Definition
Fixation is the process of setting a present or future price for a commodity. It involves evaluating the market conditions, particularly the forces of supply and demand, to arrive at a predetermined price. This process is fundamental in determining the pricing benchmarks for various commodities in financial and trading markets.
For instance, the price of gold is fixed twice each business day in London, known as the “London Gold Fixing.” During this process, representatives from major financial institutions convene to set the price of gold, taking into account current market trends and economic factors.
Examples
-
London Gold Fixing: The price of gold is fixed twice a day in London after reviewing the market conditions. Institutions like Deutsche Bank, HSBC, and Société Générale come together to determine the price of gold through a structured process.
-
Oil Prices: The Organization of the Petroleum Exporting Countries (OPEC) frequently engages in fixation processes to set the oil price targets that influence global oil trade.
-
Agricultural Commodities: Corn, soybean, and wheat prices can be fixed forward contracts to ensure stability and predictability in agricultural markets.
Frequently Asked Questions (FAQs)
Q1: What is the purpose of fixation in commodity markets?
A1: Fixation helps provide a stable pricing structure for commodities, thereby reducing market volatility and enabling traders, producers, and consumers to make informed decisions.
Q2: How often is the price of gold fixed in London?
A2: The price of gold is fixed twice a business day in London, once in the morning and once in the afternoon.
Q3: Who participates in the fixation process for commodities like gold?
A3: Typically, major financial institutions and market makers participate in the fixation process.
Q4: What is the significance of fixation for forward contracts?
A4: By setting prices in advance, forward contracts help mitigate the risks associated with price fluctuations over time.
Q5: Can fixation influence global markets?
A5: Yes, the fixation of key commodities like gold and oil can have a profound impact on global financial and trading markets.
Related Terms and Definitions
- Hedging: A strategy employed to offset potential losses in investments by taking an opposite position in a related asset.
- Forward Contract: A customized contractual agreement to buy or sell a specific asset at a predetermined price at a future date.
- Spot Price: The current market price at which a particular asset can be bought or sold for immediate delivery.
- Benchmark Pricing: A standard price set for various financial instruments or commodities, often used as a reference for trading.
Online References
- Investopedia on Commodity Pricing
- Wikipedia: London Gold Fixing
- OPEC Official Website
- CME Group: Agricultural Commodities
Suggested Books for Further Studies
- “The Economics of Commodity Markets” by Julien Chevallier - An in-depth guide on the economic theory and practical aspects of commodity markets.
- “Commodity Markets and Derivatives” by Tony Easton and John Wright - This book covers a comprehensive exploration of commodity trading, including derivatives.
- “Gold: The Once and Future Money” by Nathan Lewis - A historical and analytical view on the significance and pricing of gold.
Fundamentals of Fixation: Economics and Financial Markets Basics Quiz
Thank you for exploring the foundational aspects and intricate details of fixation in commodity pricing. Continue enhancing your knowledge and application in financial marketplaces!
