Commodity Forward Purchase Agreement

If, at the time of expiry of the contract, the price fixed in the contract is in accordance with the current rate, the contract has no value. If the average price of the goods has risen to a level higher than the contract price during the term of the contract, the contract becomes valuable to the buyer. If the average price of the goods has fallen, the contract helps the seller. In the case of futures contracts, one of the parties to the contract wins when the price of the contract product changes, while the other loses. Appreciation benefits the buyer, while depreciation benefits the seller. In addition, it is likely that the buyer will require, as a precondition to conclusion, that the seller enter into and maintain refining agreements regarding the manufactured product, in order to ensure that the quality of the product meets its standards. Unlike standard futures, a futures contract can be adjusted based on a good, amount, and delivery date. The raw materials traded can be grains, precious metals, natural gas, oil or even poultry. Term settlement can be made on a cash or delivery basis.

A farmer intends to produce about 1 million wood corn. Even before growing the crop, he concludes a futures contract with a bank. Fearing that the price of corn will drop and end in a loss, the farmer accepts a $4/bushel price that is to be delivered in 6 months. In addition, technical analysis is particularly important, including all conclusions relating to the authorisations and licences required to operate a project. There are often commercial discussions about the necessary authorizations or licenses before the buyer makes partial or full payments under forward contracts for the purchase of goods. Since the farmer`s counterparty is a bank, this contract will likely be a cash settlement contract. The same contract can exist between the farmer and a corn ethanol company. In this case, it would probably involve a physical delivery of the goods. Suppose that F V T ( X) {displaystyle FV_ {T} (X)} is the time value of cash flows X at the maturity value of contract T {displaystyle T}. The futures price is then indicated by the formula: futures purchase contracts for goods are usually subject to normal due diligence from the seller and the mine concerned, and the closing conditions are similar to those that lenders seek in the event of debt financing.

Unlike futures, futures on futures products can be adjusted. . . .

  • Facebook
  • Twitter
  • Google +
  • LinkedIN
Tagged in