ATFXHow to avoid risks and stay away from investment scams in the futures market

futuresThe market is a financial market that trades according to agreements reached and delivers on predetermined dates. The significant difference between spot and futures is that the delivery period of futures is in the future, while the price, quantity, method, location, and other conditions of delivery and payment are specified by the buyer and seller in the contract at the spot, and both commodities and securities can be traded in the futures market.

How to avoid risks in the futures market?

The futures market achieves risk avoidance function through hedging.

The futures market has two basic functions. The first is price discovery, and the second is risk avoidance. From the overall structure of the industrial chain, there are both upstream and downstream enterprises in an industrial chain. Upstream enterprises need to worry more about changes in production costs and purchasing difficulties caused by changes in raw material prices, while downstream enterprises need to worry more about changes in expected revenue profits and sales difficulties caused by changes in product prices. The function of futures risk avoidance is not to enable enterprises to make money in the futures market through standardized futures contracts, but to enable enterprises to avoid risks caused by abnormal fluctuations in raw material or product prices through the futures market. This risk is mainly concentrated in financial risks and production planning risks.

Basically, the ways to achieve the risk avoidance function of the futures market can be divided into buying hedging and selling hedging. Both upstream and downstream enterprises can avoid the risks caused by abnormal changes in raw material or commodity prices by buying or selling hedging. They can also plan the production scale and material usage of factories in advance and arrange production and operation activities reasonably. If a company expects to purchase raw materials in the future, the current spot market price of the raw material is in a reasonable period, but the company is concerned that the price may rise when the company uses the raw material in the future. If you buy immediately now, the company may face difficulties in capital turnover and financial condition. At this point, enterprises can adopt the method of buying and hedging to avoid risks.

In terms of specific operations, enterprises buy forward futures contracts in the futures market at the current price level while normal procurement activities continue. When the enterprise is about to use this batch of raw materials, if the price of the raw materials rises as expected by the enterprise. So the benefits brought by the rise in futures can offset the increase in production costs caused by the rise in raw material prices for enterprises. Essentially, this allows companies to lock in future production raw material costs early on in the present.

Selling hedging is the same as buying hedging. Downstream enterprises or distributors lock in profits in advance by selling commodity positions in the futures market to avoid the risk of potential revenue and profit decline caused by price declines for the enterprise.