• Two markets

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

    To understand the cotton futures market, a distinction must be made between physical (cash) cotton and cotton futures.

    In the cotton cash market, participants buy and sell physical cotton of different grades and quality that will be delivered immediately on a specified date. The cash transaction therefore involves the transfer of ownership of a specific lot of a particular grade of physical cotton. Cash market contracts for later delivery of cotton, called forward contracts, should not be confused with futures contracts. The cash price for the cotton is the current local price for the specific product to be transferred.

    In the cotton futures market, participants buy and sell a price for a standard grade of cotton. The futures transaction centres around trading a futures contract based on physical cotton (or its cash equivalent) at a price determined in an open auction – the futures market. The futures price is the price one expects to pay, or receive, for cotton at some future date.

    The futures contract is a standardized legal commitment to deliver or receive a specific quantity and grade of a commodity or its cash equivalent on a specified date and a specified delivery point. The standardization of the contract allows market participants to focus on the price and the choice of contract month.

    Traders in the cotton futures market are primarily interested in risk management (hedging) or speculation, rather than the physical exchange of actual cotton. Although delivery of physical cotton can take place under the terms of the futures contract, few contracts actually lead to delivery. Instead, purchases of contracts are usually matched by offsetting sales and vice versa before the contract expires, and no physical delivery takes place.

    In addition to its pricing functions, the cotton futures market helps to support standards of quality and grade that can be applied throughout the industry. 
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    Cotton Exporter's Guide

    Brochure - African cotton promotion
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