the simultaneous purchase and sale of a commodity or
asset in different markets with the objective to make profit from the difference in
buying and selling prices (CLARK & GHOSH, 2004).
ZAMORA (1990) argued that arbitrage is accomplishing a profit from price
differences that may exist at any one time within a market. These differences may
involve distinctions in the cost of funds, distinctions in the value of a given currency or
even distinctions between the values of commodities.
SUBRAMANI (2009) describes arbitrage as taking advantage from the price
distinctions between two or more markets. Arbitrage refers to a buying and selling of
similar products in two or more different markets in order to benefit from price
discrepancy.
When the prices for the futures are higher than the spot prices including the cost of
carry, the arbitrageur will buy the securities from the spot market and will sell them in
the futures market. This is called a long arbitrage. A short arbitrage occurs when the
prices for the futures including the cost of carry are lower than the futures market. If the
market prices do not allow to benefits from arbitrage, the prices establish an arbitrage
equilibrium or arbitrage –free market.
1.5.3
Speculation
Speculative trading tries to find price changes or price differentials for a
commodity. Speculators are not hedging against an underlying commodity position.
20
They are just purchasing and selling contracts with hope to make a profit (GARP,
2008).
VESELÁ (2007) argued that the aim of the speculative transactions is not an
interest on the real performance on the contract, but the participation on the profit
generated as a result of fluctuation of the exchange rate of a goods, which are traded on
the commodity exchange.
The sustained activity of speculators is very beneficial, because they contribute to an
increase in volume of completed transactions and an increase of liquidity in the market.
By their effort to realizing profits mostly by the short-term fluctuations help the
speculators to the rapid elimination of exchange rate differences between the actual and
equilibrium rates. Speculators therefore not only contribute to liquidity, but also to
stability in the stock market.
Speculation a la hausse
Transactions where it is speculated on an increase of the prices are known as
transactions a la hausse and the person who speculates on the rise as a haussier, but
more common English term is bull. The investor buys a listed investment instruments
with the expectation that their rates will rise in the future and on the temporary holding
and by the subsequent re-sale profit he will be rewarded (REJNUŠ, 2008).
Speculation a la baisse
Transactions which speculate on the decrease of the prices are known as a la
baisse, and the person who speculates on the decrease as a baissier or a bear in English.
These investors expect a price decline, so the sale and subsequent repurchase of the
investment instrument will return the capital. A bear speculator plays the role of the
seller (short position), but sells goods that he does not have yet therefore, his position is
not covered. The investor expects to reduce the cost of goods sold prior to maturity of
the goods bought cheaply and thus earn income stemming from the different selling and
buying prices (REJNUŠ, 2008).
21
Differential transactions
Differential transactions were originally developed on the effect exchanges from
future transactions. Parties did not want to meet the contract, but the goal of differential
transactions was to get the differential of the exchange rate. To a difference of exchange
rate should take place between the trade date and the agreed deadlines. If indeed there
arise a difference of exchange rate, then usually one of the parties withdraws from the
business and pay only for the exchange rate differential that has occurred. The real sale
of instrument does not occur in this case. If, however, the instrument has been sold, it
must be paid at an agreed rate, including an exchange rate difference. Differential
transactions constitute the overwhelming majority of futures contracts (VESELÁ,
2007).
1.5.4
Options
Optional written contract represents an agreement covering the rights and
obligations for both parties (buyer and seller). On the one hand, the seller wants to sell
in the future date a particular underlying instrument, and seeks a partner (buyer) who
wants to implement the reverse operation. Important aspect that distinguishes an option
from other financial derivatives is its conditionality. For option contracts is typical that
its fulfillment occur, when market circumstances develop in favor of an option buyer. If
the market will evolve in line with the expectations of the purchaser, to the fulfillment
of option contract will never occur. It means that the possible implementation of options
will be depended on the will of the purchaser (VLACHYNSKÝ & MARKOVIČ,
2001).
RADOVÁ, DVOŘÁK AND MÁLEK (2009) state that Options contracts are
present as standard exchange transactions, as well as the transactions concluded out of
the exchange.
VLACHYNSKÝ AND MARKOVIČ (2001) assert that in dependence on the
right to buy or sell the underlying instrument we can identify: the call option and the put
option.
22
Call option
The call option represents the buyer’s right, but not the obligation, to buy at the
agreed date, the underlying instrument at a predetermined price. The buyer can receive
the underlying instrument, if he decides to realize an option. The seller is obliged to
fulfill the contract if the counterparty requests him to, deliver the underlying instrument
at an agreed price and at the corresponding qualitative and quantitative parameters. The
reward of a seller is an option premium, which he collects from the purchaser at the
time of the conclusion of contract (VLACHYNSKÝ & MARKOVIČ, 2001).
Put option
Put option represents the buyer’s right but not the obligation, to sell the
underlying instrument at an agreed future date at a predetermined strike price. For this
right pays to the seller an option premium. Option seller undertakes to perform the
contract upon request. As an option buyer has the right to sell the underlying instrument
he will enter join the contract when he will assumes that the price of underlying
instrument decline. In the case that the price of underlying instrument will be expected
to rise above the strike price of the option, it is a highly probable that the option expires
without compliance (VLACHYNSKÝ & MARKOVIČ, 2001).
