Contract with commodities as underlying assets

CFA Level I Equities
#1

Dear all,

I read from Schweser Notes under reading #46 that Financial Contracts are often based on securities, currencies, commodities or security indexes.

Question: Aren’t commodities considered as physical assets and at such should be considered as physical contract?

Thanks.

Cheers,

Ernest

#2

Based on my understanding the financial contracts based on commodities are referring to futures, which delivers the commodities at a specified time and price.

Thus futures help to protect the financial position of the investors who speculate the commodities prices to be increasing in the future. If the commodity price is really higher than the future contract predetermined price, the investor makes a gain.

Correct me if i’m wrong. thanks!

#3

Thanks wigglytuff for the explanation!