A grain farmer who signs an agreement to deliver corn in three months at a fixed price has entered into which type of contract?

A grain farmer who signs an agreement to deliver corn in three months at a fixed price has entered into which type of contract?

• A. Spot price contract
• B. Forward price contract
• C. Futures contract
• D. Option contract

Answer: (B)

This item tests price-risk protection through a forward contract. A forward price contract is a private, customized agreement to deliver a specific quantity of a commodity at a fixed price on a future date. For a grain farmer, signing to deliver corn in three months at a set price locks in revenue and shields against adverse price moves, with terms like delivery date, quality, and location tailored in the contract. In contrast, a futures contract is standardized and traded on an exchange with daily margin settlements, which makes it less customizable to a specific delivery date or terms. An option contract gives the buyer the right but not the obligation to sell at a strike price, so it doesn’t obligate delivery. A spot price contract involves immediate delivery and payment, not a future date.

This item tests price-risk protection through a forward contract. A forward price contract is a private, customized agreement to deliver a specific quantity of a commodity at a fixed price on a future date. For a grain farmer, signing to deliver corn in three months at a set price locks in revenue and shields against adverse price moves, with terms like delivery date, quality, and location tailored in the contract.

In contrast, a futures contract is standardized and traded on an exchange with daily margin settlements, which makes it less customizable to a specific delivery date or terms. An option contract gives the buyer the right but not the obligation to sell at a strike price, so it doesn’t obligate delivery. A spot price contract involves immediate delivery and payment, not a future date.