What Are Actuals?
The term "actuals" refers to the homogeneous commodities that are the underlying basis for futures trading. Actuals can be any commodity, but some commonly traded commodities include crude oil, heating oil, natural gas, gold, copper, silver, platinum, wheat, corn, and soy.
The actuals making up the most liquid contracts see seasonal shifts based on their real-world production schedules, particularly with agricultural products. Actuals are also referred to as the cash commodity, the underlying, the reference commodity, or the underlying reference commodity.
In accounting, actuals refer to how much revenue an account has actually generated.
- Actuals are the underlying commodities that have been standardized for futures contracts.
- Actuals can be any commodity, but some commonly traded commodities include crude oil, heating oil, natural gas, gold, copper, silver, platinum, wheat, corn, and soy.
- The actuals are what is actually delivered at a derivative contract's expiration to the long.
- Because they have been homogenized to a certain extent, the quality and quantity of the underlying asset received will be known in advance.
- In accounting, actuals are the recorded revenues and expenditures at a given point in time (as compared to a budget, which is only an estimate of revenues and expenditures).
How Actuals Work
Actuals are the goods that are being traded in futures contracts. In the futures market, two parties enter into an exchange-traded contract in which one party agrees to deliver a set quantity and quality of the underlying commodity; the other party agrees to purchase the commodity. The physical delivery of the actuals can be avoided through cash settlement and the parties in the contract can sell their positions before delivery.
Manufacturers, refineries, processors, and other users of the raw materials and commodities traded on the futures market typically enter into contracts with the intention of taking delivery of the actuals to ensure they have sufficient stocks on hand to keep operating. This means they want the barrels of crude, the bushels of wheat, and the pounds of meat for the purpose of refining, feeding, processing, and so on. These buyers who are also end-users of the actuals may use the cash settlement version of the contract purely to hedge contracts they have in the non-exchange-traded physical market.
Of course, there are also speculators, investors, and proprietary traders in the futures market who have no intention of taking delivery of the actuals. These market actors are only interested in the actuals because of the historical, seasonal, and current pricing trends they are hoping to profit off of through the trade.
The contracts that speculators, investors, and traders trade are no different in their market function from the ones traded by entities with the intention to use the actuals involved. The delivery mechanism in the futures market makes certain all the contracts converge on a fair market price and that pricing risks are parceled out to those who want it, regardless of buyer intent.
Physical Market vs. Commodities Futures Market
Actuals are, of course, traded in the physical, or spot market, as well as the futures market. In the physical market, two parties enter into a private agreement to exchange the commodity for cash or another commodity, and delivery almost always occurs. In fact, any failure to deliver is usually a breach of contract that opens up legal liability.
The actuals trade in the physical market is essentially a signed purchasing contract where the product amount is specified to ensure both parties are clear. A contract for actuals in the physical market is unlikely to change hands and it often contains more conditions as to the grade and quality of the actuals compared to a futures market contract.
Actuals vs. Budget
In accounting, the term actuals has a different meaning. Whereas a budget refers to an estimate of revenues and expenses for an account for a fiscal year, the actuals reflect how much revenue an account has actually generated or how much money an account has paid out in expenditures at a given point in time during a fiscal year. While it is expected that there will be a little variance in a budget, when a company's actuals deviate immensely from its budget, this can be a bad sign.