Returns on buying and selling futures

Participants in futures are either hedgers or speculators.

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Hedgers seek to reduce price uncertainty over some future period.

For example, by purchasing a coffee contract, the coffeeshop owner can hedge and lock in a specific buying price for coffee and be protected from any price increases.

Similarly, sellers can protect themselves from downward price movements too.

The coffee farmer might sell a coffee future contract to hedge against a fall in coffee prices.

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Speculators, on the other hand, seek to profit from the uncertainty that will occur in the future.

If they expect prices to rise, contracts will be purchased, and if they expected prices to fall, they would sell contracts.


Ref: Make Your Money Work For You, by Keon Chee & Ben Fok