A primary economic function of the futures markets is hedging. Hedging is the buying and selling of futures contracts to offset the risks of changing prices in the cash markets, or where the commodities actually get bought and sold. This risk-transfer mechanism has made futures contracts virtually indispensable to companies, farmers and financial institutions around the world for over a century. Therefore, these companies are concerned that the cost of the commodity may change before they either buy it or sell it. To alleviate some of that concern, they seek price protection by hedging the commodity.
Farmers hedge the price of their crops against the price going down.
Heating oil distributors hedge the value of their heating oil inventory. Speculators in the futures markets fulfill several vital economic functions by facilitating the marketing of basic commodities and the trading in financial instruments. In addition to assuming risk, providing liquidity and capital, speculators help ensure the stability of the market. Speculators trade in the futures markets to profit from price fluctuations. The price of grain, for example, changes along with supply and demand.