Due to this relationship there is a high correlation between the market price of the future/forward contract and the spot market price of the underlying commodity. Deviations from the perfect correlation lead to the so-called basis risk. Indexes can have several underlying commodities, using same commodity classes, for example, grain or different commodity classes like agriculture and energy.
Examples of underlying commodities:
- The IPE Brent crude oil future has the underlying Brent crude oil with delivery location Rotterdam.
- The LME copper futures have copper "Grade A" as underlying.
- CBOT wheat futures and KCBT wheat futures have wheat as underlying, but different deliverable grades: CBOT references to soft red winter wheat, KCBT to hard red winter wheat.
- The Goldman Sachs Commodity Index (GSCI) uses metals, agricultural products, and energy products as underlying commodities.
- The GSCI U.S. grain refers to the underlying commodities like corn, soybean, Chicago wheat, and Kansas wheat.