Commodity forwards

A ‘forward’ is a contract agreed between two parties whereby one agrees to deliver a specific quantity of an asset – say one ton of aluminium – on an agreed date and the other agrees to pay a fixed price for it on that date. The buyer of a forward might be a manufacturer worried about the market price of aluminium rising and the seller might be a producer worried about the opposite.

By locking in a price for ‘forward delivery’, both solve their respective price worries. What’s more, the buyer ensures they can actually get hold of aluminium on the delivery date, should there be a shortage, or they can sue the seller for non-delivery. Forwards can be standardised and traded on commodities exchanges too. Usually they are then called futures contracts.

• See Tim Bennett’s video tutorial: What are futures?

Merryn

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