The term “actuals”, refers to homogeneous commodities which are the basis for futures trading. Any commodity can be an actual, but the most commonly traded commodities are crude oil and heating oil .
Actuals that make up the most liquid contracts experience seasonal shifts based upon their actual-world production schedules, especially with agricultural products. Actuals can also be called the cash commodity or the reference commodity.
Actuals are the actual revenue generated by an account in accounting.
How the Actuals Work
Actuals refer to the actual goods being traded in futures contract. Two parties enter into a exchange-traded contract where one party promises to deliver the underlying commodity in a specified quantity and quality; the other agrees to buy the commodity. Cash settlement can avoid physical delivery of actuals and parties can also sell their positions prior to delivery.
Refineries, processors and other users of commodities and raw materials traded on the futures exchange typically sign contracts to take delivery of actual in order to have enough stock to continue operating. They want the barrels, bushels, and pounds of meat needed for refining, feeding and processing. These buyers, who may also be end-users of actual, might use the cash settlement version to hedge any contracts they have in non-exchangeable physical markets.
There are also investors and speculators who do not intend to take delivery of actual. These market players are only interested in actual due to the historical, seasonal and current pricing trends that they hope to profit from through trade.
The market functions of the contracts that traders, investors, and speculators trade are the same as those traded by entities intending to use the actual. The delivery mechanism in futures markets ensures that all contracts agree on a fair price. This means that pricing risks can be shared with anyone who wants them, regardless of buyer intent.
Physical Market vs. Commodities Futures Market
Actuals can be traded in both the spot market and the futures markets. Two parties make a private deal to exchange the commodity for cash, or another commodity. Delivery almost always happens in the physical market. In reality, a failure to deliver can lead to legal liability.
Actuals trade in the physical marketplace is basically a signed purchase contract. The product amount is stated to ensure that both parties are clear. Contracts for actuals in physical markets are unlikely to be changed and often contain more conditions regarding the quality and grade of actuals than a futures contract.
Actuals vs. budget
The term actual is a different term in accounting. A budget is an estimate of revenue and expenses for an account during a fiscal calendar year. Actuals, on the other hand, reflect how much revenue an accounting account actually generates or how much it has spent in its expenditures over a period of time. It is normal for there to be some variance in a budget. However, if a company’s actuals are significantly different from its budget it can be a red flag.