• back
  • 4.4-COTTON TRADING-COTTON FUTURES AND OPTIONS – ICE FUTURES U.S.

  •  
  • Cotton futures and options – ICE Futures U.S.

    Chapter 4 - Cotton trading - Cotton futures and options – ICE Futures U.S. 

     
     
    The trading of agricultural commodities represents one of civilization’s oldest commercial activities. Crop commodities, such as cotton, have been in use for thousands of years. Basic commodities with universal value in different cultures could be described as the first international currencies of exchange. With such a long history as a basis of commerce, it is easy to understand how the marketplace value of a commodity could play a major role in the rise and fall of empires.

    The shape and scope of commodity trading has evolved since the early trading routes were established, but the role of commodity trading remains a fundamental economic component in world economic development. The price fluctuations of a basic commodity can still shock the economy of a country or an entire region. The price of the latest cotton crop matters a great deal. The central importance of commodity pricing gave rise to the commodity exchanges and their principal pricing tools – futures and options contracts.

    Futures markets exist because of price risk in the cash market for the underlying industry. No price risk means there is no role for a futures market – a fact that is crucial to any understanding of the purpose and function of the futures markets. Cotton futures represent cotton that will become available at some point in the future, based on standard contracts to deliver or accept a predetermined quantity and quality of cotton at one of the contract specified delivery ports. The only points to determine when trading a futures contract are the delivery period (the month listed for the contract) and the price. The delivery period is chosen from a preset list of calendar months or contract months. The price is negotiated openly in the marketplace.

    For well over a century, cotton industry representatives have joined traders and investors in the ICE Futures U.S. (formerly “the New York Board of Trade (NYBOT)”) futures and options markets to engage in price discovery, price risk transfer and price dissemination for this internationally traded commodity. Each day, people from around the world look to the ICE markets for a benchmark price in cotton.

    To support a futures market, a cash market must have certain characteristics: In addition to sufficient price volatility and continuous price risk exposure affecting all levels of the marketing chain, it should have enough market participants with competing price goals (buyers and sellers) and a quantifiable underlying basic commodity with grades of common characteristics that can be standardized.

    The futures marketplace is an organized marketplace that provides and operates the facilities for trading; establishes, monitors and enforces the rules for trading; and keeps and disseminates trading data.

    The exchange does not set the price. It does not even participate in cotton price determination. The basic price functions supported by the exchange marketplace are price discovery, price risk transfer, price dissemination, price quality and arbitration. The exchange maintains a transparent, free market setting for the trading of futures and options, which helps the underlying industry find a fair market price (price discovery) for the product and allows the transfer of price risk associated with cash price volatility. As price discovery takes place, the exchange provides price dissemination worldwide. Continuous availability of pricing information contributes to wider market participation and to the quality of the price. (More buyers and sellers in the marketplace means better pricing opportunities.) Greater participation means that price discovery reflects the fundamental conditions of the commodity market as a whole (particularly in relation to the basics of supply and demand). To ensure the accuracy and efficiency of the trading process, the exchange also resolves disputes through arbitration.

    *Formerly the New York Board of Trade®, NYBOT®, NYCE®, Cotton No. 2, United States Dollar Index®,and USDX®, are registered trademarks or service marks of the Board of Trade of the City of New York, Inc.