CHAPTER 16 Futures Contracts Trading in futures contracts adds a time dimension to commodity markets. A futures contract separates the date of the agreement - when a delivery price is specified - from the date when delivery and payment actually occur. By separating these dates, buyers and sellers achieve an important and flexible tool for risk management. | CHAPTER 16 Futures Contracts Trading in futures contracts adds a time dimension to commodity markets. A futures contract separates the date of the agreement - when a delivery price is specified - from the date when delivery and payment actually occur. By separating these dates buyers and sellers achieve an important and flexible tool for risk management. So fundamental is this underlying principle that it has been practiced for several millennia and is likely to be around for several more. A hallmark of ancient civilization was the trading of commodities at an officially designated marketplace. Indeed the Forum and the Agora defined Rome and Athens as centers of civilization as much as the Pantheon and the Parthenon. While commodities trading was normally conducted on the basis of barter or coin-and-carry the use of what are known as forward contracts dates at least to ancient Babylonia where they were regulated by Hammurabi s Code. This chapter covers modern-day versions of these activities. The first sections discuss the basics of futures contracts and how their prices are quoted in the financial press. From there we move into a general discussion of how futures contracts are used and the relationship between current cash prices and futures prices. 2 Chapter 16 marg. def. forward contract Agreement between a buyer and a seller who both commit to a transaction at a future date at a price set by negotiation today. Futures Contract Basics By definition a forward contract is a formal agreement between a buyer and a seller who both commit to a commodity transaction at a future date at a price set by negotiation today. The genius of forward contracting is that it allows a producer to sell a product to a willing buyer before it is actually produced. By setting a price today both buyer and seller remove price uncertainty as a source of risk. With less risk buyers and sellers mutually benefit and commerce is stimulated. This principle has been understood and .
