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?

MoneyWeek magazine

Latest issue:

Magazine cover
The future of motoring

Profit as cars get connected

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking