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Traditionally developed for thepurpose of Yellow wave pattern spunlace non-woven cloth risk management, commodity derivatives are now increasing inpopularity as an investment tool. Presently, investors having no need for thecommodity are trading in the commodity derivatives market. In fact, investorsjust speculate on the price direction of such commodities, with the hope ofmaking money in case the price moves in their favor.  Commodity derivatives market is adirect form of investing in commodities rather than investing in thosecompanies trading in such commodities. For instance, an investor can directlyinvest in steel derivatives rather than investing in the shares of a steelcompany.

It is quite simpler to predict the price of commodities depending ontheir supply and demand forecast, in comparison to forecasting the price of theshares of the firm. This depends on many other factors before considering just thesupply and demand of the products manufactured and sold or traded.  Advantages of Trading in Derivatives: It is much cheaper to trade inderivatives, since investors require only a small amount of money to purchasederivative contract. Before looking into how theinvestment in the derivative contract works, investors need to familiarizethemselves with the terms, seller and buyer of the derivative contract. Buyersof derivative contract are those people who pay an initial margin, to purchasethe right of selling or purchasing a commodity, at certain date and at certainprice in the future.  The sellers, on the other hand,accept the margin and agree to accomplish the decided contract terms, byselling or buying the commodity at a fixed price on the contract maturity.  The answer to actually how theinvestment in the derivative contract works is as follows. The individual investorhas the option of taking the delivery of one ton of soybean and selling it inthe market for a higher cost making a hefty profit. On the contrary, in case,the price of soybean falls to 8400, the investor makes a hefty loss.  Rather than the investors takingthe commodity delivery on contract maturity, they also have an option ofsettling the contract in cash. Cash settlement includes exchange of the spotprice difference of the exercise price and the commodity, depending on thefuture contracts.  

Overview: Settlement and clearing of tradesis the most critical function in the commodity derivatives exchange. Commodityderivatives also involve the exchange of goods and funds. For handling allsettlements, the exchanges have a separate body known as clearing house.  For instance, the seller offuture who contracts to purchase soybean, can select to take the soybeandelivery prior to maturity as compared to closing the position. In such cases,the function of the clearing organization is, to take care of the possible defaultproblems created by the other party being involved, by simplifying andstandardizing the transaction process between organization and participants.