Why Does the Futures Market Exist? 

Part 1 of the article 👇👇👇

I'd like to give real-world examples to make readers understand the existence of future markets. Let's say there is an Aluminium Manufacturer. He would like to mitigate his risk on the prices of Aluminium. Why is he mitigating his risk? Simple, he doesn't know what would happen to the prices of Aluminium over the future course of his business. 

Before unerstanding the way to mitigate the risk,one must understand that Risk mitigation is the practice of reducing the impact of potential risks by developing a plan to manage, eliminate, or limit setbacks as much as possible.

How would he do that? 

Well, he goes to the "Futures Exchange" to sell his product. He could sell the forward contract of his product. In the forward contract, the probability of receiving a premium for his products is high and he'd sell contracts of Aluminum. Let me explain through a hypothetical case - let's call him Manufacturer A. A sells 10000 contracts of Aluminium of 2 months forward assuming that we're writing this on October 28 and he is selling futures of January contract. A is selling for 10000@ $200/ton. He'd be having $2,000,000 less trading fees in his ac. Say the spot prices are trading around $180. He is getting a premium of $20/Ton. Say at the time of January 28 Aluminium is selling at $180.

Part - 2 To be Continued