23
2 OBJECTIVES
Commodity market can be defined as the place where buyers and sellers meet
each other in order to exchange their products. The objectives for sale on commodity
market are raw materials such as ores, grains, cattle, and timber. The sellers are the
farmers, planters, ranchers, lumbering and mining companies and buyers are diverse
materials processing businesses such as metal refiners, saw mills and vegetable
canneries. The commodity exchange provides to the producers of commodities three
valuable functions. By the price discovery it making better marketing efficiency for
agricultural products and create marketing opportunities. By providing information
about future prices it enables farmers to make better managerial decision. And the third
function is connected with reduction of price risk by improving the market liquidity and
improving stability of local trading networks.
Main goal: Evaluate the importance of commodity market for the producers of
commodities
We have fulfilled this goal by the use of the minor goals:

Literature overview

Importance of the basic functions of commodity exchanges for the producers of
commodities

Characteristics of the selected commodity exchanges

Suggestions for the improvement of Slovak commodity market
For the goal of this work, to evaluate the importance of commodity market for the
producers of commodities we have chose three exchanges. We have chosen the CME
group because the commodity market has history in United States and it is the biggest
and most diverse derivatives exchange on the world. Then we have chosen the Budapest
Stock Exchange Ltd. for its long history and for its geographical location The third
exchange we have chosen is the Commodity Exchange Bratislava trough the which we
can see the situation of commodity market in Slovakia.
24
3 METHODOLOGY
Methodology of this bachelor thesis arises from the main goal of the work and
its minor goals.
The bachelor thesis deals with the issue of the importance of the commodity
market for the producers of the commodities. It describes the theory connected with the
commodity market, evaluates the main functions and describes the situation of
commodity market in Slovakia.
Process of the development of the work is methodologically divided into the
following sections:
 Study of the available sources of the domestic and foreign literature of the
given field
 Accumulation and selection of the data and information for the topic
 Data analysis
 Evaluation and comparison of the data obtained
 Evaluation of the achieved results and formulation of recommendations and
suggestions for improvement of the situation in commodity market.
Underlying data and information used in processing the bachelor thesis were acquired
from the books of the domestic and foreign authors and working papers. Informations
are also acquired from the websites of the Bratislava commodity exchange, Budapest
commodity exchange and CME Group.
In the bachelor thesis were used following methods of research:
 Analysis – represents a breakdown of the whole on the individual parts,
properties or context in order to determine the essential characteristics of the
investigated phenomena. This method was used in the chapter the function of price
discovery.
 Synthesis - conceptual combination of elements, facts or properties in the
whole. This method was used in the conclusion.
25
 Deduction – method of logical deriving of the conclusion from the general
knowledge. This method was used in the the chapter that deal with the situation of
commodity market in Slovakia.
 Comparation – detection method of identical or different characteristics of the
observed entities. It si an general operation of thought, which results in determining
whether the two subjects or phenomena are identical, similar or different. This method
was used for comparison of future prices of wheat in different exachanges.
26
4 RESULTS AND DISCUSSION
1.6 4.1
Importance of commodity market
The main reason and purpose of formation of commodity exchanges was
primarily facilitate the trading of commodities and increase efficiency, especially since
stocks of agricultural products (they were the first commodities which were traded on
commodity exchanges), farmers often had to let rot. The reason was simple.
Expectations did not succeed, the crop was high and thus supply significantly exceeded
demand. Furthermore, many farmers did not have any storage capacity. Trading with
commodities was ineffective and therefore a change was needed.
In present time an important role in guiding Slovak and the World agri-food market
have Commodity Exchanges, which represent a highly organized form of a market,
where there is a concentrated a number of diverse buyers and sellers. It ultimately
results in the creation of competitive environment.
A commodity exchange performs few valuable functions. The most important is
the function of price discovery which is closely connected with the means of
transferring risk or hedging. Another important function for the producers of
commodities is the trade function
4.1.1
Function of price discovery
From a theoretical point of view the equilibrium price can only reached in perfect
market, which is characterized by:
 the same information at the same time for all entities that are interested in it
 the large number of subjects with different profit interests that want to use
these interests
 the different expectation of price development and rates of price changes
The theoretical model of perfect market is practically impossible to create but
developed commodity exchange is getting close to it. The price on the commodity
exchange is the result of a concentrated supply and demand. These in turn are
27
expressions of different strategies of thousands of production, stockholding commercial
and consumer bodies. In addition to this process, there enter the market speculators. The
result of these conflicting interests in terms of concentrated supply and demand, there is
the equilibrium price for a long time in advance. Thus, the public knows March or May
or the November price of wheat or another commodity in advance.
When the producers pricing their products they have two possibilities: they can
take what the market offering them when they are actually ready to deliver the products,
or they can lock in price before the delivery. In the time of extreme price volatility
producers can use advantage of futures market offered by commodity exchanges and
secure their revenues in advance.
We can define futures prices as today's consensus of the price that will be in the
future. But the actual price of commodity will be known at the time of its trade, when
the actual supply and demand will be known.
It is well known that commodity markets are volatile. Therefore, the price volatility
forces the demand for hedging the risk in the commodity market. Producers and
consumers often look for the ways of hedging risk and trading risk. As a response to
those needs, derivative markets for commodity risks trading arose, and their use has
become increasingly widespread.
Function of price discovery is also very important for the people who are trading on the
over the counter market. On the webpages of commodity exchanges they can find the
value of the commodity they are trading with.
Future price of wheat
In our work we have decided to use prices of wheat as an example for the
demonstration of future price discovery. We have chose this commodity because it
appears in the product list of each of selected exchanges.
