How Does a Futures Contract Work in Hedging a Commodity Price?
A futures contract is an agreement to buy or sell a specific quantity of a commodity at a predetermined price on a future date. A producer of a commodity can hedge against falling prices by selling a futures contract.
This locks in a selling price for their future production. Conversely, a consumer of that commodity can hedge against rising prices by buying a futures contract, which locks in a purchase price.
This strategy helps both parties mitigate the risk of price volatility.
Glossar
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.