You observe that a company has entered into futures contracts where the company is obligated to sell more of the commodity it produces than the volume they actually expect to produce. How might this be justified?
What if instead you observed that a company had entered into futures contracts to sell less than the volume they expect to produce, say they have locked in a price for only 50% of anticipated production? How might this be justified?
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Futures contracts are used to hedge the risk that the prices of the commodity can move in the adverse direction. They are also used when traders speculate that markets are bullish or bearish. Moreover, the magnitude in which the futures price and the spot price move may also not be the same. This is because of the presence of market irregularities. Prior to expiry of the futures contract, there is the possibility that if the spot price changes by 10%, the futures price may change by less than 10% or more than 10%. ...
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