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Who Uses Future Contracts?
There are two reasons to use futures contracts: 1) To hedge a price risk, and 2) To speculate in the changing price.
A hedger is someone who owns or plans to purchase an inventory of a commodity and wishes to reduce risk associated with this ownership. Hedgers make their purchases or sales solely for the purpose of establishing a known price level in advance for something they later intend to buy or sell in the cash market. They do this by taking an equal and opposite position in the futures market than they have in the cash market. As the price of the commodity fluctuates, the hedger is protected because gains in one market are offset by losses in the other market, regardless of which direction the price moves. Hedgers willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.
Speculators, on the other hand, are willing to accept the risk the hedger wishes to relinquish. Speculators take positions on their expectations of future price movement often with no intention of making or taking delivery of the commodity. They buy when they anticipate rising prices and sell when they anticipate declining prices. The speculator provides a very important function in the futures market because without him, the market would not be liquid and the price protection sought by the hedger would be very costly.
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