Spot and Forward Markets
The cash market for immediate delivery and the bespoke forwards that fix future prices off exchange.
Overview
Spot is now: wet barrels, cash grain at the elevator, metal in the warehouse, priced at a location with a differential to the benchmark. Forwards are bilateral deals fixing price, volume, and date for later, customized but illiquid and exposed to counterparty default, the weakness exchanges fixed with margining. Basis joins the two: the local cash price minus futures, reflecting freight, quality, and local supply demand. Most physical crude, LNG, and metal trade on formula pricing off monthly averages of futures, anchoring the entire price edifice to the paper markets.
Related Topics
Futures Contracts
Each contract fixes quantity, quality, delivery point, and months, 1,000 barrels at Cushing, 5,000 bushels in store, so only price...
Contango
The term, an old piece of London exchange slang, describes an upward sloping forward curve where nearby months are cheaper than de...
Backwardation
In backwardation the front month costs more than deferred months: users bid up barrels available now, paying a premium for immedia...
Hedging
A refiner buying crude futures locks a refining margin, a farmer sells corn futures against unharvested bushels, an airline buys c...