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Futures and Options: Tools for Navigating Business and Financial Risk

When people and companies come to futures exchanges to buy and sell commodities and financial products, what they’re really trying to do is remove risk from their business or make money as an investor when prices fluctuate. Bottom line, they don’t know the future. But derivatives like futures and options can help them protect their goals, even if prices move in the wrong direction.

A real world example

In the summer of 2012, the United States experienced its most severe drought since the Dust Bowl of the 1930s. The drought had perhaps the biggest impact in the Midwest Corn Belt. As the season became dryer and hotter, corn farmers and country elevators that store corn for later sale bought corn futures at a certain price, for a certain date of sale. This guaranteed a level of profit, which helped plan for a year in which production and supply of their crop would most certainly be lower than normal.