Skip to content

CFA Level I Exam · Natural Resources

Commodities: Types, Spot and Futures Markets Explained

Updated 7 October 2026 · Fact-checked

Commodities are physical goods grouped into energy, metals, agriculture and livestock. The spot market trades for immediate delivery at today's price. Forwards and futures fix a price now for delivery later. Futures are standardized, exchange-traded and marked to market daily. Most investors never take delivery and close or roll positions.

Understand Commodities: Types, Spot and Futures Markets

A commodity is a basic physical good that is largely interchangeable, such as crude oil, copper or wheat. Because one unit of a given grade is much like another, price is the main thing that differs between sellers. Commodities produce no cash flows. Their value comes from consumption or use, not from coupons or dividends.

The main sectors are:

  • Energy: crude oil, natural gas, refined products such as gasoline and heating oil.
  • Metals: precious metals (gold, silver, platinum) and industrial or base metals (copper, aluminium, zinc).
  • Agriculture: grains and oilseeds (wheat, corn, soybeans) and softs (coffee, sugar, cocoa, cotton).
  • Livestock: live cattle, lean hogs.

Some sources also list carbon emissions allowances as a separate category. Commodities differ in how easily they can be stored. Gold stores cheaply for years. Natural gas and electricity are costly or impossible to store. Perishable crops and livestock have seasonal supply and storage limits. Storability drives the link between spot and futures prices.

The spot market is where a commodity is bought and sold for immediate delivery at the spot price. A forward contract is a private, customized agreement to buy or sell at a set price on a future date. It carries counterparty risk. A futures contract is similar but standardized in quantity, grade and delivery date, traded on an exchange, and guaranteed by a clearinghouse.

Futures require initial margin at the start. The position is marked to market each day: gains and losses are settled in cash, and if the margin account falls below the maintenance margin, a margin call requires you to top it up to the initial margin level. Most traders close out before expiry. Some contracts settle physically, others in cash. Investors who want ongoing exposure roll by closing the near contract and opening a later one. The shape of the futures curve then matters: when futures prices are above spot the market is in contango, and when they are below spot it is in backwardation.

Key formulas to remember

Futures price by cost of carry (no-arbitrage)
F₀ = S₀ × (1 + r)^T + FV(storage costs) − FV(convenience yield), with storage costs and convenience yield as currency amounts. Continuous-compounding version, with c and y as annual rates: F₀ = S₀ × e^((r + c − y)T)
In the discrete formula, FV means the currency amount valued at the contract's expiry (time T). In the continuous version, c is the storage cost rate and y is the convenience yield rate. Higher storage and financing costs raise futures above spot. Convenience yield, the benefit of holding the physical good, lowers it.
Contango
Futures price > spot price
Occurs when carry costs (financing and storage) exceed convenience yield. Futures curve slopes upward.
Backwardation
Futures price < spot price
Occurs when convenience yield exceeds carry costs, for example when supply is scarce.
Daily futures gain or loss (long)
(Settlement price today − settlement price yesterday) × contract size × number of contracts
A short position has the opposite sign.

How to solve Commodities: Types, Spot and Futures Markets questions

Use this approach for any question on commodity types, spot versus futures and futures mechanics.

  1. 1Identify what is asked: classification, market structure, margin mechanics or curve shape.
  2. 2For classification, place the commodity in energy, precious metals, industrial metals, grains, softs or livestock.
  3. 3For spot versus derivative, decide whether delivery is immediate (spot) or later (forward or futures).
  4. 4For forward versus futures, check for standardization, exchange trading, clearinghouse and daily settlement. Those mean futures.
  5. 5For margin questions, compute the daily change × contract size × contracts, then adjust the margin account. Compare the balance to maintenance margin.
  6. 6For curve questions, compare futures with spot. Higher means contango, lower means backwardation. Link the cause to carry costs or convenience yield.
  7. 7Eliminate the two options that contradict these definitions, then check units and the sign (long versus short).

Quickest way: Spot, forward or futures in 20 seconds

When to use it: Use for definition-style questions where you must match a feature to a market.

  1. Immediate delivery? Spot.
  2. Customized, private, settled at maturity, counterparty risk? Forward.
  3. Standardized, exchange-traded, clearinghouse, daily marking to market? Futures.
  4. Futures above spot? Contango. Below? Backwardation.
  5. For margin math, multiply price change × size × contracts and apply the sign for long or short.