28
Future price of wheat on CME group
CME group has from the selected commodity exchanges the biggest average
daily trading volume. In CME group there were average 913000 1 contracts with
commodities per day in 2010. This fact is reflected in the period in which the price is
discovered. The Chart 1 was made on the basis of prices published on the web page of
CME group, retrieved on the 4th of April, 2011. We can see that the CME group offers
to the producers the advantage of knowledge of the price of wheat more than two years
in advance. Producers of commodities know the July 2013 or earlier price of wheat
already in the April 2011. This fact gives them opportunity to decide whether they sell
they crop at the prices offered them by the market at the time of harvest or they can
secure they revenues in advance and lock the prices before the delivery. Producers can
also see the actual price development. According the values from the 4th of April, 2011
the price of wheat increasing from May 2011 to May 2012 where it reaches the peak.
Than between May 2012 and May 2013 the price fluctuates and at the end of observed
period it decreases a little bit.
Chart 1
Future prices of wheat on CME Group
Future prices of wheat on CME Group
240
230
220
210
200
190
180
170
EUR/t
Source: Made by the author according the data from the webpage www.cmegroup.com
and recalculated with the exchange rate from NBS 4.4.2011
1
CME Group.Retrieved from
http://files.shareholder.com/downloads/CME/1208436949x0x432766/dc9bb7f8-73ec-4065-8aa269cf4dc73d6b/CME_News_2011_1_4_General.pdf
29
Future prices of wheat on the Budapest Stock Exchange
Average volume of contracts in this exchange was 26 2 in 2010 which is much
lower than it is in CME group. The lower average volume of contracts is reflected in
smaller period in which futures prices are discovered. The Chart 2 was made on the
basis of prices published on the web page of Commodity Exchange Budapest, retrieved
on the 4th of April, 2011. In comparison with CME group where the futures prices of
wheat in April 2011 are discovered till the July 2013 in the Commodity Exchange
Budapest the futures prices of wheat in April 2011 are discovered only till the
September 2011. In this exchange there is differentiated the feed wheat and the mill
wheat. The producers here can see, that according the April 2011 values there are sharp
decrease between May 2011 and August 2011 prices.
Chart 2
Future prices of wheat on the Budapest Stock Exchange
Future prices of wheat on CBE
290
270
250
230
Feed wheat, EUR/t
210
Mill wheat, EUR/t
190
170
150
May 2011
August 2011
September
2011
Source: Made by the author according the data from the webpage www.bse.hu and
recalculated with the exchange rate from NBS 4.4.2011
Future prices of wheat on the Commodity Exchange Bratislava
In Slovakia there are four bodies that deal with the wheat: farmers, merchants,
mills and other consumers, and the government. The market for wheat is organized in
2
BSE. Retrieved from http://www.bse.hu/topmenu/trading_data/stat_hist_download/data_sections
30
Bratislava Commodity Exchange. Market prices of wheat are placed on the website of
the Stock Exchange. Exchange pricing Committee meets every two weeks to determine
the market price of wheat two weeks back, the current, the estimated 2 weeks in
advance and the expected market price of 3 months in advance. Agricultural Paying
Agency Questionnaire doing market research and publishes it in the ATIS (agricultural
market infomrations of Slovakia) report. In Commodity Exchange Bratislava as well as
in the Budapest Stock Exchange the wheat is divided on the feed wheat and mill wheat.
Prices of all commodities are made for west, middle and east part of Slovakia. In case of
wheat they are divided according the STN (Slovak technical norms) classes too. In the
report made on the meeting of pricing committee there are determined actual prices,
prices two weeks in advance and three months in advance. In the Table 1there are the
May and June prices of feed wheat and mill wheat. Prices are made according the
relevant reports of pricing committee, as an average of prices of three parts of Slovakia
and STN classes. May prices are made on the basis of reports from the February and
June prices are made according the reports from March. 2011.
Table 1
Future prices of wheat on Commodity Exchange Bratislava
Feed wheat,
Mill wheat,
EUR/t
EUR/t
May 2011
195,065
238
June 2011
197,5
274
Source: Made by the author according the data from the webpage www.kbb.sk
4.1.2
Trade function
By the beginning of 20th century was the trade function the most important
function of commodity exchange. Originally the commodity exchange worked as a
trading place with the strict rules of the game made by the exchange members among
themselves.
In the conditions where the production and consumption places were separate by the
transport and communication, had the concentration of supply and demand in one place
and at the same time great importance for the provision of inputs for production.
31
In present time the trade function of commodity exchange lost its importance. We can
see it in the Table 2, where we have chose as an example the average daily volume of
contracts made in commodity section of the Budapest Stock Exchange. We can see that
there is significant dominance of futures contracts over the spot contracts. It means that
commodity exchange is used for securing the revenues of producers by locking the price
in advance, rather, than it is for the actual trade.
Table 2
Average daily volume of grain contracts on Budapest Stock Exchange in 2010
Grain futures
Grain spot
Total
Source: www.kbb.sk
2010
25
1
26
In Hungary as well as in Slovakia, have been many businesses accustomed for a
long time to produce only. Their business divisions were designed to ensure business
strategy input-output. Sales of goods produced yielded up to the specialized trade
organizations. Times are changing, business segments are getting activated, they want
to do business, but often do not know how. Commodity Exchange provides a new
approach to production organization, marketing their goods, but especially active
participation in influencing the market for these goods in accordance with their business
strategy. Implementation costs of trade through commodity exchange are ultimately
much lower than the cost of commercial branched network. Brokers seek partners faster
and cheaper. In spite of fact, in Hungary and in Slovakia there are businesses where the
entrepreneur has stable customers and does not see the reason to trade on commodity
exchange. Enterprise often works on halved capacity because it supplies only the
purchaser about which it believes that he will pay sooner or later. Enterprise acts also in
the same way in relation to its own suppliers. Supply and demand, delivered through the
commodity exchange in that business strategy do not appear to fit.
