What can futures and options contracts be used for?
1 – Hedging: These contracts can be used to minimize losses resulting from spot market volatilities and exchange rate risks. Hedging contracts are used by manufacturers, importers, exporters, and corporate risk managers to protect themselves against the possibility that prices may go up or down in the future. 2 – Speculation: Forward contracts that are not entered into for hedging purposes are regarded as speculative and are entered into in order to profit from the investor’s expectations about future market movements. 3 – Arbitrage: Arbitrage is the practice of taking advantage of a difference in an asset’s price in different places or at different times. Future contracts can be used in effect to buy something at a low price and then sell it at a higher one. In that respect, arbitrage trading is relatively risk-free compared with hedging and speculation.
