Series 3: Chapter One

Chapter One

Trading in Commodity Futures

Commodities futures agreements are a way to manage the price risk of a business. This is the risk of a sudden, adverse change in the price of goods that a business wishes to buy or sell. A farmer planting his crop in April may worry that prices will decline by the time he brings his crop to market in September. The farmer will enter into a forward or futures contract to lock in a price now to be received later when he delivers his product. On the other side, a purchaser of the farmer’s product may worry that prices will rise, so he enters into a forward or futures contract to lock in the April price. Each party to the contract is said to hedge, or limit, his risk.

A forward contract is a