This is supported by the comparison of average daily volume of commodities
contracts in 2010. In CME group there were average 913000 contracts with
commodities per day which was significantly more than average 26 contracts per day in
commodity section of Budapest stock exchange.
32
Huge daily volume of contracts on CME group is caused by the size of the
country, amount of producers as well as by the longer history and usage of commodity
exchange.
1.7 4.2
4.2.1
Characteristics of the selected commodity exchanges
CME Group
CME Group is the biggest and most diverse derivatives exchange on the world. It
was created by the merger of Chicago Mercantile Exchange and Chicago Board of
Trade in 2007. In the 2008 New York Mercantile Exchange become a part of CME
Group.
Company´s customer base includes professional traders, financial institutions,
institutional and individual investors, corporations, manufacturers, producers, and
governments.
CME group is an international marketplace which brings together buyers and seller
trough CME Globex electronic trading platform and on the trading floors in Chicago
and New York. CME Clearing virtually eliminates counterparty credit risk by acting as
the seller to every buyer and buyer to every seller.
By the CME Group is offered the widest range of benchmark products available across
all major asset classes, including futures and options based on interest rates, equity
indexes, foreign exchange, metals, energy, commodities, agricultural, and alternative
investment products such as weather and real estate.
Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange was founded in 1898 as the Chicago Butter
and Egg Board, so called because it only traded contracts in butter and eggs. In 1919 it
became known as the Chicago Mercantile Exchange. Over the years the exchange
greatly enlarged its product line. It begun with the frozen pork belly futures in 1961 and
in 1964 the exchange began trading live cattle futures. In 1972 it begun trading futures
on foreign currencies, and in 1982 it added stock index futures to its product list. In
33
2002 the Chicago Mercantile Exchange become the first exchange in the United States
which was issuing shares listing on the New York Stock Exchange and the NASDAQ
under the ticker symbol CME.
Chicago Board of Trade (CBOT)
The Chicago Board of Trade was founded in Chicago, Illinois in 1848 by a
group of businessmen who wanted to make an order in the Midwest's chaotic grain
market.
In early history, the CBOT traded only agricultural commodities such as wheat, corn,
soybeans, etc. Futures contracts on the Stock Exchange appeared years ago in order to
include trading with commodities, which cannot be stored for a long time.
On July 9th 2007, the voting shareholders of both the Chicago Mercantile Exchange and
the Chicago Board of Trade)voted for the merger of the two companies into a single
company known as the CME Group.
New York Mercantile Exchange (NYMEX)
New York Mercantile Exchange, Inc. was founded in 1872 It was named as The
Butter and Cheese Exchange of New York and changed its name to Butter and Cheese
Exchange, Inc. in 1882 Butter and Cheese Exchange, Inc. changed its name to New
York Mercantile Exchange, Inc..
Trading takes place through two elements, namely the NYMEX, a place for trading
energy, platinum and palladium and the COMEX Division, where all other traded
metals.
CME Group, acquired NYMEX in 2008; the partnership between the two firms
stretches back to 2006 when the two teamed up to facilitate after-hours trading of
energy, platinum, and palladium futures.
34
4.2.2
Budapest Stock Exchange (BSE)
The aim of the Budapest Stock Exchange is to ensure transparent market for its
listed securities in Hungary and in abroad as well. Various economic entities are
provided by an opportunity to raise capital in an open market through the Budapest
Stock Exchange. There is concentrate demand and supply the result of which is the
price discovery.
History
Predecessor of the Budapest Stock Exchange (BSE), the Hungarian Stock
Exchange started its operation on 18 January 1864. It was set up as a stock exchange,
but after four years of its existence it acquired the Grain Hall, the centre of grain trade.
Since 1889 the stock prices of companies listed on the Hungarian Stock Exchange were
also published in Frankfurt, Vienna, Paris and London.
After the World War 2 the majority of private Hungarian firms were nationalized and
exchange´s assets became state property as well.
On the 21st of June, 1990 the Budapest Stock Exchange was re-established.
Commodity market
On the commodity market of the Budapest Stock Exchange are available spot,
futures and options transactions linked to grain commodity.
Commodity products on the Exchange are standardized. It means that Exchange sets the
quality standards and the parameters of different contracts. These enhance liquidity and
meets requirements of different market players. The most important among these
parameters are delivery parity, contract size, delivery method, expiration dates, and for
options the type of the contract and strike price.
35
4.2.3
Commodity Exchange Bratislava (KBB)
History
Commodity Exchange Bratislava (KBB) was established under license of the
Ministry of Economy in the 8th of December, 1992 according to Act No 229/92 Coll. on
commodity exchanges. The highest authority of KBB is the General Assembly. the
statutory and governing body is the Exchange Chamber. KBB was the first commodity
exchange in Slovakia. The purpose of its existence is a need for a broadly credible
market operator, which creates conditions for formation of equilibrium prices and
ensures the smooth flow of funds and goods. Its mission is to ensure transparent
realization of exchange transactions and services according to customer´s requirements
with the guarantee of deliveries and payments. Exchange floor is a place where meet
together those who apart from profit seek the seriousness, fairness and hard rules of the
game. These ensure the conversion of the spoken "buy" to pay a "sold" to provide. KBB
General Assembly approved the big changes in the way and trading system in KBB.
