Question: Under the view that futures transfer risk from asset holders to futures buyers, the: Answer: expected asset price in the future will be less than the futures price. Explantion: Under the view that futures transfer risk from asset holders to futures buyers, the futures price will be less than the expected future spot price. The longs (speculators) must be compensated for bearing asset price risk by receiving a lower future purchase price for the asset. Could someone elaborate on this? I’m confused when it starts mentioning hedgers and speculators and whether spot prices are above or below future prices.
well it’s really easy take an example you are producing grain and want to hegde you price risk. therefore you want to short grain in future- enter in a futures contract as a short then you need a speculator to enter long for example. but the speculator wont enter into the contract at price FP=expected future price of grain because then he does not earn anything and has no incetive to enter the contract therefore for baring the risk of entering long in a contract Futures price< expected price in future