Question

Explain why futures contracts can be viewed as an over-under investment decision. Explain generally when you may wish to be long as opposed to other times when you may wish to be short futures contracts. Provide an example, using today.

Answer 1

future contract type of derivative contract which is used to speculate the direction of the market and it can be a tool of hedging to protect the the erosion of the value of different portfolios.

it can be viewed as a tool of Over or under investment because it is always taken as an additional position in respect of some position in portfolio. these are types of derivative contracts which are used to Hedge the value of portfolio. These are over investment because these are highly levereged and they can be highly destructive to at times .

I wish to be long on the futures when there is an economic stability and there is high recovery in the market and there is no uncertainty looming around.

I go short on the futures when I am sure about some downside in the market and it could lead to high level of uncertainty. I'm short futures when I am sceptical of the future uncertainty and I also own a portfolio in such situation. shorting futures can provide an opportunity of hedging in which the portfolio downside is protected by the futures gain.