Finance School of Management Illustration a farmer a baker A farmer has planted her fields a baker will need wheat a with wheat and the size of her month from now to produce crop is reasonably certain bread It is now a month before A large fraction of his wealth is harvest tied up in his bakery business a large fraction of her wealth is The way for him to reduce the tied up in her wheat crop price risk is to buy wheat She want to eliminate the risk wheat now for future delivery associated with uncertainty The baker is a natural match about its future price by selling for the farmer to enter into a it now at a fixed price for forward contract future delivery uesTc7 Finance School of Management Illustration: a Farmer & a Baker v A farmer has planted her fields with wheat, and the size of her crop is reasonably certain v It is now a month before harvest v A large fraction of her wealth is tied up in her wheat crop v She want to eliminate the risk associated with uncertainty about its future price by selling it now at a fixed price for future delivery v A baker will need wheat a month from now to produce bread v A large fraction of his wealth is tied up in his bakery business v The way for him to reduce the price risk is to buy wheat wheat now for future delivery v The baker is a natural match for the farmer to enter into a forward contract