Commodity Trading

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Commodity Trading

• Using commodity futures to minimize risk

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What are Futures?

• exchange traded contracts that require delivery
  of commodities at a set price at a specified date
  in the future
• used by farmers and companies that buy and sell
  large amounts of commodities

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An Example

• petPRo could invest in chicken
• buy a future now at an agreed price
• protects petPRO from the price increasing due to
  a supply shortage

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How would commodities trading help PetPRO?

• investments could cut cost and minimize risk
• we avoid fluctuations in price level of
  commodities
• Useful for budget preparation and profit planning
• costs are known in advance

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Implementation

• two possible routes
• discount broker or Full service broker
• both will be Internet based technologies

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Full-Service Broker

• will cost more but will give advice
• will monitor our portfolio and adjust it
  according to our needs
• Not much additional work will be required by
  petPRO

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Discount Broker

• will place the trade but no advice would be given
• cheaper but someone would have to be trained
  in-house

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Full Service Broker

• ADVANTAGES
• specialized advice
• limited fraud liability
• others do the work

• DISADVANTAGES
• loss of control
• payment of commission
• churning trades-unethical practices

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Discount Broker

• ADVANTAGES
• flexibility
• involved in decision making
• lower transaction fees

• DISADVANTAGES
• expansive to train employee in-house
• no professional advice, higher risk
• harder to track sales and purchases

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Laissez Faire

• ADVANTAGES
• no new costs incurred
• no change in business process
• possibility of no benefit

• DISADVANTAGES
• uncertainty in the price of commodities
• not keeping up with industry
• not trying to improve

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Staying still in the business world is like
taking one step back -A.Mack
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Implications

• Purchasing- no bargaining with suppliers ,
  eliminates bribery
• Legal External-clear contract, prevents
  lawsuits
• HR Training-if discount broker is chosen then
  there is a cost of training in house

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Recommendation

• FULL-SERVICE BROKER
• professional advice
• cost effective
• safe, low risk

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Risks

• in the short run price could go down and work
  against you
• untrustworthy, unethical broker
• breach of security, internet based
• miscommunication

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Sites to visit

• www.tradecenterinc.com
• www.lind-waldock.com
• http//www.profittaker.com/home.asp?codeeb3e