Risk management

Future contracts.
●  Standardizing Features
   ❖  Contract Size
   ❖  Delivery Month
●  Daily resettlement
   ❖Minimizes the chance of default​Υ●Initial Margin
   ❖  About 4-10% of contract value
   ❖  Cash or T-bills held in a street name at your brokerage

Underlying assets of future contracts​: Shares, Stock Market Indices, Short-term interest rates, Medium- and long-term interest rates, Foreign exchange rates, Commodities.A futures contract represents a zero-sum game between a buyer and a seller.
▪  Gains realized by the buyer are offset by losses realized by the seller (and vice-versa).
▪  The futures exchanges keep track of the gains and losses every day. Futures contracts are used for hedging and speculation
▪  Hedging and speculating are complementary activities.
▪  Hedgers shift price risk to speculators.
▪  Speculators absorb price risk.

Hedging
Hedger​: Someone who bears an economic risk and uses the futures market or other derivatives to reduce that risk.Hedging is a prudent business practice; today a prudent manager has an obligation to understand and apply risk management techniques including the use of derivatives
Speculation
Speculator​: A person or firm who accepts the risk the hedger does not want to take. Speculators believe the potential ​return outweighs the risk​.
The primary purpose of derivatives markets is not speculation. Rather, they permit or enable the transfer of risk between market participants as they desire.
Hedging and Speculation in Future contracts.Hedging ​:​ Generally conducted where a price change could negatively affect a firm’s profits