Actuals (Commodities) - Explained
What are Actuals?
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Table of ContentsWhat are Actuals in Commodity Trading?How Do Actuals Work?Actuals Versus the Buyers IntentHow Actuals Works in the Physical MarketKey TakeawaysAcademics Research on Actuals
What are Actuals in Commodity Trading?
Actuals refer to homogenous commodities that form the basis of future trade. Actuals may be any commodity, however, the most common include natural gas, crude oil, gold, and diamonds among others. Note that actuals may be traded on the physical market for immediate delivery. Better still, it can also be traded on the futures market where delivery is done at the end of the contract.
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How Do Actuals Work?
Generally, actuals can be said to be commodities traded through contracts. This happens when two business dealers decide to be part of an exchange-traded contract. In this type of contract, one of the dealers agrees to supply a given amount and quality of a certain commodity as agreed. On the other hand, the other business dealer agrees to buy the commodity. Note that actuals physical delivery may be evaded via cash settlement. This is done when the business dealers who are involved in the contract decide to engage in selling their position before the commodity is actually delivered.
Actuals Versus the Buyers Intent
The materialization of the contracts actuals is highly dependent on the intent of the buyer. The buyers, in this case, are raw material users such as the manufacturers, processors, refineries, etc. Note that these are usually traded on futures markets. In this kind of trade, buyers usually become part of the contract with the intention of receiving the commodities. This is to ensure that they have enough stocks to enable them to continue with their operations. These buyers are also the actuals end users. They can, therefore, make use of the contracts settlement version to safeguard the contracts they have traded in the non-exchange physical market. However, there are also other traders as well as investors in the futures market who have no do not intend to take deliveries. In this case, they have no interest in the actual past the existing pricing trends. This is because they hope to profit throughout the trade.
How Actuals Works in the Physical Market
Actuals can be traded in both physical and futures markets. Normally two trading usually parties enter into an agreement to enter a business contract. The contract normally involves the exchange of a commodity for money or another commodity. Note that the actual trade involves a signed purchasing contract. Therefore, it is considered a breach of contract should there be a failure to deliver the commodities. The contract is binding and so, any breach of this contract is likely to lead to legal action. In addition, as a signed purchasing contract, actuals usually have specifications about the quantity and the quality of the commodity being exchanged. The specifications are there to ensure that parties are clear and satisfied with the whole purchasing process.
- Actuals refer to homogenous commodities that form the basis of future trade.
- Actuals may be traded on both the physical as well as in the future markets.
- The materialization of the contracts actuals is highly dependent on the intent of the buyer.
- The actual trade involves a signed purchasing contract that may lead to legal action should any of the parties fail to honor the contract (breach the contract).