The arrangement where Farmer Jones agrees in May to sell corn in November at a delivered price of $3.50 per bushel is an example of a

The arrangement where Farmer Jones agrees in May to sell corn in November at a delivered price of $3.50 per bushel is an example of a

• A. Forward contract
• B. Futures contract
• C. Cash sale
• D. Options contract

Answer: (A)

This is a forward contract. The farmer and a buyer make a private agreement in May to deliver corn in November at a price fixed today, $3.50 per bushel. That setup is characteristic of a forward: a customized, over-the-counter deal where delivery and price are settled in the future, not on an exchange and not with daily financial marking. Because it’s a private agreement with a future delivery date and a set price, it isn’t a cash sale (which would occur now for immediate payment). It’s not a futures contract either, since futures are standardized, traded on an exchange, and involve daily margin payments and marked-to-market. It also isn’t an options contract, which would give the right but not the obligation to sell at a set price. The arrangement described commits both sides to the sale at the future date and price, which is the essence of a forward contract.

This is a forward contract. The farmer and a buyer make a private agreement in May to deliver corn in November at a price fixed today, $3.50 per bushel. That setup is characteristic of a forward: a customized, over-the-counter deal where delivery and price are settled in the future, not on an exchange and not with daily financial marking.

Because it’s a private agreement with a future delivery date and a set price, it isn’t a cash sale (which would occur now for immediate payment). It’s not a futures contract either, since futures are standardized, traded on an exchange, and involve daily margin payments and marked-to-market. It also isn’t an options contract, which would give the right but not the obligation to sell at a set price. The arrangement described commits both sides to the sale at the future date and price, which is the essence of a forward contract.