Final answer:
Futures are utilized to hedge against the risk of unfavorable price changes in the underlying asset, providing stability and protection to firms involved in international transactions.
Step-by-step explanation:
Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes. When companies engage in transactions involving various currencies, they face the risk of exchange rate fluctuations. For example, if a U.S. firm has a contract to receive 1 million euros a year from now, the actual value in U.S. dollars may vary due to the fluctuating dollar/euro exchange rate. To avoid the risk of the euro being worth less in U.S. dollars when the payment is received, the firm can enter into a hedging contract that locks in a specific exchange rate for the future, thus protecting against unfavorable currency movements. This fee-based contract serves as insurance; it may result in a loss if the euro appreciates but provides significant protection if the euro depreciates against the dollar.