How a position is hedged using futures

1. How a position is hedged using futures? A futures contract is a standardized, binding legal agreement to acquire or sell a certain asset at a specific price at a future date with the regulated forex brokers in India. Regardless of the market price on the date the contract expires, the buyer must acquire the asset at this time and the seller must sell the underlying asset at the agreed-upon price. Commodities including wheat, crude oil, natural gas, and corn, as well as other financial instruments, can serve as the underlying assets for futures contracts. Corporations and investors may employ futures contracts—also known simply as futures—as a hedging tactic. Some companies that produce or consume commodities utilize futures contracts to lessen the possibility that future unforeseen costs or losses may be incurred by the company as a consequence of a negative price movement in the underlying asset, which is often a commodity. To lessen the possibility of suffering a loss as a result of an adverse change in the market value of the underlying asset, often security or another financial instrument, the best broker for forex in India advises buying futures contracts as part of their hedging strategy. An investor may be more inclined to buy a futures contract if the securities or financial instrument regularly exhibits high volatility. How to hedge using futures contracts? Corporations typically participate in the futures market to lock in more advantageous pricing ahead of a transaction. A company can choose to take a long position in a futures contract if it thinks it will need to buy a certain item in the future. A long position is when you purchase a currency, commodity, or stock with the hope that its value will increase in the future. For instance, let’s say Company A is aware that it has to buy 20K ounces of silver to complete an order in six months. Assume that an ounce of silver costs $12 on the open market and $11 on a six- month futures contract. Company A may ensure a price of $11 an ounce by buying the futures contract. This lowers the risk for the corporation as it will be able to settle its futures position and purchase 20K ounces of silver for $11 each when the contract expires in six months.

2. The corporation would have been required to buy the 20K ounces of silver at the price of $14 per ounce if Company A had not bought the six-month futures contract and the price of silver ended up rising from $12 per ounce to $14 per ounce after one month. Compared to the $11 per ounce price it might have guaranteed by buying a silver futures contract, this would incur a higher cost for the corporation. On the other side, a business may choose to enter into a short position in a futures contract if it anticipates selling a certain item in the future. For instance, if the spot price of silver is $12 per ounce and the futures price is $11 per ounce, Company A may consent to a contract that binds them to sell 20K ounces of silver at a future date that is six months away. In six months, Company A will be able to sell its 20K worth of silver at $11 per ounce when it closes out its futures position. Company A would have been obliged to sell every ounce of its silver at $10 per ounce (as opposed to selling every ounce of silver at $11 per ounce). If it had not chosen to take this position in a futures contract and the market price of silver had unpredictably dropped to $10. In this case, the corporation has lessened the chance that a future sharp reduction in the market price for silver will cause it to suffer financial harm. In exchange for each ounce of silver sold, Company A has promised to pay it $11. The key benefit for investors considering a futures contract is that it eliminates ambiguity regarding the price of a commodity, investment, or financial instrument in the future. Companies can reduce the danger of any unforeseen costs or losses by fixing a price. Difference between future options and contracts Options contracts are derivative financial products, just like futures contracts. With option contracts, often known as options, the buyer has the choice to either purchase or sell the underlying asset based on the type of contract they possess. If you buy a futures contract as an investor, you are making a binding commitment to buy the underlying security. Conclusion: A futures contract is a standardized, binding legal agreement to acquire or sell a certain asset at a specific price at a future date. The ability to eliminate ambiguity regarding the future price of an asset or financial instrument is the key benefit for investors wishing to engage in the futures market.