No. of Recommendations: 0
Fellow Fools,
Below is my understanding of derivative contracts. Is this correct or how far away from reality am I?

Say a farmer decides to sell a derivative contract for 100 bushels of corn @ $100/bushel. When the corn is ready to be sold, the price of corn has;

* gone up to $110/bushel ($10 more/bushel than the contract). The farmer has to sell the 100 bushels of corn at $100/bushel for a cost of $10,000. This represents a derivative loss of $1,000 (current cost of $110/bushel x 100 ears) that will end up as a loss on the quarterly income statement.

* gone down to $90/bushel when the corn is ready to be sold, the farmer still sells the corn at the contract price of $100/bushel and reports a derivative gain of $1,000 on the income statement.

keep it fun & enjoy each one
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.