Motivating Forward Contracts

1 Nov

In general, forward contracts can become either and asset or a liability for any of the parties involved. As a result, one would only get into such contract to lock a price in the present, depending on whether the individual is expecting, or for some reason knows, that the present value of the item will fall or increase at the delivery date. In such way, I think that a realistic motivation for forward contracts should be highly seen in businesses that face exchange rate fluctuations. The best example of which I can think takes place in the agricultural industry. For example, lets say that a farmer knows will have 10 bushels by the end of the harvesting season. In order to prevent that his revenues decrease due to possible downward fluctuations, he will try to sell at a fix price the 10 bushels that he is expecting. In an opposite direction, a person who knew for some reason that the price of the 10 bushels will increase at a future time, then he will try to lock the price of the bushells in the present.

Question of the week: Considering a 2×2 matrix to solve one constraint, what is the purpose of using the determinant to calculate the inverse matrix of A if in the end the determinant will cancel? In other words, can we just skip the whole process of having to write 1/detA if we know that it will get cancelled?

Also, a more conceptual question: are futures the same as forwards?


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