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Comment by ballenf | Hacker News Reader

In the context of futures being a way for a farmer to finance the expenses of growing a crop or raising a herd, isn't this a stretch of the use of the word "future". I get that the word means a lot more today than its origins would convey, but shouldn't the term used just be the generic "derivative" or "index"?

Forgive my ignorance of the finance world, but it feels like they are stretching definitions in order to frame this as approaching crude oil or pork bellies when it's more of an options contract.

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"Future" basically just means a specific settlement date (and margined with variation, in contrast to a forward).

Anything at all can be traded in such a way. What's useful about it is you are trading with the exchange, they take care of everyone's credit risk, hence they margin everyone. And they concentrate the interest in a monthly or quarterly date.

> more of an options contract

No, definitely not. An option contrast has asymmetric payoff, because options can be left unexercised. When you trade a future you are obliged to make the exchange at the appointed price and time.

No, they aren't. There are all sorts of futures contracts, and they are all derivatives and none are indexes themselves. There are equity index futures, single stock futures, foreign exchange futures, treasury futures, etc. Cash settlement vs the ability to take settlement in the physical underlying is where you might be getting confused, but they're all futures nonetheless.

Why do futures exist for something that can be settled in 30 minutes?

Suppose someone will pay you one bitcoin next week, as per some private agreement.

For this discussion, let's entirely ignore credit risk (the risk this person doesn't pay) but consider market risk.

Like it or not, you carry the risk of bitcoin fluctuations. You might be comfortable receiving $6400 for your bitcoin next week. But bitcoin is volatile. Maybe bitcoin jumps to $8000. But maybe it drops to $4000.

If you're comfortable giving up the upside, for a chance to prevent that downside, this bitcoin future is for you.

You enter a future contract where you agree to sell one bitcoin in one week at a price of $6400 (if that's the going one week forward rate).

In one week, your person pays you the agreed bitcoin, which you then sell to the exchange and receive your $6400.

Meanwhile, for that week you can sleep at night knowing that if the bitcoin market crashes, you still get your $6400. And if the market rallies to a higher price, well missing out on that rally was the cost of being able to sleep at night.

This is what commodity futures were originally used for, eg farmers agreeing to sell their stocks at agreed rates without worrying about market fluctuations.

Companies do this too, eg hedging their cost of fuel to a known quantity in line with expected consumption.

For one thing, bitcoin miners would love to short the future price of bitcoin. They're spending dollars now to buy mining rigs, which make bitcoin later. They're exposed to the future price of BTC for whether or not this is profitable. With a short futures position on BTC, it turns uncertain profit into more certain profit.

Because then money and commodity never actually have to exchange hands. If you trust the CME to guarantee all parts of the transaction, and if you have no use for the commodity beyond speculation, then why part with all that money and move around all those bitcoins?

With a future you can create negative exposure, aka being short. It's a lot more straightforward than finding borrow for it and arranging to pay interest and returning it after you're done.

> Why do futures exist for something that can be settled in 30 minutes?

Because money.

Or more specifically, someone is willing to sell these futures to someone who is willing to buy them.

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