Question

6. Assume that in March a farmer and a baker enter into a forward contract on 100,000 bushels of wheat at a price of $5 per bushel for delivery in September. In September the spot price of wheat is $5.2 per bushel. Who has profited from entering into the forward contract, by how much?

           

Answer 1

Forward contract refers to the obligation between the two parties to trade the asset at a future point of time with the Spot agreement rate in the market.

So, The price has increased from 5 to 5.2 in this scenario,

The Farmer will Gain from the transaction and Baker will Lose from the transaction as the farmer will get more amount of money he earlier would have got while the baker has to pay more amount to purchase the same amount of bushels.

The Farmer Will Gain = Quantity of Bushels * ( Spot Price - Agreement price)

= 1,00,000 * (5.2 - 5)

= 100000*0.20

= $ 20,000.

In the forward contract the gain of one party will be the loss of other party. So the baker will lose $ 20000.