I'm a student, now studying about derivatives. In type of commodity options, why do we have wheat options, oil options, gold options... why don't we have cement options?And please let me know, is there any qualification, any criteria for choosing a goods to be an underlying asset of a derivative?
Don't be intimidated by the charts, actually they are not that hard to read and understand. Strategies that are based on reading and analyzing charts are part of the technical analysis area.
Well, first off we don't exactly have wheat options, oil options, and gold options. We have wheat, oil, and gold futures options (there probably exist options on these cash commodities but they aren't exchange traded and would generallynot be available to joe investor). If you are trading options on these commodities, upon exercise of the option you receive position in a futures contract not a position inn the commodity. That means your question is really, why aren't there cement futures contracts. The answer is: a) They have thought about them in some places at various times. A couple of years ago, they tried to get one going in India but some regulatory board nixed it for reasons unknown to me. b) Cement prices are relatively stable (and low). Cement sells for $100/ton (I think) and just doesn't vary much. c) Partly because of b) there is no need to hedge cement and a commodity with very stable prices would not entice many specuators. If the price of something is currently stable, introducing a futures contract and speculation to try to maake the commodity price unstable so people will hedge it and use futures contracts would be terribly abusive to the economy. d) Cement is usually a small component of the price of any project using large amounts of cement. The big expense is usually the construction expenses surrounding the cement and moving concrete. Thus, even if cement prices were variable, the variability would only contribute to variable costs of a project in a samll way and so probably not be worth hedging. e) If CBOT or CME thought it would be successful and they could get CFTC to go along with it they would offer cement futures in a Chicago second.
