Obviously he wants to earn a profit for what he does

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Unformatted text preview: er a put or call option? Futures and Options Key Terms futures contract option Futures futures contract Agreement to buy or sell a specific amount of something (commodity, currency, financial instrument) at a particular price on a stipulated future date. Myers is a miller. He buys wheat from the wheat farmer, turns the wheat into flour, and then sells the flour to the baker. Obviously he wants to earn a profit for what he does. But how much, if any, profit he earns depends on the price at which he can buy the wheat, and the price at which he can sell the flour. Now suppose Myers enters into a contract with a baker. Myers promises to deliver to the baker 1,000 pounds of flour in six months. At the current wheat price, $3 a bushel, Myers knows he can earn a profit on his deal with the baker. But he doesn’t need the wheat now; he needs it in about 6 months. What will the price of wheat be then? If it is, say, $2 a bushel, then Myers will earn more profit on the deal with the baker. But if it is, say, $4 a bushel, then he will lose money on the deal. Myers’s problem is that he doesn’t know what a bushel of wheat will sell for in six months. Myers decides to enter into a futures contract. A futures contract is a contract in which the seller agrees to provide a particular good (in this case, wheat) to the buyer on a specified future date at an agreed-upon 450 Chapter 16 Stocks and Bonds price. For example, Myers might buy bushels of wheat now, for a price of $3 a bushel, to be delivered to him in six months. Who would enter into a futures contract with Myers? A likely possibility would be a speculator, someone who buys and sells commodities to profit from changes in the market. A speculator assumes risk in the hope of making a gain. Suppose Smith, a speculator, believes that the price of wheat six months from now is going to be lower than it is today. She may look at things this way: “The price of wheat today is $3 a bushel. I think the price of wheat in six months will be...
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