Question

explain in detail with an example why a company would trade in futures contracts if futures contracts are risky

Answer 1

The use of futures contracts mitigates the risk of price movements by allowing the parties to determine the market price in advance for a future date. The buyer of the future contract undertakes to purchase the underlying asset at the agreed price. This reduces the risk of the transaction by guaranteeing the price at which the product or the commodity can be sold at a future date irrespective of the market price. The price gets locked in and hence it is a way of ensuring the price for a product at a future date. This protects the seller against the volatility of market movements.