Modification of exchange rules was designed to approach the standard way of trading
on foreign exchanges. 1. 4. 2008 came into force a new Commodity Exchange Act no.
92/2008 Coll. on commodity exchanges according which the existing commodity
exchanges such as the Commodity Exchange in Bratislava were required to adjust their
status, scope and legal relations. Commodity exchange Bratislava becomes a limited
company.
Organizational Structure
Organizational Structure of the Commodity Exchange Bratislava (KBB) passed
during the 17th years of its existence several stages. The current situation is the result of
rationalization of work processes with regard to ensuring the smooth operation of
exchanges. The supreme body of KBB is the General Assembly, which consists of
exchange´s shareholders
General Assembly has the right to appoint and remove members of the Stock Exchange
Chamber and approve the annual report of KBB.
36
The executive body of KBB is the Exchange chamber, which consists of 9 members. At
its meetings, it decides on the direction of KBB, determines development priorities,
changes exchange rules, approves key documents, that do not require to be approved by
General Assembly, and also decides on the management with the property of exchange.
For the Exchange Chamber acts independently the Director of Exchange Chamber, who
primarily oversees the maintenance of law and exchange rules. The Director also
oversees the implementation of the tasks entrusted by the Exchange Chamber. The
Director is also the Head of KBB. For the daily operations of the Exchange is
responsible Secretary General of KBB. He directs the activities of exchange system and
all employees, he prepares documents for the meetings of the Exchange Chamber,
publishes its conclusions and communications and ensures the maintenance of order on
the stock rallies.
Trading System
Trading on KBB is legally organized on a membership principle. The member of
KBB can be any natural or legal person who satisfies the conditions of membership of
the Statute of KBB. On the exchange floor can directly trade only brokers of KBB
members. Other entities can trade through these members. The trade is made in 9 steps:
1. Client makes a contract for providing services with a broker and gives him full
powers to conclude contracts in his name on the floor of the Stock Exchange.
2. The client submits a trading order to a broker, to sell 1000 tons of wheat (for
example) for a minimum price of 140 EUR. Trading order from client for the
broker can be canceled only according the terms that have to be precisely
specified.
3. The client sends a guarantee on an account of the broker in exchange system of
accounts.
4. Broker puts the supply to the exchange system
5. On the Stock Exchange floor brokers mutually agree on the purchase and sale
price - for example, 145 EUR per a ton. If the price should be in other trading
range than it is in trading order, it is necessary to have a written or other
approval from the client, agreed in advance.
37
6. After the trade is paired, the exchange creates the closing letter, signed by both
brokers and stock exchange
7. Brokers are required to put the assurances on an account of a clearing house
(Settling Center, Inc.)
8. The buyer is obliged to pay remaining amount on the seller's broker's account
with signature rights of KBB and the clearinghouse
The seller must deliver goods within the time specified in the order (for example
3 days from signing the closing letter).
9. After presenting the delivery later, the funds from the account of a clearing
house will be released for the seller client.
1.8 4.3
Suggestions for the improvement of Slovak commodity
market
Commodity exchanges in advanced economies are the integral part of the market
environment. They contribute to the formation of prices of commodities and reduce risk
associated whit the no exchange transactions. In Slovak republic, the situation is still
different. Slovak financial market, which includes the commodity exchange, underwent
extensive development over the last decade. Compared with most developed world
economies are still lagging behind. The same situation applies in commodity exchanges.
Obstacle in the initial development was the unstable and uncertain macroeconomic
situation and lack of experience with the functioning of stock exchanges during the
previous regime.
Another factor that affects the vast difference between domestic and foreign
commodity exchanges is market liquidity. This is influenced by low public and
individual producer awareness about the commodity exchanges. Although the
investment in commodity exchanges is still popular, there is minimum information
about the Slovak commodity market and investors increase the value of their investment
on foreign stock exchanges. Low market liquidity is also associated with the physical
settlement of transactions. Transactions are concluded mainly between producers, or
suppliers and buyers of the commodity. Lack of confidence in the domestic stock
38
market has the consequence that only a small portion of production goes through the
stock exchange. This explains the low liquidity of the domestic market.
For further development of commodity exchanges is important to raise investor
awareness about the opportunities that investment in this market brings. Commodity
exchanges may also be contributing to the education of investors and also the public by
organizing various seminars and their own professional publishing activity. Other
options to improve the current situation we see in better access to information about
trade, more transparent and user-attractive website and improvement of electronic
systems for trading.
In order to improve its market position and offer better services to trading participants,
major foreign exchanges merger together. This trend could be the impetus for a
consideration of a similar development of the domestic commodity market. By the
merger of stock exchanges in the region it would arises more competitive entity capable
of enhancing the quality of service at lower cost.
39
CONCLUSION
In our work we have dealt with the issue of importance of commodity exchange
for the producers of commodities.
In literature overview we have defined what the commodity market is, described its
history and development, types of exchange transactions and different market
participants. We have described different views according which the commodity
exchange can be classified. For our work the most important was the classification
according the settlement of the deal. In this classification the commodity market is
divided on the spot market where the actual commodities are traded and the time for the
settlement of the deal is short. Usually the transaction is made within 3 days. And the
second division is futures market where the contracts representing the commodity are
traded rather than the actual commodity.
