AP Microeconomics
5.3 Understanding Futures Contracts Assignment
Emily Baer
Introduction
Farmers and their agricultural products such as corn, wheat, livestock, etc… are good examples of the
type of firm and good that operate within a perfectly competitive market structure. One important
concept that provides insight into how farmers operate within their market structure is the futures
contract. While this concept will not necessarily be on an AP test, it is important for anyone interested
in finance, politics, or risk management to understand.
Assignment
Read the first three sections of the following article and watch both video #1 and video #2. Then answer
the questions below. This assignment will be graded out of 8 points, with 2 points possible for each
question.
1) Explain what a futures contract is.
A futures contract is essentially an agreement between a supplier (short position) and the person who
demands what the other is supplying (long position) to purchase goods, commodities, and/or financial
instruments at a set time and price in the future.
2) Explain the benefit that futures contracts can provide.
Futures contracts can protect the parties in the short and long positions from changes in the price of the
commodity that is being exchanged in the futures contract. It is also safer than purchasing stocks
because the purchasing price will remain the same even if the market price for that good changes.
3) Futures contracts provide farmers with an increased chance at making a profit. Identify and explain
the characteristic of the perfectly competitive market structure that causes futures contracts to be so
important to farmers making a profit or a loss.
prevent it from being in a futures contract.