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  • The function of futures markets

     
     

    The coffee futures exchanges were originally created to bring order to the process of pricing and trading coffee and to diminish the risk associated with chaotic cash market conditions. The futures prices that serve as benchmarks for the coffee industry are openly negotiated in the markets of the coffee futures exchanges (primarily New York and London).

    To support a futures market, a cash market must have certain characteristics: sufficient price volatility and continuous price risk exposure to affect all levels of the marketing chain; enough market participants with competing price goals; and a quantifiable underlying basic commodity with grade or common characteristics that can be standardized.

    The futures exchange 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 coffee price determination. The exchange market supports five basic pricing functions:

    • Price discovery;
    • Price risk transfer;
    • Price dissemination;
    • Price quality;
    • Arbitration.

    The exchange establishes a visible, free market setting for the trading of futures and options which helps the underlying industry find a market price (price discovery) for the product and allows the transfer of 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 price. (More buyers and sellers in the marketplace means better pricing opportunities.) Greater participation means that price discovery reflects the conditions of the commodity market as a whole. To ensure the accuracy and efficiency of the trading process, the exchange also resolves trading disputes through arbitration.

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