This division is the base for the functions that are most important for the
producers of commodities. Spot market represents the trade function which as we found
out does not have big role in present time. Farmers more likely use the services of
futures market which provides the function of price discovery and with this function
connected the means for transferring the risk. This function enables the farmers to know
the future price of their crop even two or more years in advance. With this knowledge
they can sell their future crop which is not ready or even not sowed for the future price
and by this to secure their revenues from unfavorable development.
In the next part we took a closer look at three selected commodity exchanges.
We have chosen the CME Group. The exchange has its base in the United States. We
have chosen it because the commodity market has a long history and tradition in the
United States and because it is the biggest and most diverse derivatives exchange in the
world. As the second exchange we have chosen the Budapest Stock Exchange. Because
of its long history as well, and because of the fact that it lies in the same region of the
Europe which makes it suitable for comparison of the data with our Commodity
Exchange Bratislava through which we can see the situation of commodity market in
the Slovak republic. On the example of the Commodity Exchange Bratislava exchange
we have described the trading process on commodity exchange.
40
In the last part we gave the suggestions for the improvement of Slovak
commodity market. In our country a public have low awareness about commodity
exchanges which results to lack of confidence in the domestic stock market and is
responsible for the fact that only a small portion of production goes through the
commodity exchange. For the future development it is important to raise public
awareness about opportunities that arise from the usage of commodity exchanges. In
order to improve its market position and offer better services to trading participants,
major foreign exchanges merger together. This trend could be the impetus for
consideration of similar development in our country.
41
RESUMÉ
Bakalárska práca “Komoditný trh a jeho význam pre producentov komodít” je
tvorená z dvoch častí, a síce teoretickej, v ktorej je opísaná teória súvisiaca s
komoditnými burzami a vlastnej práce, ktorá sa sústreďuje na splnenie cieľa v zmysle
významu, ktorý má komoditná burza pre producentov komodít.
V teoretickej časti sme sa najskôr zamerali na definovanie komoditnej burzy a
jej vývoj a funkcie ktoré vykonáva. Komoditnú burzu môžeme definovať ako miesto,
kde sa stretávajú predávajúci a kupujúci aby predali, alebo kúpili produkty pre ďalšie
spracovanie. Predávajúci ponúkajú svoje produkty za určitú cenu a kupujúci ponúkajú
cenu, ktorú sú ochotní zaplatiť. Keď sa dohodnú na cene, obchod je uzavretý. Počiatky
burzovníctva siahajú do dvanásteho a trinásteho storočia do talianskych miest ako sú
Janov, Florencia, Benátky a Miláno. V belgických Bruggách sa pravidelne stretávali
obchodníci na obchodných stretnutiach, ktoré sa nazývali “de burse” podľa domu
rodiny Van de Burse a v ktorých tieto stretnutia prebiehali. Komoditné burzy sa začali
vyvíjať neskôr ako burzy finančné. Dôvodom boli hlavne technické problémy, ktoré
nedovoľovali prepravu veľkého množstva tovaru. Na komoditnej burze je sústredený
dopyt a ponuka, čo jej umožňuje poskytovať tri cenné funkcie. Dokáže určiť cenu, čím
pomáha farmárom určiť hodnotu ich produkcie, redukuje risk, že farmári nebudú
schopný predať ich produkty a poskytuje informácie o budúcich cenách komodít, čím
pomáha farmárom urobiť manažérske rozhodnutia.
V ďalšej časti sme sa venovali charakteristike skupín, ktoré pôsobia na
komoditnom trhu. Sú nimi hedgeri, špekulanti a arbitáržeri. Hedgeri sú subjekty, ktoré
sa prostredníctvom burzy chránia proti nepriaznivým cenovým pohybom. Príkladom
môže byť farmár, ktorý sa bojí, že cena komodity, ktorú pestuje v budúcnosti poklesne a
preto ju predáva už dnes. Špekulanti zastávajú opačnú pozíciu na komoditnom trhu ako
hedgeri. Ich cieľom je profitovať zo zmeny ceny proti ktorej sa chcú hedgeri chrániť.
Kupujú kontrakty za nižšiu cenu aby ich v budúcnosti, ak cena stúpne, mohli predať a
profitovať z rozdielu ceny. Poslednou skupinou sú arbitrážeri, ktorí využívajú cenové
rozdiely vzťahujúce sa na čas alebo na miesto. Ak tieto cenové rozdiely prevýšia cenu
dopravy, poistenia, skladovania a iných nákladov, arbitrážeri môžu z týchto rozdielov
profitovať bez toho aby podstúpili risk.
42
Dôležitú časť tvorí rozdelenie búrz podľa rôznych kritérií. V nej sme rozlíšili
burzy podľa predmetu burzového obchodu, podľa právnej formy a podľa časového
vysporiadania obchodu. Hľadisko časového vysporiadania obchodu bolo pre našu prácu
veľmi dôležité, nakoľko sa od neho odvíjajú funkcie, ktoré sú dôležité pre producentov
komodít. Komodity môžu byť predané na termínovanej burze, alebo na burze s reálnym
tovarom. Burza s reálnym tovarom predstavuje obchodnú funkciu komoditného trhu.
