Question

what are theoretical concepts of futures contracts as a risk management tool

Answer 1

A futures contract can be used as a hedging tool as it can be used to fix the price of an underlying asset that you are supposed to buy in future at a particular date, at a particular price and a particular volume.

For example - lets say you are a mid cap company which is in the business of producing steel equipment. Due to volatility in the market, you think that prices of raw steel in futures market will increase drastically, in order to hedge the risk for not affecting profitability and revenues, you fid the price of the commodity today to be delivered in future by buying futures contract of raw steel at a recongnised exchange like NYSE.

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