If you had to list the professions most detested and despised by the public, it is quite likely that, up there with politicians, speculators would come automatically to your mind, right? The aim of this essay is to politely destroy some clichés that surround the job of future speculators, or those in charge of trading with futures. Hence, if at the end of these lines you consider future speculators as those who add value to goods rather than just gambling, I will be more than pleased.
First of all, we should define who those hated future speculators are, and what the hell they do. A future dealer agrees on a price for goods to be delivered in the future, hoping that the price of those goods will change in his or her favour later on. In order to show you a very simple example, let’s say that we are an airplane company and we need to provide our fleet with kerosene in the future, then in a very simplified way what we do is agree with the kerosene supplier to buy a quantity of this good for a fixed price X at the exact date of Y. That’s all.
What happens next? If the market price of kerosene at Y is greater than X, the supplier will lose the difference because he could sell the kerosene for a higher price than he is selling in that moment, while the airplane company will be thankful for the invention of this helpful financial contract called Future. Otherwise, if the market price turns out to be lower than X, the one who will damn the future contract will be the airplane company. Try to guess why.
But, what is really happening in the transaction I have just mentioned? Is it only about gambling with prices? Is it just like a roulette outcome which depends on pure chance? Not at all. The skilled speculator can try to estimate how some of the factors that bear on price might turn out, therefore it is not only about being lucky. But the key factor here is to wonder what speculators do. What they actually do is to manage risk.
Life is uncertain, and many people prefer the certainty of a fixed and assured price rather than a possible future one which might be higher. I’m sure it is far easier than you expected; if you run a company you want to know which will be the exact figure of your future costs, so knowing that in advance you can plan things much better. Speculators, by offering a fixed price now, take on the uncertainty with its possibilities of gain and remove the uncertainty from others less prepared to handle it.
I would like to highlight that I have been focusing exclusively on future speculators throughout this article, proving that they are not gamblers. After all that has been said I can only conclude this article by repeating that which I was claiming in the very beginning. There is more than pure chance behind a speculator activity; there is somebody crunching numbers and estimating the likelihood of plenty of factors. Speculating in futures is not a transaction about greed, it is indeed about risk. It transfers risk to those who are completely prepared to handle it.