Analysis of Future Markets and Stock Market Uncertainty in Finance

This homework assignment critically analyzes the assertion that future markets create more uncertainty for stocks. The paper argues that future markets can provide stability and act as an insurance mechanism for businesses by allowing them to fix prices for future purchases or sales of assets. The author uses examples like candy businesses hedging sugar costs and financial institutions using future contracts for hedging currency shifts. The analysis covers how future contracts can reduce material costs, protect against price increases, and provide assurance in volatile market conditions. While acknowledging the potential for losses if prices move unfavorably, the assignment emphasizes the overall benefits of future contracts for risk management and stability. The conclusion supports the view that future markets can be beneficial for businesses in managing uncertainties, referencing examples from various industries and financial applications.

Has the future market created more uncertainity for stocks

Future contract is a contract in which two persons makes a contract to purchase or
sell some assets in the future at some pre-determined price.
As per my opinion, I don’t completely agree on this point that “future market has
created more uncertainty for stocks”. Many business owners uses future markets
as an insurance (Alieid, 2016). A business man dealing in candies may buy sugar
today by entering into a contract to fix a price today for some part of its requirement
as it is one of its important ingredients. This contract is very similar to contract of
physically purchasing the goods and store them. Suppose if there is rise in the price
of commodities purchased in such case future contract will become more worthy. In
that case what company can do is they can sell the future contracts and receive the
cash and in return they can purchase the same commodities from the local market at
market price or what they can do is they can receive the delivery of goods as per the
contract, in that case company has to purchase less from the market (Kok, Ribando,
& Sloan, 2017). In both the cases its cost of material will be less, so it was very
much useful for the company to enter into future contract in order to reduce its cost.
Also by doing so company has protected itself from the risk of price rise and need
not to worry that its production will stop due to increase in price. But there could be
opposite side of this also in case the price falls in the future, in that case company
will lose some money as there is reduction in price in future. Even then there can be
something good for the company as company can buy ingredients at low cost
(Alexander, 2016). It is very clear that purpose of entering into a future contract is
to protect itself from something bad which can happen that is increase in the price, it
is just like insurance as in case of fire insurance company pays premium but it is
possible that fire doesn’t happen. Similarly loss on future contract is similar to cost
of the insurance.
As future contract provides the assurance for the future prices and also the
availability of the goods it can be said that they provide some stability in an unusual
market conditions. In earlier period future contract was more seen in agricultural
goods however with the change in time now a days they are mostly used by
financial institutions like banks or airlines (Johnson, 2017).
Future contract is also used by company for the purpose of hedging which is
actually a great idea. There are many companies like Citibank, Microsoft etc. who
are using future contracts for the purpose of hedging itself from currency shifts.
So on the basis of above facts and analysis it could be concluded that future market
could be very beneficial for the company or business in order to protect itself from
uncertainties (Oberoi, 2018).
1

References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher
Education, 71(4), 411-431.
Alieid, E. E. (2016). The Role of Accounting Information Systems in Making
Investment Decisions. Internal Auditing & Risk Management, 11(2), 233-242.
Johnson, R. (2017). The Best Strategies for Investing. In the News, 21-31.
Kok, U., Ribando, J., & Sloan, R. (2017). Facts about Formulaic Value Investing.
Financial Analysts Journal, 73(2), 14-23.
Oberoi, J. (2018). Interest rate risk management and the mix of fixed and floating
rate debt. Journal of Banking and Finance, 86(3), 70-86.
2