During the past few years, John had hedged hisrevenues using forward contracts. When he entered aforward contract, John had to guarantee the delivery ofthe contracted amount of apples at harvest. If John’sown crop fell below the amount of apples that he hadsold forward, he would have to buy enough apples onthe open market to make up the difference. Any applesthat John’s farm produced above the amount specifiedin the contract would be sold at the prevailing marketprice. All transactions, including any payment receivedby John from the forward contract and any selling orbuying of apples on the spot market at harvest wouldbe settled at the same time in the fall



Source link