Forward Market

We love tangelos. That perfect combination of citrusy and sweet, and the way they look like little malformed oranges...so cute. Anyway, we love them so much that we planted 500 tangelo trees on our property, and now produce enough extra tangelos every season that we can sell them to local grocers and restaurateurs. One of the ways we do this is via a forward market.

A forward market is a place—physical or virtual, but usually virtual—where futures are traded over the counter. One thing to zoom in on there is the phrase, “over the counter,” which means these transactions aren’t handled by a trade exchange, but are negotiated by the buyer and seller. That makes them riskier, but also a lot less rigid. Which reminds us…the tangelos.

So let’s say we’re coming up on tangelo season, and one of our fave local restaurants approaches us about buying some of our harvest. We draw up a forward contract that says that, in 60 days, we’ll sell the restaurant 1,500 tangelos at a buck apiece. Now even if the tangelo market goes nuts between now and then, and tangelos suddenly start selling for $20 a pop, we’ve still agreed to sell the lot for $1,500. Likewise, if the price of tangelos tanks, the restaurant is still contracted to pay us what we agreed upon. And that, friends, is how forward markets work.

Forward markets allow buyer and sellers to try and protect themselves—or hedge—against short-term future market instability. They’re pretty popular in the worlds of commodities and currency exchanges. Since they’re not standardized and regulated like other types of exchanges, we always run the risk of one of the contract parties defaulting on the deal. And also, since payment is made upon delivery of the goods, we don’t know for sure how it’s all going to play out until the deal is done.