Here is a simple way to think about Futures Contracts
I like barista-made coffee and pessimistically wonder due to ongoing world events that coffee will get expensive. You know, because oil is quite important for transporting coffee from Colombia. So I’d like to buy barista-made coffee 6 months from now for the same price as today (say $5).
My barista has similar fears. Due to the ongoing world events, the wars will cause a recession. So they would like some insurance on their coffee and wants to sell at least 1 coffee 6 months from now at the current price (say $5).
As luck has it, I’m at the coffee shop. The barista and I exchange our fears about coffee while the milk is foaming. In our eureka moment, we “discover” futures contracts. A neutral third party (like the FCA/CFTC) signs both of us into a futures contract and takes a small fee (say $0.05).
How I Win
6 months from now, if oil has gotten really expensive, the same cup of coffee will cost $9. I walk up to the barista, proudly ask for my coffee, pay $5 for it, and leave.
How the Barista Wins
6 months from now, if we’re in a recession and everyone is brewing their own coffee at home, I’m obligated to buy a $5 coffee and the coffee shop makes a rare sale in the recession.