Derivatives

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Explain how various types of derivatives, such as futures contracts, can be used as a risk management tool.

Derivatives help transfer risk by taking the opposite position in the futures market against the underlying commodity. This is an important risk management function of derivatives.
Futures contracts means that a commodity producer, say a rice grower and a rice mill can enter into a futures contract according to which a specified amount of money will be paid for a quantity of rice. This contact helps both the parties to reduce their risk of price and quantity uncertainness. The rice mill is assured of quantity and the rice grower of the price he will get.
Another derivative useful for managing risk is the forwards contract in which there is an agreement between two parties to buy or sell an asset at a pre-agreed future point of time. In this case ...