As we know, increasingly active the business will automatically increase the activity of buying and selling contracts. Unfortunately entanglement in the sale and purchase contract also carries the potential impact of the additional revenue loss. Why is this so? This is because the price of an item has a tendency to move upwards or downwards to follow the law of supply and demand of goods traded. Rarely does not happen the price movement.
So most likely the price in the market will move higher than the price of sale and purchase contract, or otherwise, at market prices move lower than prices in the sales contract. You can imagine what happens if the price moves become not equal to the price in the contract?
If the market price moves higher than the price of the contract, it is certain that the seller was a loss. Better for the seller to sell in the market, rather than sell under the contracts with lower prices. Conversely, if market prices move lower than the price in the contract, although the sellers feel disadvantaged, but the buyer feels aggrieved. In this condition, the buyers are better off buying in the market instead of buying a suit contract with a higher price.
The importance of futures exchange for business
Almost all business activities related to sale and purchase contract, with either short or long term (futures), depending on the products that are traded. Entanglement in buying and selling as outlined in the form of purchase agreement is very good for buyers and sellers. Sellers have got the assurance that the parties will buy the product and the buyer can ensure continuity of necessary raw materials.
Casting buying and selling in the form of futures exchange contracts brings the benefits of eliminating the risk of uncertainty in getting buyers and continuity obtain raw materials.
The benefits of futures exchanges for business
Some people are already familiar with futures exchange as one instrument to protect the price. But not many people understand that futures contracts can be used to fix prices in the long-term contracts so that both buyers and sellers still have the opportunity to earn additional income if the market price moves does not equal to price of the contract.
The concept of futures trading is actually equal to concept of other investment, purchasing at a low price and selling at high prices (buy low sell high) or otherwise, sell at high prices and buy back at lower prices.
More easily, if analogous to the case of buying and selling oil (Oil is a major commodity in the futures market). If we know the price of the oil will go down, of course we want to sell it now at a higher price and then buy it when prices have gone down or lower than the previous price. Conversely, if we know the price of oil will go up, then we want to buy now at lower prices and sell later when the commodity prices have gone up higher than the previous price.
How does exchanges of futures for swaps work?
For example, an oil producer signed a sales contract with the consumer at a price of 100 dollars / barrel for a year. After 6 months of the contract is signed, oil prices rose to 110 dollars / barrel. As a result, oil producers lose the potential additional income of 10 dollars / barrel (US$ 110 - US$ 100) for the manufacturer should be able to sell at a price of 110 dollars / ton, instead of the US$ 100 / barrel.
To replace the loss of potential revenue enhancement, manufacturers can open Buy positions in oil futures prices in the range of 110 dollars. Thus when oil prices rose again above 110 dollars / barrel, for example to 115 dollars / barrel, producers can close buy positions owned (US $ 110) by selling at a price of US.$ 115 / barrel.
Activity in futures trading helping manufacturers to get a profit of 5 dollars / barrel. So even though manufacturers already tied oil sales contract with consumers, producers still able to earn additional revenue potential stemming from rising oil prices in the market.
If it turns out to be such as oil prices fell US$ 90 / barrel, now turn to consumers who feel aggrieved, because consumers should be able to buy oil at a cheaper price in the market. . To anticipate this, consumers can open a sell position on oil futures prices in the range of US$ 90 / barrel. Thus, when oil prices fell again below 90 dollars / barrel, for example to 80 dollars / barrel, consumers can cover sell positions (90 dollars) to buy at a price of 80 dollars / barrel.
So, the activity in oil futures trading is also helping consumers get the additional income of 10 dollars / barrel (90 U.S. dollars - 80 dollars). Income can be used to reduce the burden of the purchase price of oil at the price U.S. $ 100 / barrel to 90 dollars / barrel
From the example above can be concluded, that the combination of sale and purchase contract with futures contracts, helping producers and consumers to ascertain the source of the buyer and the continuity of the products that are traded, and still be able to gain additional income, either for the producers, if the market price moves more higher than the contracted price, as well as for consumers, if the market moves lower price than the price in the contract. Both sides can open and close a position to sell or buy according to market conditions.
