Futures Trade

Benefits of Futures Trading

Efficient price discovery

The traditional spot markets lack transparency in prices as the product passes through the hands of numerous intermediaries and neither the consumers nor the producers have any direct role in price formation.  There is no mechanism for systematically forecasting the future prices and to plan production and consumption accordingly.
But the commodity exchanges have made the foreward markets transparent and price discovery efficient.  The wide network of trading terminals of the commodity exchanges and the broking firms and the dissemination of price information through print media and television has ensured necessary transparency to the price discovery process.

Price risk management

The increased transparency of futures transaction also has resulted in greater integration of spot markets, which were working in isolation earlier.  The spot markets and futures markets are also getting integrated.  The futures market also enable the farmers to hedge their price risk by entering into futures contract for such periods to minimise the price risk.  Hence, it emerges as an effective tool for efficient price risk management.
While the producers can get an idea of the expected price in future, the consumers, processors and exporters also can plan their future course of action based on the trends in futures prices, which can act as a benchmark for forecasting future trend in commodity prices.

Price stabilisation

Violent price fluctuations can be minimised through the futures prices as the demand and supply can get adjusted to the changing futures prices.  It will act as a signal for adopting appropriate strategies by producers, consumers, exporters and the market regulator (FMC) to face the situation.

Integration of commodity price structure

 The main outcome of the futures market is the emergence of an integrated price structure for the product throughout the country. The spot prices and futures prices get appropriately linked, although they may move in different directions.  The futures prices act as a benchmark for the decision making of the farmers, exporters, consumers and traders.

Facilitates balancing of supply and demand

The supply and demand are sensitive to prices.  The expected rise or fall in price as reflected in the futures prices will facilitate the demand and supply to be readjusted in the market according to expected future prices which will avoid unnecessary pressure on demand or supply in the short period.

Acts as a price barometer

Last Updated : 04-01-2008