Common mistakes in Commodities: Types, Spot and Futures Markets

  • Treating futures and forwards as identical.

    Both fix a price for future delivery.

    Fix: Remember futures are standardized, exchange-traded, cleared and marked to market daily. Forwards are customized and private.

  • Assuming commodity investors usually take physical delivery.

    The contract specifies delivery.

    Fix: Most positions are closed or rolled before expiry. Many contracts settle in cash.

  • Mixing up contango and backwardation.

    The terms sound similar.

    Fix: Backwardation means futures prices are below spot (a downward-sloping curve). Contango means futures prices are above spot (an upward-sloping curve).

  • Getting the sign wrong on a short position's daily gain.

    Candidates apply the long formula to every position.

    Fix: A price fall gains for a short and loses for a long. Write the sign before calculating.

  • Thinking a margin call restores margin only to maintenance level.

    Maintenance margin is the trigger, so it feels like the target.

    Fix: The call requires topping up to the initial margin level.

Worked examples

Example 1

An investor buys 5 crude oil futures contracts, each for 1,000 barrels, at $80.00. The initial margin is $4,000 per contract, so the account starts at $20,000. The maintenance margin is $3,000 per contract, or $15,000 in total. The next day's settlement price is $77.50. What is the margin account balance after the day's loss, before any deposit? Options: (A) $7,500; (B) $12,500; (C) $20,000.

Show the solution
  1. Daily change = $77.50 − $80.00 = −$2.50 per barrel.
  2. Loss = −$2.50 × 1,000 × 5 = −$12,500.
  3. New balance = $20,000 − $12,500 = $7,500.
  4. Margin check: $7,500 is below the $15,000 maintenance margin, so a margin call is triggered. The investor must deposit $12,500 to bring the account back up to the $20,000 initial margin level.
  5. Check the options: $12,500 is the loss (and the later deposit), not the balance before the deposit. $20,000 is the starting balance with no loss applied.

Answer: A: the balance is $7,500, which triggers a margin call for a $12,500 deposit.

Example 2

Gold spot is $2,000 per ounce and the one-year futures price is $2,080. Which statement is correct? (A) The market is in backwardation because carry costs are high; (B) The market is in contango, consistent with financing and storage costs; (C) The market is in contango because convenience yield is high.

Show the solution
  1. Compare futures with spot: $2,080 is above $2,000.
  2. Futures above spot means contango, so A is wrong.
  3. Contango arises when carrying costs (financing and storage) exceed convenience yield.
  4. High convenience yield lowers futures prices, so C gives the wrong cause.
  5. Gold is cheap to store and has low convenience yield, so carry costs explain the premium.

Answer: B: contango, consistent with financing and storage costs.

Exam tips

  • Know the sector lists cold: energy, precious metals, industrial metals, grains, softs, livestock.
  • Expect feature-matching questions on forward versus futures. Look for the words standardized, exchange-traded and clearinghouse.
  • In margin questions, compute for all contracts and note long or short before choosing an option.
  • Numerical options run smallest to largest, so a quick sign and magnitude check can eliminate two choices.
  • Link the curve shape to net carry: contango when carry costs exceed convenience yield, backwardation when convenience yield exceeds carry costs.

Practice questions from Natural Resources

Commodities: Types, Spot and Futures Markets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Commodities: Types, Spot and Futures Markets: frequently asked questions

What is the difference between spot and futures commodity markets?

The spot market trades for immediate delivery at the current price. A futures market trades standardized contracts for delivery on a later date at a price agreed today. Futures are cleared and marked to market daily.

How do commodity futures work?

You post initial margin and take a long or short position. Each day gains and losses are settled in cash through your margin account. You then close the position, roll it to a later contract or hold to expiry for delivery or cash settlement.

What are the main commodity sectors?

The main sectors are energy, metals, agriculture and livestock. Metals split into precious and industrial. Agriculture splits into grains and oilseeds and softs such as coffee and sugar.

What is the difference between contango and backwardation?

In contango, futures prices are above spot. In backwardation, futures prices are below spot. The shape matters for the return when an investor rolls futures positions.