Trader Resources : Futures Markets Basics : Primary Functions of Futures Markets
The futures markets serve two major functions - risk management and price discovery. We will go over these in more detail.

Producers use the futures markets to "hedge" or mitigate the risk of fluctuating prices for production inputs or products they will produce. Since futures contracts can typically traded up to two years in advance, a hedger can begin planning their risk-management strategy long before they begin production.

Since there are no "set" prices for agricultural commodities, futures markets serve as a way for buyers and sellers to negotiate and settle on an acceptable current price for a contract. Because anyone with the resources to satisfy the margin requirements can trade these commodities, the market becomes the point of price discovery as traders reveal their collective knowledge through the market prices they negotiate. These markets set the general price level for most of the commodities traded in these markets.

<< Prev | Next >> | Resources Menu