The manufacturer buys one corn futures contract (covering 5,000 bushels) at the current futures price of $5.00 per bushel .
Imagine a cereal manufacturer that needs 5,000 bushels of corn in three months. They fear corn prices will rise, which would hurt their profit margins. buy futures contract example
A futures contract is a legally binding agreement to buy or sell a specific asset—such as a commodity, currency, or financial index—at a predetermined price on a set future date. When you "buy" a futures contract, you enter a , committing to purchase the underlying asset at the expiration date, regardless of the then-current market price. The Mechanics of Buying Futures The manufacturer buys one corn futures contract (covering
Profits and losses are calculated and settled in your account at the end of every trading day. A futures contract is a legally binding agreement
Because you control a large asset with a small deposit, small price changes can lead to significant gains or losses that may exceed your initial investment. Buying Example: The Cereal Manufacturer (Hedging)
Buying a futures contract does not require paying the full value of the asset upfront. Instead, you post a , which is a small fraction (typically 3–12%) of the contract's total "notional" value.