While much of this page has focused on the speculative side of futures trading, it should be noted that the phenomenon is conducive to hedging. In the vast majority of cases, it is an actual producer of the underlying asset seeking protection from a sudden drop in price.

After all, assets like oil, wheat, corn, grains and sugar are dominated by supply and demand in exness personal area login. If there is too much supply and too little demand, the price of the asset will certainly fall. This will then have a direct impact on producers, as they will have to sell the asset at a lower price. In turn, they may be forced to produce the asset at a loss.

With these futures contracts, producers can mitigate the risk of reduced margins as they can set the expiry price offered by the futures market.

Let's look at an example to clear the fog:

•     Let's say the price of maize is currently the highest it has been in 4 years.
•     This is very beneficial. for maize producers as they can sell their product at a higher price. In return, they might decide to hire more staff and subsequently increase production levels
•     Aware that the price of maize could fall at any time, the producer decides to cancel a forward contract with a duration of 12 months
•     This can only lead to one of two outcomes
•     First, the producer will have to sell their product at a lower price if the market price for maize falls. But they will make money on the futures contract they made short
•     If the market value of maize continues to rise, the producer can sell their product at an even higher price. However, they will lose money from the futures contract they have shorted.

Ultimately, the above example shows that regardless of what happens to the future value of maize over the next 12 months, the farmer will be able to lock in the current price. There are fees involved, of course.

Futures trading versus options

There is often a misconception that futures and options are the same thing. On the one hand, both financial instruments allow you to speculate on the future price of an asset. Similarly, you can go long or short with both. The main difference, however, is the obligation to buy the underlying asset at expiry.

With options, the investor has the 'right', but not the obligation, to buy the asset at expiry. Instead, they only have to pay a premium upfront, which they lose if they decide not to buy.

When it comes to trading futures contracts, investors must buy the underlying contract after expiry. This is based on the price of the futures contract and the number of contracts you have bought. Whether you made a profit or not depends on the closing price of the asset when the contracts expired!