Theory question 104
Stock ExchangeCommerce 2 (theory)
(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 commodity exchange
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(a) Any three: provides an organised market for commodities; helps fix fair prices through demand and supply; reduces risk through hedging/forward contracts; gives price information to producers and buyers; encourages production of the commodities; earns foreign exchange; enables trading without seeing the goods (by sample/grade).
(b) Any two, explained: spot (cash) trading – goods are bought and paid for for immediate delivery; futures/forward trading – contracts to buy or sell at an agreed price for delivery at a future date; trading by sample – a sample represents the whole lot; trading by description/grade – goods are sold by recognised grades without inspection; auction sales.
(c) Any four: commodities must be durable (non-perishable); capable of being graded/standardised; available in large quantities; sold through registered brokers/members; must have a large number of buyers and sellers; prices must fluctuate freely; goods must be easily transported/stored.
Requirements in (c) are mainly about the nature of the commodity (durable, gradable, plentiful).