Komodity sú doručené okamžite po uzavretí obchodu. Význam slova „okamžite“ je
samozrejme závislý na dohode obchodujúcich strán podmienenej množstvom a typom
komodity, prípadne miestom doručenia. Na termínovanej burze sa obchodujú
terminované kontrakty. Tie nezahŕňajú priame predanie vlastníctva komodity, ale sú
založené na dokladoch o doručení komodity niekedy v budúcnosti. Termínované
obchody zaväzujú predajcu doručiť predmet obchodovania za stanovenú cenu v
stanovenom čase. Kupujúci a predajcovia nemôžu obchodovať priamo na burze. Nákup
a predaj terminovaných kontraktov musí byť vybavený prostredníctvom brokerov, ktorí
sú členmi burzy. Na terminovanom trhu je neustále zhodnocovaný dopyt a ponuka a iné
trhové indikátory na základe ktorých sa vykonávajú obchody a určuje cena.
Rovnovážna cena nie je stála, ale vzniká ako výsledok neustáleho toku trhových
informácii. S určovaním budúcej ceny je úzko spojený aj hedging alebo zaisťovanie sa
proti nepriaznivému budúcemu trhovému vývoju.
Posledná časť prehľadu literatúry je venovaná typom trhových transakcií. V tejto
časti sú bližšie opísané trhové transakcie ako hedging, arbitráž, špekulácie a opcie.
Hedging slúži na zaistenie profitu v prípade nepriaznivého vývoja trhu. Arbitráž je
založená na uskutočňovaní profitu z cenových rozdielov, ktoré sa nachádzajú na trhu.
Cieľom špekulácie nie je záujem na reálnom vlastnení komodity, ale účasť na profite,
ktorý je tvorený ako výsledok výkyvov ceny predmetu obchodovaného na burze.
Špekulácia je veľmi dôležitá pre finančný trh, pretože zvyšovaním objemu transakcií sa
zvyšuje aj liquidita trhu. Opcie sú typom trhových transakcii, pri ktorých sa predávajúca
alebo kupujúca strana zabezpečuje proti nepriaznivému vývoju trhu. Pri opciách
účastník získava právo, nie však povinnosť predať, alebo kúpiť daný tovar. Za toto
právo však musí druhej obchodujúcej strane zaplatiť.
Vo vlastnej práci sme prostredníctvom vedľajších cieľov naplnili hlavný ciel
bakalárskej práce, a to význam komoditného trhu pre producentov komodít. Vlastná
práca sa skladá z troch hlavných kapitol: význam komoditného trhu, opis vybraných
komoditných búrz a návrhy na zlepšenie komoditného trhu na Slovensku. Komoditná
43
burza vykonáva niekoľko cenných funkcii. Najdôležitejšou je funkcia určenia ceny,
ktorá je úzko spojená s prostriedkami zaistenia sa / hedgingom. Cena na komoditnej
burze je výsledkom koncentrácie dopytu a ponuky na jednom mieste. Spolu s
pôsobením špekulantov sa vytvára rovnovážna cena na dlhý čas dopredu. To umožňuje
verejnosti poznať marcovú, májovú alebo novembrovú cenu pšenice, či inej komodity
už dnes. Ako dôkaz sme použili budúcu cenu pšenice, pretože s ňou sa obchoduje na
každej z vybraných búrz. Burza CME Group udávala na svojej internetovej stránke cenu
pšenice až do júla 2013. Na Budapeštianskej komoditnej burze bola najneskoršia cena
pre september 2011 a na Bratislavskej komoditnej burze, ktorá udáva budúce ceny
maximálne tri mesiace dopredu, to bola cena pšenice pre jún 2011. Ďalšou funkciou,
ktorou sme sa zaoberali, bola obchodná funkcia. Tu sme na príklade údajov z
Budapeštianskej komoditnej burzy ukázali, že obchodná funkcia, ktorá bola v minulosti
hlavnou funkciou komoditnej burzy, stratila svoj význam v prospech zabezpečovacej
funkcie. V roku 2010 bolo na Budapeštianskej komoditnej burze pre obilniny priemerne
denne obchodovaných dvadsaťpäť termínových a len jeden peňažný kontrakt. V ďalšej
časti vlastnej práce sme uviedli základné informácie o CME Group, o Budapeštianskej
komoditnej burze a o Bratislavskej komoditnej burze. V rámci kapitoly o Bratislavskej
komoditnej burze sme v deviatich krokoch opísali priebeh obchodu na burze. V
poslednej kapitole našej práce sme napísali odporúčania pre zlepšenie slovenského
komoditného trhu. Ako hlavný nedostatok vidíme nízke povedomie verejnosti
o možnostiach, ktoré burza ponúka. Preto by kvalitu komoditného trhu na Slovenku
mohlo zvýšiť usporadúvanie rôznych seminárov, zvýšenie publikačnej aktivity a tiež
obohatenie a zatraktívnenie internetovej stránky.
