Futures Hedgers & Futures SpeculatorsFutures
Futures do not provide any of the benefits of the underlying financial instrument. Any benefit of asset ownership is eliminated. This includes control, dividends, residual payments, and interest payments. The only two reasons for trade are hedging and speculative profit. Futures Hedgers participate in hedging to limit losses in portfolios. Futures Speculators participate in speculation for portfolio profit.
Futures Hedgers trade primarily in the underlying commodity and use futures to reduce their exposure to volatility. They have a direct tie to prices in the marketplace separate from their futures trades. They are growers, miners, drillers, refiners, producers or other groups whose primary income is attached to this process. They use futures to reduce risks of prices moving adversely to their production needs, and hopefully to secure profit in advance. This occurs on both the long and short side. Refiners use futures to lock in a purchase price below the future market price. After refinement, they use futures to lock in a sale price above the future market price. Futures are useful for protecting the buy side from price spikes and the sell side from price crashes.
Futures Speculators enter long or short positions based on expectations of the price’s movement in the near term. Their trades attempt to profit from the differences in future price and the market’s movements. They have no actual involvement in commodity collection, manufacturing, or sale apart from the trade of futures for profit. The vast majority of market trades are speculative in nature. This has two benefits. The first is excessive buying and selling which results in higher financial liquidity. The second is constantly updated futures prices. An illiquid market creates outdated prices since the last transaction’s closing price is recorded as current market value, speculators solve the problem by regularly trading future contracts. They may trade both the underlying asset and the actual asset for speculative profit. If they’re using the combination to accelerate profits and not reduce risk, it does not qualify as hedging.
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International Economic Analysis:
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