BU283 Chapter 19: Chapter 19 Forwards and Futures
Document Summary
A spot contract is an agreement between a buyer and seller to exchange a commodity immediately: the agreed upon price in a spot contract is called the spot price. A forward contract is an agreement between a buyer and seller to exchange a commodity in the future: the agreed upon price in a forward contracted is called the forward price. Pays price and has an obligation to buy. Receives price and has an obligation to sell: forward contracts are privately negotiated. Lock in a currency rate right now with a forward contract with a financial institute. If you fear the spot rate will be worse at the maturity date, you make a forward contract and this is called a hedge transaction. A hedge is a transaction that reduces the risk associated with an adverse price movement in a commodity. A speculative transaction accepts the risk of adverse price changes in exchange for the opportunity to profit.
