11.3Why do futures contracts exist?
1What is it?
For risk transfer: people who want to reduce risk (hedgers) pass it to people willing to take it (speculators).
2Why does it exist?
Futures also improve price discovery and liquidity in the main market.
3Quick revision
- Transfer risk from hedgers to speculators.
- Aid price discovery.
4Knowledge check
Q1. Who takes on risk in futures markets?Show answer
Speculators.
Q2. Who reduces risk?Show answer
Hedgers.
Q3. Another benefit of futures?Show answer
Price discovery and liquidity.