Derivatives and Risk ManagementCarefully explain why hedge funds use futures contracts (i.e....

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Derivatives and Risk ManagementCarefully explain why hedge funds use futures contracts (i.e. currency futures) rather than the cash market if they want to speculate on price movements of the underlying asset.Explain how an airline would exactly hedge their exposure to oil price movements. Why would they still buy the fuel using the cash market but the price is being locked in when they initiated the hedge?

Nishtha · Accepted Answer

DERIVATIVE & RISK MANAGEMENT
Table of Contents
Reason for Hedge Funds Using Futures Contracts Instead of Cash Market for Speculating on Price Movements of Underlying Asset	3
Airline Hedging their Exposure to Oil Price Movements	3
References	5
Reason for Hedge Funds Using Futures Contracts Instead of Cash Market for Speculating on Price Movements of Underlying Asset
Hedging is the famous risk management tool. Hedging is buying and selling of future contracts as a protection against risk and loss incurred due to charging high prices. Person usually adopts hedging option, as there is a lot of risk dealing in cash market. The risk include both certain and uncertain factors. As mentioned by Conlon, Cotter and Gencay (2016), a future contract is standardized agreement between parties to buy or sell particular or certain date in future. The contract usually consists of delivery date, quality of the commodity, name of the commodity like oil and its quantity.
The only uncertain thing in future contracts is price of the commodity. Hedging consist of various range of investment strategy that focuses to increase and decrease the risk factor experienced by investors.

Derivatives and Risk ManagementCarefully explain why hedge funds use futures contracts (i.e. currency futures) rather than the cash market if they want to speculate on price movements of the...

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