Old MacDonald had a farm, and on that farm he grew corn — a lot of corn. This year, he expects to produce 500 bushels of corn. He can sell the corn at the price per bushel available at harvest time – or he can now set a price. The Crunchy Breakfast Cereal Company needs a lot of corn to make its grain. They send a representative to old MacDonalds Farm and offer him a fixed price to pay when 500 antlers of corn are delivered at harvest. Old MacDonald is delighted with the futures contract and gets the delivery price if it can deliver 500 bushel corn by a set date. Based on the expected delivery price, if he is able to produce the 500 bushels of corn, he can plan this year`s farm receipts and next year`s expenses. Crunchy Breakfast Cereal Company is also satisfied with the futures contract. Since they have a futures contract, they can control variable costs (for example. B the cost of maize) for making their breakfast.
If they know in advance the cost of corn, they can maintain price stability for the consumer. They may overpay Old MacDonald for his corn, but this is a risk they are willing to take to keep costs stable and keep market share for their cornflakes. Futures contracts cannot be terminated. Instead, a second contract is established, which takes the exact opposite position and expires on the same day, which removes the initial futures contract. The futures contract can then be concluded on one of two methods allowing the term buyer to conclude his credit position. Futures contracts begin when a seller is looking for a buyer for a commodity. Think of the farmers who face serious price uncertainty every year. Their harvests fail due to insects, diseases or bad weather, and the demand for their plants can vary greatly. To protect against uncertainty, farmers can establish a futures contract and sell it to a private buyer. For example, large food producers may buy a farmer`s wheat futures contract in order to guarantee the price and control their production costs. The farmer hopes to benefit from the futures contract by making sure he has a buyer for the merchandise. .