Commodity-Product Spread

Posted in Finance, Accounting and Economics Terms, Total Reads: 796
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Definition: Commodity-Product Spread

The value added between the price of the commodity as a finished product and the price of the commodity as a raw material is known as Commodity Price Spread. It is also known as “crack spread”. For example, it is the spread between price of crude oil as well as the price of refined oil products


It can also be defined as the transaction in which a commodity and product are bought and sold simultaneously. Speculation regarding the commodity price spread is an important and popular trade on the futures market. It is used by firms that make finished products from the commodities traded. Here a firm buys (sells) raw commodity futures at the same time one sells (buys) a finished commodity futures. This leads to locked in profit and acts as a hedge against undesired price variations. For example, one sell futures for crude oil while buying futures in refined oil.

 

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