for harvest. Everyday, Michael reads the newspaper in order to be informed of the price
fluctuation of the coffee. He always checks the price of a pound of coffee if it rises or falls.
Over the last month, the price of a pound of coffee fluctuates from $2.50 per pound
to $2.70 per pound.
has gone to $3.00 per pound. He knows that it costs him about $2.00 per pound
to break even farming the coffee. So he decides to sell his harvest at that price
even if he realizes that the price of coffee may increase some more.
Michael calls up his broker, and tells him that he wants to sell his harvest.
But Michael's harvest is not going to be ready until 3 months later.
In this case, Michael sells his coffee with the understanding that he will
deliver that amount of coffee 3 months from that day.
varies daily and millions of pounds are bought and sold everyday.
George thinks it is an opportunity to make money by buying
Michael's coffee at $3.00 per pound. So, on Tuesday, George
buys Michael's entire harvest, representing 5 000 pounds of coffee,
for $3.00 per pound. To do so, George pays a deposit to assure
the purchase of 5 000 pounds to Michael.
On Thursday, Michael checks again the newspaper and it is now at $3.25 per pound.
He wishes that he had waited two more days to sell it to George, but the price might have
decreased and then be out of pocket, instead he made about one dollar per pound.
It cost Michael $2.00 to make and he sold it for $3.00 for a total of $5 000 (one dollar
per pound times 5 000 pounds). The same day, George decides that it is time to sell
the 5 000 pounds he bought from Michael to Jane for $3.25 per pound. George gains
25 cents per pound in only two days that represent $1 250 (25 cents per pound times
5 000 pounds).
she needs this product to fill the stores’ shelves.
She knows very well that if she does not buy the coffee
now for delivery in 3 months, she may pay more and
therefore reduce her profit margin on every coffee
they sell in store. So she pays 3.25$ per pound
and waits 3 monthsfor delivery.
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