44
BIBLIOGRAPHY
Book resources
[1] BAILEY R., 2005. The economics of financial markets, Cambridge University
Press, ISBN-13:978-0-521-84827-5
[2] BINGHAM N., & KIESEL R., 2004. Risk-neutral valuation: pricing and hedging
of financial derivatives 2nd edition. Springer-Verlag London Limited, ISBN:185233-358-4
[3] BROWN J., 2010. The job market of the future: using computers to humanize
economies , James Cooke Brown Trust, ISBN 0-7656-0732-8
[4] BROWN K. & REILLY F., 2002. Investment Analysis and Portfolio
Management. South-Western College Pub. ISBN -13: 978-0324171730
[5] CLARK E. & GHOSH D., 2004. Arbitrage, hedging and speculation: the foreign
exchange market. Praeger Publishers, 2004 ISBN: 1-56720-582-8
[6] DĚDIČ J., 1992. Burza cenných papírů a komoditní burza. Prospektrum Praha,
ISBN 80-85431-62-9
[7] DEMANGE G., & LAROQU G., 2006. Finance and the economics of
uncertainty. Wiley-Blackwell, ISBN-13: 978-1405121385
[8] FABOZZI F., FUSS R., KAISER D., 2008. Handbook of Commodity Investing,
John Wiley & Sons, Inc,. ISBN-13 978-0-470-11764-4
[9] FLANDERS F. & GILLESPIE J., 2010.Modern Livestock and Poultry Production
8th edition. Delmar, Cengage Learning. ISBN 13: 978-1-4283-1808-9
[10] FONTANILLS G., 2007. Gegging started in commodities, John Wiley and sons,
Inc., ISBN 978-0-470-08949-1
[11] FUNG H. & MEHTA D., 2004. International bank management. Blackwell
Publishing Ltd., ISBN: 1-4051-1128-3
[12] GARP (Global Association of Risk Professionals), 2008. Foundations of Energy
Risk Management: An Overview of the Energy Sector and Its Physical and
Financial Markets. John Willey and Sons. ISBN-13: 978-0470421901
[13] GAVENDISH M., 2010. Economic literacy : a complete guide. Marshall
Cavendish Corporation, ISBN 978-0-7614-7910-9
[14] GREIF N. & JOHNSON E., 2000. The good neighbor guidebook for Colorado:
necessary information and good advice for living in and enjoying today´s
45
Colorado. Johnson books, ISBN: 1-55566-262-5
[15] CHATNANI N., 2010. Commodity Market: Operations, Instruments, and
Applications, Tata McGraw Private Limited, ISBN 13: 978-0-07-015929-7
[16] JOHNSON D., 2003. International exploration economics, risk, and contract
analysis. PennWell Corporation. ISBN 0-87814-887-6
[17] KEVIN S., 2010. Commodity and financial derivatives. PHI Learning Pvt. Ltd
ISBN: 978-81-203-4162-3
[18] KIRKPATRICK C. & DAHLQUIST J., 2011. Technical analysis: the complete
resource for financial market technicians 2nd edition. Paerson Education, Inc.,
ISBN 978-0-13-705944-7
[19] KIRSCHEN D. & STRBAC G., 2004.Fundamentals of power system economics.
John Wiley and Sons, Ltd ISBN 0-470-84572-4
[20] KOLB R., & OVERDAHL J., 2006. Understanding futures markets. Blackwell
Publishing Ltd., ISBN 978-1-4051-3403-3
[21] KOLB R., & OVERDAHL J., 2007. Futures, options, and swaps. Blackwell
Publishing Ltd., ISBN 978-1-4051-5049-1
[22] MISHKIN F. 1992. The economics of money, banking, and financial markets.
HarperCollins. ISBN: 0-673-52141-9
[23] PARAMESWARAN S., 2003. Futures Market. Tata McGraw-Hill Publishing
Company Limited. ISBN 13: 978-0-07-059912-3
[24] RADOVÁ J. & DVOŘÁK P. & MÁLEK J., 2009.Finančné matematika pro
každého the 7th edition., GRADA Publishing, a.s. ISBN 978-80-247-3291-6
[25] REJNUŠ O., 2008. Finanční trhy. Ostrava: Key Publishing. ISBN: 978-8087071-87- 8
[26] SUBRAMANI R., 2009. Accounting for investments: equities, futures and
options. John Wiley and Sons, Inc. ISBN-13:978-0470-82431-3
[27] THE CHICAGO BOARD OF TRADE. 2006. The Chicago Board of Trade
handbook of futures and options. McGraw-Hill companies. ISBN: 0-07-145751-8
[28] THE INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT. 2005. Agriculture Investments Sourcebook. The World Bank.
ISBN 13: 978-0-8213-X
[29] THE WORLD BANK., 2005. Agriculture Investments Sourcebook. The
International Bank for Reconstruction and Development/The World Bank, ISBN
46
13: 978-0-8213-X
[30] VESELÁ J., 2007. Investování na kapitálových trzích. Aspi, ISBN: 80-7357-2974
[31] VLACHYNSKÝ K. & MARKOVIČ P., 2001.Finančné inžinierstvo. IURA
EDITION, spol. s r. o. ISBN 80-89047-08-4
[32] ZAMORA A., 1990. Bank contingency financing: risks, rewards, and
opportunities. John Wiley and Sons, Inc. ISBN 0-471-60894-7
Web resources
[1] BENHAMOU E. & MAMALIS G. (n. d.). Commodity markets (overview).
Retrieved January 12, 2011 from:
http://www.ericbenhamou.net/documents/Encyclo/commodity%20markets%20_ov
erview_.pdf
[2] INVESTORWORDS.COM, 2011. Spot market. By WebFinance, Inc. Retrieved
January 12. 2011 from: http://www.investorwords.com/4661/spot_market.html
[3] LERNER R. (2000). The mechanics of the commodity futures markets: what they
are and how they function. Retrieved January 12. 2011 from:
http://www.2dix.com/view/view.php?urllink=http%3A%2F%2Fwww.turtletrader.c
om%2Fbeginners_report.pdf&searchx=%20commodity%20market
47