Cash Commodity

Definition

The term cash commodity refers to a physical commodity to be delivered as part of an agreement or contract.  Cash commodities can be agricultural products, precious metals, and even financial instruments like treasury bills.

Explanation

Parties entering into agreements in the futures market will do so for two reasons.  Speculators enter into agreements for the sole purpose of making profits by betting on the price direction of the underlying asset.  Speculators have no intention of taking physical delivery of the commodity and will close out their position before the contract expires.

Hedgers are parties that either produce the underlying asset or use it in their processes.  Unlike speculators, hedgers are oftentimes interested in physically exchanging the underlying asset for cash.  For example, an electric utility may take physical delivery of natural gas to use in its generating plants.  The physical commodity delivered at the expiration of the futures contract is known as the cash commodity.

The relationship between a futures contract and cash commodity can be explained in this manner:  a futures contract is an agreement to deliver a predetermined quantity of the cash commodity of a given quality.

Related Terms

cash market, carrying charge, Bretton Woods Agreement