Financial Management - Chapter 21

Futures contract: a contract to buy or sell a stated commodity or financial claim at a specified price at some specified future time. Suppose a farmer plans to harvest 10,000 bushels of corn in 6 months. The current price is $2.50 per bushel. The farmer sells a futures contract, which will allow Futures contract: a contract to buy or sell a stated commodity or financial claim at a specified price at some specified future time. Suppose a farmer plans to harvest 10,000 bushels of corn in 6 months. The current price is $2.50 per bushel. The farmer sells a futures contract, which will allow him to sell corn at 2.50 per bushel in 6 months. If the price of corn falls to $2.00 per bushel, the farmer loses $5,000 ($0.50 x 10,000 bushels) on his corn, but gains $5,000 on his futures contract. more