Futures contracts are also known as futures. Its original meaning is that the parties to the transaction sign a contract stipulated that the goods will be delivered at a certain time (for a long time) in the future. So what is the purpose of futures existence? Look at the fictional example below.
BXY needs to source raw materials from the iron ore market every month for steel manufacturing. BXY encountered a problem in the procurement process, that is, the price of iron ore is unstable, which makes its production costs fluctuate greatly and poses potential risks to the entire company.
The SOP employs a large number of people every month to mine iron ore. The SOP encountered a problem in the iron ore mining process, that is, the price of iron ore is unstable, so the iron ore mined is sometimes in short supply, sometimes a large backlog, and the number of people mining iron ore is not stable.
The troubles encountered by both sides were resolved after the signing of the long-term contract. Further examples are as follows:
The above picture virtualizes the fluctuation of iron ore prices from January to June 1970. AXY and SOP companies signed a contract on iron ore purchase and sales in June 1970 to avoid the impact of price fluctuations. The contract stipulated that in December 1970, the parties would perform the contract at a fixed price (for example, the price of 1600).
These two companies have avoided the impact of iron ore fluctuations in the market before their respective December.
In such a contract, the parties are generally required to provide a certain amount of margin to ensure that the contract can be fulfilled when it expires.
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