Comment by miki123211

I think hedging risks is a better example.

Imagine you're a software company in India, and you want to sign a 5-year contract with an American retailer. The retailer wants to know exactly how many Dollars they'll have to pay you for the software. You want to know exactly how many Rupees you will get to pay your employees.

Without futures, those two goals are incompatible, and the contract does not happen. With futures, the Indian company can decide to accept $1m, and buy a financial instrument that lets them exchange it in 5 years at current Rupee prices. They have to pay somebody for that privilege, but they know exactly how much they're paying, versus having an unbounded risk of currency fluctuations.

You can do the same with oil. Maybe you have no use for crude oil, but you expect your profits to fall as oil prices rise (maybe you're a transportation company locked into a long-term contract). You can hedge that risk by buying futures; if prices rise, you'll lose money on the contract, but you will make it up by selling the (now much more expensive) futures.