Futures Hedging

In this example, the use of futures contracts isn't really gambling. Quite the opposite: it's insurance!

People looking to hedge futures contracts

Isn't futures designed specifically to allow for this kind of hedging? eg. everybody thinks that food prices are going to the moon next harvest, but farmers don't want to pay the risk, so futures allow farmers to lock in prices now and not have to worry about a price crash come harvest time.

These guys were trading futures contracts. Unlike stocks, when you are long a futures contract, someone else is necessarily short, so it won't be the case that "anyone taking financial risk would be rewarded".

This is a common misconception. Futures contracts are very often used for nonspeculative purposes (e.g. Starbucks locking in prices for buying milk or farmers locking in prices to sell wheat). This is a form of insurance. While the end users are ultimately may net with each other, the intermediaries who take risk matching these parties charge a fee (the spread) for doing so.Why can't the end users trade with each other directly and avoid such fees then? Often they are not in the market a

Options are usually cash-settled so they don't have that problem

It's also based on false premises. For instance, the part that says "Suddenly, these contracts were turned into 'derivatives'" is wrong, since forward contracts are already derivatives, and also exchange-traded futures contracts appeared much earlier than the 1990s. Traders cannot simply "jack up" prices at will since futures can be short-sold, etc.

Derivatives involves a lot of betting. It also involves legitimate hedging. A farmer can lock in their revenue, and a manufacturing company can lock in exchange rates.

Yes, there is a thing that almost guarantees things in the future will materialize, it’s called a contract. People and businesses have been dealing in futures for centuries. For instance, Italian banks have special vaults for Parmigiano Reggiano taken as collateral. If some of their customers didn’t have access to these tools they probably would’ve gone out of business long ago, and we’d all have lost access to great cheese.They’re just tools, as such expected to be held the wrong way by some

The last sentence is not true. The whole point of a futures contract is to hedge risk and allow price discovery. It is true the companies consuming commodities will buy at almost any price but more active trading results in a price more closer to fair market value over time. It’s the same reason why prices for rarely sold items fluctuate widely between sales. There’s no activity to visibly show the change in demand or supply in between.