Futures
Futures are financial contracts that obligate the buyer to purchase an asset or the seller to sell an asset at a predetermined price on a specified future date. These contracts are commonly used in financial markets to hedge risks or speculate on price movements without actually owning the underlying asset.
Example #1
For instance, suppose a farmer wants to lock in a price for their wheat crop harvested in six months. They can enter into a futures contract to sell the wheat at an agreed-upon price, safeguarding against potential price fluctuations.
Example #2
Likewise, an investor expecting the price of oil to rise may purchase oil futures, aiming to benefit from the price increase when the contract matures.
Misuse
Misuse of futures can occur when investors engage in excessive speculation without the financial means to cover potential losses. This can amplify market volatility and lead to destabilization. Protecting against misuse is crucial to safeguard investors and maintain market stability.
Benefits
One of the key benefits of futures is risk management. They allow businesses and investors to hedge against price fluctuations, ensuring more predictable cash flows and protecting against adverse movements in asset prices.
Conclusion
In summary, futures provide a tool for managing risk and exposure to price fluctuations in financial markets. The misuse of futures through excessive speculation highlights the importance of regulatory oversight to protect investors and preserve market integrity.
Related Terms
See Also
Hedging StrategiesNotional Value