Common Types of Metal Derivatives
The primary types of financial derivatives used in metals markets are:
Futures: Standardized, exchange-traded contracts to buy or sell a specific quantity of a metal at a predetermined price on a future date. They are a common tool for both hedging and speculation.
Options: Contracts that give the holder the right, but not the obligation, to buy or sell a specified amount of a metal at an agreed price within a set timeframe. The option buyer pays a premium for this right.
Forwards: Customized, over-the-counter (OTC) agreements between two parties to exchange a metal at a specified price and date in the future. They are more flexible than futures but carry higher counterparty risk.
Swaps: Agreements to exchange cash flows based on differing price exposures, often used to effectively fix the price of a metal over a period.
Types of Metals Traded
Derivatives are available for a wide range of metals, typically categorized as:
Precious Metals: Often used as stores of value or hedges against inflation.
Gold
Silver
Platinum
Palladium
Base/Industrial Metals: Widely used in industrial applications, construction, and electronics.
Copper
Aluminum
Nickel
Zinc
Lead
Tin
Battery Metals: A growing market due to the energy transition and demand for electric vehicles.
Lithium
Cobalt
Key Exchanges
Major global exchanges facilitate the trading of metal derivatives, providing liquidity and transparent pricing:
London Metal Exchange (LME): A primary venue for base and ferrous metals.
CME Group (which includes COMEX and NYMEX): Offers a wide range of futures and options on precious, base, and battery metals.
Multi Commodity Exchange (MCX) (India) and others like the JSE also list metal derivative products.
Purpose and Function
Participants in the physical supply chain (miners, refiners, manufacturers, consumers) use these instruments for risk management, protecting themselves against potential losses from price swings. Investors and traders also use them to diversify portfolios or capitalize on market opportunities.