Futures Contracts as Hedging Strategies

The futures markets were created as a means of businesses using futures contracts to lock in prices on business inputs that they were either looking to buy or sell, and this still drives the commodity futures markets today.

Table Of Contents

  1. The Purpose and Need for Commodity Hedging
  2. Hedging is Driven By The Principal of Diminishing Marginal Utility
  3. Other Forms of Hedging with Futures

The commodities markets have always comprised a big percentage of contracts on the futures markets, and in spite of the futures markets introducing several other types of things to trade over the past while, including things like index futures, foreign exchange futures, interest rate futures, and so on, commodity trading still provides a very significant portion of the overall market.

Non-commodity futures have come a long way as far as catching up though, and 9 of the top 20 traded futures by volume are non-commodities. Much of the non-commodity futures are driven by hedging as well though, for instance with those who are looking to lock in interest rates or a certain exchange rate in the future for business or investment purposes.

Given that the main goal of commodity futures is hedging by the primary participants, this does serve as a vital impetus to these markets. Without commodity futures contracts being written by hedgers, there would be no contracts to trade, no contracts to speculate on.