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Subject:  Derivative contracts Date:  3/18/2012  7:51 AM
Author:  butchie64 Number:  3859 of 3978

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.

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