What is it forward?
Forward Cover is a type of commitment that allows buyers and sellers to create an agreement to buy an asset or goods at a fixed price in the future date, with specifics of price and quantity that will be purchased. Within the agreement, the seller must create the required quantity, even if there is a short amount that will come. In other words, the seller may have to secure additional units to meet the conditions of the forward options, and these additional goods forming cover.
One of the simplest ways to understand how forward the cover works is to consider an investor who gives the opportunity to buy 25,000 soybean bushings, and three months in the future. The Seller agrees with the terms and conditions, basically concluded a contract to deliver all 25,000 bushings in the agreed date, subject to receipt of payment from the buyer. If the seller finds that he has only 20,000 bushes in honor of the sale conditions, then you will need to buy another 5,000 bushings for immediate delivery to make the transactionThey were. That 5,000 pounds would be referred to as a forward cover.
The concept of forward coverage also has a certain impact on the buyer. Just as the seller is obliged to deliver the agreed quantity at the date specified, the buyer undertook to provide the payment in full on this date. This means that even if the buyer does not have cash in honor of the agreement, he will have to dispose of assets or borrow funds to complete the transaction, while those who borrow the means represent coverage.
In the best situations, there is no need for ahead. The seller has enough goods at hand to complete the transaction without having to provide other amounts elsewhere. Similarly, the buyer has financial resources at hand to pay for the order without having to obtain additional funds from an external source. If the buyer is able to use the futures agreement to buy goods at a price that is below the current market value on the day of delivery, the goods maysell immediately and obtain profit from an agreement. At the same time, the seller does not have to worry about finding buyers and probably a price for the futures agreement, which was sufficient to cover all expenses and gain some profit.
The handover cover is associated with risks. Sellers may end in a loss of money to the agreement if it is necessary to buy additional units for prices much higher than the agreed unit price when selling futures. The buyers may also find themselves losing money if the goods are currently sold on the market at the price of an agreed purchase price. For this reason, the buyer and the seller should take the time to project prices on the market between the date when the agreement is concluded, and the settlement date for the futures agreement, which, if necessary, facilitates the administration of forward coverage.