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Forward Purchase Agreements

The relationship between the spot price and the forward price of an asset reflects the net cost of labour (or port) of that asset relative to the holding of the asset. Thus, all of the costs and benefits mentioned above can be summarized as the cost of lift, c-Displaystyle c” Therefore, futures contracts begin when a seller looks for a buyer for a commodity. Think of the farmers who face significant price uncertainties every year. Their crops are cancelled due to insects, diseases or weather conditions, and demand for their crops can vary considerably. To protect themselves from insecurity, farmers can enter into a futures contract and sell it to a private buyer. For example, large food producers can buy a wheat contract from a farmer to set the price and control their production costs. The farmer hopes to benefit from the futures contract by making sure he has a buyer for the goods. It will also have an agreed price if it can fulfill the qualifications of the forward contract, such as the production and delivery of bushels of wheat, corn or oats. The buyer occupies a long position and the seller takes a short position when the futures contract is executed. The agreed price is called the delivery price.

It corresponds to the futures price at the time of the conclusion of the contract between the two parties. Futures attract two types of buyers: hedges and speculators. In general, hedgeors are more likely than speculators to participate in futures contracts. A futures contract is essentially an agreement under which the developer/seller agrees again at an early stage to sell the development to a buyer. Unlike a pre-financing transaction, the purchase price is generally not fully paid until the development is completed, with the developer financing the construction costs himself. On that date, the property is transferred to the buyer and the change of ownership is initiated. If S_ the spot price of an asset at the time of the T-Displaystyles t, and r.displaystyle r” is the continuous compound price, the forward price must be filled at a later stage t-Displaystyle T-Value T-Value F t t, T-S t e r (T – t) S_ F_. Suppose f V T (X) FV_ is the time value of X cash flow for the contract period T-Displaystyle T . The futures price is then indicated by the formula: the advance pricing formula mentioned above can also be written as follows: This is why this technique of forward funding contract offers the seller promoter the advantage of having directly the funds necessary to build the property, without having to borrow, mainly from bakery establishments. There is also the guarantee of having a buyer for the property. However, the use of this technique implies a lower profit (compared to the benefit of a futures contract).

Conversely, in markets where spot or commodity prices are easily accessible, especially the foreign exchange and OIS markets, forwards are generally rated with high-end points or arrival points. In other words, the use of the cash or base interest rate as a reference forward is indicated as a difference between the base price and the spot price of FX or the difference between the forward interest rate and the base rate of interest rate swaps and term interest rate agreements. [13] A forward purchase transaction can be attractive to both buyers and sellers. Among other benefits, a buyer may avoid a bidding and marketing process that would generally accompany a concluded or stabilized asset, and may also have a better understanding of the physical characteristics of the project during the development phase. On the other hand, a seller could reduce his holding time, make profits earlier, increase his return on invested capital and potentially use exit security to obtain more favorable construction financing.

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