What Is the Purpose of a Futures Market?
  1. Money

What Is the Purpose of a Futures Market?

Last Updated on August 23, 2020

There are many other reasons but here is one that is easy to understand.

You are a jeweler who makes a million wedding rings a year. You have accepted wholesale orders for the next 5 years at $10 per ring. You can make a decent profit on your orders if gold is purchased at the present price of say $1000/oz. You will go bankrupt if you have to pay more than $1200/oz.

To lock in your future price you buy gold futures today at $1000. This is like an option. An additional benefit is that you don’t need to purchase and stockpile all the gold you will need for the next 5 years now.

The same reasoning applies to corn or wheat or sugar futures if you are a baker.

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