Future Market

 What is Futures Market? 

The Futures Market is a centralized marketplace for buyers and sellers from around the world who meet and enter into futures contracts. Pricing can be based on an open cry system, or bids and offers can be matched electronically. The futures contract will state the price that will be paid and the date of delivery. 

Basics of Future Market- 

• A commodity futures contract is an agreement to buy or sell a particular commodity at a future date

• The price and the amount of the commodity are fixed at the time of the agreement

• Most contracts contemplate that the agreement will be fulfilled by actual delivery of the commodity

• Some contracts allow cash  and Trade Settlement in lieu of delivery 

Typical Users of the Futures Markets - 

• Most participants in the futures markets are commercial or institutional commodities producers or consumers

• Most participants are “Hedgers” who trade futures to maximize the value of their assets, and to reduce the risk of financial losses from price changes

• Other participants are “Speculators” who intends to profit from price changes in futures contracts

Example of Future Contracts

Suppose, we decide to subscribe to cable Internet. As the buyer, we enter into an agreement with the cable company to receive a particular plan of cable internet at a certain price every month for the next year. This contract made with the cable company is similar to a futures contract, in that you have agreed to receive a product at a future date, with the price and terms for delivery already set. We have secured your price for now and the next year - even if the price of cable internet plan rises during that time. By entering into this agreement with the cable company, we have reduced your risk of higher prices. 

Significance of the Futures Market 

Futures Market have a great significance on the economy of a nation like - 

• Price Discovery - Due to its highly competitive nature, the futures market has become an important economic tool to determine prices based on today's and tomorrow's estimated amount of supply and demand. Factors such as weather, war, debt default, refugee displacement, and deforestation can all have a major effect on supply and demand and, as a result, the present and future price of a commodity. 

• Risk Reduction - Futures markets are also a place for people to reduce risk when making purchases. Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell. This helps reduce the ultimate cost to the retail buyer because with less risk there is less of a chance that manufacturers will jack up prices to make up for profit losses in the cash market. 

Conclusion

The Futures Markets on which they are based have a great effect on economies around the world. Changes in commodity prices can affect entire segments of an economy, and these changes can in turn spur political action (in the form of subsidies, tax changes, or other policy shifts) and social action (in the form of substitution, innovation, or other supply-and-demand activity). So, Future Markets is very significant.

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