#Perpetual #futures #RWA #Risk

Why do Futures Market exist?

Part 2 of the article 👇👇👇

Hypothesis 1 - $180. He had made a profit of $20/ ton on hedging the contracts he sold. Anyhow he would be providing delivery of those contracts in physical goods. He'd continue his risk mitigation by doing the trade in forward contracts. He made his $20 on mitigating the risk. But in real terms, there is no change in prices. He would keep on continuing to manufacture Aluminium. He would continue to sell his current obligations in spot markets by delivering to his regular customers. This is what we call hedging. In this case, the manufacturer has mitigated the risk by selling in future markets. He would continue to sell his products as he has to do it to continue his business. In future markets, he wouldn't have a substantial premium yet he would continue to do it simply to manage the risk.

Hypothesis 2 - $220. He had made a loss of $20/ ton on hedging the contracts he sold. Anyhow he would be providing delivery of those contracts in physical goods. He'd continue his risk mitigation by doing the trade in forward contracts. He lost $20 on mitigating the risk. But it wouldn't affect him as he simply mitigated the risk by placing future contracts. Anyhow he is going to settle the contracts with his Aluminium. He sold the Aluminium at $200 when the spot was around $180. This is how a manufacturer mitigates the risk. In the coming forward markets, he would fetch more premium for his products. It's a win-win situation for him.

Now replicate this to crypto and we could understand the concept of derivatives and risk mitigation it plays in the protection.