A futures market is a central financial exchange where people can trade standardized futures contracts. A futures exchange provides physical or electronic trading venues, which can be organized as non-profit member-owned organizations or for-profit organizations. Futures exchanges can also be integrated under other types of exchanges, such as stock markets, options markets and bond markets.

Futures contracts are sometimes used by corporations and investors as a hedging strategy. Hedging refers to a range of investment strategies that are meant to decrease the risk experienced by investors and corporations.

Questions;

The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market.

1. Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility. (15 marks)

2. Review and discuss the collapse of the Futures Oil Market, which fell into the negative realm in May 2020. (15 marks)

What were the main reasons for this fall into the negative realm? Critically discuss.

(20 marks)

Total 35 marks

3. After May 2020, what are the prospects of futures contracts as a significant risk management tool for firms? Discuss critically. (30 marks)