chapter
Introduction
Pages 10

Nature offutures trading There are two current prices for any commodity: a price for delivery now, the spot price and a price for delivery at a later date, the forward price.

Consider the case of a farmer with a growing crop, with a period of production of, say, nine months; suppose that the current spot price is $10 per bushel. His risk is that the price of the commodity will fall before the crop is ready for delivery. If a buyer were to offer, say, $9.50 per bushel for delivery in nine months' time and the farmer accepts, the crop would be sold forward, and the farmer would have hedged his position against the risk of a price fall. That is, the farmer would have obtained certainty, and the price risk would now be borne by the buyer.