 In this section, I'll explain the economic functions of future market. Future markets, if they are operating in the market, the biggest benefit is that the exposure towards risk that can be reallocated or it can be shifted to other parties who are ready to take up the risk. If there is an investor or consumer who is forcing a high level of risk in certain situations and wants to shift the risk to their exposure, they can do it by participating in the futures market. So, the reallocation of exposure is one of the major benefits of participating in the futures market. Another benefit is that if the futures market are there, the producers, customers, consumers, investors participate in the futures market. They should have sufficient level of information about what is going to happen in the future. Should we keep the stock of this particular thing with us or not? Or should we immediately sell the thing or store it? If they think that the asset or commodity value is going to increase in the future, it is better to store it. Or if they are going to fall in the future, they should take the forward price and sell it. To take all these positions, they need to have sufficient information. The overall economic benefit of the futures market is that the commodities that are being traded, business origin, financial instruments or commodities, all the current and future prices are generating information. Because people are taking interest, information is generated on them. So, this is another advantage of having the futures market that a lot of information is generated because of having a vibrant or a strong effective future market. So, in order to explain the economic advantages of the future market, I will take an example that suppose you participate in a future market and you feel that the next crop will come in the harvest market after a month. And there is one month left to come in the new harvest market. And suppose we are taking an example of a wheat distributor. Suppose he has a ton of wheat. So, now he will have to see whether he has to hold it or sell it to me right now. So, what did he do for that? He knew the market price. Spot price of wheat turned out to be $2 per bushel. And the price of the future, suppose we are assuming that let's call it capital F. The future price is F. So, now he has to decide whether to keep this wheat in the store or sell it right now. Because the value of the future, he will have to decide that if it is higher, then naturally he will have to account for the cost of carry, that is, to store this particular wheat for a month, which I will have to spend extra. So, in the future market, I am getting to see the price after a month. If it is higher than that, which is the spot price right now, then my total expense will come and he will compare it. That I should keep it. He will compare these numbers to decide whether I should store the wheat or sell it immediately. Now, if for this particular reason, what the distributor can do is to hedge his expoier to the fluctuation in the price that can be there and he can have two choices. Number one is that he can sell the wheat in the spot market for $2 per bushel and deliver it immediately. So, immediately he can sell all his stock on that $2. Or he can have another choice. He is selling short or futures contract at the price of F and delivering the wheat a month from now. When the bushel is ready, then he can sell that particular wheat to the stock and participate in the futures contract and take a short position. Now, this second position depends on one more important thing. Now, the F has to be calculated on the basis of which he has to account for the amount of money he will have to spend on the wheat when the distributor is physically storing the wheat. If he will store the wheat with one month, then we call it cost to carry. How much will he have to pay? The price of storage can be given in the case of a warehouse book or a warehouse warehouse book or a warehouse warehouse book. If he has to sell the wheat, then he has to pay a short position which he will have to keep and not take out. If there is no wheat, then he can have a cost of some other maintenance. If he has some problems, then he will have to pack some other things. So, that is your additional expense. Now, the F which you want to invest in the futures contract or the second option is to sell all the wheat for one month then how much will you have to pay to sell it in the future? Now, the price of the future will have to be accounted for along with your cost of carry. So, we are saying that suppose if your cost of carry is 10 cents per bushel then the price of your future will be 2 dollars and the cost of carry is 10 cents. The F will be bigger than that only then the distributor will decide to store the wheat and wait for another one month and get into the short position or take the short position. But suppose the price of your future you feel that the government will intervene and the price will be less than 2 dollars and the cost of carry will not be recovered then you will never get it to this kind of a transaction you will never think of storing the thing and you will not go into your future contract. So, these are the important things this means that when we have to decide that we have to go into the future contract or store the wheat or sell it on the spot price we have to account for the cost of carry So, we need to look at this particular inequality that we have F as the future price S as the spot price so, the difference between future price and minus spot price if your cost of carry is smaller than this difference only then you will go for the future contract otherwise it is not a good idea and another important thing that we need to understand and remember is that the difference between the future price and the spot price is known as the spread so, spread is your cost of carry always should be smaller than your spread only then the distributor will get into a future contract or will take the short position if the cost of carry is bigger than the spread so, in such context he would never go for the future contract so, there are these important things that are to be taken care of and taken into account when you are deciding to get into the future contract or not