Many commodities options and futures products are traded as listed contracts on global exchanges such as the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) or the Intercontinental Exchange (ICE), to name a few.  Buyers and sellers of these exchange-traded products enjoy price transparency, standardized terms, and relatively high liquidity compared to non-exchange-traded derivatives. Because there is a finite number of asset types for futures and options, they may be limited in their hedging applications as they may not fully represent actual or expected positions.  Moreover, exchange-traded products may require frequent margin maintenance as positions rise or fall in value.

Over-the-counter (OTC) products have many of the same performance characteristics as exchange-traded futures and options, but have several distinct advantages and considerations.  OTC products include swaps, caps, floors, collars, and other structured derivative products, and can contain enhanced features such as, leverage, cancellation options, barrier options (knock-in, -out) or accumulators, to name a few.  Unlike standardized exchange-trades futures and options, OTC derivatives are executed bilaterally between Eligible Contract Participants (as defined by the CFTC) and are not centrally cleared.  They can be fully customized to fit a client’s specific hedging or investing goals, and as a result, do not have easily obtainable quotations and often require specialist pricing advisory services from firms like HTS Commodities.  Margin/collateral is typically negotiated between parties, not set by an exchange.

Block trades and cleared products are private futures, options or other derivative transactions in listed products meant to serve institutional trading needs.  Like OTC products, these are typically large, negotiated transactions that can be executed between an Eligible Contract Participant (as defined by the CFTC) and a counterparty at any time and at a single price. Like exchange-traded products, they are centrally cleared to reduce counterparty risk.

Structured notes are hybrid securities issued by financial institutions or other entities that consist of a debt obligation and an embedded derivative component tied to an underlying benchmark based on a single stock, equity index, ETF, commodity, or currency. The hybrid nature of structured notes puts them in a category that has performance characteristics similar to both fixed income instruments and the underlying asset (equity, commodity, etc.). Although structured notes may not be suitable for all investors, they may be attractive to certain investors otherwise hesitant to invest directly in equities, currencies or commodities.

Investors can gain indirect exposure to commodities prices through taking positions in commodity exchange-traded funds (ETFs), or through bonds or stocks of companies that are related to commodities in some way (oil and gas companies, mining companies, etc.)  The main advantage of these products is that they are easily understood, easily accessible for most investors, may be less volatile than futures contracts or other products, and may be easier to manage in an investment portfolio.  However, commodity-related stocks are not a pure play, and prices may be influenced by a number of factors (operational, M&A, interest rate, legal, etc.) unrelated to commodities prices.

Commodity indices and sub-indices are exchange-traded instruments that allow investors to participate in the price performance of a basket of commodities and their individual components.  Indexes are available that provide exposure to a broad range of commodities, exposure to specific commodities sectors (agriculture, energy, precious or industrial metals, etc.), or single commodity exposure (corn, cotton, natural gas, live cattle, etc.). Unlike other financial indexes that might consider stock dividends or interest payments, returns on commodity indexes are directly related to price movements of the underlying commodities or their futures contracts. Recent generations of indices can overlay rules-based active management and potentially add alpha generation to a more traditional market beta allocation.