Why Do Businesses and Investors Use Index Futures?
Businesses and investors use index futures for several reasons:
1. Hedging: Companies and institutional investors use index futures to hedge against potential losses in their portfolios. By taking an opposite position in the futures market, they can offset potential losses in their stock holdings.
2. Speculation: Traders use index futures to speculate on the direction of the market. If they predict the market will go up, they buy futures; if they think it will go down, they sell futures.
3. Arbitrage: Arbitrageurs exploit price discrepancies between the futures market and the underlying index to make risk-free profits.