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Publication Date

10-1989

Series Number

4167

Abstract

Most people have heard of futures but many are unsure of what they are or how they work. The primary purpose of futures is to reduce the risks associated with selling or buying commodities whose price fluctuates. The futures market operates by bringing buyers and sellers together in one place where they negotiate prices at which certain specified commodities will change hands at given future dates. Users of the futures market include producers or users of the commodity, traders in the commodity and speculators.

Futures contracts differ in several respects from typical contracts for cash sales. The futures contract standardizes the quantity and quality of a commodity to be traded as well as specifying a future month for delivery. A unique feature of futures markets is that the physical commodity need not change hands in a futures transaction. A futures contract to sell can be settled by either a futures contract to buy or delivery of the commodity against the contract. This enables users of the futures markets to protect their cash positions by hedging.

Hedging is the act of taking equal and opposite positions in the cash and futures markets, with the hope that the net result will prevent a loss due to price fluctuations.

Number of Pages

27

ISSN

0729-0012

Publisher

Western Australian Department of Agriculture

City

Perth

Keywords

Futures, Markets, Western Australia

Disciplines

Agribusiness | Business | Finance and Financial Management | Portfolio and Security Analysis

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Bulletin No 4167 - Futures markets

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