If you are new or been involved with futures trading, you would probably heard about about commodity futures and financial futures. Do you really know what is the difference between them? Well if you are not sure, here are some guides to help you to understand better.
Generally commodity simply refers to anything that the land can produced. Financial futures on the other hand refers to anything that land can trade. Both commodity and financial futures share the same trading requirement whereby both require buyer and seller to fulfill their obligation in accordance with the rules.
Offsetting
Offsetting simply means by taking the long and short positions and contra them. Under this concept, any opened contract or position can be closed out prior to maturity. As such, a trader who has buying position can offset his position by selling and vice-versa. In short, such event is called contra.
Settlement
If you have any outstanding unclosed contract, you must settle it latest at maturity date. A maturity date is therefore the last day of the trading of a given contract month.
Commodity futures
The commodity futures is based on the physical commodity. As such, commodity futures have a storage value, and hence, can be delivered physically. For this reason, at maturity, all outstanding commodity futures contracts are settled by physical delivery.
In accordance with the trading procedure, the buyer of a commodity futures is required to take delivery of physical commodity upon payment, and the seller is to make a delivery of physical commodity for payment,,
Financial Futures
This type of futures is based on the financial instrument, which by nature is intangible. As such, financial futures do not have a storage value and cannot be delivered physically. Therefore at maturity, all outstanding financial futures contracts have to be settled by cash.
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