Explain the nature of futures as an important derivative and how it helps in risk management?

Explain the nature of futures as an important derivative and how it helps in risk management? 

Ans. Futures are a type of derivative contract with an underlying asset. These contracts are entered today for delivery of some underlying asset in future. The broker collects a deposit from the parties’ concerned called initial margin. The amount of initial margin is calculated as per the formula set by the exchange. There is a clearing house in futures which guarantees that each party will keep its commitment. Clearing house are owned and operated by the exchanges themselves Trade of futures happens via exchanges. Strictly speaking futures are not securities. There are two types of futures: financial futures and commodity futures. Motivation behind futures is hedging and speculation. It helps in risk management in following ways: 

It gives hedging facility. 

A hedger is someone who takes a position to offset the risk associated with someone else’s position for a commission or return. 

They also make markets liquid, ensure accurate price and bring price stability.