Futures
Futures in finance are contracts that obligate the buyer to purchase, and the seller to sell, a specific asset at a predetermined price on a future date.
Example #1
For example, a farmer may enter into a futures contract to sell a certain amount of corn at a set price in three months to lock in a price and protect against price fluctuations.
Example #2
Similarly, an investor might buy futures in the stock market to speculate on the future price of a stock without owning it outright.
Misuse
Misuse of futures can occur when individuals or entities manipulate markets by engaging in excessive buying or selling of futures contracts, leading to price distortions that harm other market participants. This can result in unfair advantages for those with significant resources, undermining market integrity and fairness.
Benefits
One key benefit of futures is they can help manage risk by allowing parties to hedge against price fluctuations. For instance, a company could use futures to lock in the price of oil to ensure stable costs for their operations, protecting them from unexpected price increases.
Conclusion
It's crucial to regulate the use of futures to prevent market manipulation and ensure fair trading practices. When used responsibly, futures can be valuable tools for risk management and price stability in various industries.