Futures Markets And Low Income Country Risk Management

To many people, futures trading is a little understood and rather suspicious activity. The word most often associated with this trading is "speculation", the idea being that most of those involved in futures markets are gamblers in a high stakes game seeking profit at the expense of those outside the game. Any relationship between futures markets and cash markets is generally seen in a negative light - futures trading causing "speculative booms" which distort cash markets and harm many honest traders not directly involved in futures. The idea that futures trading might be a valuable risk management tool for farmers, processors, and other market participants is generally neither understood nor readily accepted. This paper is directed toward professionals, economist and non-economist alike, with an interest in the management of import and export risk by LIC's. Ths paper assumes only a basic knowledge of economics, and little or no familiarity with futures markets. It focuses on futures markets while recognizing that they are but one of a number of available risk management tools.