Broadly speaking, organised markets fulfill three main functions. First, they enable manufacturers and wholesalers to obtain supplies of commodities easily, quickly and at the competitive market price. Because they are composed of specialist buyers and sellers, prices are sensitive to any change in demand and supply. Thus they are perfect markets. Second, 'futures' dealings on these markets enable people to protect themselves from heavy losses through price changes. Thus a cotton grower prefers to know what price he will receive before his output is actually delivered to the market. On the other hand, a cotton spinner has to protect himself from a rise in the price of raw cotton between the time he quotes a price for his yarn and the time of its actual manufacture. Where a good is bought today for delivery today, the deal is known as a 'spot' transaction and the price is the 'spot price'. With many goods, however, it is possible to buy today for delivery in the future. The price agreed upon is the 'future' or 'forward' price. For a commodity to be dealt in on a futures market certain conditions must be fulfilled:
· the commodity must be durable, thereby enabling stocks to be carried;
· the commodity must be described in terms of grades which are internationally uniform;
· dealings must be frequent enough to occupy professional dealers;
· the commodity must be subject to price fluctuations.
