The importance of organised futures markets for important commercial articles including both agricultural and mineral products, has long been recognized all over the world. The justification of such markets lies in the insurance which these provide against trading risks and is succinctly put in the following words by the committee on trading in Futures appointed by the International Chamber of Commerce.
A properly organised futures market can and in many trades does minimize this inevitable trading risk by providing the machinery for the transfer and speed of the risks among a body of professional risk bearers or speculators. The genuine trader is thus able to a large degree to ensure to himself a normal trading profit and to insure himself against exceptional unforeseen losses.
The trading risks arise from fluctuations in prices which necessitate anticipatory dealings or what is known in market parlance as “speculation“. So long as the trading risks are there, operations in a futures market or speculation must be considered to be of great advantage and help to the trade, much in the same way as the insurance provides a safeguard against other forms of risk or contingency. Basically the reasons for the existence of organised futures trading is to furnish the merchant and the manufacturer a means of protection against the risk of price change.
The amount and trend of price change over a period of time are unpredictable. So there must be some means by which the risks arising from price change can be shared or shifted to those who are willing or able to bear it. It is necessary for the very survival of the merchant and the manufacturers. The futures market furnishes such a facility to shift risk to others through the medium of hedging.
Another important reason for the existence of futures market is the fact of uncertainty with respect to the supply of staple agricultural commodities. The futures market provides a means by which the speculator may discount the effect of present and prospective events on future supply and demand and may thus give expression to his forecast by a purchase or sale in the futures market.
The existence of futures market is justified from the point of view of the economic welfare of the community in general and stability of industry and trade in particular.
The future market ensures, by providing scope for speculation, a comparative steadiness of price as the buying and selling in such a market is influenced by anticipations of the entire seasonal supply and demand. This steadiness of price, as well as the facilities which the futures market provides for continuous buying and selling, and for information relating to the amount of produce exported, the amount consumed, the amount shipped to terminal markets, the extent of cultivation in various countries, prospective yields, transportation costs, weather, etc., is unquestionably of great economic advantage to the community as a whole on the traders and industrialists the futures market confers an inestimable benefit by providing facilities for hedging.