Minimum Price Contract
Categories: Company Management
Let’s say you’ve got 1,000 barrels of yellow glitter to sell on the commodities market. You decide to sell it via a forward contract, meaning the transaction is written into a contract with the execution date in the future. You know, best to wait for yellow glitter season (June, obviously).
But you’re worried about purple glitter, which is challenging yellow glitter’s reign. You might want to make your forward contract a minimum price contract, which would guarantee you a minimum price at delivery for a specified quantity and delivery period. This means that, if purple glitter overtakes yellow glitter, causing the price of yellow to plummet around the time of delivery and contract execution, you’d still get a minimum amount of money.
Minimum price contracts protect commodity sellers from price fluctuations in forward contracts, guaranteeing a minimum price for their commodity. They’re often used with the sale of agricultural goods to protect sellers from losing profits, in case their goods go bad before they’re sold. This incentivizes the buyer to get to business, getting the goods and selling them.
Signed, sealed, delivered...the yellow glitter is all yours (it’s in the fine print).