Chapter 2 Beginning with the Basics
Chapter 2 Beginning with the Basics
Why do we need the futures market? Suppose that you and I lived in rural area.I raise beef cattle.You raise corn 15 miles down the road
◼ Suppose that you and I lived in rural area. I raise beef cattle. You raise corn 15 miles down the road. Why do we need the futures market?
■ Each fall,when your corn comes in,you truck the entire crop to me,and I buy it to feed to my steers. To make things fair,we agree that I will pay you the cash price for corn on an exchange on the day I take delivery
◼ Each fall, when your corn comes in, you truck the entire crop to me, and I buy it to feed to my steers. ◼ To make things fair, we agree that I will pay you the cash price for corn on an exchange on the day I take delivery
Corn is important to both of us.It is your principal crop;it is my main cost in feeding cattle
◼ Corn is important to both of us. It is your principal crop; it is my main cost in feeding cattle
Let's set our corn price now for next fall Let's pick a price that allows each of us a reasonable profit and agree on it
◼ Let’s set our corn price now for next fall ◼ Let’s pick a price that allows each of us a reasonable profit and agree on it