A "benchmark contract" is the standard reference contract used in the trading of a given commodity, typically representing the most actively traded and liquid contract in the market. This contract serves as a pricing reference for other related contracts and for physical transactions of the commodity. It reflects market consensus on supply, demand, and price expectations at a given time.
Benchmark contracts are essential in financial markets because they provide transparency, standardization, and a reliable pricing mechanism for buyers and sellers. Examples include Brent Crude for oil, COMEX Gold for precious metals, and Henry Hub for natural gas.
These contracts typically attract the highest trading volume and open interest, making them the preferred choice for hedgers and speculators. Their prices are widely quoted and used as benchmarks for pricing physical commodities, derivatives, and other financial instruments.