Posted: May 25th, 2022

The Future Contracts Case Study

Future Contracts Case Study

Ricardo International stands to benefit from its engagements in the futures market because it can hedge risk. The futures market is also a major financial hub that provides an outlet for intense competition among the buyers of its products like the computer hardware industry and the sellers that compete with them in their market niche (Boudreault, 2010). The futures market provides them with a center to manage price risks. Ricardo International and the computer hardware companies can enter into a futures contract, where Ricardo International secures a price for its products that both of them believe is fair. Ricardo International becomes the holder of the short position while the computer hardware manufacturers become the holder of long position.

Futures Contract market definitely has economic importance to Ricardo International in the sense that it has vital market information and sentiment indicators. The market can help this business enterprise to determine its prices based on today’s and tomorrow’s estimated amount of supply and demand through price discovery (Heakal, 2013). Futures market is also important to Ricardo International because it is a forum where they can reduce risk when making purchases. Risks are reduced because prices are pre-set. This makes them know how much they will need to buy or sell.

Mark to market is an accounting practice by which companies value and report their financial instruments at market price. It is the price at which an asset is trading at in a public exchange. The concept id used for level 1 and level 2 assets. Level 1 asset are actively traded exchanges while level two assets are not actively traded (Heakal, 2013). However, it is easy to determine their prices based on prices of other similar assets like the bonds of comparable quality.

The Commodity Futures Trading Commission is an independent agency of the United States government whose core function is to regulate the futures market. A self-regulatory body called National Futures Association works under the direct supervision of the Trading Commission (Heakal, 2013). Brokerage firms have to be registered with the commission. Without registration with the commission it cannot buy or sell futures contracts. Futures brokers must also register with the commission and Futures Association for them to do their business. The commission can through the Department of Justice instigate a criminal prosecution against a firm that: engages in illegal activity and violates NFA’s business ethics and code of conduct (Heakal, 2013). Investors intending to enter the futures market have to understand the commission’s regulations and make sure that the brokers, traders, and companies acting on their behalf are licensed by the commission. In case of a loss an investor can look up to the NFA for arbitration and appeal to the commission.

Farmers used to grow their crops and bring them to the market with the intent of selling their inventory before the North American Futures Market was founded. Because supply exceeded demand un-purchased crops used to rot in the streets (Heakal, 2013). When certain commodities like wheat were out of season, the prices of products made from them suddenly shot up. The predicaments that the farmers faced led to the creation of the futures market which saved many farmers the losses they incurred as a result of loss of crops and profits (Heakal, 2013). The futures market helped them stabilize supply and prices in the off-season. Things have since changed because today’s futures market is not only a preserve of agricultural goods but also financial instruments like treasury bonds and securities.

References List

Boudreault, J.J. (2010). Hedging Borrowing Costs with Eurodollar Futures and Options.

Retrieved from http://www.cmegroup.com/trading/interest-rates/files/IR-

301_Hedging_Borrowing_Costs_with_ED_Futures_and_Options.pdf

Heakal, R. (2013). Futures Fundamentals. Retrieved from http://www.investopedia.com/university/futures/

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