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Future contract is a contract in which two persons makes a contract to purchase or sell some assets in the future at some pre-determined price.
As per my opinion, I don’t completely agree on this point that “future market has created more uncertainty for stocks”. Many business owners uses future markets as an insurance (Alieid, 2016). A business man dealing in candies may buy sugar today by entering into a contract to fix a price today for some part of its requirement as it is one of its important ingredients. This contract is very similar to contract of physically purchasing the goods and store them. Suppose if there is rise in the price of commodities purchased in such case future contract will become more worthy. In that case what company can do is they can sell the future contracts and receive the cash and in return they can purchase the same commodities from the local market at market price or what they can do is they can receive the delivery of goods as per the contract, in that case company has to purchase less from the market (Kok, Ribando, & Sloan, 2017). In both the cases its cost of material will be less, so it was very much useful for the company to enter into future contract in order to reduce its cost. Also by doing so company has protected itself from the risk of price rise and need not to worry that its production will stop due to increase in price. But there could be opposite side of this also in case the price falls in the future, in that case company will lose some money as there is reduction in price in future. Even then there can be something good for the company as company can buy ingredients at low cost (Alexander, 2016). It is very clear that purpose of entering into a future contract is to protect itself from something bad which can happen that is increase in the price, it is just like insurance as in case of fire insurance company pays premium but it is possible that fire doesn’t happen. Similarly loss on future contract is similar to cost of the insurance.
As future contract provides the assurance for the future prices and also the availability of the goods it can be said that they provide some stability in an unusual market conditions. In earlier period future contract was more seen in agricultural goods however with the change in time now a days they are mostly used by financial institutions like banks or airlines (Johnson, 2017).
Future contract is also used by company for the purpose of hedging which is actually a great idea. There are many companies like Citibank, Microsoft etc. who are using future contracts for the purpose of hedging itself from currency shifts.
So on the basis of above facts and analysis it could be concluded that future market could be very beneficial for the company or business in order to protect itself from uncertainties (Oberoi, 2018).
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.
Alieid, E. E. (2016). The Role of Accounting Information Systems in Making Investment Decisions. Internal Auditing & Risk Management, 11(2), 233-242.
Johnson, R. (2017). The Best Strategies for Investing. In the News, 21-31.
Kok, U., Ribando, J., & Sloan, R. (2017). Facts about Formulaic Value Investing. Financial Analysts Journal, 73(2), 14-23.
Oberoi, J. (2018). Interest rate risk management and the mix of fixed and floating rate debt. Journal of Banking and Finance, 86(3), 70-86.
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