The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market. Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility. What were the main reasons for this fall into the negative realm? Critically discuss. After May 2020, what are the prospects of futures contracts as a significant risk management tool for firms? Discuss critically.
The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market.
- Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility.
-
What were the main reasons for this fall into the negative realm? Critically discuss.
- After May 2020, what are the prospects of futures contracts as a significant risk management tool for firms? Discuss critically.
A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation the buy and receives the underlying asset when the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.
A futures contract allows an investor to speculate on the direction of a security, commodity, or a financial instrument, either long or short, using leverage. They are also often used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price change.
Underlying assets include physical commodities and other financial instruments.
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