The New York Mercantile Exchange

Financial energy commodity contracts are traded on the New York Mercantile Exchange. The picture at the left side of the slide here, the actual building with the reflection of the sun on it, is the New York Mercantile Exchange building on the Hudson River in New York City. To the right is an actual picture taken with the traders trading in the pits, as they yell and scream back and forth at one another, placing the orders.

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The New York Mercantile Exchange started in the 1800s. There were scattered markets for the goods in large cities. You can picture a city like New York City and agricultural products being brought in and sold in various parts of it. So some entrepreneurial businessmen decided that they needed a central exchange. So in 1872, it was founded as the Butter and Cheese Exchange. In 1880, it was changed to the Butter, Cheese, and Egg Exchange. And then finally in 1882, it was changed to its present name of the New York Mercantile Exchange.

Later products would include yellow globe onions, apples, potatoes, plywood, and platinum. Platinum is the only product which is still traded today on the New York Mercantile Exchange. So today, it trades crude oil, heating oil, gasoline, propane, natural gas, platinum, and palladium.

Futures contract

The definition given by the New York Mercantile Exchange is “...a legally binding obligation for the holder of the contract to buy or sell a particular commodity at a specific price and location at a specific date in the future.” The key word here is future. These are known as futures. We are buying and selling energy commodities at a future date and time. And again, this is a legally binding obligation. This is what makes exchanges a sound place to conduct business. If you fail to perform under a contract obligation with the New York Mercantile Exchange, there are both financial and legal ramifications.

The components of a standard NYMEX energy contract. First, we name the commodity-- crude oil, natural gas, heating oil, unleaded gasoline. The price, which is what most times we are most interested in. The location-- each of the energy commodities on NYMEX has a different delivery location. And then the date. What the future point in time do we wish to buy or sell the energy commodity?

The trades on the New York Mercantile Exchange between the counter parties are conducted under the International Swaps and Derivatives Association, or ISDA, 2002 Master Agreement. This is a standardized contract under which all financial energy commodity contracts are traded. Link to the contract??