Futures are contracts to buy or sell certain goods… in the future. The trick is that these contracts are signed in the present. In said signature, the price of the specific good, its quantity, and the expiration date are fixed. In other words: they are very attractive financial products for speculators.
This type of contract was born in the 19th century and used to revolve around raw materials, precious metals, agricultural products, or merchandise. Currently, there are also currency futures, shares, and stock indices. As the purchase or sale will take place in the future, but the price is agreed in the present, it may be that on the agreed date the price is similar, lower, or higher than the agreed price, and the buyer's profit will depend on that similarity or difference. and the seller.
Although it is not until just over 200 years ago that this type of agreement was formalized, evidence of similar negotiations has already been found in Ancient Egypt, about 4,000 years ago when farmers agreed on a price with the buyer before the end of the Harvest.
Until the 1980s, this type of contract was limited to raw materials, from agricultural to minerals, and different types of merchandise, but at the end of the 20th century, negotiations began with the future of financial products, such as currencies, interest rates, stocks, and stock indices.
What do the futures buyer and the seller gain?
What the buyer of the futures markets is looking for is to buy something at a certain value that he hopes that when it reaches his possession it will have a higher market value than the one negotiated. Thus, once the product was acquired, he would sell it again at the price he has at that moment and thus obtain a profit. For his part, the seller ensures payment in the future. This prevents him from being subject to the fluctuations of the market and would allow him, for example, to negotiate a loan to be able to carry out his activity.
The risk is primarily for the buyer. As in any speculative process, if for whatever reason the forecasts fail and at the time of executing the purchase the market price of the product is lower than the agreed price, the buyer will lose money.
Let's take a simple example. A farmer plants his wheat field. That wheat cannot be sold yet, but he speaks with a buyer and commits his harvest to a buyer at a certain price in 6 months' time. When negotiating the price, the farmer will take into account the costs of production while the buyer will look at how much he expects the wheat to be worth on the day he buys it and will seek to buy it cheaper.
For the seller, it is collection insurance once the agreed time has elapsed. If he has negotiated well, he will be able to cover the costs of production and make a profit from it. In addition, if he does not have enough money to face the production and has to ask for financial help, he would have a favorable position, also to negotiate that credit. The negative part for the farmer would be that, once the time comes to sell the crop, his market price is higher than the negotiated price and his profits are lower than those of someone who sells at the time and would not have sold it in the market. futures.
If after half a year, the harvest has been very good and the price of wheat has dropped a lot, the buyer could pull his hair out. If, on the other hand, the harvest has gone bad or the demand for wheat increases due to a crisis, a war, or forecasts that the next harvest will be worse and the price of wheat shoots up, the buyer could have made a fat business without lifting a finger.
