The Country Farm and the Cookie Maker met today and agreed to exchange wheat six months from now at a price which they negotiated today.This agreement was made between the two firms and did not pass through an organized exchange.Which one of the following best describes this transaction?
A)futures contract
B)spot market
C)cash market
D)forward contract
E)CME transaction

Question

Quizplus · Accepted Answer

This transaction is a forward contract as it involves an agreement between two parties to exchange a specific asset (wheat) at a predetermined price (negotiated today) at a future date (six months from now). It is not a futures contract as it did not go through an organized exchange such as the CME. It is also not a spot market transaction as the exchange of wheat and payment did not occur immediately. Lastly, it is not a cash market transaction as it involved a forward agreement and not an immediate exchange of wheat for cash.

The Country Farm and the Cookie Maker Met Today and Agreed