Bidding cost in futures contracts includes all expenses associated with delivery and certification of the product, and is generally due before contract expiration. Commodities, such as grain and livestock, have unique requirements for long-term storage and transportation. Financial products, like stocks and bonds, have bidding costs consisting of fees such as broker commissions and trading fees.
With a futures contract, the term bidding cost refers to all of the underlying costs associated with the delivery and certification of the contracted product. Accounting for all expenses in a long-term contract to include transportation to expiration, storage of the product during the contract, required insurance coverage, incidental costs necessary to maintain the product, and any other expenses incurred by the seller, the product it is then delivered to the holder at the expiration of the contract. Bidding cost payment is generally due before the contract expiration date. However, if the holder of a futures contract chooses to close out his position before the contract expires, rather than take delivery, then he will not incur the cost of bidding.
Commodities are generally bought in bulk through what is called a futures contract. Items considered commodities may include grain, livestock, coffee, sugar, tea, cotton, or oil, for example. For the most part, a commodity is an unprocessed raw material that is processed to make products that will be sold in the marketplace. Each product has its own unique requirements for long-term storage and transportation to maintain quality. Cattle, for example, will need to be properly fed and cared for to produce healthy meat, while requiring proper transportation methods so that the cattle arrive in good physical condition.
As such, each product will have different costs calculated in the bid cost to reflect the long-term maintenance of the product, until delivery. The sellers of the merchandise, since they retain possession, are responsible for this maintenance, as well as for the safe delivery. In return, the burden of spending falls on the holder if he or she takes delivery. The term commodity is also applied to financial markets, particularly currency exchange, stocks, and bonds. These also have a cost of bidding, although the maintenance of these products is usually less intensive.
Often, financial products like stocks and bonds are purchased through options on an exchange through a broker or platform that allows for independent trading, rather than in bulk directly from an entity that offers such investments. The cost of bidding for these types of items typically consists of fees, such as broker commissions, trading fees, and maintenance fees to maintain the trading platform. In most cases, these fees are collected at the initiation of a trade, purchase, or sale, but usually at the time of sale.
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