Futures contracts reduce future uncertainty. Which of the following statements show how this is achieved? I. Futures contracts allow the parties involved to mitigate possible shortages in quantities of the good. II. Futures contracts allow the parties involved to mitigate unexpected changes in price that could hurt earnings. III. Futures contracts always allow the seller to receive a price that is higher than the market price for the product.
A) I and II only
B) I only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

Statement I is true because futures contracts provide the parties involved with a predetermined quantity of the good at a fixed price, which helps them to mitigate the risk of potential supply shortages.

Statement II is also true because futures contracts provide a fixed price for the product regardless of any changes in the market price, thereby reducing the uncertainty and risk associated with price fluctuations.

However, statement III is incorrect because the futures contract guarantees a fixed price, but it does not necessarily ensure that the price will be higher than the market price. In fact, the opposite can happen, and the seller may end up receiving a lower price than the market price. Therefore, option D is incorrect.

Futures Contracts Reduce Future Uncertainty