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Futures contract
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==Futures contracts users== Futures traders are traditionally placed in one of two groups: [[Hedge (finance)|hedgers]] and [[speculator]]s. Hedgers have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to ''hedge out'' the risk of price changes. Speculators, by contrast, seek to make a profit by predicting market moves and opening a [[derivative (finance)|derivative]] contract related to the asset "on paper", while they have no practical use for or intent to actually take or make delivery of the underlying asset. In other words, speculators are seeking exposure to the asset in long futures contracts or the opposite effect via short futures contracts. ===Hedgers=== Hedgers typically include producers and [[consumer]]s of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate. For example, in traditional [[commodity market]]s, [[farmer]]s often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. In modern (financial) markets, "producers" of [[interest rate swaps]] or [[equity derivative]] products will use financial futures or equity index futures to reduce or remove the risk on the [[swap (finance)|swap]]. Those that buy or sell commodity futures need to be careful. If a company buys contracts hedging against price increases, but in fact, the market price of the commodity is substantially lower at the time of delivery, they could find themselves disastrously non-competitive (for example see: [[VeraSun Energy]]). Investment fund managers at the portfolio and the fund sponsor level can use financial asset futures to manage portfolio interest rate risk, or duration, without making cash purchases or sales using bond futures.<ref>{{Cite web|url=https://www.cfainstitute.org/-/media/documents/protected/refresher-reading/2020/pdf/swaps-forwards-futures-strategies.ashx|title=Swaps, Forwards, and Futures Strategies|last1=Valbuzzi|first1=Barbara|publisher=CFA Institute|pages=7β8|year=2019|access-date=2020-05-18}}</ref> Invest firms that receive capital calls or capital inflows in a different currency than their base currency could use currency futures to hedge the currency risk of that inflow in the future.<ref>{{Cite web|url=https://www.cfainstitute.org/-/media/documents/protected/refresher-reading/2020/pdf/swaps-forwards-futures-strategies.ashx|title=Swaps, Forwards, and Futures Strategies|last1=Valbuzzi|first1=Barbara|publisher=CFA Institute|page=17|year=2019|access-date=2020-05-18}}</ref> ===Speculators=== Speculators typically fall into three categories: position traders, [[day trader]]s, and swing traders ([[swing trading]]), though many hybrid types and unique styles exist. With many investors pouring into the futures markets in recent years controversy has risen about whether speculators are responsible for increased volatility in commodities like oil, and experts are divided on the matter.<ref>{{cite news |last1=Dreibus |first1=Tony C.|url=https://www.bloomberg.com/news/2011-06-05/commodity-bubbles-caused-by-speculators-need-intervention-un-agency-says.html |title=Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says|newspaper=Bloomberg |date= June 5, 2011 |access-date=July 2, 2011}}</ref> An example that has both hedge and speculative notions involves a [[mutual fund]] or [[separately managed account]] whose investment objective is to track the performance of a stock index such as the S&P 500 stock index. The [[portfolio manager]] often "equitizes" unintended cash holdings or cash inflows in an easy and cost-effective manner by investing in (opening long) S&P 500 stock index futures. This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual 500 stocks just yet. This also preserves balanced diversification, maintains a higher degree of the percent of assets invested in the market and helps reduce [[tracking error]] in the performance of the fund/account. When it is economically feasible (an efficient amount of shares of every individual position within the fund or account can be purchased), the portfolio manager can close the contract and make purchases of each individual stock.<ref>{{Cite web|url=https://www.cfainstitute.org/-/media/documents/protected/refresher-reading/2020/pdf/swaps-forwards-futures-strategies.ashx|title=Swaps, Forwards, and Futures Strategies|last1=Valbuzzi|first1=Barbara|publisher=CFA Institute|page=23|year=2019|access-date=2020-05-18}}</ref> The social utility of futures markets is considered to be mainly in the transfer of [[risk]], and increased liquidity between traders with different risk and [[time preference]]s, from a hedger to a speculator, for example.<ref name="chicagofed.org"/>
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