Question

. The _______ of a forward contract is obligated to ______ delivery and pay for the contracted goods at the forward price; the _______ of a forward contract is obligated to ______ delivery and accept payment for the goods at the forward price.
A. seller; make; buyer; take
B. seller; take; buyer; make
C. buyer; make; seller; take
D. buyer; take; seller; take
E. buyer; take; seller; make

Answer 1

Answer:  

E. buyer; take; seller; make

Explanation:

A forward contract is a private agreement or a customized contract   between two parties giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time.

If you plan to grow 500 orange trees five years, you could sell your oranges for whatever the price is when you harvest it, or you could lock in a price now by selling a forward contract that obligates you to sell 500 orange trees to , say, Orange juice company after the harvest for a fixed price. By locking in the price now, you eliminate the risk of falling orange prices. On the other hand, if prices rise later, you will get only what your contract entitles you to.

If you are Orange juice company, you might want to purchase a forward contract to lock in prices and control your costs. However, you might end up overpaying or (hopefully) underpaying for the orange depending on the market price when you take delivery of the orange.