The advantage of hedging using futures contracts is that it is liquid and can be traded on the central market. This means that futures contracts can be bought or sold quickly on the central market. This is because futures contracts can be traded on the central market where many market participants are located. When many market participants trade futures contracts on the central market, it will increase the level of liquidity because many market participants will enter and exit the position, such as long and short positions. Market participants will then be able to buy and sell futures contracts more easily on the central market. Additionally, it will cause the trader to easily close their position by simply making a reverse trade on the central market. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Next, the benefit of hedging using futures includes leverage. This means that by placing a small deposit value on the assets being traded, it can significantly amplify gains (or losses). Indeed, the function of the margin system is to allow a trader to take a larger position by depositing only a small value of deposit or initial margin. For example, a futures contract worth $1,000,000 has an initial margin of $100,000, and each percentage change in the futures price would result in a change of approximately 10% from the trader's initial cost. This amplification of gains (or losses) is called leverage. This leverage will offer the trader the ability to hedge larger amounts using a lower cost. Additionally, the advantage of hedging using futures includes that the position can be easily closed. This means that the trader can end or exit a long or short position without consuming much time and effort. According to (Ben-David), this is because when a trader wants to close their position in the market, they can simply make a reverse trade at any time before the expiration date in the market and close that position. . For example, if a trader wants to exit a position and they have sold June 10 dollar futures contracts expiring in June, they can then make a reverse trade that buys June 10 dollar futures contracts in order to close that position . The benefit of hedging using futures contracts also includes convergence. This means that when the futures contract is close to the expiration date, the futures price and spot price move closer to each other. In other words, the futures price and the spot price will tend to converge as the futures contract approaches its delivery date. For example, when the futures price is higher than the spot price, the futures price will decrease to the spot price while the spot price will increase to the futures price. Therefore, on the day of expiration or on the day of delivery, prices must be equal. This convergence comes from the activities of arbitrageurs when they notice the price inequalities between futures and spot contracts and when they intend to take advantage of them. For example, buy the cheapest and sell the most expensive. Disadvantages of Hedging Using Futures The disadvantage of hedging using futures includes the fact that it is a legal requirement. This means that there is a mandatory action that the holder is required to perform. This is because futures are a contract and require the holder to perform his action as.