Why people trade futures ?
There are 3 main reasons for trading futures:
- Hedging
By hedging one intends to transfer the risk of future price fluctuations to other market participants.
There are two kinds of hedges: One would be a short hedge in which the investors hold positions from the spot market and holds the counterpositions from the derivatives market. With a short hedge, the investor shorts own their own stock market position by using a derivative contract. In that way, the short hedge protects the investor against future losses (but also against future profits).
The opposite one would be the long hedge. It allows to “lock in” the current rates. A long hedge means one uses a future position to lock in a price for an asset in the future. That means one compensates possible future losses on the sport market with the profits from the derivatives market.
2) Arbitrage
Arbitrageurs try to find price differences in comparable derivatives (eg. interest rate futures with different maturities) or differences between derivative and spot markets. By looking for such differences they essentially try to spot opportunities for generating profits. Against that backdrop, they also ensure efficient pricing as well as a source of liquidity for the respective markets.
3) Trading
Usually, trading is done by risk-takers. They form the opposite market side to hedgers. They take risks with the expectation of making a profit. They build up positions based on forecasts for price developments.