Why is forward contracting useful?

Forward contracting is very valuable in hedging and speculation. The classic hedging application would be that of a wheat farmer

forward -selling his harvest at a known price in order to eliminateprice risk. Conversely, a bread factory may want to buy bread forward in order to assist production planning without the risk of price fl uctuations. If a speculator has information or analysis which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction making a profi t.

 

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